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| PMBC > SEC Filings for PMBC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
Introduction
Pacific Mercantile Bancorp is a bank holding company that owns all of the stock of Pacific Mercantile Bank (the "Bank"), which is a commercial bank that provides a full range of banking services to small and medium-size businesses and to professionals and the general public in Orange, Los Angeles, San Bernardino and San Diego counties, in Southern California. Substantially all of our operations are conducted and substantially all of our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses and operating income.
The following discussion presents information about (i) our consolidated results of operations for the three and nine month periods ended September 30, 2009 and comparisons of those results with the results of operations for the corresponding three and nine month periods of 2008, and (ii) our consolidated financial condition, liquidity and capital resources at September 30, 2009. The information in the following discussion should be read in conjunction with our interim consolidated financial statements and the notes thereto included elsewhere in this Report.
Forward-Looking Information
Statements contained in this Report that are not historical facts or that
discuss our expectations, beliefs or views regarding our future operations or
future financial performance, or financial or other trends in our business or in
the markets in which we operate, constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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 and on assumptions
that we make about future 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. Unexpected future events and such risks and
uncertainties could cause our financial condition or actual operating results in
the future to differ significantly 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. Certain of those risks and uncertainties are discussed below in this
Item 2 of this Report, in Item 1A in our Annual Report on Form 10-K for our
fiscal year ended December 31, 2008 (our "2008 10-K") and in Item 1A, entitled
"Risk Factors," in Part II of this Report. Therefore, you are urged to read not
only the information contained in this section of this Report, but also the
information contained in Item 1A of our 2008 10-K and in Item 1A in Part II of
this Report in conjunction with your review of the following discussion
regarding our results of operations for the three and nine months ended, and our
financial condition at, September 30, 2009.
Due to those risks and uncertainties, 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 or in our 2008 10-K or any other of our filings previously made with Securities and Exchange Commission, except as may otherwise be required by law or Nasdaq rules.
Overview of Operating Results in the Three and Nine Months Ended September 30, 2009
The following table sets forth information regarding the interest income that we generated, the interest expense that we incurred, our net interest income, noninterest income, noninterest expense, and our net income (loss) and net income (loss) per share for the three and nine month periods set forth below.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 Percent 2009 2008 Percent
Amounts Amounts Change Amounts Amounts Change
Interest income $ 12,879 $ 15,230 (15.4 )% $ 38,814 $ 46,262 (16.1 )%
Interest expense 7,495 8,246 (9.1 )% 23,621 25,879 (8.7 )%
Net interest income 5,384 6,984 (22.9 )% 15,193 20,383 (25.5 )%
Provision for loan losses 470 1,625 (71.1 )% 10,513 5,441 93.2 %
Net interest income (loss)
after provision for loan
losses 4,914 5,359 (8.3 )% 4,680 14,942 (68.7 )%
Noninterest income 1,475 704 109.5 % 4,590 2,589 77.3 %
Noninterest expense 9,512 5,566 70.9 % 24,043 16,955 41.8 %
Income (loss) before income
tax (3,123 ) 497 (728.4 )% (14,773 ) 576 N/M
Income tax (benefit) provision (1,211 ) 143 N/M (6,180 ) 51 N/M
Net income (loss) $ (1,912 ) $ 354 (640.1 )% $ (8,593 ) $ 525 N/M
Net income (loss) per diluted
share $ (0.18 ) $ 0.03 (700.0 )% $ (0.82 ) $ 0.05 N/M
Weighted average number of
diluted shares 10,434,665 10,479,280 (0.4 )% 10,434,665 10,595,249 (1.5 )%
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We incurred net losses of $1.9 million, or $0.18 per diluted share, and $8.6 million, or $0.82 per diluted share, in the three and nine month periods ended September 30, 2009, respectively, as compared to net income of $354,000, or $0.03 per diluted share, and $525,000, or $0.05 per diluted share, in the same three and nine month periods of 2008, respectively. The net losses in the three and nine months ended September 30, 2009 were primarily attributable to:
• Declines in net interest income of $1.6 million, or 22.9%, and $5.2 million, or 25.5%, respectively, in the three and nine month periods ended September 30, 2009, due primarily to decreases in interest income that were only partially offset by decreases in interest expense, as interest income was adversely affected by (i) reductions in interest rates implemented by the Federal Reserve Board which affected the yields we were able to realize on loans and other interest-earning assets, and (ii) an increase, during the nine months ended September 30, 2009, of $37.3 million, or 234%, in non-performing loans, on which we were required to cease accruing interest.
