##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10Q



---

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number
030777



---

PACIFIC MERCANTILE BANCORP

(Exact name of Registrant as specified in its charter)



---



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|California                                                     |  | 330898238                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                         |  |           
|-------------------------------------------------------- |  | ----------
|949 South Coast Drive, Suite 300, Costa Mesa, California |  | 92626     
|(Address of principal executive offices)                 |  | (Zip Code)

(714) 4382500

(Registrants telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed, since last year)



---

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.) (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

10,435,262 shares of Common Stock as of August 3, 2007



---



---

##### Table of Contents

PACIFIC MERCANTILE BANCORP

QUARTERLY REPORT ON FORM 10Q

FOR

THE QUARTER ENDED JUNE 30, 2007

TABLE OF CONTENTS



|              |  |                                                                                                           |  |                                                                                                          |  |         
|------------- |  | --------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------
|              |  |                                                                                                           |  |                                                                                                          |  | Page No.
|Part I.       |  | Financial Information                                                                                     |  |                                                                                                         
|              |  |                                                                                                           | 
|              |  | Item 1.                                                                                                   |  | Financial Statements                                                                                     |  | 1       
|              |  |                                                                                                           | 
|              |  |                                                                                                           |  | Consolidated Statements of Financial Condition at June 30, 2007 and December 31, 2006                    |  | 1       
|              |  |                                                                                                           | 
|              |  |                                                                                                           |  | Consolidated Statements of Income for the Three and Six Months ended June 30, 2007 and 2006              |  | 2       
|              |  |                                                                                                           | 
|              |  |                                                                                                           |  | Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, 2007 and 2006 |  | 3       
|              |  |                                                                                                           | 
|              |  |                                                                                                           |  | Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007 and 2006                    |  | 4       
|              |  |                                                                                                           | 
|              |  |                                                                                                           |  | Notes to Consolidated Financial Statements                                                               |  | 6       
|              |  |                                                                                                           | 
|              |  | Item 2.                                                                                                   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                    |  | 13      
|              |  |                                                                                                           | 
|              |  | Item 3.                                                                                                   |  | Market Risk                                                                                              |  | 32      
|              |  |                                                                                                           | 
|              |  | Item 4.                                                                                                   |  | Controls and Procedures                                                                                  |  | 32      
|              |  |                                                                                                          
|Part II.      |  |                                                                                                           |  |                                                                                                         
|              |  |                                                                                                           | 
|              |  | Item 1A.                                                                                                  |  | Risk Factors                                                                                             |  | 33      
|              |  |                                                                                                           | 
|              |  | Item 2.                                                                                                   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  | 33      
|              |  |                                                                                                           | 
|              |  | Item 4.                                                                                                   |  | Submission of Matters to a Vote of Security Holders                                                      |  | 33      
|              |  |                                                                                                           | 
|              |  | Item 6.                                                                                                   |  | Exhibits                                                                                                 |  | 34      
|              |  |                                                                                                          
|Signatures    |  |                                                                                                           |  | S1                                                                                                     
|              |  |                                                                                                          
|Exhibit Index |  |                                                                                                           |  | E1                                                                                                     
|              |  |                                                                                                          
|              |  | Exhibit 31.1 Certification of Chief Executive Officer under Section 302 of the SarbanesOxley Act of 2002 |  |                                                                                                         
|              |  |                                                                                                          
|              |  | Exhibit 31.2 Certification of Chief Financial Officer under Section 302 of the SarbanesOxley Act of 2002 |  |                                                                                                         
|              |  |                                                                                                          
|              |  | Exhibit 32.1 Certification of Chief Executive Officer under Section 906 of the SarbanesOxley Act of 2002 |  |                                                                                                         
|              |  |                                                                                                          
|              |  | Exhibit 32.2 Certification of Chief Financial Officer under Section 906 of the SarbanesOxley Act of 2002 |  |                                                                                                         



---

##### Table of Contents

PART I.  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

(Unaudited)



|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                           |  | June 30,2007 |           |   | December 31,2006 |  
|ASSETS                                                                                                                                                                     |  |              |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                    |  | $            | 18,161    |   |                  | $ | 13,304    |  
|Federal funds sold                                                                                                                                                         |  |              | 101,000   |   |                  |   | 13,000    |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                  |  |              | 119,161   |   |                  |   | 26,304    |  
|Interest-bearing deposits with financial institutions                                                                                                                      |  |              | 198       |   |                  |   | 198       |  
|Federal Reserve Bank and Federal Home Loan Bank Stock, at cost                                                                                                             |  |              | 13,215    |   |                  |   | 13,792    |  
|Securities available for sale, at fair value                                                                                                                               |  |              | 225,885   |   |                  |   | 241,912   |  
|Loans (net of allowances of $6,029 and $5,929, respectively)                                                                                                               |  |              | 740,541   |   |                  |   | 740,957   |  
|Investment in unconsolidated subsidiaries                                                                                                                                  |  |              | 837       |   |                  |   | 837       |  
|Accrued interest receivable                                                                                                                                                |  |              | 4,755     |   |                  |   | 4,877     |  
|Premises and equipment, net                                                                                                                                                |  |              | 1,842     |   |                  |   | 2,152     |  
|Other assets                                                                                                                                                               |  |              | 13,239    |   |                  |   | 11,500    |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total assets                                                                                                                                                               |  | $            | 1,119,673 |   |                  | $ | 1,042,529 |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                       |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                  |  |              |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                        |  | $            | 183,742   |   |                  | $ | 189,444   |  
|Interest-bearing                                                                                                                                                           |  |              | 583,944   |   |                  |   | 528,349   |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                                                             |  |              | 767,686   |   |                  |   | 717,793   |  
|Borrowings                                                                                                                                                                 |  |              | 225,683   |   |                  |   | 201,797   |  
|Accrued interest payable                                                                                                                                                   |  |              | 3,872     |   |                  |   | 2,930     |  
|Other liabilities                                                                                                                                                          |  |              | 3,746     |   |                  |   | 4,246     |  
|Junior subordinated debentures                                                                                                                                             |  |              | 27,837    |   |                  |   | 27,837    |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                          |  |              | 1,028,824 |   |                  |   | 954,603   |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Commitments and contingencies                                                                                                                                              |  |              |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                      |  |              |           |   |                  |   |           |  
|Preferred stock, no par value, 2,000,000 shares authorized, none issued                                                                                                    |  |              |          |   |                  |   |          |  
|Common stock, no par value, 20,000,000 shares authorized, and 10,410,262 and 10,308,364 shares issued and outstanding at June 30, 2007
and December 31, 2006, respectively |  |              | 71,304    |   |                  |   | 70,790    |  
|Retained earnings                                                                                                                                                          |  |              | 23,214    |   |                  |   | 20,076    |  
|Accumulated other comprehensive loss                                                                                                                                       |  |              | (3,669    | ) |                  |   | (2,940    | )
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                 |  |              | 90,849    |   |                  |   | 87,926    |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                 |  | $            | 1,119,673 |   |                  | $ | 1,042,529 |  
|                                                                                                                                                                           |  |              |           |   |                  |   |           |  

The accompanying notes are an integral part of these consolidated financial statements.



1



---

##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except for per share data)

(Unaudited)



|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|-------------------------------------------------------- |  | --------------------------- | ---------- | ---- | ------------------------- | ---------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                                         |  | Three Months Ended June 30, |            |      | Six Months Ended June 30, |           
|                                                         |  | 2007                        |            | 2006 |                           |            | 2007 |  | 2006 |           
|Interest income:                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Loans, including fees                                    |  | $                           | 13,957     |      | $                         | 12,587     |      |  | $    | 27,670     |  | $ | 24,073     |  
|Federal funds sold                                       |  |                             | 1,181      |      |                           | 248        |      |  |      | 1,754      |  |   | 356        |  
|Securities available for sale and stock                  |  |                             | 2,752      |      |                           | 2,647      |      |  |      | 5,624      |  |   | 5,447      |  
|Interest-bearing deposits with financial institutions    |  |                             | 2          |      |                           | 201        |      |  |      | 4          |  |   | 402        |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Total interest income                                    |  |                             | 17,892     |      |                           | 15,683     |      |  |      | 35,052     |  |   | 30,278     |  
|Interest expense:                                        |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Deposits                                                 |  |                             | 6,549      |      |                           | 4,042      |      |  |      | 12,636     |  |   | 7,312      |  
|Borrowings                                               |  |                             | 3,497      |      |                           | 3,377      |      |  |      | 6,799      |  |   | 6,543      |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Total interest expense                                   |  |                             | 10,046     |      |                           | 7,419      |      |  |      | 19,435     |  |   | 13,855     |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net interest income                                      |  |                             | 7,846      |      |                           | 8,264      |      |  |      | 15,617     |  |   | 16,423     |  
|Provision for loan losses                                |  |                             | 325        |      |                           | 335        |      |  |      | 625        |  |   | 560        |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net interest income after provision for loan losses      |  |                             | 7,521      |      |                           | 7,929      |      |  |      | 14,992     |  |   | 15,863     |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Noninterest income                                       |  |                             | 315        |      |                           | 327        |      |  |      | 668        |  |   | 605        |  
|Noninterest expense                                      |  |                             | 5,393      |      |                           | 5,261      |      |  |      | 10,493     |  |   | 10,357     |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Income before income taxes                               |  |                             | 2,443      |      |                           | 2,995      |      |  |      | 5,167      |  |   | 6,111      |  
|Income tax expense                                       |  |                             | 899        |      |                           | 1,235      |      |  |      | 2,029      |  |   | 2,475      |  
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Income from continuing operations                        |  |                             | 1,544      |      |                           | 1,760      |      |  |      | 3,138      |  |   | 3,636      |  
|(Loss) income from discontinued operations, net of taxes |  |                             |           |      |                           | (73        | )    |  |      |           |  |   | (189       | )
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net income                                               |  | $                           | 1,544      |      | $                         | 1,687      |      |  | $    | 3,138      |  | $ | 3,447      |  
|Net income (loss) per share basic:                       |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Income from continuing operations                        |  | $                           | 0.15       |      | $                         | 0.18       |      |  | $    | 0.30       |  | $ | 0.36       |  
|Income (loss) from discontinued operations               |  | $                           | 0.00       |      | $                         | (0.01      | )    |  | $    | 0.00       |  | $ | (0.02      | )
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net income                                               |  | $                           | 0.15       |      | $                         | 0.17       |      |  | $    | 0.30       |  | $ | 0.34       |  
|Net income (loss) per share diluted:                     |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Income from continuing operations                        |  | $                           | 0.14       |      | $                         | 0.17       |      |  | $    | 0.29       |  | $ | 0.34       |  
|Income (loss) from discontinued operations               |  | $                           | 0.00       |      | $                         | (0.01      | )    |  | $    | 0.00       |  | $ | (0.02      | )
|                                                         |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Net income                                               |  | $                           | 0.14       |      | $                         | 0.16       |      |  | $    | 0.29       |  | $ | 0.32       |  
|Weighted average number of shares:                       |  |                             |            |      |                           |            |      |  |      |            |  |   |            |  
|Basic                                                    |  |                             | 10,396,999 |      |                           | 10,248,408 |      |  |      | 10,361,396 |  |   | 10,226,763 |  
|Diluted                                                  |  |                             | 10,682,401 |      |                           | 10,757,288 |      |  |      | 10,689,768 |  |   | 10,751,344 |  

The accompanying notes are an integral part of these consolidated financial statements.



2



---

##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)



|                                                                                                                                   |  |                            |       |   |                          |   |        |      |  |   |       |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                                                   |  | Three MonthsEnded June 30, |       |   | Six MonthsEnded June 30, |  
|                                                                                                                                   |  | 2007                       |       |   | 2006                     |   |        | 2007 |  |   | 2006  |  
|Net income                                                                                                                         |  | $                          | 1,544 |   |                          | $ | 1,687  |      |  | $ | 3,138 |   |  | $ | 3,447  |  
|Other comprehensive loss, net of tax:                                                                                              |  |                            |       |   |                          |   |        |      |  |   |       |   |  |   |        |  
|Change in unrealized gain (loss) on securities available for sale, net of tax effect                                               |  |                            | (936  | ) |                          |   | (1,365 | )    |  |   | (636  | ) |  |   | (2,083 | )
|Change in net unrealized gain (loss) and prior service benefit (cost) on supplemental executive retirement plan, net of tax
effect |  |                            | 10    |   |                          |   |       |      |  |   | (93   | ) |  |   |       |  
|                                                                                                                                   |  |                            |       |   |                          |   |        |      |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                                                         |  | $                          | 618   |   |                          | $ | 322    |      |  | $ | 2,409 |   |  | $ | 1,364  |  
|                                                                                                                                   |  |                            |       |   |                          |   |        |      |  |   |       |   |  |   |        |  

The accompanying notes are an integral part of these consolidated financial statements.



