Pacific Mercantile Bank is a different kind of bank as 2016 approaches.
The Costa Mesa-based unit of holding company Pacific Mercantile Bancorp, with about $1.1 billion in assets, has been at work to shift its character from a generalist with a bent for commercial real estate lending to a relationship-driven business bank with niche specialties.
The change in its lending approach is part of an overall “turnaround and purposed recovery” of the company that was hit hard by the recent recession, said Chief Executive Steven Buster, who oversaw the strategic refocus and now plans to retire, with Tom Vertin set to move up from president of commercial banking to the top job next month.
It looks as though Buster will go out with a turnaround to his credit after nearly three years spent drawing investor capital, cleaning off sour assets, and exiting certain types of loan products.
“We had done very little until two and a half years ago to turn this bank around by recognizing the problematic nature of our portfolio and to get the capital and fix it,” Buster said. “The tailwinds that the rest of the [banking] industry has already enjoyed from the recovery period—ours came later.
Real Estate Heritage
Buster joined Pacific Mercantile in 2013 after retiring from Mechanics Bank in Walnut Creek. He succeeded Raymond Dellerba, who founded Pacific Mercantile in 1999 and headed its growth into the biggest Orange County-based bank by assets, a standing it held for years.
The growth, though, had been closely pegged to commercial real estate loans, Buster said.
“The [intent] was to grow very quickly, to become a significant player in Southern California as a community bank,” he said. “It was felt there was a good need for this. But the strategy was so general that about anything that looked like it had attractive yield, they would pursue and book. So it was not focused, and the dominant part of the activity was commercial real estate.”
That needed to change, as the heavy concentration on real estate left the bank vulnerable to the impacts of the recession and attendant residential and commercial real estate credit crunch.
The California Department of Financial Institutions—what’s now the California Department of Business Oversight—issued an order in 2010 requiring Pacific Mercantile to “adopt and implement formal plans … to address the adverse consequences that the economic recession has had on the quality of [its] loan portfolio and … operating results, and to increase our capital to strengthen our ability to weather any further adverse conditions,” according to a statement by the bank.
“Somehow we managed to maneuver … through the Great Recession and managed to raise capital a couple of times to survive,” Buster said. “I don’t know how we survived.”
A key step came in 2011, when Pacific Mercantile raised about $11 million from New York-based SBAV LP and Carpenter Community BancFund, the private equity arm of Irvine-based advisory firm Carpenter & Co., which counts Irvine-based Plaza Bank as one of three community banks it controls in the state.
The Carpenter fund increased its stake in Pacific Mercantile the following year, and Carpenter & Co. founder Ed Carpenter became chairman of the bank.
Changes
Pacific Mercantile announced plans shortly thereafter to halt wholesale mortgage lending. A year later it announced plans to close its consumer mortgage division, exiting the residential mortgage market altogether. The closures, combined with a decision to discontinue its business of funding broker-originated SBA loans, meant the bank had to cut its employee base by about half—it now has about 160.
Changes in the bank’s lending approach have started to reshape its portfolio.
Recent filings indicate that commercial loans and owner-occupied commercial real estate loans—which the bank describes as “relationship loans”—make up 63% of its loans, totaling $828.6 million, versus 45% about two and a half years earlier. Other commercial real estate loans and residential mortgage loans combined to account for about 34% of total loans recently, down from 48%.
Assets as of Sept. 31 were $1.1 billion, versus $1 billion as of March 31, 2013.
The bank has been building specific niche areas along the way, including financing movies. Recent films the bank financed include “Damascus Cover” and “Norm of the North.”
“There’s probably about six banks that compete” in entertainment lending, Buster said, citing City National Bank as one. The Los Angeles-based bank—known as the “bank to the Hollywood stars”—was acquired this year by Royal Bank of Canada for about $5.4 billion.
“What we wanted to address was the convergence of technology and entertainment,” said chief executive-in-waiting Vertin, who joined Pacific Mercantile in 2012 after an 18-year run at Silicon Valley Bank. “A lot of the facilities, a lot of the know-how in producing a film or TV is also used in producing games or virtual-reality scenarios. So we’re paying close attention to that convergence. We believe we can bring the entertainment expertise and network to bear on behalf of a tech company.”
Deposit Mix
Vertin said the bank also has been working on changing its deposit mix.
“When you’re a real estate lender, you don’t necessarily focus on deposit-gathering,” he said. “We had to change the attitude of the staff toward making sure that when you’re making relationships with companies, it includes deposits.”
Noninterest-bearing deposits made up about 28% of the total deposit base of about $927.3 million as of Sept. 30. The percentage was 22% as of March 31, 2013.
Another change, Vertin said, was treasury management.
“Treasury management really is associated with the ways that companies collect their money, pay out their money, ways companies keep track and secure their money,” he said. “When [I] first arrived, there was very little treasury management at Pacific Mercantile. We brought in an expert who worked with me formerly, who developed a full suite of treasury management products.”
Vertin and Buster are among the roster of top executives who joined Pacific Mercantile in recent years as the bank started to change gears.
Robert Sjogren arrived as general counsel in 2013 and was named chief operating officer last year. Previously he worked for more than seven years at Carpenter & Co.
Curt Christianssen joined the bank as interim chief financial officer in 2013 and became CFO early this year. He’s also CFO at Carpenter & Co.
Noma Bruton joined in 2013 as chief human resources officer, and Robert Stevens came as chief risk officer in 2014.
New Directors
Pacific Mercantile’s board of directors also got several new members.
Romir Bosu and Denis Kalscheur joined early this year. Bosu is a veteran in the financial technology industry, having founded and sold companies, including Compushare. Kalscheur is set to wrap up his duties as chief executive of Newport Beach-based Aviation Capital Group in January, moving to the vice chairman role at a commercial jet leasing company, a subsidiary of Pacific Life Insurance Co.
Industry veteran David Munio was named to the board last week to replace Daniel Strauss, who retired from the holding company and bank. Munio, rounding out the group of 10, brings more than 40 years of experience in the banking industry that includes senior executive positions at First Interstate Bank and Wells Fargo & Co.
Pacific Mercantile’s departing chief executive, meanwhile, will leave behind an ambitious benchmark.
“We believe we can support a rapid growth rate now,” Buster said. “Fortunately for us, we’re in one of the most vibrant economic communities in the U.S. Southern California looks really healthy compared to other places. We have no need to go anywhere else.”
