Pacific Mercantile Bancorp Reports First Quarter 2008 Operating Results

COSTA MESA, Calif.--(Business Wire)--
Pacific Mercantile Bancorp (NASDAQ:PMBC) today reported its
results of operations for the first quarter ended March 31, 2008.

Overview

During the first quarter ended March 31, 2008, the Company's net
income totaled $1.0 million, or $0.09 per diluted share, as compared
to $1.6 million, or $0.15 per diluted share, in the same quarter of
2007, a decline of $594,000. This decline was primarily attributable
to (i) an $887,000 decline in net interest income, (ii) a $775,000
increase in provision for loan losses, and (iii) a $595,000 increase
in non-interest expense, partially offset by a $1.1 million gain on
the sale of securities available for sale.

During the last twelve months, the Company continued to enhance
shareholder value by:

-- declaring and paying our first cash dividend during the first
quarter of 2008, in the amount of $0.10 per share, to reward
our shareholders for their loyalty and support;

-- reducing our outstanding Federal Home Loan Bank borrowings by
$16 million, or 7%; to $215 million at March 31, 2008, from
$231 million at March 31, 2007;

-- improving the mix of our interest-earning assets, by
increasing the volume of total loans outstanding by $58
million, or 8%, to $787 million at March 31, 2008, from $729
million at March 31, 2007; and

-- retiring $10 million of junior subordinated debentures in the
third quarter of 2007.

"We recognize and thank our valued shareholders and customers who
bank at Pacific Mercantile Bank, where quality banks," stated Raymond
E. Dellerba, the Company's President and Chief Executive Officer.

Mr. Dellerba continued, "We believe that the Company experienced a
good quarter as compared to peer, regional, and world banks. The
management team navigated a course which steered us away from many of
the problems facing banks today, with the foresight to exit the
mortgage business in 2005, and the decision to curtail new
construction lending in early 2007, in response to worsening trends in
the real estate market. As a result, we were able to reduce our total
construction loan portfolio at March 31, 2008 to $34 million, or 4.2%
of total loans outstanding, as compared to $54 million, or 7.3%, at
March 31, 2007. The Company was not altogether immune from the
worsening economy, as it did experience some increase in problem
assets beginning in the fourth quarter of 2007. However, that increase
was relatively small when compared to increases in problem assets
reported by many other banks. The Company continues to work diligently
to capitalize on the current economic environment to strengthen and
expand its good customer relationships in order to grow deposits and
loans."

Results of Operations

Net Interest Income. Net interest income, a primary measure of
bank profitability, decreased in the first quarter of 2008 by
$887,000, or 11%, to $6.9 million, from $7.8 million in the first
quarter of the prior year, due to a decrease of $1.3 million, or 7.3%,
in interest income, which more than offset a decrease in interest
expense of $369,000, or 3.9%.

The decrease in interest income in the first quarter ended March
31, 2008, as compared to the same quarter in 2007, was due primarily
to a 300 basis points decline in the prime rate since September 18,
2007, resulting primarily from decreases implemented by the Federal
Reserve Board in the federal funds rate. The decrease in interest
income was partially offset by a change in the mix of earning assets,
as we increased higher yielding loans by $58 million during this
year's first quarter, as compared to the same quarter of 2007, funded
in large part with the proceeds from a $46 million reduction in
lower-yielding federal funds sold. The decrease in interest expense
during the quarter ended March 31, 2008, as compared to the quarter
ended March 31, 2007, was primarily attributable to a decrease in
interest rates paid on interest bearing deposits, partially offset by
increases in the volume of interest-bearing deposits.

Our net interest margin declined by 47 basis points to 2.60% in
the three months ended March 31, 2008, from 3.07% in the same period
of 2007, due primarily to the decline in prevailing market rates of
interest.

