Pacific Mercantile Bancorp Reports Net Income of $354,000 in the Third Quarter of 2008

COSTA MESA, Calif.--(BUSINESS WIRE)--Pacific Mercantile Bancorp (NASDAQ: PMBC) today reported its results of operations for the third quarter and nine months ended September 30, 2008. The Company also reported that its Board of Directors has approved a $2.0 million increase in its existing Share Repurchase Program.

“This means that customers’ noninterest bearing checking accounts will be 100% insured, while money market accounts, saving accounts, and certificate of deposits will be insured up to $250,000 per depositor pursuant to the FDIC guideline”

Results of Operations

The Company recorded net income of $354,000, or $0.03 per diluted share, for the third quarter ended September 30, 2008, as compared to net income of $1.4 million, or $0.13 per diluted share, in the same quarter of 2007. For the nine months ended September 30, 2008, net income totaled $525,000, or $0.05 per diluted share, as compared to net income of $4.6 million, or $0.42 per diluted share, for the same nine months of 2007. These declines were primarily attributable to (i) decreases of $1.1 million and $3.3 million in net interest income, and (ii) increases of $1.3 million and $4.5 million in the provisions made for loan losses, in the three and nine month periods ended September 30, 2008, respectively, as compared to the same corresponding periods of 2007.

The decreases in net interest income were primarily attributable to reductions in the interest income that we earned on loans and other interest-earning assets, which was only partially offset by reductions in our interest expense, which consists principally of interest paid on deposits. Those reductions in both interest income and interest expense were primarily the result of reductions by the Federal Reserve Board in the federal funds rate in response to the economic downturn. Those reductions, in turn, led to declines in prevailing market rates of interest which directly affect the interest rates we are able to charge on loans and the yields we realize on other interest-earning assets and the interest rates we pay on deposits. The decreases in interest rates on deposit accounts was partially offset by increases in the volume of time deposits in both the three and nine month periods of 2008, which we obtained to offset declines in demand deposits and lower cost savings and money market deposits, as customers drew down those deposits to fund their cash needs or to purchase U.S. Treasury securities in response to the credit crisis.

We increased the provisions for loan losses, in both the three and nine months ended September 30, 2008, in order to increase our loan loss reserve at September 30, 2008 to $8.4 million, or 1.00% of the total loans then outstanding, from $5.6 million, or 0.75% of total loans outstanding at September 30, 2007, primarily due to an increase in non-performing assets to $26.2 million at September 30, 2008 from $6.2 million at September 30, 2007, which we attribute to the worsening of economic conditions.

Partially offsetting the declines in net interest income in both the three and nine months ended September 30, 2008, were increases in non-interest income of $335,000, or 91%, and $1.6 million, or 150%, respectively. Those increases were primarily attributable to gains recognized on sales of securities held for sale and increases in fees and service charges on deposit account transactions, in both the three and nine months ended September 30, 2008, as compared to the same respective periods of 2007.

Financial Condition

Capital and Capital Adequacy. Despite the decreases in earnings and the increases in non-performing loans, at September 30, 2008 our wholly owned banking subsidiary, Pacific Mercantile Bank, had total capital of $100 million, which represented 11.2% of the Bank’s total risk-based assets (total assets risk weighted between 0% and 100% pursuant to the regulatory classifications of assets). As a result, the Bank continues to qualify as a “well-capitalized” financial institution under Federal regulatory guidelines, which is the highest capital rating that a banking institution can earn under those guidelines.

The following table sets forth the capital and capital ratios of the Company (on a consolidated basis) and the Bank (on a stand alone basis) at September 30, 2008, as compared to the regulatory requirement that must be met to be rated as a well-capitalized institution.

		Actual At September 30, 2008							Federal Regulatory Requirement to be Rated Well-Capitalized
		Amount			Ratio				Amount			Ratio
		(Dollars in thousands)
Total Capital to Risk Weighted Assets:
Company		$	123,324		13.6	%				N/A		N/A
Bank			99,832		11.2	%			$	89,466		At least 10.0%
Tier 1 Capital to Risk Weighted Assets:
Company		$	114,659		12.7	%				N/A		N/A
Bank			91,204		10.2	%			$	53,680		At least 6.0%
Tier 1 Capital to Average Assets:
Company		$	114,659		10.2	%				N/A		N/A
Bank			91,204		8.2	%			$	55,895		At least 5.0%