3



---

##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                                                |  |                          |        |   |      |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                                |  | Six Months EndedJune 30, |       
|                                                                                                |  | 2007                     |        |   | 2006 |  
|Cash Flows From Continuing Operating Activities:                                                |  |                          |        |   |      |   |         |  
|Income from continuing operations                                                               |  | $                        | 3,138  |   |      | $ | 3,636   |  
|Adjustments to reconcile net income to net cash provided by operating activities:               |  |                          |        |   |      |   |         |  
|Depreciation and amortization                                                                   |  |                          | 412    |   |      |   | 339     |  
|Provision for loan losses                                                                       |  |                          | 625    |   |      |   | 560     |  
|Net amortization of premium (discount) on securities                                            |  |                          | 36     |   |      |   | 248     |  
|Mark to market loss adjustment of equity securities                                             |  |                          | 50     |   |      |   | 61      |  
|Net gain on sale of fixed assets                                                                |  |                          |       |   |      |   | (3      | )
|Stock-based compensation expense                                                                |  |                          | 278    |   |      |   | 337     |  
|Net decrease (increase) in accrued interest receivable                                          |  |                          | 122    |   |      |   | (277    | )
|Net increase in other assets                                                                    |  |                          | (300   | ) |      |   | (3,078  | )
|Net decrease (increase) in deferred taxes                                                       |  |                          | (930   | ) |      |   | 1,034   |  
|Net decrease in accrued interest payable                                                        |  |                          | 942    |   |      |   | 272     |  
|Net decrease (increase) in other liabilities                                                    |  |                          | (657   | ) |      |   | 251     |  
|                                                                                                |  |                          |        |   |      |   |         |  
|Net cash provided by operating activities                                                       |  |                          | 3,716  |   |      |   | 3,380   |  
|Cash Flows From Investing Activities:                                                           |  |                          |        |   |      |   |         |  
|Maturities of and principal payments received for securities available for sale and other stock |  |                          | 19,979 |   |      |   | 26,125  |  
|Purchase of securities available for sale and other stock                                       |  |                          | (4,541 | ) |      |   | (1,638  | )
|Proceeds from sale of subsidiary                                                                |  |                          |       |   |      |   | 134     |  
|Gain on sale of subsidiary                                                                      |  |                          |       |   |      |   | (2      | )
|Net increase in loans                                                                           |  |                          | (209   | ) |      |   | (58,922 | )
|Purchases of premises and equipment                                                             |  |                          | (102   | ) |      |   | (305    | )
|                                                                                                |  |                          |        |   |      |   |         |  
|Net cash provided by (used) in investing activities                                             |  |                          | 15,127 |   |      |   | (34,608 | )
|Cash Flows From Financing Activities:                                                           |  |                          |        |   |      |   |         |  
|Net increase in deposits                                                                        |  |                          | 49,893 |   |      |   | 61,451  |  
|Proceeds from exercise of stock options                                                         |  |                          | 923    |   |      |   | 423     |  
|Tax benefits from exercise of stock options                                                     |  |                          |       |   |      |   | 268     |  
|Net decrease from share buyback                                                                 |  |                          | (688   | ) |      |   |        |  
|Net increase (decrease) in borrowings                                                           |  |                          | 23,886 |   |      |   | (35,013 | )
|                                                                                                |  |                          |        |   |      |   |         |  
|Net cash provided by financing activities                                                       |  |                          | 74,014 |   |      |   | 27,129  |  
|                                                                                                |  |                          |        |   |      |   |         |  
|Cash Flows provided by continuing operations                                                    |  |                          | 92,857 |   |      |   | (4,099  | )

The accompanying notes are an integral part of these consolidated financial statements.



4



---

##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWScontinued

(Dollars in thousands)

(Unaudited)



|                                                                                                                          |  |                          |         |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------ | -
|                                                                                                                          |  | Six Months EndedJune 30, |        
|                                                                                                                          |  | 2007                     |         | 2006 |  
|Discontinued Operations:                                                                                                  |  |                          |         |      |   |        |  
|Cash Flows From Operating Activities                                                                                      |  |                          |         |      |   |        |  
|Loss from discontinued operations                                                                                         |  |                          |        |      |   | (189   | )
|Depreciation and Amortization                                                                                             |  |                          |        |      |   | 2      |  
|Net decrease in other assets                                                                                              |  |                          |        |      |   | 181    |  
|Net decrease in fixed assets                                                                                              |  |                          |        |      |   | 11     |  
|Net decrease in other liabilities                                                                                         |  |                          |        |      |   | (49    | )
|                                                                                                                          |  |                          |         |      |   |        |  
|Net cash used by operating activities                                                                                     |  |                          |        |      |   | (44    | )
|Cash Flows From Investing Activities:                                                                                     |  |                          |         |      |   |        |  
|Net decrease in interest-bearing deposits with financial institutions                                                     |  |                          |        |      |   | 142    |  
|                                                                                                                          |  |                          |         |      |   |        |  
|Net cash flow provided in investing activities                                                                            |  |                          |        |      |   | 142    |  
|                                                                                                                          |  |                          |         |      |   |        |  
|Cash Flows used by discontinued operations                                                                                |  |                          |        |      |   | 98     |  
|Net increase (decrease) in cash and cash equivalents                                                                      |  |                          | 92,857  |      |   | (4,001 | )
|Cash and Cash Equivalents, beginning of period                                                                            |  |                          | 26,304  |      |   | 34,822 |  
|                                                                                                                          |  |                          |         |      |   |        |  
|Cash and Cash Equivalents, end of period                                                                                  |  | $                        | 119,161 |      | $ | 30,821 |  
|                                                                                                                          |  |                          |         |      |   |        |  
|Supplementary Cash Flow Information:                                                                                      |  |                          |         |      |   |        |  
|Cash paid for interest on deposits and other borrowings                                                                   |  | $                        | 18,493  |      | $ | 13,595 |  
|                                                                                                                          |  |                          |         |      |   |        |  
|Cash paid for income taxes                                                                                                |  | $                        | 3,000   |      | $ | 3,000  |  
|                                                                                                                          |  |                          |         |      |   |        |  
|Non-Cash Investing Activities:                                                                                            |  |                          |         |      |   |        |  
|Net increase (decrease) in net unrealized losses on securities held for sale, net of income tax                           |  | $                        | 636     |      | $ | (2,083 | )
|                                                                                                                          |  |                          |         |      |   |        |  
|Net increase in net unrealized losses and prior year service cost on supplemental executive retirement, net of income tax |  |                          | 93      |      |   |       |  
|                                                                                                                          |  |                          |         |      |   |        |  

The accompanying notes are an integral part of these consolidated financial statements.



5



---

##### Table of Contents

Part I. Item 1. (continued)



PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of Business

Pacific Mercantile Bancorp (PMBC) is a bank holding company which, through its wholly owned subsidiary, Pacific Mercantile Bank (the
Bank) is engaged in the commercial banking business in Southern California. PMBC is registered as a one bank holding company under the United States Bank Holding Company Act of 1956, as amended. The Bank is chartered by the California
Department of Financial Institutions (the DFI) and is a member of the Federal Reserve Bank of San Francisco (FRB). In addition, the deposit accounts of the Banks customers are insured by the Federal Deposit Insurance
Corporation (FDIC) up to the maximum amount allowed by law. PMBC and the Bank, together, shall sometimes be referred to in this report as the Company or as we, us or our.

Substantially all of our operations are conducted and substantially all our assets are owned by the Bank, which accounts for substantially all of our
consolidated revenues and expenses, and earnings. The Bank provides a full range of banking services to small and medium-size businesses, professionals and the general public in Orange, Los Angeles, San Bernardino and San Diego Counties of
California and is subject to competition from other financial institutions conducting operations in those same markets.

During 2002, we
organized three business trusts, under the names Pacific Mercantile Capital Trust I, PMB Capital Trust I, and PMB Statutory Trust III, respectively, to facilitate our issuance $5.155 million, $5.155 million and $7.217 million, respectively,
principal amount of junior subordinated debentures, all with maturity dates in 2032. In October 2004, we organized PMB Capital Trust III to facilitate our issuance of an additional $10 million principal amount of junior subordinated debentures, with
a maturity date in 2034. In accordance with applicable accounting standards, the financial statements of these trusts are not included in the Companys consolidated financial statements. See Note 2: Significant Accounting Policies 
Principles of Consolidation below.

In July 2007, we redeemed the $5.155 million principal amount of junior subordinated
debentures issued in conjunction with the organization of Pacific Mercantile Capital Trust I and we plan to redeem, in August 2007, the $5.155 million principal amount of junior subordinated debentures issued in conjunction with the organization of
PMB Capital Trust I. Those trusts will be dissolved as a result of those redemptions. See Note 7: Subsequent Events below.

2. Significant
Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions
to Form 10Q and, therefore, do not include all footnotes that would be necessary for a fair presentation of financial position, results of operations, changes in cash flows and comprehensive income (loss) in accordance with generally accepted
accounting principles in the United States (GAAP). However, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of our management, are necessary for a
fair presentation of our results for the interim period presented.

These unaudited consolidated financial statements have been prepared on
a basis consistent with prior periods, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2006, and the notes thereto included in our Annual Report on Form 10K
for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

As described below under the subcaption Discontinued Operations in this Note 2, in the second quarter of 2006, the Company sold one of its subsidiaries, PMB Securities Corp., which was an SECregistered securities
broker/dealer engaged in the retail securities brokerage business. Therefore, the results of operations of that business are presented as discontinued operations, separate from the results of our continuing operations, in our financial statements
for the three and six month periods ended June 30, 2006. Because that business was sold in 2006, those discontinued operations had no financial impact on our operating results in the three or six month periods ended June 30, 2007 and also
will not have any financial impact on our operating results during the remainder of 2007.



6



---

##### Table of Contents

Our consolidated financial position at June 30, 2007, and the consolidated results of operations for
the three and six month periods ended June 30, 2007, are not necessarily indicative of what our financial position will be as of the end of, or of the results of our operations that may be expected for any other interim period during or for,
the full year ending December 31, 2007.

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates are made primarily in
connection with the determination of the allowance for loan losses, the fair value of securities available for sale, and the valuation of deferred tax assets. Actual amounts or results could differ, possibly materially, from those estimates. See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSForward Looking Information included elsewhere in this Report.

Principles of Consolidation

The consolidated financial statements for the three and six month periods ended June 30, 2007, include the accounts of PMBC and its wholly owned subsidiary, Pacific Mercantile Bank. The consolidated financial statements for three and
six month periods ended June 30, 2006, also include the accounts of PMB Securities Corp., as discontinued operations, to the date of its sale on June 1, 2006. All significant intercompany accounts and transactions have been eliminated in
consolidation.

Nonperforming Loans and Other Assets

At June 30, 2007 and December 31, 2006, we had $4.6 million and $1.8 million, respectively, in nonaccrual and impaired loans, but we had no
restructured loans and no loans that were past due as to principal for 90 days or more that were still accruing interest.

Earnings
Per Share (EPS)

Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in our earnings. For
the three and six month periods ended June 30, 2007, stock options to purchase up to 185,989 and 179,282 shares, respectively, were not considered in computing diluted earnings per common share because they were antidilutive.

The following table shows how we computed basic and diluted EPS for the three and six month periods ended June 30, 2007 and 2006.



|                                                        |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|------------------------------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                        |  | For the three months endedJune 30, |        | For the six months endedJune 30,
|(In thousands, except earnings per share data)          |  | 2007                               |        | 2006                             |   | 2007   |  | 2006
|Net income available for common shareholders (A)        |  | $                                  | 1,544  |                                  | $ | 1,687  |  | $    | 3,138  |  | $ | 3,447 
|                                                        |  |                                    |        |                                 
|Weighted average outstanding shares of common stock (B) |  |                                    | 10,397 |                                  |   | 10,248 |  |      | 10,361 |  |   | 10,227
|                                                        |  |                                    |        |                                 
|Dilutive effect of employee stock options and warrants  |  |                                    | 285    |                                  |   | 509    |  |      | 329    |  |   | 524   
|                                                        |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Common stock and common stock equivalents (C)           |  | $                                  | 10,682 |                                  | $ | 10,757 |  | $    | 10,690 |  | $ | 10,751
|                                                        |  |                                    |        |                                 
|Earnings per share:                                     |  |                                    |        |                                  |   |        |  |      |        |  |   |       
|Basic (A/B)                                             |  | $                                  | 0.15   |                                  | $ | 0.17   |  | $    | 0.30   |  | $ | 0.34  
|Diluted (A/C)                                           |  | $                                  | 0.14   |                                  | $ | 0.16   |  | $    | 0.29   |  | $ | 0.32  

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for sale and unrealized actuarial gains and losses on the supplemental executive plan, are reported as a separate component of the equity section of the balance sheet net of
income taxes, and such items, along with net income, are components of comprehensive income.



7



---

##### Table of Contents

Recent Accounting Pronouncements

The U.S. Securities and Exchange Commission in September 2006, released Staff Accounting Bulletin (SAB) 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statements, that provides guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year
misstatement. SAB 108 is effective for fiscal years beginning after November 15, 2006. SAB 108 has not, to date, had and is not expected to have a material impact on our results of operation or financial condition.

In July 2006, the FASB also issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109, (FIN 48). FIN 48 clarifies the accounting for uncertain tax positions in accordance with SFAS 109, Accounting For Income Taxes, by prescribing a minimum recognition threshold that a tax position is required
to meet before being recognized in the financial statements. The minimum recognition threshold will require us to recognize, in our financial statements, the impact of a tax position if it is more likely than not that the tax position is valid and
would be sustained on audit, including resolution of related appeals or litigation processes, if any. Only tax positions that meet the more likely than not recognition criteria at the effective date may be recognized or continue to be
recognized in the financial statements upon the adoption of FIN 48. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition requirements in
accounting for uncertain tax positions. Changes in the amount of tax benefits recognized resulting from the application of the provisions of this Interpretation would result in a one-time non-cash charge to be recognized as a change in accounting
principle via a cumulative adjustment to the opening balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, we adopted the provisions of FIN 48 in the first
quarter 2007. The adoption of FIN 48 has not had an impact on our results of operations or financial condition. See Note 5: Income Taxes below.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and therefore, does not expand the use of fair value in any new
circumstances. SFAS 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those
assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and lowest priority to unobservable data. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not expect that the
adoption of FAS 157 will have a material effect on our consolidated financial statements.

On September 29, 2006, the FASB issued SFAS
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and 132(R), (SFAS 158). SFAS 158 represent the first phase of the FASBs
project on pension and post-retirement benefits. The next phase will consider potential changes in determining net periodic benefit cost and measuring plan assets and obligations. A company with publicly traded equity securities is required to
initially recognize the funded status of a defined benefit post-retirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The disclosures required by SFAS 158 are included in Note
15 (Employee Benefit Plans) to our Consolidated Financial Statements for the fiscal year ended December 31, 2006 in our 2006 Annual Report on Form 10-K.

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, (SFAS 159). SFAS 159
provides an alternative measurement treatment for certain financial assets and financial liabilities, under an instrument-by-instrument election, that permits fair value to be used for both initial and subsequent measurement, with changes in fair
value recognized in earnings. SFAS 159 is effective beginning January 1, 2008. However, we do not expect that the adoption of SFAS 159 will have a material effect on our consolidated financial condition or results of operations.



8



---

##### Table of Contents

Commitments and Contingencies

To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These
financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial
statements. At June 30, 2007, loan commitments and letters of credits totaled $206 million and $12 million, respectively. The contractual amount of a credit-related financial instrument such as a commitment to extend credit, a credit-card
arrangement or a letter of credit represents the amounts of potential accounting loss should the commitment be fully drawn upon, the customer default, and the value of any existing collateral securing the customers payment obligation become
worthless.