"During the first quarter of 2008, our net interest margin
continued to compress as the competition for deposits prevented us
from reducing interest rates paid on deposits to match the decline in
interest rates charged on loans that resulted from the decline in
prevailing market rates of interest. Interest rates on loans declined
primarily as a result of the Federal Reserve Board's 300 basis point
reduction in the federal funds rate, implemented over a relatively
short period of time in response to the deteriorating economic
conditions and the mortgage crisis," said Nancy A. Gray, Executive
Vice President and Chief Financial Officer.

Provision for Loan Losses. During the three months ended March 31,
2008, we made provisions for possible loan losses totaling $1.1
million, compared to $300,000 in the same three months of 2007, in
response to: (i) a $2.7 million increase in non-performing loans
during the first quarter of 2008 from the fourth quarter of 2007;
(ii) an increase in net loan charge-offs, which required us to make
provisions to replenish the allowance for loan losses; (iii) the
growth of our loan portfolio; and (iv) a worsening of economic
conditions, which increased the risks of loan defaults by borrowers.
During the first quarter of 2008, net loan charge-offs totaled
$540,000, as compared to $408,000 in the first quarter of 2007.

Non-interest Income. Non-interest income increased by $1.1
million, or 318%, to $1.5 million in the first quarter of 2008, from
$353,000 for the same period in 2007, primarily as a result of a $1.1
million gain recognized, during the first quarter of 2008, on sales of
securities available for sale. Those sales were made in response to
the repositioning of our securities available for sale portfolio in
the overall asset/liability management of the Bank.

Non-interest Expense. Non-interest expense increased by $595,000,
or 12%, in the three months ended March 31, 2008, as compared to the
same three months of 2007. That increase was, for the most part,
attributable to an increase of $308,000 in compensation expense, due
primarily to the addition of commercial loan officers during 2007, as
part of our initiative to increase commercial loans and decrease real
estate and real estate construction loans, and a $303,000 increase in
other non-interest expenses, consisting primarily of (i) a $123,000
increase in Federal Deposit Insurance assessments (that are paid by
all federally insured banking institutions) resulting from the 2007
change in assessment formulas mandated by the Federal Deposit
Insurance Reform Act of 2005, (ii) a $97,000 increase in professional
fees, and (iii) recognition of $81,000 of expenses associated with
acquisition and resale of other real estate owned. Due primarily to
the increase in non-interest expense and the decline in total revenues
(net interest income, plus non-interest income) in the three months
ended March 31, 2008, our efficiency ratio (non-interest expense as a
percentage of total revenues) increased to 68% in the first quarter of
2008, from 63% in the quarter ended March 31, 2007.

Provision for Income Taxes. Our effective tax rate for the three
months ended March 31, 2008 decreased to 37% from 41% for the three
months ended March 31, 2007, due in part to an increase in tax free
investments during 2007 and the decline in pre-tax income in the three
months ended March 31, 2008. As a result, the provision that we made
for income taxes decreased by $542,000, or 48%, in the three months
ended March 31, 2008, as compared to the three months ended March 31,
2007.

Balance Sheet Growth and Asset Quality

Loans and Assets. Loans (net of the allowance for loan losses)
increased by $58 million, or 8%, to $787 million at March 31, 2008,
from $729 million at March 31, 2007. We decreased federal funds sold
by $46 million to $50 million at March 31, 2008, from $96 million at
March 31, 2007. Securities available for sale decreased by $19 million
to $225 million at March 31, 2008, from $244 million at March 31,
2007. The decreases in federal funds sold and in investments were
substantially, but not fully, offset by the increase in loans
outstanding. As a result, total assets decreased slightly, to $1.103
billion at March 31, 2008, from $1.105 billion one year earlier.