Loans. At September 30, 2008, gross loans totaled nearly $840 million, an increase of $95 million, or 13%, as compared to nearly $745 million at September 30, 2007. The following table sets forth, in thousands of dollars, the composition, by loan category, of our loan portfolio at September 30, 2008 and September 30, 2007. As the table indicates, during the year ended September 30, 2008, we were able to reduce the volume of residential real estate mortgage loans and real estate construction loans in our loan portfolio, while increasing commercial business and commercial real estate loans:

		September 30, 2008							September 30, 2007
		Amount			Percent				Amount			Percent
		Unaudited
Commercial loans		$	286,761		34.1	%			$	249,616		33.5	%
Commercial real estate loans - owner occupied			193,388		23.0	%				159,877		21.5	%
Commercial real estate loans - all other			125,813		15.0	%				107,726		14.5	%
Residential mortgage loans - single family			63,125		7.5	%				66,639		8.9	%
Residential mortgage loans - multi-family			100,728		12.0	%				90,156		12.1	%
Construction loans			37,942		4.5	%				49,068		6.6	%
Land development loans			25,159		3.0	%				14,988		2.0	%
Consumer loans			7,385		0.9	%				6,700		0.9	%
Gross loans		$	840,301		100.0	%			$	744,770		100.0	%

Deposits. Deposits increased by $13 million, or 2%, to $791 million at September 30, 2008, from $777 million at September 30, 2007, as we increased time deposits by $95 million, or 24%, to $493 million at September 30, 2008, from $398 million at September 30, 2007, primarily to fund increases in loans and to offset declines in lower cost deposits, principally interest-bearing transaction accounts and non-interest bearing deposits, which declined, respectively, by $46 million, or 26%, to $128 million and by $35 million, or 17%, to $170 million, at September 30, 2008. We believe that those declines were primarily the result of the worsening of economic conditions and the more recent onset of and the fears posed by the credit crisis, which led many depositors to draw down those deposits to fund their cash needs and to shift money from bank deposits to U.S. Treasury securities.

“Pacific Mercantile Bank will be participating in the new FDIC insurance program called Transaction Account Guarantee 'TAG.' Under this program the FDIC will insure 100% of noninterest bearing transaction accounts and up to $250,000 on all other deposit accounts though December 2009,” said Nancy Gray, Senior Executive Vice President and Chief Financial Officer. “This means that customers’ noninterest bearing checking accounts will be 100% insured, while money market accounts, saving accounts, and certificate of deposits will be insured up to $250,000 per depositor pursuant to the FDIC guideline,” added Ms. Gray.

Appointment of Robert Bartlett as Chief Operating and Chief Credit Officer of the Bank.

“We are very pleased to announce the hiring of Robert 'Bob' Bartlett as the Bank’s new Chief Operating Officer. I’ve personally known Bob for 23 years and the timing has finally been right for us to join forces. Mr. Bartlett will also serve as our interim Chief Credit Officer and will assist me in our search for a candidate with the background commensurate to the Bank’s credit requirements. Mr. Bartlett comes to us with a wealth of experience and a proven track record in both positions and will be instrumental in the expansion of our credit facilities in our Southern California marketplace,” said Mr. Raymond E. Dellerba, President and Chief Executive Officer.

“Strategically, the Bank has never changed its underwriting criteria, established at the Bank’s inception, which enables us to continue lending in the Southern California markets we serve, even in this challenging economic environment. The Bank has taken action to limit its exposure to construction lending and in the single family arena. Construction lending is down to $38 million at September 30, 2008 from $49 million at September 30, 2007,” stated Mr. Dellerba. Mr. Dellerba went on to say, “The Bank continues to be focused on risk management and is pleased to announce the addition of Craig Eiker, Senior Vice President and Risk Manager, who will lead and strengthen the risk management team.”

Capital and Capital Adequacy. At September 30, 2008, our total risk based capital was $123 million, up from $119 million at September 30, 2007, primarily as a result of retained earnings over the last 12 months, somewhat offset by the cash dividend paid to shareholders in this year’s first quarter. The Bank continue to be rated as “well-capitalized” under applicable regulatory capital guidelines at September 30, 2008. In addition, our tangible book value per share at September 30, 2008 increased to $9.34 from $9.20 at September 30, 2007.

About Pacific Mercantile Bancorp

Pacific Mercantile Bancorp is the parent holding company of Pacific Mercantile Bank, which opened for business March 1, 1999. The Bank is an FDIC insured, California state-chartered bank and a member of the Federal Reserve System and provides a wide range of commercial banking services to businesses, business professionals and individual clients through its combination of traditional banking financial centers and comprehensive, sophisticated electronic banking services.