As a result, the Company uses the same credit policies in making commitments to extend credit and conditional obligations as it
does for on-balance sheet instruments. Commitments generally have fixed expiration dates; however, since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customers creditworthiness on a case-by-case basis, using the same credit underwriting standards that are employed in making commercial loans. The amount of collateral obtained, if deemed necessary by
the Company upon an extension of credit, is based on managements credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, real estate and income-producing
commercial properties.

In the ordinary course of business, we are subject to legal actions normally associated with financial
institutions. At June 30, 2007, we were not a party to any pending legal action that is expected to be material to our consolidated financial condition or results of operations.

3. Stock-Based Employee Compensation Plans

Effective March 2, 1999, our Board of Directors
adopted, and in January 2000 our shareholders approved, the 1999 Stock Option Plan (the 1999 Option Plan). That Plan authorizes the granting of options to directors, officers and other key employees that entitle them to purchase shares
of common stock of the Company at a price per share equal to or above the fair market value of the Companys shares on the respective grant dates of the awards. Options may vest immediately or over various periods, generally ranging up to five
years, as determined by the Compensation Committee of our Board of Directors at the time it approves the grant of options under the 1999 Option Plan. Options may be granted for terms of up to 10 years, but will terminate upon termination of service,
if sooner. A total of 1,248,230 shares were authorized for issuance under the 1999 Option Plan (which number has been adjusted for stock splits effectuated subsequent to the Plans adoption).

Effective February 17, 2004, the Board of Directors adopted the Pacific Mercantile Bancorp 2004 Stock Incentive Plan (the 2004 Stock Incentive
Plan), which was approved by the Companys shareholders in May 2004. That Plan authorizes the granting of options and rights to purchase restricted stock to directors, officers and other key employees, that entitle them to purchase shares
of common stock of the Company at, in the case of stock options, a price per share equal to or above the fair market value of the Companys shares on the date the option is granted or, in case of stock purchase rights, at prices and on such
terms as are fixed by the Compensation Committee of the Board of Directors at the time the rights are granted. Options and restricted stock purchase rights may vest immediately or over various periods of up to five years, or based on the achievement
of specified performance goals, as determined by the Companys Compensation Committee at the time the options are granted or the stock purchase rights are awarded. Options may be granted under the 2004 Stock Incentive Plan for terms of up to 10
years after the grant date, but will terminate upon termination of service, if sooner. The Company will become entitled to repurchase any unvested shares subject to restricted purchase rights in the event of a termination of employment or service of
the holder of the stock purchase right or in the event the holder fails to achieve any goals that are required to be met as a condition of vesting. A total of 400,000 shares were authorized for issuance under the 2004 Stock Incentive Plan.

In December 2004, Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment,
which requires entities that grant stock options or other equity compensation awards to employees to recognize the fair value of those options and shares as compensation cost over their respective service (vesting) periods in their financial
statements. In the case of the Company, SFAS No. 123(R) became effective January 1, 2006 and, as of that date, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method.
Under this transition method, equity compensation expense includes: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on their grant date fair values estimated in
accordance with the



9



---

##### Table of Contents

original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on
their grant date fair values estimated in accordance with the provisions of SFAS No. 123(R). Since stock-based compensation that is recognized in the statement of income is to be determined based on the equity compensation awards that we expect
will ultimately vest, that compensation expense has been reduced for estimated forfeitures of unvested options that typically occur due to terminations of employment of optionees. SFAS No. 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For purposes of the determination of stock-based compensation expense for the quarter ended June 30, 2007, we estimated no forfeitures
of options held by the Companys directors and all other forfeitures to be 21% of the unvested options issued.

The fair values of the
options that were outstanding under the 1999 and 2004 Plans were estimated as of their respective dates of grant using the Black-Scholes option-pricing model. The following table summarizes the weighted average assumptions used for grants in the
following periods:



|                                                             |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------------------ |  | -------------------------- | ---- | - | ------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                             |  | Three Months EndedJune 30, |      |   | Six Months EndedJune 30, |  
|Assumptions with respect to:                                 |  | 2007                       |      |   | 2006                     |   |      | 2007 |  |   | 2006 |  
|Expected volatility                                          |  |                            | 30   | % |                          |   | 35   | %    |  |   | 30   | % |  |   | 35   | %
|Risk-free interest rate                                      |  |                            | 4.62 | % |                          |   | 4.91 | %    |  |   | 4.67 | % |  |   | 4.64 | %
|Expected dividends                                           |  |                            | 1.35 | % |                          |   | 1.07 | %    |  |   | 1.24 | % |  |   | 1.07 | %
|Expected term (years)                                        |  |                            | 6.5  |   |                          |   | 6.5  |      |  |   | 6.5  |   |  |   | 6.5  |  
|Weighted average fair value of options granted during period |  | $                          | 4.86 |   |                          | $ | 7.50 |      |  | $ | 5.22 |   |  | $ | 7.12 |  

The following tables summarize the share option activity under the Companys 1999 Option Plan
and the 2004 Stock Incentive Plan during for the six month period ended June 30, 2007 and 2006.



|                             |  |                                   |  |                                         |       |                                   |           |                                         |   |      
|---------------------------- |  | --------------------------------- |  | --------------------------------------- | ----- | --------------------------------- | --------- | --------------------------------------- | - | -----
|                             |  | Six Months Ended June 30,        
|                             |  | 2007                              |  | 2006                                   
|                             |  | Number ofShares Subjectto Options |  | Weighted-AverageExercisePrice Per Share |       | Number ofShares Subjectto Options |           | Weighted-AverageExercisePrice Per Share
|OutstandingJanuary 1,       |  | 1,366,924                         |  | $                                       | 9.11  |                                   | 1,470,698 |                                         | $ | 8.51 
|Granted                      |  | 23,800                            |  |                                         | 15.05 |                                   | 41,500    |                                         |   | 18.22
|Exercised                    |  | 151,898                           |  |                                         | 6.08  |                                   | 117,574   |                                         |   | 5.00 
|Forfeited/Canceled           |  | 24,000                            |  |                                         | 17.38 |                                   | 28,000    |                                         |   | 16.32
|                             |  |                                   |  |                                         |       |                                   |           |                                         |   |      
|OutstandingJune 30,         |  | 1,214,826                         |  |                                         | 9.44  |                                   | 1,366,624 |                                         |   | 8.94 
|                             |  |                                   |  |                                         |       |                                   |           |                                         |   |      
|Options ExercisableJune 30, |  | 950,327                           |  | $                                       | 8.28  |                                   | 1,010,572 |                                         | $ | 7.51 

The aggregate intrinsic values of options exercised at June 30, 2007 and 2006 were $1.2
million and $1.5 million, respectively. Total fair values of vested options at June 30, 2007 and 2006 were $375,000 and $390,000, respectively.



|                        |  |                                         |  |                                         |  |                               |       |                                                   |      |        |         |                                |   |      
|----------------------- |  | --------------------------------------- |  | --------------------------------------- |  | ----------------------------- | ----- | ------------------------------------------------- | ---- | ------ | ------- | ------------------------------ | - | -----
|                        |  | Options Outstanding as of June 30, 2007 |  | Options Exercisable as of June 30, 2007
|Range of Exercise Price |  | Vested                                  |  | Unvested                                |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractual Life (Years) |      | Shares |         | Weighted-AverageExercise Price
|$ 4.00  $5.99          |  | 99,842                                  |  |                                         |  | $                             | 4.00  |                                                   | 1.67 |        | 99,842  |                                | $ | 4.00 
|$ 6.00  $9.99          |  | 578,881                                 |  | 5,120                                   |  |                               | 7.29  |                                                   | 3.23 |        | 578,881 |                                |   | 7.29 
|$10.00  $12.99         |  | 222,423                                 |  | 120,760                                 |  |                               | 11.23 |                                                   | 6.66 |        | 222,423 |                                |   | 11.22
|$13.00  $17.99         |  | 42,381                                  |  | 111,419                                 |  |                               | 15.23 |                                                   | 8.30 |        | 42,381  |                                |   | 14.97
|$18.00  $18.84         |  | 6,800                                   |  | 27,200                                  |  |                               | 18.18 |                                                   | 8.58 |        | 6,800   |                                |   | 18.18
|                        |  |                                         |  |                                         |  |                               |       |                                                   |      |        |         |                                |   |      
|                        |  | 950,327                                 |  | 264,499                                 |  | $                             | 9.44  |                                                   | 4.86 |        | 950,327 |                                | $ | 8.28 
|                        |  |                                         |  |                                         |  |                               |       |                                                   |      |        |         |                                |   |      



10



---

##### Table of Contents

The aggregate intrinsic values of options that were outstanding and exercisable under the plans at
June 30, 2007 and 2006, were $6.0 million and $13.3 million, respectively.

A summary of the status of the unvested options as of
December 31, 2006, and changes during the six month period ended June 30, 2007, are set forth in the following table.



|                              |  |                                   |   |  |                                      |     
|----------------------------- |  | --------------------------------- | - |  | ------------------------------------ | ----
|                              |  | Number ofShares Subjectto Options |   |  | Weighted-AverageGrant DateFair Value
|Unvested at December 31, 2006 |  | 331,287                           |   |  | $                                    | 5.80
|Granted                       |  | (23,800                           | ) |  |                                      | 5.22
|Vested                        |  | (66,988                           | ) |  |                                      | 5.60
|Forfeited/Canceled            |  | 24,000                            |   |  |                                      | 6.91
|                              |  |                                   |   |  |                                      |     
|Unvested at June 30, 2007     |  | 264,499                           |   |  | $                                    | 5.76
|                              |  |                                   |   |  |                                      |     

The aggregate amounts charged against income in relation to stock-based awards were $145,000 and
$278,000 for the three and six months ended June 30, 2007, respectively. At June 30, 2007, compensation expense related to non-vested stock option grants aggregated $1.2 million, which is expected to be recognized as follows:



|                                |  |                                   |      
|------------------------------- |  | --------------------------------- | -----
|                                |  | Stock Option Compensation Expense
|                                |  | (In thousands)                   
|Remainder of 2007               |  | $                                 | 290  
|For the year ended December 31, |  |                                   |      
|2008                            |  |                                   | 581  
|2009                            |  |                                   | 205  
|2010                            |  |                                   | 84   
|2011                            |  |                                   | 37   
|2012                            |  |                                   | 2    
|                                |  |                                   |      
|Total                           |  | $                                 | 1,199
|                                |  |                                   |      

4. Employee Benefit Plan

The Company has established a Supplemental Retirement Plan (SERP) for its Chief Executive Officer. Net periodic benefit costs are charged to employee benefits expense in the consolidated statements of
income to recognize the Companys expense in respect of that Plan. The components of net periodic benefit cost for the SERP are set forth in the table below:



|                                             |  |                            |    |                          |   |      |  |      |     |  |   |    
|-------------------------------------------- |  | -------------------------- | -- | ------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                             |  | Three Months EndedJune 30, |    | Six Months EndedJune 30,
|                                             |  | 2007                       |    | 2006                     |   | 2007 |  | 2006
|                                             |  | (In thousands)             |    | (In thousands)          
|Service cost                                 |  | $                          | 42 |                          | $ | 33   |  | $    | 83  |  | $ | 67 
|Interest cost                                |  |                            | 22 |                          |   | 16   |  |      | 41  |  |   | 31 
|Expected return on plan assets               |  |                            |   |                          |   |     |  |      |    |  |   |   
|Amortization of prior service cost/(benefit) |  |                            | 4  |                          |   | 4    |  |      | 8   |  |   | 8  
|Amortization of net actuarial loss/(gain)    |  |                            | 14 |                          |   | 6    |  |      | 28  |  |   | 11 
|                                             |  |                            |    |                          |   |      |  |      |     |  |   |    
|Net periodic SERP cost                       |  | $                          | 82 |                          | $ | 59   |  | $    | 160 |  | $ | 117
|                                             |  |                            |    |                          |   |      |  |      |     |  |   |    

5. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109, (FIN 48) on
January 1, 2007. We did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.



11



---

##### Table of Contents

We file income tax returns in the U.S. federal jurisdiction and the state of California. As of
June 30 and January 1, 2007, we were subject to examination in the U.S. federal tax jurisdiction for the 2003 - 2006 tax years. We were also subject to examination in California for the 2002 - 2006 tax years. We do not believe there will
be any material changes in our unrecognized tax positions over the next 12 months.

Our policy is that we recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, and no interest expense was
recognized during the quarter. Our effective tax rate differs from the federal statutory rate primarily due to non-deductible expenses and state taxes.

6. Discontinued Operations

As previously reported, in the second quarter of 2006 we sold our securities brokerage business
and, accordingly, for financial reporting purposes that business was classified as discontinued operations in 2006. Since we were able to sell that business in the second quarter of 2006, those discontinued operations had no financial impact on our
operating results in the first and second quarters of 2007 and also will not have any financial impact on our operating results during the remainder of 2007. By comparison, those discontinued operations sustained losses of $73,000 and $116,000,
respectively, in the first and second quarters of 2006.

The operating results of the discontinued securities brokerage businesses included
in the accompanying consolidated statements of income are set forth below:



|                                                       |  |                             |   |      |                           |      |      |  |      |   |  |   |      |  
|------------------------------------------------------ |  | --------------------------- | - | ---- | ------------------------- | ---- | ---- |  | ---- | - |  | - | ---- | -
|                                                       |  | Three Months Ended June 30, |   |      | Six Months Ended June 30, |     
|                                                       |  | 2007                        |   | 2006 |                           |      | 2007 |  | 2006 |  
|                                                       |  | (In thousands)              |   |      | (In thousands)            |     
|Loss from discontinued operations, before income taxes |  | $                           |  |      | $                         | (120 | )    |  | $    |  |  | $ | (313 | )
|Income tax benefit                                     |  |                             |  |      |                           | (47  | )    |  |      |  |  |   | (124 | )
|                                                       |  |                             |   |      |                           |      |      |  |      |   |  |   |      |  
|Loss from discontinued operations, net of taxes        |  | $                           |  |      | $                         | (73  | )    |  | $    |  |  | $ | (189 | )
|                                                       |  |                             |   |      |                           |      |      |  |      |   |  |   |      |  

As of June 30, 2007 and December 31, 2006, there were no accounts included in the consolidated statement
of financial condition from the discontinued securities brokerage business.

7. Subsequent Events

On July 2, 2007, PMBC redeemed, at par, the $5.155 million principal amount of junior subordinated debentures issued in July 2002 in conjunction with
the organization of Pacific Mercantile Capital Trust I. PMBC used available cash to fund that redemption.