Deposits and Other Interest Bearing Liabilities. Deposits
increased, growing by $19 million, or 3%, to $759 million at March 31,
2008, from $740 million at March 31, 2007, primarily as a result of
(i) a $21 million, or 16% increase in savings and money market
deposits, to $154 million at March 31, 2008, from $133 million at
March 31, 2007 and (ii) a $24 million, or 6%, increase in time
deposits to $418 million at Mach 31, 2008, from $395 million at March
31, 2007, which more than offset a 11.7% decrease in non-interest
bearing deposits. As a result of these changes in the mix of deposits,
at March 31, 2008, non-interest bearing deposits totaled 22.2%, and
time deposits (in denominations both below and above $100,000) totaled
55.1%, of total deposits, as compared to 25.7% and 53.1%,
respectively, of total deposits at March 31, 2007.

Non-Performing Loans and Allowance for Loan Losses. Due to
worsening economic conditions and the mortgage crisis, loans that were
90 days past due or impaired totaled $11.9 million at March 31 2008,
of which $10.7 million, or 1.4% of total loans outstanding at March
31, 2008, were classified as non-performing. By comparison, at March
31, 2007, loans that were 90 days past due or impaired totaled $4.4
million, all of which were classified as non-performing, and
represented 0.6% of total loans outstanding at March 31, 2007. We had
$3.3 million of restructured loans at March 31, 2008 and no
restructured loans at March 31, 2007. Due to the additional provisions
we made for possible loan losses subsequent to March 31, 2007, the
allowance for loan losses totaled $6.7 million, or 0.84%, of loans
outstanding, at March 31, 2008, as compared to $5.8 million and 0.79%,
respectively, at March 31, 2007.

Ms. Gray commented, "At March 31, 2008 there were three single
family residences and one interim construction loan on a condominium
project, with carrying values totaling nearly $4.7 million, which were
classified as other real estate owned. One of those single family
residences was sold in April 2008 and another is in escrow with a
closing anticipated by June 1, 2008."

Cash Dividend and Share Repurchases. In the first quarter of 2008,
the Board of Directors declared and the Company paid a one time cash
dividend, in the amount of $0.10 per share, to our shareholders. The
total dollar amount of that dividend was $1.049 million.

Pursuant to the Company's previously announced stock repurchase
program, during the three months ended March 31, 2008, the Company
repurchased 4,900 shares of its common stock in open market
transactions, for an aggregate purchase price of $43,743.

Capital and Capital Adequacy. At March 31, 2008, the Company's
total capital was $122.2 million, down from $126.0 million at March
31, 2007 as a result of the payoff of $10 million junior subordinated
debentures in the third quarter of 2007 and the cash dividend paid to
shareholders in this year's first quarter. Notwithstanding that
decrease, however, the Company continued to be classified as
"well-capitalized" under applicable regulatory capital adequacy
guidelines at March 31, 2008. The Company's tangible book value per
share increased to $9.36 at March 31, 2008, from $8.98 at March 31,
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, which is an FDIC insured, California state-chartered bank and a
member of the Federal Reserve System, 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 or an increase in
loan delinquencies that would 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 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 which 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.

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*T
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share)
(Unaudited)

Three Months Ended March 31,
----------------------------

Percent
2008 2007 Change
--------- --------- --------

Total interest income $ 15,904 $ 17,160 (7.3)%
Total interest expense 9,019 9,388 (3.9)%
--------- ---------
Net interest income 6,885 7,772 (11.4)%
Provision for loan losses 1,075 300 258.3%
--------- ---------
Net interest income after provision for
loan losses 5,810 7,472 (22.2)%
Non-interest income
Service charges & fees on deposits 211 187 12.8%
Gain of sale of securities 1,080 -- N/M
Other non-interest income 183 166 10.2%
--------- ---------
Total non-interest income 1,474 353 317.6%
Non-interest expense
Salaries & employee benefits 3,290 2,982 10.3%
Occupancy and equipment 966 982 (1.6)%
Other non-interest expense 1,440 1,137 26.7%
--------- ---------
Total non-interest expense 5,696 5,101 11.7%
--------- ---------
Income before income taxes 1,588 2,724 (41.7)%
Income tax expense 588 1,130 (48.0)%
--------- ---------
Net Income $ 1,000 $ 1,594 (37.3)%
========= =========