• An increase, during the nine months ended September 30, 2009, in the
provisions we made for loan losses of $5.1 million, or 93%, to provide for
(i) the increases that occurred in non-performing loans during that period
and the risk of possible increases in non-performing loans in future
months due to the continuing economic recession and credit crisis and the
prospect that these conditions will not improve significantly during the
remainder of 2009. These increases in the provision for loan losses
resulted in an increase in the amount of our allowance for loan losses to
$17.2 million, or approximately 2.06% of loans outstanding, at
September 30, 2009, as compared to $15.5 million, or 1.83%, of the loans
outstanding at December 31, 2008.
We believe that our actions in charging off nonperforming loans and increasing the allowance for loan losses were prudent in light of prevailing economic conditions and the uncertainties regarding the ultimate duration and severity of the economic recession and credit crisis.
The following table indicates the impact that the decreases in our net interest income and the net losses incurred in the three and nine months ended September 30, 2009 have had on our net interest margin and the returns on average assets and average equity during those periods:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Net interest margin (1) (2) 1.88 % 2.56 % 1.76 % 2.52 %
Return on average assets (1) (0.64 )% 0.13 % (0.96 )% 0.06 %
Return on average shareholders' equity (1) (9.82 )% 1.51 % (13.58 )% 0.74 %
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(1) Annualized.
(2) Net interest income expressed as a percentage of total average interest earning assets.
At September 30, 2009, non-performing loans, together with other nonperforming assets consisting of OREO, totaled $74 million, or 6.7% of total assets, as compared to $29.9 million or 2.6% of total assets at December 31, 2008.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make assumptions and judgments regarding circumstances or trends that could affect the value of those assets, such as, for example, assumptions regarding economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets, such as securities available for sale and our deferred tax assets. Those assumptions and judgments are made based on current information available to us regarding those economic conditions or trends or other circumstances. If adverse changes were to occur in the events, trends or other circumstances on which our assumptions or judgments had been based, or other unanticipated events were to happen that might affect our operating results, under GAAP it could become necessary for us to reduce the carrying values of the affected assets on our balance sheet. In addition, because reductions in the carrying value of assets are sometime effectuated by or require charges to income, such reductions also may have the effect of reducing our income.
For additional information regarding critical accounting policies, refer to Note 2-"Significant Accounting Policies" in the Notes to Consolidated Financial Statements and the sections captioned "Critical Accounting Policies" and "Allowance for Loan Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-K for the year ended December 31, 2008. There have been no significant changes in the Company's application of accounting policies since December 31, 2008.
Results of Operations
Net Interest Income
One of the principal determinants of a bank's income is its net interest income,
which is the difference between (i) the interest that a bank earns on loans,
investment securities and other interest-earning assets, on the one hand, and
(ii) its interest expense, which consists primarily of the interest it must pay
to attract and retain deposits and the interest that it pays on borrowings and
other interest-bearing liabilities, on the other hand. As a general rule, all
other things being equal, the greater
the difference or "spread" between the amount of our interest income and the amount of our interest expense, the greater will be our net income; whereas, a decline in that difference or "spread" will generally result in a decline in our net income. A bank's interest income and interest expense are, in turn, affected by a number of factors, some of which are outside of its control, including national and local economic conditions and the monetary policies of the Federal Reserve Board which affect interest rates, competition in the market place for loans or deposits, the demand for loans and the ability of borrowers to meet their loan payment obligations. Net interest income, when expressed as a percentage of total average interest earning assets, is a banking organization's "net interest margin."