On July 11, 2007 PMBC
notified the Trustee for the holders of the $5.155 million principal amount of junior subordinated debentures issued in August 2002, that PMBC would be redeeming, at par, all of those debentures effective as of August 30, 2007. PMBC will be
using available cash to fund that redemption.

There will be $17.527 million principal amount of junior subordinated debentures that will
remain outstanding after giving effect to these redemptions



12



---

##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

Pacific Mercantile Bancorp is a bank holding company that owns all of the stock of Pacific
Mercantile Bank (the Bank), which is a commercial bank that provides a full range of banking services to small and medium-size businesses and to professionals and the general public in Orange, Los Angeles, San Bernardino and San Diego
counties, in Southern California. Substantially all of our operations are conducted and substantially all of our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, operating income and expenses.

The following discussion presents information about our consolidated results of operations for the three and six month periods ended
June 30, 2007 and 2006 and our consolidated financial condition, liquidity and capital resources at June 30, 2007 and should be read in conjunction with our interim consolidated financial statements and the notes thereto included elsewhere
in this Report.

Additionally, except where otherwise noted, the following discussion of our results of operation and financial condition
relates primarily to the results of operations and the assets and liabilities of our commercial banking business, which comprises our continuing operations and which excludes our discontinued securities brokerage business, which was sold in June
2006. See Note 6 of the Notes to our Consolidated Financial Statements included elsewhere in this Report for further information relating to our discontinued operations.

Forward-Looking Information

Statements contained in this Report that are not historical facts
or that discuss our expectations, beliefs and regarding our future operations or future financial performance, or financial or other trends in our business, constitute 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 fact that they do not relate strictly to historical or current facts. Often, they
include the words 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. The information contained in such forward-looking statements is based on current information and assumptions about future events over which we do not have control and our
business is subject to a number of risks factors that could cause our financial condition or actual operating results in the future to differ significantly from our expected financial condition or operating results that are set forth in those
statements. Certain of those risks factors are summarized below, in this Item 2, under the caption Risks that could Affect our Future Financial Performance and those, as well as other, risks are discussed in detail in Item 1A,
Risk Factors, in our Annual Report on Form 10-K for our fiscal year ended December 31, 2006 and readers of this Report are urged to read that summary below and the information contained in Item 1A of the 2006 Annual Report on
Form 10-K in conjunction with this Report.



13



---

##### Table of Contents

Overview of Operating Results in the Three and Six Months Ended June 30, 2007

The following table sets forth information regarding the interest income that we generated, the interest expense that we incurred,
our net interest income, noninterest income, noninterest expense, and our net income and net income per share for the three and six months ended June 30, 2007 and 2006.



|                                           |  |                                                |            |              |                                       |            |               |  |       |              |  |              |            |  |               |            |   |  |       |   
|------------------------------------------ |  | ---------------------------------------------- | ---------- | ------------ | ------------------------------------- | ---------- | ------------- |  | ----- | ------------ |  | ------------ | ---------- |  | ------------- | ---------- | - |  | ----- | --
|                                           |  | Three Months Ended June 30,(Unaudited)         |            |              | Six Months Ended June 30, (Unaudited) |           
|                                           |  | 2007 Amounts                                   |            | 2006 Amounts |                                       |            | PercentChange |  |       | 2007 Amounts |  | 2006 Amounts |            |  | PercentChange |           
|                                           |  | ( Dollars in thousands, except per share data) |           
|Interest income                            |  | $                                              | 17,892     |              | $                                     | 15,683     |               |  | 14.1  | %            |  | $            | 35,052     |  | $             | 30,278     |   |  | 15.8  | % 
|Interest expense                           |  |                                                | 10,046     |              |                                       | 7,419      |               |  | 35.4  | %            |  |              | 19,435     |  |               | 13,855     |   |  | 40.3  | % 
|                                           |  |                                                |            |              |                                       |            |               |  |       |              |  |              |            |  |               |            |   |  |       |   
|Net interest income                        |  | $                                              | 7,846      |              | $                                     | 8,264      |               |  | (5.1  | )%           |  | $            | 15,617     |  | $             | 16,423     |   |  | (4.9  | )%
|Noninterest income                         |  | $                                              | 315        |              | $                                     | 327        |               |  | (3.7  | )%           |  | $            | 668        |  | $             | 605        |   |  | 10.4  | % 
|Noninterest expense                        |  | $                                              | 5,393      |              | $                                     | 5,261      |               |  | 2.5   | %            |  | $            | 10,493     |  | $             | 10,357     |   |  | 1.3   | % 
|Income from continuing operations(1)       |  | $                                              | 1,544      |              | $                                     | 1,760      |               |  | (12.3 | )%           |  | $            | 3,138      |  | $             | 3,636      |   |  | (13.7 | )%
|Loss from discontinued operations(1)       |  | $                                              |           |              | $                                     | (73        | )             |  | NM    | %            |  | $            |           |  | $             | (189       | ) |  | NM    | % 
|Net income                                 |  | $                                              | 1,544      |              | $                                     | 1,687      |               |  | (8.5  | )%           |  | $            | 3,138      |  | $             | 3,447      |   |  | (9.0  | )%
|Net income (loss) per share diluted        |  |                                                |            |              |                                       |            |               |  |       |              |  |              |            |  |               |            |   |  |       |   
|Income from continuing operations          |  | $                                              | 0.14       |              | $                                     | 0.17       |               |  | (17.7 | )%           |  | $            | 0.29       |  | $             | 0.34       |   |  | (14.7 | )%
|Income (loss) from discontinued operations |  | $                                              | 0.00       |              | $                                     | (0.01      | )             |  | NM    | %            |  | $            | 0.00       |  | $             | (0.02      | ) |  | NM    | % 
|Net income diluted per share               |  | $                                              | 0.14       |              | $                                     | 0.16       |               |  | (12.5 | )%           |  | $            | 0.29       |  | $             | 0.32       |   |  | (9.4  | )%
|Weighted average number of diluted shares  |  |                                                | 10,682,401 |              |                                       | 10,757,288 |               |  | (0.7  | )%           |  |              | 10,689,768 |  |               | 10,751,344 |   |  | (0.6  | )%

---

|(1) | Net of taxes
|--- | ------------

Key Factors Affecting Operating Results in the Three and Six Months Ended June 30, 2007

As the table above indicates, income from continuing operations in the three and six months ended June 30, 2007 declined by $216,000, or 12.3%, and
$498,000, or 13.7%, respectively. On a diluted per share basis, income from continuing operations declined to $0.14 and $0.29 in the three and six months ended June 30, 2007, respectively, from $0.17 and $0.34 in the respective corresponding
periods of 2006.

Set forth below are the key factors that caused those declines:



| |  |  | Declines in Net Interest Income.Net interest income, a primary measure of bank profitability, decreased in the second quarter of 2007
by $418,000, or 5%, to $7.8 million from $8.3 million in the second quarter of the prior year. In the six months ended June 30, 2007, net interest income decreased by $806,000, or 5% to $15.6 million from $16.4 million in the same six months of
2006. The decreases in net interest income were due to increases in interest expense of $2.6 million, or 35%, and $5.5 million, or 40%, in the quarter and six months ended June 30, 2007 compared to the respective periods in 2006. The increases
in interest expense more than offset increases in interest income of $2.2 million, or 14%, and $4.8 million, or 16%, for the same periods in 2007. The increases in interest expense were primarily attributable to increases in volume of
interest-bearing deposits and increases in interest rates paid on deposits in response to increases in market rates of interest.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in Non-interest Expense. Non-interest expense increased by $132,000, or 3%, in the three months ended June 30, 2007 and by $136,000, or 1%, in
the six months ended June 30, 2007. Those increases were, for the most part, attributable to increases in Federal Deposit Insurance assessments on federally insured banking institutions which were attributable to a change, mandated by the
Federal Deposit Insurance Reform Act of 2005, in assessment formulas. Those increases more than offset decreases in other operating expenses over which we have greater control, including decreases in employee compensation expense and in occupancy
and equipment costs in the three months ended June 30, 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



---

##### Table of Contents

Set forth below are certain key financial performance ratios and other unaudited financial data from
continuing operations for the periods indicated:



|                                           |  |                            |   |  |                          |   |  |      |   |  |      |  
|------------------------------------------ |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                           |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                           |  | 2007                       |   |  | 2006                     |   |  | 2007 |   |  | 2006 |  
|                                           |  | (Unaudited)                |   |  | (Unaudited)              |  
|Return on average assets (1)               |  | 0.56                       | % |  | 0.72                     | % |  | 0.59 | % |  | 0.73 | %
|Return on average shareholders equity (2) |  | 6.79                       | % |  | 8.91                     | % |  | 7.01 | % |  | 9.07 | %
|Net interest margin (2)                    |  | 2.92                       | % |  | 3.38                     | % |  | 2.99 | % |  | 3.42 | %

---

|(1) | Annualized.
|--- | -----------

|(2) | Net interest income expressed as a percentage of total average interest earning
assets.
|--- | ---------------------------------------------------------------------------------------

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP) and
general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could affect the value of
those assets, such as, for example, assumptions regarding economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions
are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or
other unanticipated events were to happen that might affect our operating results, under GAAP it could become necessary to reduce the carrying values of the affected assets on our balance sheet.

Our critical accounting policies relate to the determination of our allowance for loan losses, the fair value of securities available for sale and the
valuation of deferred tax assets.

Allowance for Loan Losses. The accounting policies and practices we follow in determining the
sufficiency of the allowance we establish for possible loan losses require us to make judgments and assumptions about economic and market conditions and trends that can affect the ability of our borrowers to meet their loan payment obligations to
us. Accordingly, we use historical loss factors, adjusted for current economic market conditions and other economic indicators, to estimate the potential losses inherent in our loan portfolio and assess the sufficiency of our allowance for loan
losses. If unanticipated changes were to occur in those conditions or trends, actual loan losses could be greater than those predicted by those loss factors and our prior assessments of economic conditions and trends. In such an event, it could be
necessary for us to increase the allowance for loan losses by means of a charge to income referred to in our financial statements as the provision for loan losses. Such an increase would reduce the carrying value of the loans on our
balance sheet, and the additional provision for loan losses taken to increase that allowance would reduce our income in the period when it is determined that an increase in the allowance for loan losses is necessary. See the discussion in the
subsections entitled Results of OperationsProvision for Loan Losses and Financial ConditionAllowance for Loan Losses and Nonperforming Loans below.

Fair Value of Securities Available for Sale. We determine the fair value of securities that are available for sale (as opposed to those which we
intend to hold to maturity) by obtaining price quotations from third party vendors and securities brokers. When such quotations are not available, a reasonable fair value is determined by using a variety of industry standard pricing methodologies
including, but not limited to, discounted cash flow analysis, matrix pricing, option adjusted spread models, as well as fundamental analysis. These pricing methodologies require us to make various assumptions relating to such matters as future
prepayment speeds, yield, duration, monetary policy and demand and supply for the individual securities. Consequently, if changes were to occur in the market or other conditions on which those assumptions were based, it could become necessary for us
to make adjustments to the fair values of those securities, which would have the effect of changing our accumulated other comprehensive gain/(loss) in our consolidated statements of financial condition.

Utilization of Deferred Income Tax Benefits. The provision that we make for income taxes is based on, among other things, our ability to use
certain income tax benefits available under state and federal income tax laws to reduce our income tax liability. As of June 30, 2007, the total of the unused income tax benefits (included in Other Assets in our consolidated balance
sheet), available to reduce our income taxes in future periods was $4.9 million. Unless used, such tax benefits expire over time. Therefore, the realization of those benefits is dependent on our generating taxable income in the future in amounts
sufficient to enable us to use those tax benefits prior to their expiration. We have made a judgment, based on historical



15



---

##### Table of Contents

experience and current and anticipated market and economic conditions and trends, that it is more likely than not that we will generate taxable income in
future years sufficient to fully utilize those benefits before they expire. In the event that our income were to decline in future periods making it less likely that those benefits could be fully utilized, it could become necessary for us to
establish a valuation reserve to cover the potential loss of those tax benefits by increasing the provision we make for income taxes, which would have the effect of reducing our net income in the period when that valuation reserve is established.

Discontinued Operations

As previously reported, in the second quarter of 2006 we sold our retail securities brokerage subsidiary, PMB Securities Corp. In accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS No. 144), the operating results of that business were classified as discontinued operations in 2006 and prior period financial statements have been restated on that same basis. Since
we were able to sell that business in the second quarter of 2006, those discontinued operations had no financial impact on our operating results in the three or six months ended June 30, 2007 and will not have any financial impact on our
operating results for any subsequent periods.

Additionally, as a result of our sale of our retail securities brokerage business, our
commercial banking business constitutes our continuing operations and the discussion that follows focuses almost entirely on those continuing operations.

Results of Operations

Net Interest Income

One of the principal determinants of a banks income is net interest income, which is the difference between (i) the interest that a bank earns
on loans, investment securities and other interest-earning assets, on the one hand, and (ii) its interest expense, which consists primarily of the interest it must pay to attract and retain deposits and the interest that it pays on borrowings
and other interest-bearing liabilities, on the other hand. A banks interest income and interest expense are, in turn, affected by a number of factors, some of which are outside of its control, including national and local economic conditions
and the monetary policies of the Federal Reserve Board which affect interest rates, the demand for loans, and the ability of borrowers to meet their loan payment obligations. Net interest income, when expressed as a percentage of total average
interest earning assets, is a banking organizations net interest margin.

