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Wholesaler Closes a Second Time

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A wholesale mortgage lender that previously closed down then subsequently reopened is throwing in the towel for a second time. The company wants to reallocate its capital.

Pacific Mercantile Bank closed down its wholesale business in 2005. At the time, the financial institution blamed its decision on increased costs, inconsistent results and excessive capital needed to improve the unit. Capital would instead be used for its growing commercial lending business.

But four years later, prompted by a dearth of commercial mortgage capital and weak demand for commercial loans, the firm was back in wholesale mortgage lending. Pacific Mercantile Bancorp President and Chief Executive Officer Raymond Dellerba predicted at the time that an economic recovery would ensue and home prices would stabilize — pushing up demand for home purchase financing over the following months.

Now the Costa Mesa, Calif.-based company is once again abandoning originations from mortgage brokers.

In its second-quarter earnings report, Pacific Mercantile said that it undertook a recent review of its mortgage banking business to determine how it could redeploy capital resources to its core commercial lending business. The review was in anticipation of an eventual increase in interest rates.

The mortgage operation had grown rapidly over a short time period, and the bank wanted to see how it could reduce costs and increase efficiency.

“Based on that review, a decision has been made to focus our mortgage operations entirely on our direct-to-consumer retail channel and to exit our wholesale mortgage business, which depends on independent mortgage brokers to originate mortgage loans for us,” the report stated.

No more wholesale submissions will be accepted from mortgage brokers after Aug. 31.

Any submissions received before the deadline will continue in process until funded.

The move is expected to significantly reduce residential originations and lead to lower subsequent mortgage banking revenues.

“Nevertheless, in our view, this action is in the best interests of the company and our shareholders, because we believe that it will enable us to build a stronger foundation for achieving improved profitability in the future, reduce and control our operating costs and reduce interest rate and other risks inherent in the wholesale mortgage business, in order to enhance the value of our banking franchise in the future,” according to Pacific Mercantile.

More than $97 million in residential loans were on the balance sheet as of June 30. Total assets were $1.1 billion.

Second-quarter earnings before taxes were $1.7 million, off from $1.9 million in the year-earlier period. It was the sixth consecutive quarter that the company operated in the black.

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