Tom Vertin lost out in the competition for the top job at Silicon Valley Bank in 2011.
As a result, he went to Costa Mesa-based Pacific Mercantile Bancorp (Nasdaq: PMBC) to try a skillset that includes fixing problems and a deep knowledge of Silicon Valley.
“I’m a turnaround guy,” he said.
The market is still out on whether that turnaround is succeeding. Since Vertin became chief executive in early 2016, the bank’s share price has risen 33%, lagging the 38% increase of the benchmark KBW Nasdaq Regional Banking Index during the same period. Its market cap hovers around $219 million, making it the fifth-largest Orange County-based publicly traded bank, trailing rivals like Pacific Premier Bancorp Inc. and Opus Bank.
What does Wall Street think of the bank?
“Overall, investors look to Pacific Mercantile as a story of transformation and growth,” said Jacquelynne Bohlen, an analyst at Keefe, Bruyette & Woods. “Investors are looking for improving profitability in a rising rate environment.”
Bohlen, who has an outperform rating with a $10.50 price target, said share price sometimes gets a bump amid rumors of a bank being acquired.
When Vertin was asked if the bank has received buyout offers, he said he’s advised the board of directors not to tell him because he wants to focus on organic growth.
It’s natural to consider Pacific Mercantile a target. Chairman Ed Carpenter, owner of a banking consulting firm and a member of the Business Journal’s OC 50 list of the county’s most influential people, had large stakes in Heritage Oaks Bancorp and Plaza Bancorp, which were sold last year to Pacific Premier. Carpenter’s 2015 sale of Bridge Capital Holdings was “one of the best returns on an investment that bankers have ever seen,” Vertin said.
Prunes to Silicon
Vertin, 64, was born and raised in San Jose “when it was still the prune capital of the world.”
“I was the rebellious one for a dad who was a Jesuit-trained Catholic,” he recalled in his third-floor office at Metro Pointe near South Coast Plaza. “I was often bouncing outside the bounds of acceptable behavior in the late ’60s and early ’70s. I really didn’t know what I wanted to do.”
He worked as a bus driver and restaurant manager to put himself through San Jose State University, where he earned a bachelor’s degree in political science and psychology and later a master’s degree in public administration.
He tried working abroad, staying for three years at the World Health Organization in Geneva, where his initial job was “commander of a photo copy machine.”
When he returned, he obtained a job at Bank of America Corp. through networking contacts.
“I fell into banking, and I’ve never regretted it,” Vertin said. “It’s a fabulous career because it allows you to develop so many skills,” like analytics, writing, public speaking and leadership.
It’s eBay Stupid
In the early 1990s he landed at Silicon Valley Bank, a subsidiary of SVB Financial Group (Nasdaq: SIVB).
“I was really good at leading the team in acquiring banking relationships,” he said.
During his tenure, Vertin served as chief operating officer, head of the California division and head of global sales and service. He led turnarounds at two regional offices and the nationwide Asset Based Lending group.
Vertin saw Silicon Valley up close, remembering with regret the deals that he passed on—Google Inc. and eBay Inc.
“We had every other search engine banking with us. Then comes Google. So we didn’t try hard enough on that one.”
He turned down eBay, thinking it was “a stupid idea.”
“I really missed the boat,” he said.
Among its successes, the bank gave Cisco Systems Inc. its first loan for $50,000, and it also banked then-Irvine-based Broadcom on its first round.
“There were all kinds of companies that we banked. It was wonderful to be part of this ecosystem.”
Not a Consumer Bank
Vertin was in the running to be chief executive, but in 2011 lost out to his friend Greg Becker. He decided to find a troubled bank where he could conduct a turnaround. That’s when he discovered Pacific Mercantile, whose problems in 2012 included two regulatory cease-and-desist orders for mortgages and commercial banking. Vertin started as president of the commercial bank unit that year and was named chief executive in 2016.
When he began, about 70% of the bank’s loans were funded by certificates of deposit—“the most expensive funding that you can find.”
“That was deplorable. That’s the worst funding I’d ever seen,” he said. “CDs are more of a consumer product. We don’t do consumers.”
Nowadays, about 30% of the funding comes from certificates of deposit, which he wants to reduce to 20%.
He’s changed the bank’s focus from funding transactional real estate to operating companies, where he seeks the entire relationship of loans, deposits and treasury management.
His secret sauce includes a program developed in-house called Horizon Analytics. He employed Silicon Valley programmers and bankers to design the program to provide detailed marketing information to small- to medium-size companies with annual sales of $10 million to $70 million. It uses a private company database and financial analysis techniques typically available only to large public companies.
“There’s a vacuum of information that these companies could use,” he said. “We can present them with data the likes of which they haven’t seen.”
When potential customers see this detailed information on their industry, “It clears the field of competitors. It makes pricing a minor part.”
Seeking Top Quartile
Vertin has brought in a credit risk officer and hired executives from Silicon Valley Bank. Pacific Mercantile has already beefed up its employee count to 170, which is why it may hire only five more this year, he said.
He said his management team is aiming to produce $15 million to $17 million in annual profit. In his first year as chief executive, the bank reported a loss of $34.6 million because it had to write off a bad loan. Last year it reported net income of $10.5 million.
He’s focused on organic growth and changing its deposit mix.
“That’s the one thing keeping us from being in the top quartile of performance,” he said. “A couple years from now, we’ll be known as the best place for an operating company to bank.”