The following table sets forth our interest
income, interest expense and net interest income (in thousands of dollars) and our net interest margin in the three and six months ended June 30, 2007 and 2006, respectively:



|                    |  |                             |        |   |                           |   |        |               |  |      |            |  |   |            |   |  |               |        |   |  |      |   
|------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ------------- |  | ---- | ---------- |  | - | ---------- | - |  | ------------- | ------ | - |  | ---- | --
|                    |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                    |  | 2007 Amount                 |        |   | 2006Amount                |   |        | PercentChange |  |      | 2007Amount |  |   | 2006Amount |   |  | PercentChange |       
|                    |  | (Unaudited)                 |        |   | (Unaudited)               |  
|                    |  | (Dollars in thousands)      |        |   |                           |   |        |               |  |      |            |  |   |            |   |  |               |       
|Interest income     |  | $                           | 17,892 |   |                           | $ | 15,683 |               |  | 14.1 | %          |  | $ | 35,052     |   |  | $             | 30,278 |   |  | 15.8 | % 
|Interest expense    |  |                             | 10,046 |   |                           |   | 7,419  |               |  | 35.4 | %          |  |   | 19,435     |   |  |               | 13,855 |   |  | 40.3 | % 
|                    |  |                             |        |   |                           |   |        |               |  |      |            |  |   |            |   |  |               |        |   |  |      |   
|Net interest income |  | $                           | 7,846  |   |                           | $ | 8,264  |               |  | (5.1 | )%         |  | $ | 15,617     |   |  | $             | 16,423 |   |  | (4.9 | )%
|Net interest margin |  |                             | 2.92   | % |                           |   | 3.38   | %             |  |      |            |  |   | 2.99       | % |  |               | 3.42   | % |  |      |   

As the table above indicates, our net interest income decreased by $418,000, or 5%, in the second
quarter of 2007, and by $806,000, or 5%, in the six months ended June 30, 2007, as compared to the same respective periods of 2006. Those decreases were primarily attributable to increases in interest expense of $2.6 million, or 35%, and $5.5
million, or 40%, respectively, in the three and six month periods of 2007, as compared to the same respective corresponding periods of 2006. Those increases in interest expense more than offset increases in interest income of $2.2 million, or 14%,
and $4.8 million, or 16%, respectively, in the three and six month periods ended June 30, 2007 over the respective corresponding periods of 2006.



16



---

##### Table of Contents

Our net interest margin decreased to 2.92% in the second quarter of 2007 from 3.38% in the same quarter
of 2006, and to 2.99% in the six months ended June 30, 2007, from 3.42% in the same six months of 2006. In the three months ended June 30, 2007 the yield on interest-earning assets improved to 6.66% from 6.41% in the same period of 2006;
however, the effect of that improvement on our net interest margin was more than offset by an increase in the average rate of interest paid on our interest-bearing liabilities to 4.82% from 3.95%, in the same three months of 2006. Similarly,
although in the six months ended June 2007 the yield on interest-earning assets improved to 6.71%, from 6.31% in the same period of 2006, the average rate of interest paid on our interest-bearing liabilities increased to 4.82%, from 3.85% in the
same six months of 2006.

The following table sets forth the changes in interest income, including loan fees, and interest paid in the
three and six month periods ended June 30, 2007, as compared to the same periods in 2006 and the extent to which those changes were attributable to changes in the volume of and rates of interest earned on interest-earning assets and the volume
of and interest paid on interest-bearing liabilities.



|                                        |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  
|--------------------------------------- |  | ------------------------------------------------------------------- | ------ | - | ----------------------------------------------------------------- | - | ------ | ----- |  | - | --------- | - |  | ------- | ------ | - | ----- | - | ------ | - |  | - | ----- | -
|                                        |  | Three Months Ended June 30,2007 vs
2006 Increase (decrease) due to: |        |   | Six Months Ended June 30,2007 vs
2006 Increase (decrease) due to: |  
|                                        |  | Volume(1)                                                           |        |   | Rate(1)                                                           |   |        | Total |  |   | Volume(1) |   |  | Rate(1) |        |   | Total |  
|                                        |  | (Unaudited) (Dollars in thousands)                                  |        |   | (Unaudited) (Dollars in thousands)                                |  
|Interest income:                        |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  
|Short-term investments(2)               |  | $                                                                   | 918    |   |                                                                   | $ | 17     |       |  | $ | 935       |   |  | $       | 1,354  |   |       | $ | 44     |   |  | $ | 1,398 |  
|Securities available for sale and stock |  |                                                                     | (511   | ) |                                                                   |   | 415    |       |  |   | 94        |   |  |         | (454   | ) |       |   | 233    |   |  |   | (221  | )
|Loans                                   |  |                                                                     | 1,059  |   |                                                                   |   | 311    |       |  |   | 1,370     |   |  |         | 1,899  |   |       |   | 1,698  |   |  |   | 3,597 |  
|                                        |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  
|Total earning assets                    |  |                                                                     | 1,466  |   |                                                                   |   | 743    |       |  |   | 2,209     |   |  |         | 2,799  |   |       |   | 1,975  |   |  |   | 4,774 |  
|Interest expense:                       |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  
|Interest-bearing checking accounts      |  |                                                                     | (26    | ) |                                                                   |   | 27     |       |  |   | 1         |   |  |         | (16    | ) |       |   | 16     |   |  |   |      |  
|Money market and savings accounts       |  |                                                                     | (394   | ) |                                                                   |   | 708    |       |  |   | 314       |   |  |         | 29     |   |       |   | 655    |   |  |   | 684   |  
|Certificates of deposit                 |  |                                                                     | 1,575  |   |                                                                   |   | 618    |       |  |   | 2,193     |   |  |         | 3,382  |   |       |   | 1,258  |   |  |   | 4,640 |  
|Borrowings                              |  |                                                                     | (1,587 | ) |                                                                   |   | 1,692  |       |  |   | 105       |   |  |         | (1,057 | ) |       |   | 1,224  |   |  |   | 167   |  
|Junior subordinated debentures          |  |                                                                     |       |   |                                                                   |   | 14     |       |  |   | 14        |   |  |         |       |   |       |   | 89     |   |  |   | 89    |  
|                                        |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  
|Total interest-bearing liabilities      |  |                                                                     | (432   | ) |                                                                   |   | 3,059  |       |  |   | 2,627     |   |  |         | 2,338  |   |       |   | 3,242  |   |  |   | 5,580 |  
|                                        |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  
|Net interest income                     |  | $                                                                   | 1,898  |   |                                                                   | $ | (2,316 | )     |  | $ | (418      | ) |  | $       | 461    |   |       | $ | (1,267 | ) |  | $ | (806  | )
|                                        |  |                                                                     |        |   |                                                                   |   |        |       |  |   |           |   |  |         |        |   |       |   |        |   |  |   |       |  

---

|(1) | Changes in interest earned and interest paid due to changes in the mix of
interest-earning assets and interest-bearing liabilities have been allocated to the change due to volume and the change due to interest rates in proportion to the relationship of the absolute dollar amounts of the changes in each.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Short-term investments consist of federal funds sold and interest bearing deposits
with financial institutions.
|--- | ---------------------------------------------------------------------------------------------------------------

The above table indicates that the decrease of $418,000 in our net interest income
in the three month period ended June 30, 2007, as compared to the like period in 2006, was primarily the result of a $3.1 million increase in interest expense that was attributable to interest rate increases, which more than offset increases in
interest earned on interest earning assets as a result of increases in both the volume and in the interest rates on those assets, and a decrease of $432,000 of interest expense primarily attributable to a decline in the amount of outstanding
borrowings and in the volume of money market and saving deposits. The increase in the rate variance reflects an increase in interest rates paid on average interest-bearing liabilities of 87 basis points, which more than offset an increase in
interest rates earned on average interest earning assets of 14 basis points, in the three months ended June 30, 2007, as compared to the same period of 2006.

The decline of $806,000 in net interest income in the six months ended June 30, 2007, as compared to the same six months of 2006, was due to an increase in interest expense that was attributable to increases in
both the interest rates paid on and in the volume of interest-bearing liabilities. Those increases more than offset increases in the interest earned on interest-earning assets as a result of increases in both interest rates and in the volume of
those assets. The increase in the rate variance reflects an increase in interest rates paid on average interest-bearing liabilities of 97 basis points, as compared to an increase in interest rate on average interest-earning assets of 40 basis
points, in the six months ended June 30, 2007, as compared to the same periods of 2006.



17



---

##### Table of Contents

Provision for Loan Losses

The failure of borrowers to repay their loans is an inherent risk of the banking business. Therefore, like virtually all banks and other financial
institutions, we follow the practice of maintaining an allowance for possible loan losses that occur from time to time as an incidental part of the banking business. When it is determined that the payment in full of a loan has become unlikely, the
carrying value of the loan is reduced to what management believes is its realizable value. This reduction, which is referred to as a loan charge-off, or write-down is charged against that allowance. The amount of the
allowance for loan losses is increased periodically (i) to replenish the allowance after it has been reduced due to loan charge-offs, (ii) to reflect changes in the volume of outstanding loans, and (iii) to take account of changes in
the risk of potential losses due to a deterioration in the condition of borrowers or in the value of property securing nonperforming loans or changes in economic conditions. See Financial ConditionAllowance for Loan Losses
and Nonperforming Loans below in this Section of this Report. Increases in the allowance are made through a charge, recorded as an expense in the statement of income referred to as the provision for loan losses. Recoveries of loans
previously charged-off are added back to the allowance and, therefore, have the effect of increasing the allowance and reducing the amount of the provision that might otherwise have had to be made to replenish or increase the allowance.

During the second quarter of 2007, we made provisions, totaling $325,000, for potential loan losses, as compared to $335,000 in the same quarter of
2006. At June 30, 2007, the Allowance for Loan Losses totaled $6.0 million, or 0.81% of loans then outstanding, as compared to $5.9 million, or 0.79% of loans outstanding, at December 31, 2006.

We employ economic models that are based on bank regulatory guidelines, industry standards and historical loss experience to evaluate and determine both
the sufficiency of the allowance for loan losses and the amount of the provisions that are required to be made for potential loan losses. Those determinations involve judgments about trends in current economic conditions and other events that can
affect the ability of borrowers to meet their loan obligations to us. The duration and effects of current economic trends are subject to a number of risks and uncertainties and changes that are outside of our ability to control. See the discussion
below in this section under the caption Risks That Could Affect Our Future Financial PerformanceWe could incur losses on the loans we make. If changes in economic or market conditions or unexpected subsequent events were to occur,
it could become necessary to incur additional charges to increase the allowance for loan losses, which would have the effect of reducing our income or causing us to incur losses.

In addition, the Federal Reserve Board and the California Department of Financial Institutions, as an integral part of their examination processes,
periodically review the adequacy of our allowance for loan losses. These agencies may require us to make additional provisions, over and above the provisions that we have already made, the effect of which would be to reduce our income.

Noninterest Income

Noninterest income consists primarily of fees charged for services provided by the Bank on deposit accounts. The following table identifies the components of, and sets forth the percentage changes in, noninterest income in the three and six
month periods ended June 30, 2007, as compared to the same respective periods of 2006.



|                         |  |                                  |     |                  |                                  |               |        |      |                  |  |      |     |               |   |     |  |      |  
|------------------------ |  | -------------------------------- | --- | ---------------- | -------------------------------- | ------------- | ------ | ---- | ---------------- |  | ---- | --- | ------------- | - | --- |  | ---- | -
|                         |  | Three Months Ended June 30,      |     |                  | Six Months Ended June 30,        |              
|                         |  | Amount                           |     | PercentageChange |                                  |               | Amount |      | PercentageChange | 
|                         |  | 2007                             |     | 2006             |                                  | 2007 vs. 2006 |        |      | 2007             |  | 2006 |     | 2007 vs. 2006 |  
|                         |  | Unaudited (Dollars in thousands) |     |                  | Unaudited (Dollars in thousands) |              
|Service fees on deposits |  | $                                | 198 |                  | $                                | 205           |        | (3.4 | )%               |  | $    | 385 |               | $ | 368 |  | 4.6  | %
|Other                    |  |                                  | 117 |                  |                                  | 122           |        | (4.1 | )%               |  |      | 283 |               |   | 237 |  | 19.4 | %
|                         |  |                                  |     |                  |                                  |               |        |      |                  |  |      |     |               |   |     |  |      |  
|Total                    |  | $                                | 315 |                  | $                                | 327           |        | (3.7 | )%               |  | $    | 668 |               | $ | 605 |  | 10.4 | %
|                         |  |                                  |     |                  |                                  |               |        |      |                  |  |      |     |               |   |     |  |      |  



18



---

##### Table of Contents

Noninterest Expense

The following table compares the amounts (in thousands of dollars) of the principal components of noninterest expense in the three and six months ended
June 30, 2007 and in the same three and six month periods of 2006.



|                               |  |                                  |       |                  |                                  |               |        |       |                  |  |      |        |               |   |        |  |       |   
|------------------------------ |  | -------------------------------- | ----- | ---------------- | -------------------------------- | ------------- | ------ | ----- | ---------------- |  | ---- | ------ | ------------- | - | ------ |  | ----- | --
|                               |  | Three Months Ended June 30,      |       |                  | Six Months Ended June 30,        |              
|                               |  | Amount                           |       | PercentageChange |                                  |               | Amount |       | PercentageChange | 
|                               |  | 2007                             |       | 2006             |                                  | 2007 vs. 2006 |        |       | 2007             |  | 2006 |        | 2007 vs. 2006 |  
|                               |  | Unaudited (Dollars in thousands) |       |                  | Unaudited (Dollars in thousands) |              
|Salaries and employee benefits |  | $                                | 2,794 |                  | $                                | 2,821         |        | (1.0  | )%               |  | $    | 5,775  |               | $ | 5,742  |  | 0.6   | % 
|Occupancy                      |  |                                  | 700   |                  |                                  | 628           |        | 11.4  | %                |  |      | 1,365  |               |   | 1,256  |  | 8.7   | % 
|Equipment and depreciation     |  |                                  | 323   |                  |                                  | 350           |        | (7.7  | )%               |  |      | 641    |               |   | 683    |  | (6.2  | )%
|Data processing                |  |                                  | 158   |                  |                                  | 177           |        | (10.7 | )%               |  |      | 324    |               |   | 338    |  | (4.1  | )%
|Professional fees              |  |                                  | 225   |                  |                                  | 328           |        | (31.4 | )%               |  |      | 400    |               |   | 639    |  | (37.4 | )%
|Customer expense               |  |                                  | 186   |                  |                                  | 259           |        | (28.1 | )%               |  |      | 345    |               |   | 415    |  | (16.9 | )%
|FDIC Insurance                 |  |                                  | 199   |                  |                                  |              |        | NM    |                  |  |      | 199    |               |   |       |  | NM    |   
|Other operating expense(1)     |  |                                  | 808   |                  |                                  | 698           |        | 15.8  | %                |  |      | 1,444  |               |   | 1,284  |  | 12.5  | % 
|                               |  |                                  |       |                  |                                  |               |        |       |                  |  |      |        |               |   |        |  |       |   
|Total                          |  | $                                | 5,393 |                  | $                                | 5,261         |        | 2.5   | %                |  | $    | 10,493 |               | $ | 10,357 |  | 1.3   | % 
|                               |  |                                  |       |                  |                                  |               |        |       |                  |  |      |        |               |   |        |  |       |   

---

|(1) | Other operating expense primarily consists of telephone, stationery and office
supplies, regulatory, and investor relations expenses, and insurance premiums, postage, and correspondent bank fees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The increases in non-interest expense in the three and six months ended June 30, 2007 were primarily attributable to increases in Federal Deposit Insurance assessments on federally insured banking institutions that resulted from a
change, mandated by the Federal Deposit Insurance Reform Act of 2005, in assessment formulas. Those increases more than offset decreases in other operating expenses over which we have greater control, including a decreases in employee compensation
expense and equipment costs in the three months ended June 30, 2007.