The following table sets forth our interest income, interest expense and net interest income (in thousands of dollars) and our net interest margin in the three and nine months ended September 30, 2009 and 2008, respectively:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 Percent 2009 2008 Percent
Amount Amount Change Amount Amount Change
Interest income $ 12,879 $ 15,230 (15.4 )% $ 38,814 $ 46,262 (16.1 )%
Interest expense 7,495 8,246 (9.1 )% 23,621 25,879 (8.7 )%
Net interest income $ 5,384 $ 6,984 (22.9 )% $ 15,193 $ 20,383 (25.5 )%
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Net interest margin 1.88 % 2.56 % 1.76 % 2.52 %
As the above table indicates, our net interest income decreased by $1.6 million, or 23%, in the third quarter of 2009, and by $5.2 million, or 26%, in the nine months ended September 30, 2009. The decreases were primarily attributable to decreases in interest income of $2.4 million, or 15%, and $7.4 million, or 16%, respectively, in those three and nine month periods, which more than offset decreases in interest expense of $751,000, or 9%, and $2.3 million, or about 9%, respectively, in the three and nine months ended September 30, 2009.
Those decreases in interest income were due primarily to (i) declines of 500 basis points in prevailing market rates of interest primarily as a result of reductions, commenced in September 2007, in the federal funds rate implemented by the Federal Reserve Board in response initially to a slowing in economic growth and, then, to the economic recession and credit crisis, and (ii) the increases, described above, in non-performing loans, on which we ceased accruing interest income. Those decreases were only partially offset by the effects on interest income of increases, in the three and nine months ended September 30, 2009, of $29 million and $48 million, respectively, in average loans outstanding, which generate higher yields than other interest earning assets.
The decreases in interest expense during the three and nine month periods ended September 30, 2009 were primarily attributable to the aforementioned decreases in prevailing market rates of interest, which enabled us to reduce the rates at which we paid interest on substantially all types of interest bearing deposits, including certificates of deposit. However, those decreases in interest expense were partially offset by increases, during the three and nine months ended September 30, 2009, in the volume of certificates of deposit, on which we pay interest at higher rates than on other types of deposits, as we used those deposits to provide additional funds that enabled us to increase the volume of the loans we made and to reduce borrowings during the three and nine months ended September 30, 2009.
Primarily as a result of the decreases in interest income in the three and nine months ended September 30, 2009, our net interest margin declined to 1.88% and 1.76%, respectively, from 2.56% and 2.52% in the same three and nine month periods of 2008. In the three months ended September 30, 2009, the yield on interest-earning assets declined to 4.49% from 5.61% in the same three months of 2008, which more than offset a decline in the average interest rate paid on interest bearing liabilities to 3.24%, from 3.90% in the same three month period of 2008. Similarly, in the nine months ended September 30, 2009, the average rate of interest earned on average earning assets declined to 4.48%, from 5.73% in the same nine months of 2008, and was only partially offset by a decrease in the average interest rate paid on interest bearing liabilities to 3.35%, from 4.11% in the same period of 2008. The decreases in net interest margin also reflect timing differences in the impact that the declines in market rates of interest have on our interest income and interest expense. Those declines resulted in automatic decreases in the interest rates on our adjustable rate loans, whereas the impact of those declines on the interest we paid on deposits was more gradual primarily as a result of the maturity schedule of our time certificates of deposit.
Average Balances
Information Regarding Average Assets and Average Liabilities
The following table sets forth information regarding our average balance sheet,
yields on interest earning assets, interest expense on interest-bearing
liabilities, the interest rate spread and the interest rate margin for the three
months ended September 30, 2009 and 2008.
Three Months Ended
September 30,
2009 2008
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) $ 148,568 $ 129 0.34 % $ 38,526 $ 179 1.85 %
Securities available for sale and
stock(2) 147,764 814 2.19 % 228,814 2,595 4.51 %
Loans 842,031 11,936 5.62 % 813,514 12,456 6.09 %
Total earning assets 1,138,363 12,879 4.49 % 1,080,854 15,230 5.61 %
Noninterest earning assets 48,977 35,681
Total Assets $ 1,187,340 $ 1,116,535
Interest-bearing liabilities:
Interest-bearing checking accounts $ 26,952 58 0.85 % $ 20,100 27 0.54 %
Money market and savings accounts 113,350 348 1.22 % 117,818 511 1.72 %
Certificates of deposit 604,184 5,295 3.48 % 450,079 4,969 4.39 %
Other borrowings 163,164 1,648 4.01 % 239,835 2,499 4.15 %
Junior subordinated debentures 17,682 146 3.28 % 17,682 240 5.40 %
Total interest-bearing liabilities 925,332 7,495 3.24 % 845,514 8,246 3.90 %
Noninterest-bearing liabilities 184,753 178,177
Total Liabilities 1,110,085 1,023,691
Shareholders' equity 77,255 92,844
Total Liabilities and
Shareholders' Equity $ 1,187,340 $ 1,116,535
Net interest income $ 5,384 $ 6,984
Interest rate spread 1.25 % 1.71 %
Net interest margin 1.88 % 2.56 %
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(1) Short-term investments consist of federal funds sold and interest bearing deposits with financial institutions.