The Bank operates a total of eight financial centers in Southern California, four of which are located in Orange County, two of which are located in Los Angeles County, one of which is located in San Diego County and the other of which is located in the Inland Empire in San Bernardino County. The four Orange County financial centers are located, respectively, in the cities of Newport Beach, Costa Mesa (which is visible from the 405 and 73 Freeways), La Habra and San Juan Capistrano (which is our South County financial center that is visible from the Interstate 5 Freeway). Our two financial centers in Los Angeles County are located, respectively, in the cities of Beverly Hills and Long Beach. Our San Diego financial center is located in La Jolla and our Inland Empire financial center is located in the city of Ontario, visible from the Interstate 10 Freeway. In addition to the Bank's physical locations, it offers comprehensive banking services over its Internet Bank, which is accessible 24/7 worldwide at www.pmbank.com.

Forward-Looking Statements

This news release contains statements regarding our expectations, beliefs, intentions and views about our future financial performance and trends in our business or markets, which are “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 use of words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Due to a number of risks and uncertainties to which our business is subject, our actual financial performance in the future may differ, possibly significantly, from our expected future financial performance as set forth in the forward-looking statements contained in this news release. These risks and uncertainties relate to such matters as, but are not limited to, the following:

• Possible increases in competition from other financial institutions, which could prevent us from increasing our loan volume or require us to reduce the interest rates we are able to charge on the loans we make or to increase the interest rates we must offer in order to attract or retain deposits.
• Adverse changes in local or national economic conditions, which could lead to a decline in loan volume, a reduction in net interest income or an increase in loan defaults, any or all of which could result in declines in our net interest income and in our net income.
• Changes in Federal Reserve Board monetary policies which directly affect prevailing market rates of interest and, therefore, could cause increases in our costs of funds and affect the willingness or ability of customers to borrow money, or decreases in interest rates we are able to charge on the loans we make, any of which could result in reductions in our net interest income and in our net income.
• The risk that declines in real property values in Southern California will result in a deterioration in the performance of our loan portfolio, which could necessitate increases in the provisions we must make for possible loan losses, or would result in a reduction in loan demand, which would cause our net interest income and net income to decline.
• The worsening economic conditions and the recent credit crisis in the United States, which has reduced the confidence of consumers and businesses and adversely affected our operating results, due to decreases in prevailing market rates of interest rates primarily as a result of actions of the Federal Reserve Board to reduce interest rates in order to stimulate the economy, an increase in problem loans and other real estate owned, which has required us to increase the provisions that we have made for possible loan losses, and an increase in deposit withdrawals by customers, which has required us to increase more costly time deposits to fund our operations. These conditions, moreover, could continue to adversely affect our net interest income and results of operations at least for the next 6 to 12 months.
• The possible adverse impact on our operating results if we are unable to manage our growth or achieve profitability at new financial center locations, or if we are unable to successfully enter new markets or introduce new financial products or services that will gain market acceptance.
• The risks that natural disasters, such as earthquakes or fires, which are not uncommon in Southern California, could adversely affect our operating results.
• Our dependence on certain key officers for our future success, the loss of any of which could adversely affect our operating results
• Increased government regulation which could increase the costs of our operations or make us less competitive, particularly with financial service businesses that are not subject to bank regulations.

Certain of these, as well as other, risk factors and uncertainties are discussed in greater detail in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2007, filed with the Securities and Exchange Commission. Readers of this news release are urged to read the discussion of those risks and uncertainties that are contained in that Annual Report and are cautioned not to place undue reliance on the forward-looking statements contained in this news release, which speak only as of the date of this news release. The Company disclaims any obligation to update forward-looking statements whether as a result of new information, future events or otherwise.

CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share) (Unaudited)
		Three Months Ended September 30,											Nine Months Ended September 30,
										Percent											Percent
		2008				2007				Change			2008				2007				Change
Total interest income		$	15,230			$	18,057			(15.7	)%		$	46,262			$	53,109			(12.9	)%
Total interest expense			8,246				9,964			(17.2	)%			25,879				29,399			(12.0	)%
Net interest income			6,984				8,093			(13.7	)%			20,383				23,710			(14.0	)%
Provision for loan losses			1,625				300			441.7	%			5,441				925			488.2	%
Net interest income after provision for loan losses			5,359				7,793			(31.2	)%			14,942				22,785			(34.4	)%
Non-interest income
Service charges & fees on deposits			326				140			132.9	%			823				431			91.0	%
Gain on sale of securities			127				--			N/M				1,259				--			N/M
Net loss on sale of other real estate owned			--				--			N/M				(40	)			--			N/M
Other non-interest income			251				229			9.6	%			547				605			(9.6	)%
Total non-interest income			704				369			90.8	%			2,589				1,036			149.9	%
Non-interest expense
Salaries & employee benefits			3,226				2,919			10.5	%			9,348				8,694			7.5	%
Occupancy and equipment			937				983			(4.7	)%			2,882				2,990			(3.6	)%
Other real estate owned			65				--			N/M				494				--			N/M
Amortization of debt issuance cost			4				457			(99.1	)%			10				486			(97.9	)%
Other non-interest expense			1,334				1,505			(11.4	)%			4,221				4,187			0.8	%
Total non-interest expense			5,566				5,864			(5.1	)%%			16,955				16,357			3.7	%
Income before income taxes			497				2,298			(78.4	)%			576				7,464			(92.3	)%
Income tax expense			143				867			(83.5	)%			51				2,896			(98.2	)%
Net Income		$	354			$	1,431			(75.3	)%		$	525			$	4,568			(88.5	)%
Net income per share:
Basic		$	0.03			$	0.14						$	0.05			$	0.44
Diluted		$	0.03			$	0.13						$	0.05			$	0.42
Cash dividends per share		$	--			$	--						$	0.10			$	--
Weighted average shares outstanding (1)
Basic			10,475				10,466							10,482				10,397
Diluted			10,479				10,906							10,595				10,868
Ratios from continuing operations(2)
ROA			0.13	%			0.51	%						0.06	%			0.56	%
ROE			1.51	%			6.13	%						0.74	%			6.71	%
Efficiency ratio			72.40	%			69.30	%						73.81	%			66.10	%
Net interest margin (2)			2.56	%			2.94	%						2.52	%			2.97	%
(1) In thousands.
(2) Ratios and net interest margin for the three months ended September 30, 2008 and 2007 have been annualized.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited)
		September 30,						Percent
ASSETS		2008			2007			Increase/(Decrease)
Cash and due from banks		$	21,836		$	16,775		30.2	%
Fed funds sold			62,510			89,785		(30.4	)%
Interest bearing deposits			198			198		0.0	%
Investments			223,913			263,143		(14.9	)%
Loans (net of allowance of $8,371 and $5,556, respectively)			831,752			739,202		12.5	%
Investment in unconsolidated trust subsidiaries			682			682		0.0	%
Other assets			26,420			18,425		43.4	%
Total Assets		$	1,167,311		$	1,128,210		3.5	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits		$	169,753		$	205,274		(17.3	)%
Interest bearing deposits
Interest checking			20,602			24,488		(15.9	)%
Savings/money market			107,653			149,685		(28.1	)%
Certificates of deposit			492,690			397,839		23.8	%
Total interest bearing deposits			620,945			572,012		8.6	%
Total deposits			790,698			777,286		1.7	%
Other borrowings			248,719			201,404		23.5	%
Other liabilities			16,532			37,578		(56.0	)%
Junior subordinated debentures			17,527			17,527		0.0	%
Total liabilities			1,073,476			1,033,795		3.8	%
Shareholders' equity			93,835			94,415		(0.6	)%
Total Liabilities and Shareholders' Equity		$	1,167,311		$	1,128,210		3.5	%
Tangible book value per share(1)		$	9.34		$	9.20
Shares outstanding			10,475,471			10,505,899
(1) Excludes accumulated other comprehensive income/loss, which was included in shareholders’ equity.

Average Balances		Year Ended September 30,
		2008			2007
		(In thousands)
Average gross loans(a)		$	796,929		$	739,797
Average earning assets		$	1,078,461		$	1,065,742
Average assets		$	1,111,465		$	1,093,774
Average equity		$	95,288		$	91,059
Average interest bearing deposits		$	591,711		$	571,969
(a) Excludes loans held for sale and allowance for loan loss (ALL).

Credit Quality Data (Dollars in thousands)		At September 30,
		2008				2007
Total non-accruing loans		$	20,294			$	6,174
Other real estate owned		$	5,957			$	--
Total non-performing assets		$	26,251			$	6,174
90-day past due loans		$	15,847			$	5,642
Net charge-offs year-to-date		$	3,196			$	1,298
Allowance for loan losses		$	8,371			$	5,556
Allowance for loan losses/gross loans (excl. loans held for sale)			1.00	%			0.75	%
Allowance for loan losses/total assets			0.72	%			0.49	%