As a result of the combined effect of the increases in
non-interest expense and the declines in net interest income in the three and six months ended June 30, 2007, our efficiency ratios (operating expenses as a percentage of total revenues from continuing operations) during those periods were
approximately 66% and 64%, respectively, as compared to approximately 61% in both the quarter and six months ended June 30, 2006.

Asset/Liability
Management

The primary objective of asset/liability management is to reduce our exposure to interest rate fluctuations, which can
affect our net interest margins and, therefore, our net interest income and net earnings. We seek to achieve this objective by matching interest rate sensitive assets and liabilities, and maintaining the maturities and the repricing of these assets
and liabilities at appropriate levels in response to the changes in the interest rate environment. Generally, if rate sensitive assets exceed rate sensitive liabilities, net interest income will be positively impacted during a rising interest rate
environment and negatively impacted during a declining interest rate environment. When rate sensitive liabilities exceed rate sensitive assets, net interest income generally will be positively impacted during a declining interest rate environment
and negatively impacted during a rising interest rate environment. However, because interest rates for different asset and liability products offered by depository institutions respond differently to changes in the interest rate environment, the
relationship or gap between interest sensitive assets and interest sensitive liabilities is only a general indicator of interest rate sensitivity and how our net interest income might be affected by changing rates of interest.

For example, rates on certain assets or liabilities typically lag behind changes in market rates of interest. Additionally, prepayments of
loans and securities available for sale, and early withdrawals of certificates of deposit, could cause the interest sensitivities to vary.



19



---

##### Table of Contents

The table below sets forth information concerning our rate sensitive assets and liabilities at
June 30, 2007. The assets and liabilities are classified by the earlier of maturity or repricing dates in accordance with their contractual terms. As described above, certain shortcomings are inherent in the method of analysis presented in this
table.



|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|---------------------------------------------------------------------------- |  | -------------------------------- | ------- | --- | -------------------------------- | - | -------- | -------------------------------- |  | - | --------------- | - |  | ---------------------- | ------- | - | ----- | - | -------- | - |  | - | ---------
|                                                                             |  | Three Months or Less             |         |     | Over Three Through Twelve Months |   |          | Over One Year Through Five Years |  |   | Over Five Years |   |  | Non- Interest- Bearing |         |   | Total
|                                                                             |  | Unaudited (Dollars in thousands)
|Assets                                                                       |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Interest-bearing deposits in other financial institutions                    |  | $                                | 198     |     |                                  | $ |         |                                  |  | $ |                |   |  | $                      |        |   |       | $ |         |   |  | $ | 198      
|Investment in unconsolidated trust subsidiaries                              |  |                                  |        |     |                                  |   |         |                                  |  |   |                |   |  |                        | 837     |   |       |   |         |   |  |   | 837      
|Securities available for sale                                                |  |                                  | 14,485  |     |                                  |   | 33,478   |                                  |  |   | 115,185         |   |  |                        | 62,737  |   |       |   |         |   |  |   | 225,885  
|Federal Reserve Bank and Federal Home Loan Bank stock                        |  |                                  | 13,215  |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   |         |   |  |   | 13,215   
|Federal funds sold                                                           |  |                                  | 101,000 |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   |         |   |  |   | 101,000  
|Loans, gross                                                                 |  |                                  | 324,529 |     |                                  |   | 89,979   |                                  |  |   | 261,181         |   |  |                        | 70,881  |   |       |   |         |   |  |   | 746,570  
|Non-interest earning assets, net                                             |  |                                  |        |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   | 31,968   |   |  |   | 31,968   
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Total assets                                                                 |  | $                                | 453,427 |     |                                  | $ | 123,457  |                                  |  | $ | 376,366         |   |  | $                      | 134,455 |   |       | $ | 31,968   |   |  | $ | 1,119,673
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Liabilities and Shareholders Equity                                          |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Noninterest-bearing deposits                                                 |  | $                                |        |     |                                  | $ |         |                                  |  | $ |                |   |  | $                      |        |   |       | $ | 183,742  |   |  | $ | 183,742  
|Interest-bearing deposits                                                    |  |                                  | 314,412 | (1) |                                  |   | 193,575  | (2)                              |  |   | 75,957          |   |  |                        |        |   |       |   |         |   |  |   | 583,944  
|Borrowings                                                                   |  |                                  | 31,683  |     |                                  |   | 43,000   |                                  |  |   | 151,000         |   |  |                        |        |   |       |   |         |   |  |   | 225,683  
|Junior subordinated debentures                                               |  |                                  | 27,837  |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   |         |   |  |   | 27,837   
|Other liabilities                                                            |  |                                  |        |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   | 7,618    |   |  |   | 7,618    
|Shareholders equity                                                         |  |                                  |        |     |                                  |   |         |                                  |  |   |                |   |  |                        |        |   |       |   | 90,849   |   |  |   | 90,849   
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Total liabilities and shareholders equity                                    |  | $                                | 373,932 |     |                                  | $ | 236,575  |                                  |  | $ | 226,957         |   |  | $                      |        |   |       | $ | 282,209  |   |  | $ | 1,119,673
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Interest rate sensitivity gap                                                |  | $                                | 79,495  |     |                                  | $ | (113,118 | )                                |  | $ | 149,409         |   |  | $                      | 134,455 |   |       | $ | (250,241 | ) |  |   |          
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Cumulative interest rate sensitivity gap                                     |  | $                                | 79,495  |     |                                  | $ | (33,623  | )                                |  | $ | 115,786         |   |  | $                      | 250,241 |   |       |   |         |   |  |   |          
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Cumulative % of rate sensitive assets in maturity period                     |  |                                  | 40      | %   |                                  |   | 52       | %                                |  |   | 85              | % |  |                        | 97      | % |       |   | 100      | % |  |   |          
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Rate sensitive assets to rate sensitive liabilities and shareholders equity |  |                                  | 121     | %   |                                  |   | 52       | %                                |  |   | 166             | % |  |                        | N/A     |   |       |   | N/A      |   |  |   |          
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          
|Cumulative ratio                                                             |  |                                  | 121     | %   |                                  |   | 94       | %                                |  |   | 114             | % |  |                        | 130     | % |       |   | N/A      |   |  |   |          
|                                                                             |  |                                  |         |     |                                  |   |          |                                  |  |   |                 |   |  |                        |         |   |       |   |          |   |  |   |          

---

|1 | Net of Bancorps savings accounts of $26.6 million
|- | --------------------------------------------------

|2 | Net of Bancorps certificate of deposits of $5.3 million
|- | --------------------------------------------------------

At June 30, 2007, our rate sensitive balance sheet was shown to be in a negative twelve-month gap position.
This would imply that our net interest margin would decrease in the shortterm if interest rates rise and would increase in the short-term if interest rates were to fall. However, as noted above, the extent to which our net interest margin will
be impacted by changes in prevailing interests rates will depend on a number of factors, including how quickly rate sensitive assets and liabilities react to interest rate changes, the mix of our interest earning assets (loans versus other lower
yielding interest earning assets, such as securities) and the mix of our interest bearing deposits (between for example, lower interest core deposits and higher cost time certificates of deposit) and our other interest bearing liabilities.



20



---

##### Table of Contents

Financial Condition

Assets

Our total consolidated assets increased by $77 million, or 7%, to $1.120 billion at
June 30, 2007 from $1.043 billion at December 31, 2006, as we used increases in deposits during the six months ended June 30, 2007 to increase federal funds sold.

The following table sets forth the composition of our interest earning assets (in thousands of dollars) at:



|                                                               |  |               |         |                   |   |        
|-------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                               |  | June 30, 2007 |         | December 31, 2006
|                                                               |  | Unaudited     |         |                  
|Federal funds sold                                             |  | $             | 101,000 |                   | $ | 13,000 
|Interest-bearing deposits with financial institutions          |  |               | 198     |                   |   | 198    
|Federal Reserve Bank and Federal Home Loan Bank Stock, at cost |  |               | 13,215  |                   |   | 13,792 
|Securities available for sale, at fair value                   |  |               | 225,885 |                   |   | 241,912
|Loans (net of allowances of $6,029 and $5,929, respectively)   |  |               | 740,541 |                   |   | 740,957

Loans

The following table sets forth, in thousands of dollars, the composition, by loan category, of our loan portfolio, at June 30, 2007 and December 31, 2006:



|                                              |  |               |         |   |                   |       |   |        |   |         |         |  |       |  
|--------------------------------------------- |  | ------------- | ------- | - | ----------------- | ----- | - | ------ | - | ------- | ------- |  | ----- | -
|                                              |  | June 30, 2007 |         |   | December 31, 2006 |      
|                                              |  | Amount        |         |   | Percent           |       |   | Amount |   |         | Percent | 
|                                              |  | Unaudited     |         |   |                   |       |   |        |  
|Commercial loans                              |  | $             | 246,533 |   |                   | 33.0  | % |        | $ | 230,960 |         |  | 30.9  | %
|Commercial real estate loans - owner occupied |  |               | 159,331 |   |                   | 21.3  | % |        |   | 128,632 |         |  | 17.2  | %
|Commercial real estate loans - all other      |  |               | 100,151 |   |                   | 13.4  | % |        |   | 125,851 |         |  | 16.8  | %
|Residential mortgage loans - single family    |  |               | 70,280  |   |                   | 9.4   | % |        |   | 76,117  |         |  | 10.2  | %
|Residential mortgage loans - multi-family     |  |               | 93,536  |   |                   | 12.5  | % |        |   | 98,678  |         |  | 13.2  | %
|Construction loans                            |  |               | 52,119  |   |                   | 7.0   | % |        |   | 65,120  |         |  | 8.7   | %
|Land development loans                        |  |               | 18,029  |   |                   | 2.4   | % |        |   | 16,733  |         |  | 2.2   | %
|Consumer loans                                |  |               | 6,753   |   |                   | 0.9   | % |        |   | 5,401   |         |  | 0.7   | %
|                                              |  |               |         |   |                   |       |   |        |   |         |         |  |       |  
|Gross loans                                   |  |               | 746,732 |   |                   | 100.0 | % |        |   | 747,492 |         |  | 100.0 | %
|                                              |  |               |         |   |                   |       |   |        |   |         |         |  |       |  
|Deferred fee (income) costs, net              |  |               | (162    | ) |                   |       |   |        |   | (606    | )       |  |       |  
|Allowance for loan losses                     |  |               | (6,029  | ) |                   |       |   |        |   | (5,929  | )       |  |       |  
|                                              |  |               |         |   |                   |       |   |        |   |         |         |  |       |  
|Loans, net                                    |  | $             | 740,541 |   |                   |       |   |        | $ | 740,957 |         |  |       |  
|                                              |  |               |         |   |                   |       |   |        |   |         |         |  |       |  

Commercial loans are loans to businesses to finance capital purchases or improvements, or to
provide cash flow for operations. Commercial real estate and residential mortgage loans are loans secured by trust deeds on real property, including commercial property and single family and multi-family residences. Construction and land development
loans are interim loans to finance specific construction projects. Consumer loans include installment loans to consumers.

The following
table sets forth, in thousands of dollars, the maturity distribution of our loan portfolio (excluding consumer and residential mortgage loans) at June 30, 2007:



|                                      |  |                  |         |                                  |   |                 |  |       |         |  |   |        
|------------------------------------- |  | ---------------- | ------- | -------------------------------- | - | --------------- |  | ----- | ------- |  | - | -------
|                                      |  | June 30, 2007   
|                                      |  | One Year or Less |         | Over One Year Through Five Years |   | Over Five Years |  | Total
|                                      |  |                  |         | Unaudited                        |   |                
|Real estate and construction loans(1) |  |                  |         |                                  |   |                 |  |       |         |  |   |        
|Floating rate                         |  | $                | 86,644  |                                  | $ | 12,636          |  | $     | 152,761 |  | $ | 252,041
|Fixed rate                            |  |                  | 13,124  |                                  |   | 28,728          |  |       | 35,737  |  |   | 77,589 
|Commercial loans                      |  |                  |         |                                  |   |                 |  |       |         |  |   |        
|Floating rate                         |  |                  | 166,239 |                                  |   | 32,521          |  |       | 4,426   |  |   | 203,186
|Fixed rate                            |  |                  | 13,470  |                                  |   | 25,542          |  |       | 4,335   |  |   | 43,347 
|                                      |  |                  |         |                                  |   |                 |  |       |         |  |   |        
|Total                                 |  | $                | 279,477 |                                  | $ | 99,427          |  | $     | 197,259 |  | $ | 576,163
|                                      |  |                  |         |                                  |   |                 |  |       |         |  |   |        

---

|(1) | Does not include mortgage loans on single and multi-family residences and consumer
loans, which totaled $163.8 million and $6.7 million, respectively, at June 30, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

Allowance for Loan Losses and Nonperforming Loans

Allowance for Loan Losses. The allowance for loan losses (the Allowance) at June 30, 2007 was $6.0 million, which represented
approximately 0.81% of the loans outstanding at June 30, 2007, as compared to $5.9 million, or 0.79%, of the loans outstanding at December 31, 2006.

We carefully monitor changing economic conditions, the loan portfolio by category, the financial condition of borrowers, the history of the loan portfolio, and we follow bank regulatory guidelines in determining the
adequacy of the allowance. We believe that the allowance at June 30, 2007 was adequate to provide for losses inherent in the loan portfolio. However, as the volume of loans increases, additional provisions for loan losses will be required to
maintain the allowance at adequate levels. Additionally, the allowance was established on the basis of assumptions and judgments regarding such matters as economic conditions and trends and the condition of borrowers, historical industry loan loss
data and regulatory guidelines and, if there were changes in those conditions or trends, actual loan losses in the future could vary from the losses that were predicted on the basis of those earlier assumptions, judgments and guidelines. For
example, if economic conditions were to deteriorate, or interest rates were to increase significantly, which would have the effect of increasing the risk that borrowers would encounter difficulties meeting their loan payment obligations, it could
become necessary to increase the allowance by means of additional provisions for loan losses. See Results of OperationsProvision for Loan Losses above.