Net income(loss) per share:
Basic $ 0.10 $ 0.15
Diluted $ 0.09 $ 0.15

Cash dividends per share $ 0.10 $ --

Weighted average shares outstanding (in
thousands)
Basic 10,491 10,325
Diluted 10,676 10,717

Ratios from continuing operations(1)
ROA 0.37% 0.64%
ROE 4.08% 7.25%
Efficiency ratio 68.14% 62.94%

Net interest margin (1) 2.60% 3.07%

(1) Ratios and net interest margin for the three months ended March
31, 2008 and 2007 have been annualized.
*T

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*T
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(Unaudited)

March 31, Percent
-----------------------
ASSETS 2008 2007 Increase/(Decrease)
----------- ----------- -------------------

Cash and due from banks $ 16,243 $ 16,241 0.0%
Fed funds sold 50,160 96,300 (47.9)%
Interest bearing deposits 198 198 0.0%
Investments 225,344 244,069 (7.7)%
Loans (net of allowance of
$6,661 and $5,821,
respectively) 787,410 729,349 8.0%
Investment in
unconsolidated trust
subsidiaries 682 837 (18.5)%
Other assets 22,796 17,875 27.5%
----------- -----------
Total Assets $ 1,102,833 $ 1,104,869 (0.2)%
=========== ===========

LIABILITIES AND
SHAREHOLDERS' EQUITY
Non-interest bearing
deposits $ 168,230 $ 190,536 (11.7)%
Interest bearing deposits
Interest checking 17,885 22,006 (18.7)%
Savings/money market 154,350 133,043 16.0%
Certificates of deposit 418,280 394,603 6.0%
----------- -----------
Total interest bearing
deposits 590,515 549,652 7.4%
----------- -----------
Total deposits 758,745 740,188 2.5%
Other borrowings 222,379 238,405 (6.7)%
Other liabilities 7,363 8,418 (12.5)%
Junior subordinated
debentures 17,527 27,837 (37.0)%
----------- -----------
Total liabilities 1,006,014 1,014,848 (0.9)%
Shareholders' equity 96,819 90,021 7.6%
----------- -----------
Total Liabilities
and Shareholders'
Equity $ 1,102,833 $ 1,104,869 (0.2)%
=========== ===========

Tangible book value per
share(1) $ 9.36 $ 8.98
=========== ===========
Shares outstanding 10,487,149 10,335,364

(1) Excludes accumulated other comprehensive income/loss, which was
included in shareholders' equity.
*T

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Average Balances Year Ended March 31,
---------------------
2008 2007
---------- ----------
(In thousands)

Average gross loans(a) $ 783,057 $ 742,140
Average earning assets $1,063,057 $1,029,865
Average assets $1,093,472 $1,057,669
Average equity $ 98,196 $ 89,164
Average interest bearing deposits $ 590,389 $ 547,537

(a) Excludes loans held for sale and allowance for loan loss (ALL).
*T

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Credit Quality Data (Dollars in thousands) At March 31,
-----------------
2008 2007
-------- --------

Total non-performing assets $ 15,383 $ 4,405
Total non-accruing loans $ 10,734 $ 4,405
Other Real Estate Owned $ 4,649 $ --
90-day past due loans $ 11,888 $ 4,405
Net charge-offs year-to-date $ 540 $ 408
Allowance for loan losses $ 6,661 $ 5,821
Allowance for loan losses/gross loans (excl. loans
held for sale) 0.84% 0.79%
Allowance for loan losses/total assets 0.60% 0.53%
*T

Pacific Mercantile Bancorp
Nancy Gray, EVP & CFO, 714-438-2500
or
Barbara Palermo, EVP & IR, 714-438-2500

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