(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Table of Contents Forward Looking Statements Statements contained in this Quarterly Report on Form 10-Q (this "Report") that are not historical facts or that discuss our expectations, beliefs or views, including those regarding our proposed merger with Banc of California, Inc. ("Banc of California"), our future financial performance and our business, trends and expectations regarding the markets in which we operate, and our future plans, including the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," "forecast," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." The information contained in such forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and the occurrence of events in the future or changes in circumstances that had not been anticipated, could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could, therefore, also affect the price performance of our shares. In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: the possibility that the merger with Banc of California does not close when expected or at all because required regulatory, or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; changes in Banc of California's or our stock price before closing, including as a result of the companies' financial performance prior to closing, general stock market movements, and the performance of other financial companies and peer group companies; the risk that the anticipated benefits of the merger may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which Banc of California and we operate; Banc of California's ability to promptly and effectively integrate our businesses following the merger; the reaction to the transaction of the companies' customers, employees and counterparties; diversion of management time on merger-related issues; deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk that steps we have taken to strengthen our overall credit administration are not effective; the risk of a recession in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of other real estate owned and would continue to incur expenses associated with the management and disposition of those assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Readers of this Report are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (as amended, the "2020 Form 10-K") that we filed with the Securities and Exchange Commission ("SEC") on March 15, 2021, as such information may be updated from time to time in subsequent Quarterly Reports on Form 10-Q that we file with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three and six months ended, and our financial condition at, June 30, 2021. Due to the risks and uncertainties we face, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report as a result of new information, future events or otherwise, except as may otherwise be required by law. Table of Contents Recent Developments
On March 22, 2021, Pacific Mercantile Bancorp entered into an Agreement and Plan of Merger (the "Merger Agreement") with Banc of California. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Pacific Mercantile Bancorp will merge with and into Banc of California (the "Merger"), with Banc of California surviving the Merger. Promptly following the Merger, the Bank will merge with and into Banc of California's wholly-owned bank subsidiary, Banc of California, National Association, a national banking association (the "Bank Merger"). Banc of California, National Association will be the surviving bank in the Bank Merger. The Merger Agreement was adopted and approved by the Board of Directors of each of Pacific Mercantile Bancorp and Banc of California. The closing of the Merger, which is expected to occur in the third quarter of 2021, is contingent upon receipt of necessary regulatory approvals, along with the satisfaction of other customary closing conditions.
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Results of Operations Operating Results for the Three and Six Months Ended June 30, 2021 and 2020 Our operating results for the three and six months ended June 30, 2021, compared to the same period in June 30, 2020, were as follows: Three Months Ended June 30, 2021 vs. 2020 Six Months Ended June 30, 2021 vs. 2020 2021 2020 % Change 2021 2020 % Change (Dollars in thousands) Interest income $ 12,539 $ 15,580 (19.5) % $ 26,237 $ 30,349 (13.5) % Interest expense 838 2,262 (63.0) % 1,798 5,558 (67.7) % Provision for loan and lease losses - 2,850 (100.0) - 9,050 (100.0) % Noninterest income 2,865 1,171 144.7 % 4,603 2,265 103.2 % Noninterest expense 9,193 8,934 2.9 % 18,857 18,651 1.1 % Income tax expense (benefit) 1,479 800 84.9 % 2,903 (190) (1,627.9) % Net income (loss) $ 3,894 $ 1,905 104.4 % $ 7,282 $ (455) (1,700.4) %
Six Months Ended June 30, 2021 and 2020
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Six Months Ended June 30, 2021 and 2020
Three Months Ended June 30, 2021 2020 Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Interest-earning assets Short-term investments(1) $ 257,133 $ 66 0.10 % $ 322,023 $ 79 0.10 % Securities available for sale and stock(2) 49,765 317 2.55 % 35,000 210 2.41 % Loans(3) 1,222,889 12,156 3.99 % 1,331,270 15,291 4.62 % Total interest-earning assets 1,529,787 12,539 3.29 % 1,688,293 15,580 3.71 % Noninterest-earning assets Cash and due from banks 17,997 16,622 All other assets 23,438 28,048 Total assets $ 1,571,222 $ 1,732,963 Interest-bearing liabilities: Interest-bearing checking accounts $ 193,113 $ 42 0.09 % $ 103,164 $ 25 0.10 % Money market and savings accounts 368,367 189 0.21 % 454,877 567 0.50 % Certificates of deposit 192,307 461 0.96 % 260,354 1,371 2.12 % Other borrowings 55 - - % 122,015 130 0.43 % Junior subordinated debentures 17,527 146 3.34 % 17,527 169 3.88 % Total interest bearing liabilities 771,369 838 0.44 % 957,937 2,262 0.95 % Noninterest bearing liabilities Demand deposits 618,404 606,481 Accrued expenses and other liabilities 17,574 18,649 Shareholders' equity 163,875 149,896 Total liabilities and shareholders' equity $ 1,571,222 $ 1,732,963 Net interest income $ 11,701 $ 13,318 Net interest income/spread 2.85 % 2.76 % Net interest margin 3.07 % 3.17 %
(1)Short-term investments consist of Federal Funds sold and interest bearing deposits that we maintain at other financial institutions.
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Six Months Ended June 30, 2021 2020 Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Interest-earning assets Short-term investments(1) $ 229,469 $ 118 0.10 % $ 271,310 $ 800 0.59 % Securities available for sale and stock(2) 51,742 633 2.47 % 35,422 471 2.67 % . . .
Aug 13, 2021
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