Set forth below is a summary, in thousands of dollars, of the transactions in the allowance for loan losses for the six months ended June 30, 2007
and the year ended December 31, 2006:



|                             |  |                                |       |   |                              |   |       |  
|---------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ----- | -
|                             |  | Six Months Ended June 30, 2007 |       |   | Year Ended December 31, 2006 |  
|                             |  | Unaudited                      |       |   |                              |  
|Balance, beginning of period |  | $                              | 5,929 |   |                              | $ | 5,126 |  
|Provision for loan losses    |  |                                | 625   |   |                              |   | 1,105 |  
|Net, Amounts charged off     |  |                                | (525  | ) |                              |   | (302  | )
|                             |  |                                |       |   |                              |   |       |  
|Balance, end of period       |  | $                              | 6,029 |   |                              | $ | 5,929 |  
|                             |  |                                |       |   |                              |   |       |  

Non-Performing Loans. We also measure and establish reserves for loan impairments on a
loan-by-loan basis using either the present value of expected future cash flows discounted at a loans effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. We exclude smaller, homogeneous loans, such
as consumer installment loans and lines of credit, from our impairment calculations. Also, loans that experience insignificant payment delays or shortfalls are generally not considered impaired. We cease accruing interest, and therefore classify as
nonaccrual, any loan as to which principal or interest has been in default for a period of 90 days or more, or if repayment in full of interest or principal is not expected.

At June 30, 2007 and December 31, 2006, we had $4.6 million and $1.8 million, respectively, of loans that were delinquent and which were
classified as nonaccrual and impaired loans. The increase in non-performing loans at June 30, 2007, as compared to December 31, 2006, was attributable to a net increase of $1.7 million of commercial loans and $1.1 million of mortgage loans
that had become delinquent and were placed on nonaccrual status during the first six months of 2007. However, we believe that all of these loans are well-collateralized or have adequate reserves.

We had no loans with delinquent balances of 90 days or more that were still accruing interest as of June 30, 2007 and December 31, 2006. There
were no restructured loans at June 30, 2007 or December 31, 2006. At June 30, 2007, our average investment in impaired loans, on a year-to-date basis, was $2.5 million. The interest that we would have earned during the six months
ended June 30, 2007, had the impaired loans remained current in accordance with their original terms was $240,000.



22



---

##### Table of Contents

Deposits

Average Balances of and Average Interest Rates Paid on Deposits. Set forth below, in thousands of dollars, are the average amounts (in thousands of dollars) of, and the average rates paid on, deposits for the
six months ended June 30, 2007:



|                                    |  |                               |         |             |      |  
|----------------------------------- |  | ----------------------------- | ------- | ----------- | ---- | -
|                                    |  | Six Months EndedJune 30, 2007 |        
|                                    |  | Unaudited                     |        
|                                    |  | AverageBalance                |         | AverageRate |     
|Noninterest-bearing demand deposits |  | $                             | 166,222 |             |     |  
|Interest-bearing checking accounts  |  |                               | 22,133  |             | 0.74 | %
|Money market and savings deposits   |  |                               | 144,078 |             | 3.50 | %
|Time deposits                       |  |                               | 392,668 |             | 5.16 | %
|                                    |  |                               |         |             |      |  
|Average total deposits              |  | $                             | 725,101 |             | 3.51 | %
|                                    |  |                               |         |             |      |  

Deposit Totals. Deposits totaled $768 million at June 30, 2007 as compared to $718
million at December 31, 2006. At June 30, 2007, noninterest-bearing deposits totaled $184 million and represented 24% of total deposits, as compared to $189 million and 26% of total deposits at December 31, 2006. At June 30,
2007, certificates of deposit in denominations of $100,000 or more totaled $237 million and represented 31% of total deposits, as compared to $219 million and 31% of total deposits at December 31, 2006. Set forth below, in thousands of dollars,
is a maturity schedule of domestic time certificates of deposit outstanding at June 30, 2007:



|                                     |  |                                       |         |                                            |   |        
|------------------------------------ |  | ------------------------------------- | ------- | ------------------------------------------ | - | -------
|                                     |  | At June 30, 2007                     
|                                     |  | Certificates of DepositUnder $100,000 |         | Certificates of Depositof $100,000 or More
|                                     |  | Unaudited                            
|Maturities                           |  |                                       |         |                                            |   |        
|Three months or less                 |  | $                                     | 47,526  |                                            | $ | 90,619 
|Over three and through twelve months |  |                                       | 81,710  |                                            |   | 111,864
|Over twelve months                   |  |                                       | 41,159  |                                            |   | 34,798 
|                                     |  |                                       |         |                                            |   |        
|Total certificates of deposit        |  | $                                     | 170,395 |                                            | $ | 237,281
|                                     |  |                                       |         |                                            |   |        

Liquidity

We actively manage our liquidity needs to ensure that sufficient funds are available to meet the ongoing needs of our customers. We project the future sources and uses of funds and maintain sufficient liquid funds for
unanticipated events. Our primary sources of cash include payments on loans, and the sale or maturity of investments and growth in deposits. The primary uses of cash include funding new loans and making advances on existing lines of credit,
purchasing investments, including securities available for sale, funding deposit withdrawals and paying operating expenses. We maintain funds in overnight federal funds and other short-term investments to provide for short-term liquidity needs. We
also have obtained credit lines from the Federal Home Loan Bank and other financial institutions to meet any additional liquidity requirements.

Our liquid assets, which included cash and due from banks, federal funds sold, interest earning deposits with financial institutions and unpledged securities available for sale (excluding Federal Reserve Bank and Federal Home Loan Bank
stock) totaled $206 million or 18% of total assets at June 30, 2007.

Cash flow Provided by Financing Activities. Cash flow of
$74 million was provided by financing activities during the six months ended June 30, 2007, the source of which consisted primarily of net increases of $50 million in deposits and $24 million in net borrowings.

Cash flow From Operating Activities. Cash flow of $4 million was provided by our continuing operations during the six months ended June 30,
2007.

Cash flow Provided by Investing Activities. In the six months ended June 30, 2007, cash flow of $15 million was provided
by investing activities, primarily by $20 million of proceeds from principal payments received on investment securities available for sale, partially offset by $4.5 million expended to purchase other securities available for sale.



23



---

##### Table of Contents

The relationship between gross loans and total deposits provides a useful measure of our liquidity. Since
repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields and higher interest
income on loans than we do on investments, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the
need to generate a fair return on assets. At June 30, 2007, the ratio of loans-to-deposits was 96%, compared to 103% at December 31, 2006. Even though our loans-to-deposits ratio was 96%, we believe that we have adequate liquidity
supported by Federal Home Loan Bank advances and securities sold under repurchase agreements.

Off Balance Sheet Arrangements

Loan Commitments and Standby Letters of Credit. In order to meet the financing needs of our customers in the normal course of business, we make
commitments to extend credit and issue standby commercial letters of credit to or for our customers. At June 30, 2007 and December 31, 2006, we were committed to fund certain loans amounting to approximately $206 million and $224 million,
respectively.

Commitments to extend credit and standby letters of credit generally have fixed expiration dates or other termination
clauses and the customer may be required to pay a fee and meet other conditions in order to draw on those commitments or standby letters of credit. We expect, based on historical experience, that many of the commitments will expire without being
drawn upon and, therefore, the total commitment amounts do not necessarily represent future cash requirements.

To varying degrees,
commitments to extend credit involve elements of credit and interest rate risk for us that are in excess of the amounts recognized in our balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the customers to whom
such commitments are made is equal to the amount of those commitments. As a result, before making such a commitment to a customer, we evaluate the customers creditworthiness using the same underwriting standards that we would apply if we were
approving loans to the customer. In addition, we often require the customer to secure its payment obligations for amounts drawn on such commitments with collateral such as accounts receivable, inventory, property, plant and equipment,
income-producing commercial properties, residential properties and properties under construction. As a consequence, our exposure to credit and interest rate risk on such commitments is not different in character or amount than risks inherent in the
outstanding loans in our loan portfolio.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

We believe that our cash and cash equivalent resources, together with available borrowings under our credit facilities, will be sufficient to enable us
to meet any increases in demand for loans or in the utilization of outstanding loan commitments or standby letters of credit and any increase in deposit withdrawals that might occur in the foreseeable future.



24



---

##### Table of Contents

Contractual Obligations

Borrowings. As of June 30, 2007, we had $151 million of outstanding long-term borrowings and $68 million of outstanding short-term borrowings that we had obtained from the Federal Home Loan Bank. The table
below sets forth the amounts (in thousands of dollars) of, the interest rates we pay on, and the maturity dates of these Federal Home Loan Bank borrowings. These borrowings, along with the securities sold under agreements to repurchase, have a
weighted-average annualized interest rate of 5.00%.



|                       |                                    |               |      |   |                |                    |                        |   |               |  |      |                |  |                  
|---------------------- | ---------------------------------- | ------------- | ---- | - | -------------- | ------------------ | ---------------------- | - | ------------- |  | ---- | -------------- |  | -----------------
|Principal Amounts      |                                    | Interest Rate |      |   | Maturity Dates |                    | Principal Amounts      |   | Interest Rate |  |      | Maturity Dates
|(Dollars in thousands) |                                    |               |      |   |                |                    | (Dollars in thousands) |   |               |  |      |               
|                       | $                            5,000 |               | 5.49 | % |                | July 16, 2007      |                        | $ | 5,000         |  | 4.94 | %              |  | November 28, 2008
|                       | 5,000                              |               | 5.29 | % |                | July 17, 2007      |                        |   | 5,000         |  | 4.91 | %              |  | December 2, 2008 
|                       | 10,000                             |               | 5.28 | % |                | July 19, 2007      |                        |   | 10,000        |  | 5.09 | %              |  | January 20, 2009 
|                       | 3,000                              |               | 3.14 | % |                | September 18, 2007 |                        |   | 5,000         |  | 3.45 | %              |  | February 11, 2009
|                       | 2,000                              |               | 3.06 | % |                | September 24, 2007 |                        |   | 5,000         |  | 5.25 | %              |  | May 1, 2009      
|                       | 1,000                              |               | 2.91 | % |                | October 1, 2007    |                        |   | 7,000         |  | 5.25 | %              |  | May 1, 2009      
|                       | 7,000                              |               | 5.6  | % |                | October 9, 2007    |                        |   | 7,000         |  | 4.93 | %              |  | November 24, 2009
|                       | 5,000                              |               | 5.38 | % |                | January 22, 2008   |                        |   | 5,000         |  | 4.86 | %              |  | November 27, 2009
|                       | 5,000                              |               | 5.24 | % |                | May 2, 2008        |                        |   | 7,000         |  | 4.81 | %              |  | December 14, 2009
|                       | 10,000                             |               | 5.29 | % |                | May 5, 2008        |                        |   | 5,000         |  | 4.87 | %              |  | December 21, 2009
|                       | 7,000                              |               | 5.25 | % |                | May 19, 2008       |                        |   | 12,000        |  | 4.96 | %              |  | January 4, 2010  
|                       | 8,000                              |               | 5.28 | % |                | June 5, 2008       |                        |   | 5,000         |  | 4.85 | %              |  | January 8, 2010  
|                       | 8,000                              |               | 5.55 | % |                | July 10, 2008      |                        |   | 12,000        |  | 5.04 | %              |  | January 19, 2010 
|                       | 5,000                              |               | 5.36 | % |                | July 25, 2008      |                        |   | 7,000         |  | 5.1  | %              |  | January 25, 2010 
|                       | 5,000                              |               | 5.22 | % |                | August 8, 2008     |                        |   | 7,000         |  | 4.83 | %              |  | March 1, 2010    
|                       | 10,000                             |               | 5.22 | % |                | October 16, 2008   |                        |   | 7,000         |  | 4.88 | %              |  | March 1, 2010    
|                       | 2,000                              |               | 5.26 | % |                | November 5, 2008   |                        |   | 10,000        |  | 4.84 | %              |  | March 2, 2010    

At June 30, 2007, U.S. Agency and Mortgage Backed securities, U.S. Government agency
securities and collateralized mortgage obligations with an aggregate fair market value of $139 million and $155 million of residential mortgage and other real estate secured loans were pledged to secure these Federal Home Loan Bank borrowings,
repurchase agreements, local agency deposits, and Treasury, Tax and Loan accounts.

The highest amount of borrowings outstanding at any
month end during the six months ended June 30, 2007 consisted of $231 million of borrowings from the Federal Home Loan Bank and $10 million of overnight borrowings in the form of securities sold under repurchase agreements. During 2006, the
highest amount of borrowings outstanding at any month end consisted of $274 million of advances from the Federal Home Loan Bank and $33 million of overnight borrowings in the form of securities sold under repurchase agreements.

Junior Subordinated Debentures. Pursuant to rulings of the Federal Reserve Board, bank holding companies have been permitted to issue long term
subordinated debt instruments that will, subject to certain conditions, qualify as and, therefore, augment capital for regulatory purposes. Pursuant to those rulings, in 2002, we formed subsidiary grantor trusts to sell and issue to institutional
investors a total of approximately $17.5 million principal amount of floating junior trust preferred securities (trust preferred securities). We received the net proceeds from the sale of the trust preferred securities in exchange for
our issuance to the grantor trusts, of a total $17.5 million principal amount of our junior subordinated floating rate debentures (the Debentures), the payment terms of which mirror those of the trust preferred securities. The Debentures
also were pledged by the grantor trusts as security for their payment obligations under the trust preferred securities.

In October 2004,
we established another grantor trust that sold an additional $10.3 million of trust preferred securities to an institutional investor and, in connection therewith, we sold and issued an additional $10.3 million principal amount of junior
subordinated floating rate debentures in exchange for the proceeds raised from the sale of those trust preferred securities. The payments that we make of interest and principal on the Debentures are used by the grantor trusts to make the payments
that come due to the holders of the trust preferred securities pursuant to the terms of those securities.