(2) Stock consists of Federal Home Loan Bank Stock and Federal Reserve Bank Stock.
The following table sets forth information regarding our average balance sheet, yields on interest earning assets, interest expense on interest-bearing liabilities, the interest rate spread and the interest rate margin for the nine months ended September 30, 2009 and 2008.
Nine Months Ended
September 30,
2009 2008
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) $ 163,971 $ 373 0.30 % $ 47,923 $ 803 2.24 %
Securities available for sale and
stock(2) 147,791 2,912 2.63 % 233,609 7,877 4.50 %
Loans 845,363 35,529 5.62 % 796,929 37,582 6.30 %
Total earning assets 1,157,125 38,814 4.48 % 1,078,461 46,262 5.73 %
Noninterest earning assets 38,601 33,004
Total Assets $ 1,195,726 $ 1,111,465
Interest-bearing liabilities:
Interest-bearing checking accounts $ 26,036 118 0.61 % $ 19,555 81 0.56 %
Money market and savings accounts 105,473 934 1.18 % 140,495 2,230 2.12 %
Certificates of deposit 604,152 16,647 3.68 % 431,661 15,148 4.69 %
Other borrowings 187,296 5,425 3.87 % 229,607 7,633 4.44 %
Junior subordinated debentures 17,682 497 3.75 % 17,682 787 5.95 %
Total interest-bearing liabilities 940,639 23,621 3.35 % 839,000 25,879 4.11 %
Noninterest-bearing liabilities 170,509 177,177
Total Liabilities 1,111,148 1,016,177
Shareholders' equity 84,578 95,288
Total Liabilities and Shareholders'
Equity $ 1,195,726 $ 1,111,465
Net interest income $ 15,193 $ 20,383
Interest rate spread 1.13 % 1.62 %
Net interest margin 1.76 % 2.52 %
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(1) Short-term investments consist of federal funds sold and interest bearing deposits with financial institutions.
(2) Stock consists of Federal Home Loan Bank Stock and Federal Reserve Bank Stock.
The following table sets forth the changes in interest income, including loan fees, and interest paid in the three and nine months ended September 30, 2009, as compared to the same respective periods of 2008, and the extent to which those changes were attributable to changes in (i) the volumes of or in the rates of interest earned on interest-earning assets and (ii) the volumes of or the rates of interest paid on our interest-bearing liabilities.
Three Months Ended Nine Months Ended
September 30, September 30,
2009 vs. 2008 2009 vs. 2008
Increase (decrease) due to: Increase (decrease) due to:
Volume(1) Rate(1) Total Volume(1) Rate(1) Total
(Dollars in thousands)
Interest income:
Short-term investments(1) $ 189 $ (239 ) $ (50 ) $ 705 $ (1,135 ) $ (430 )
Securities available for sale and
stock(2) (725 ) (1,056 ) (1,781 ) (2,331 ) (2,634 ) (4,965 )
Loans 437 (957 ) (520 ) 2,181 (4,234 ) (2,053 )
Total earning assets (99 ) (2,252 ) (2,351 ) 555 (8,003 ) (7,448 )
Interest expense:
Interest-bearing checking accounts 12 19 31 29 8 37
Money market and savings accounts (19 ) (144 ) (163 ) (468 ) (828 ) (1,296 )
Certificates of deposit 1,494 (1,169 ) 325 5,195 (3,696 ) 1,499
. . .
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