25



---

##### Table of Contents

Set forth below, in thousands of dollars, is certain information regarding the terms of the Debentures
that were outstanding as of June 30, 2007:



|                     |  |                  |        |                |                      |                |               
|-------------------- |  | ---------------- | ------ | -------------- | -------------------- | -------------- | --------------
|Original Issue Dates |  | Principal Amount |        | Interest Rates |                      | Maturity Dates
|June 2002            |  | $                | 5,155  |                | LIBOR plus 3.75%(1)  |                | June 2032     
|August 2002          |  |                  | 5,155  |                | LIBOR plus 3.625%(2) |                | August 2032   
|September 2002       |  |                  | 7,217  |                | LIBOR plus 3.40%(1)  |                | September 2032
|October 2004         |  |                  | 10,310 |                | LIBOR plus 2.00%(1)  |                | October 2034  
|                     |  |                  |        |                |                      |                |               
|Total                |  | $                | 27,837 |                |                      |                |               
|                     |  |                  |        |                |                      |                |               

---

|(1) | Interest rate resets quarterly.
|--- | -------------------------------

|(2) | Interest rate resets semi-annually.
|--- | -----------------------------------

These Debentures require quarterly or semi-annual interest payments. Subject to certain conditions, we have the right, at our discretion, to defer those
interest payments for up to five years. However, we have no plans to exercise this deferral right.

Under the Federal Reserve Board
rulings, the borrowings evidenced by the Debentures, which are subordinated to all of our other borrowings that are outstanding or which we may obtain in the future, are eligible (subject to certain dollar limitations) to qualify, and at
June 30, 2007, a total amount of $27.8 million principal amount of those Debentures qualified, as Tier I capital for regulatory purposes.

These Debentures are redeemable, at our option, without premium or penalty, beginning five years after their respective original issue dates.

At June 30, 2007, we had cash in excess of our operating requirements, totaling approximately $32 million, which was being held in deposit accounts at the Bank. After considering the alternative uses available
for that cash, the Board of Directors determined that a portion of the cash should be used to redeem (i) the $5.155 million principal amount of Debentures issued in June 2002 and (ii) the $5.155 million principal amount of the Debentures
issued in August 2002. Accordingly, on July 2, 2007 we redeemed $5.155 million of the Debentures and on July 11, 2007, we notified the Trustee for the $5.155 million principal amount of Debentures issued in August 2002 that we will be
redeeming those Debentures, as well, on or about August 30, 2007.

Consequently, as of August 30, 2007, the remaining aggregate
principal amount of Debentures that will be outstanding will be $17.527 million.

Investment Policy and Securities Available for Sale

Our investment policy is designed to provide for our liquidity needs and to generate a favorable return on investments without undue interest rate risk,
credit risk or asset concentrations.

Our investment policy:



| |  |  | authorizes us to invest in obligations issued or fully guaranteed by the United States Government, certain federal agency obligations, time deposits issued by
federally insured depository institutions, municipal securities and in federal funds sold;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provides that the weighted average maturities of U.S. Government obligations and federal agency securities cannot exceed 10 years and municipal obligations cannot
exceed 25 years;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provides that time deposits must be placed with federally insured financial institutions, cannot exceed $100,000 in any one institution and may not have a maturity
exceeding 60 months; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibits engaging in securities trading activities.
| | - |  | ----------------------------------------------------

Securities available for sale are those that we intend to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, changes in interest rates, changes in prepayment risks
or other similar factors. Such securities are recorded at fair value. Any unrealized gains and losses are reported as Other Comprehensive Income (Loss) rather than included in or deducted from earnings.



26



---

##### Table of Contents

The following is a summary of the major components of securities available for sale and a comparison of
the amortized cost, estimated fair values and gross unrealized gains and losses, in thousands of dollars, as of June 30, 2007 and December 31, 2006:



|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        
|-------------------------------------------- |  | ------------- | ------- | ------------------- | - | ------------------- |  | ------------------- | ----- |  | - | -------
|                                             |  | AmortizedCost |         | GrossUnrealizedGain |   | GrossUnrealizedLoss |  | EstimatedFair Value
|                                             |  |               |         | Unaudited           |   |                    
|June 30, 2007                                |  |               |         |                     |   |                     |  |                     |       |  |   |        
|Securities Available For Sale:               |  |               |         |                     |   |                     |  |                     |       |  |   |        
|US Agencies/Mortgage-backed securities       |  | $             | 189,605 |                     | $ | 40                  |  | $                   | 5,087 |  | $ | 184,558
|Collateralized mortgage obligations          |  |               | 20,301  |                     |   |                    |  |                     | 565   |  |   | 19,736 
|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        
|Total government and agencies securities     |  |               | 209,906 |                     |   | 40                  |  |                     | 5,652 |  |   | 204,294
|Municipal securities                         |  |               | 20,112  |                     |   | 34                  |  |                     | 255   |  |   | 19,891 
|Mutual fund                                  |  |               | 1,700   |                     |   |                    |  |                     |      |  |   | 1, 700 
|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        
|Total Securities Available For Sale          |  | $             | 231,718 |                     | $ | 74                  |  | $                   | 5,907 |  | $ | 225,885
|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        
|December 31, 2006                            |  |               |         |                     |   |                     |  |                     |       |  |   |        
|Securities Available For Sale:               |  |               |         |                     |   |                     |  |                     |       |  |   |        
|U.S. agencies and mortgage-backed securities |  | $             | 211,790 |                     | $ | 91                  |  | $                   | 4,608 |  | $ | 207,273
|Collateralized mortgage obligations          |  |               | 21,751  |                     |   |                    |  |                     | 437   |  |   | 21,314 
|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        
|Total government and agencies securities     |  |               | 233,541 |                     |   | 91                  |  |                     | 5,045 |  |   | 228,587
|Municipal securities                         |  |               | 11,651  |                     |   | 201                 |  |                     |      |  |   | 11,852 
|Mutual fund                                  |  |               | 1,473   |                     |   |                    |  |                     |      |  |   | 1,473  
|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        
|Total Securities Available For Sale          |  | $             | 246,665 |                     | $ | 292                 |  | $                   | 5,045 |  | $ | 241,912
|                                             |  |               |         |                     |   |                     |  |                     |       |  |   |        

At June 30, 2007, U.S. Agencies and Mortgage Backed securities, U.S. Government Agency
securities and collateralized mortgage obligations with an aggregate fair market value of $139 million were pledged to secure Federal Home Loan Bank borrowings, repurchase agreements, local agency deposits and Treasury, Tax and Loan accounts.

The amortized cost and estimated fair value, at June 30, 2007, of securities available for sale are shown, in thousands of dollars in
the following table, by contractual maturities and historical prepayments based on the prior three months of principal payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to
collateralized mortgage obligations, because borrowers may react to interest rate market conditions differently than the historical prepayment rates.



|                                                    |  |                  |        |   |                               |   |         |                                |  |   |               |   |  |       |        |   |  |   |         |  
|--------------------------------------------------- |  | ---------------- | ------ | - | ----------------------------- | - | ------- | ------------------------------ |  | - | ------------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                                    |  | Maturing in      |       
|(Dollars in thousands)                              |  | One year or less |        |   | Over oneyearthroughfive years |   |         | Over fiveyearsthroughten years |  |   | Over tenyears |   |  | Total |       
|                                                    |  | Unaudited        |       
|Securities available for sale, amortized cost       |  | $                | 38,387 |   |                               | $ | 105,523 |                                |  | $ | 47,727        |   |  | $     | 40,374 |   |  | $ | 231,718 |  
|Securities available for sale, estimated fair value |  |                  | 37,392 |   |                               |   | 102,234 |                                |  |   | 46,434        |   |  |       | 39,825 |   |  |   | 225,885 |  
|Weighted average yield                              |  |                  | 4.23   | % |                               |   | 4.39    | %                              |  |   | 4.63          | % |  |       | 4.63   | % |  |   | 4.46    | %



27



---

##### Table of Contents

The table below shows as of June 30, 2007, the gross unrealized losses and fair values (in thousands
of dollars) of our investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.



|                                           |  |                                                     |        |                   |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|------------------------------------------ |  | --------------------------------------------------- | ------ | ----------------- | - | ---------- |  | -------------- | ------- | ---------- | - | -------------- |  | - | ------- |  | - | -----
|                                           |  | Securities With Unrealized Loss as of June 30, 2007
|                                           |  | Less than 12 months                                 |        | 12 months or more |   | Total     
|(Dollars In thousands)                     |  | Fair Value                                          |        | UnrealizedLoss    |   | Fair Value |  | UnrealizedLoss |         | Fair Value |   | UnrealizedLoss
|                                           |  | Unaudited                                          
|US agencies and mortgage backed securities |  | $                                                   | 38,237 |                   | $ | 345        |  | $              | 139,039 |            | $ | 4,742          |  | $ | 177,276 |  | $ | 5,087
|Collateralized mortgage obligations        |  |                                                     | 5,993  |                   |   | 101        |  |                | 13,743  |            |   | 464            |  |   | 19,736  |  |   | 565  
|Municipal securities                       |  |                                                     | 14,114 |                   |   | 255        |  |                |        |            |   |               |  |   | 14,114  |  |   | 255  
|                                           |  |                                                     |        |                   |   |            |  |                |         |            |   |                |  |   |         |  |   |      
|Total temporarily impaired securities      |  | $                                                   | 58,344 |                   | $ | 701        |  | $              | 152,782 |            | $ | 5,206          |  | $ | 211,126 |  | $ | 5,907
|                                           |  |                                                     |        |                   |   |            |  |                |         |            |   |                |  |   |         |  |   |      

We regularly monitor investments for significant declines in fair value. We have determined that
the declines in the fair values of these investments below their amortized costs, as set forth in the table above, are temporary based on the following: (i) those declines are due to interest rate changes and not due to a deterioration in the
creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.

Capital Resources

Capital Regulatory Requirements
Applicable to Banking Institutions. Under federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on a consolidated basis) and the Bank (on a stand-alone basis) must meet
specific capital adequacy requirements that, for the most part, involve quantitative measures primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting
practices. Under those regulations, based primarily on those quantitative measures each bank holding company and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following categories.



| |  |  | well capitalized
| | - |  | ----------------



| |  |  | adequately capitalized
| | - |  | ----------------------



| |  |  | undercapitalized
| | - |  | ----------------



| |  |  | significantly undercapitalized; or
| | - |  | ----------------------------------



| |  |  | critically undercapitalized
| | - |  | ---------------------------

Certain
qualitative assessments also are made by a banking institutions primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the
quantitative measures used to assess the institutions capital adequacy. At each successive lower capital category, a bank and its bank holding company are subject to greater operating restrictions and increased regulatory supervision by their
federal bank regulatory agencies.

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 June 30, 2007, as compared to the respective minimum regulatory requirements applicable to them.



28



---

##### Table of Contents



|                                        |  |        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|--------------------------------------- |  | ------ | ------- | ----- | ------------------------ | - | ----------------------------------------- | --------------------------------- | ------ |  | ------------ | ------ |  | ----- | ------ |  | ------------- | -
|                                        |  |        |         |       |                          |   | Applicable Federal Regulatory Requirement |                                  
|                                        |  | Actual |         |       | Capital AdequacyPurposes |   |                                           | To be Categorized WellCapitalized |       
|                                        |  | Amount |         | Ratio |                          |   | Amount                                    |                                   | Ratio  |  |              | Amount |  | Ratio |       
|                                        |  |        |         |       |                          |   | (Dollars in thousands)                    |                                   |        |  |              |        | 
|Total Capital to Risk Weighted Assets:  |  |        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $      | 127,885 |       | 15.60                    | % |                                           | $                                 | 65,601 |  | At least 8.0 | %      |  | $     | 82,002 |  | At least 10.0 | %
|Bank                                    |  |        | 40,968  |       | 11.17                    | % |                                           |                                   | 65,170 |  | At least 8.0 | %      |  |       | 81,462 |  | At least 10.0 | %
|Tier 1 Capital to Risk Weighted Assets: |  |        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $      | 121,516 |       | 14.82                    | % |                                           | $                                 | 32,801 |  | At least 4.0 | %      |  | $     | 49,201 |  | At least 6.0  | %
|Bank                                    |  |        | 84,637  |       | 10.39                    | % |                                           |                                   | 32,585 |  | At least 4.0 | %      |  |       | 48,877 |  | At least 6.0  | %
|Tier 1 Capital to Average Assets:       |  |        |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $      | 121,516 |       | 10.98                    | % |                                           | $                                 | 44,253 |  | At least 4.0 | %      |  | $     | 55,316 |  | At least 5.0  | %
|Bank                                    |  |        | 84,637  |       | 7.67                     | % |                                           |                                   | 44,162 |  | At least 4.0 | %      |  |       | 55,202 |  | At least 5.0  | %

As of June 30, 2007, based on applicable capital regulations, the Company (on a consolidated
basis) and the Bank (on a stand-alone basis) qualified as well capitalized institutions under the capital adequacy guidelines described above.

The consolidated total capital and Tier 1 capital of the Company, at June 30, 2007, include an aggregate of $27.8 million principal amount of Junior Subordinated Debentures that we issued in 2002 and 2004 in connection with the sale of
trust preferred securities. We contributed $26 million of the net proceeds from the sale of the trust preferred securities to the Bank, thereby increasing its total capital and Tier 1 capital. As described above, in July 2007 we redeemed $5.155
million principal amount of the Junior Subordinated Debentures and we will be redeeming another $5.155 million principal amount of the Junior Subordinated Debentures in August 2007.

The following table sets forth, on a pro forma basis, the amounts of capital and the capital ratios of the Company (on a consolidated basis) and the Bank
(on a stand alone basis), as of June 30, 2007, adjusted to give effect to these redemptions as if they had occurred on June 30, 2007, and compares those amounts and capital ratios to the respective minimum regulatory requirements
applicable to the Company and the Bank.



|                                        |  |                      |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|--------------------------------------- |  | -------------------- | ------- | ----- | ------------------------ | - | ----------------------------------------- | --------------------------------- | ------ |  | ------------ | ------ |  | ----- | ------ |  | ------------- | -
|                                        |  |                      |         |       |                          |   | Applicable Federal Regulatory Requirement |                                  
|                                        |  | Pro Forma asAdjusted |         |       | Capital AdequacyPurposes |   |                                           | To be Categorized WellCapitalized |       
|                                        |  | Amount               |         | Ratio |                          |   | Amount                                    |                                   | Ratio  |  |              | Amount |  | Ratio |       
|                                        |  |                      |         |       |                          |   | (Dollars in thousands)                    |                                   |        |  |              |        | 
|Total Capital to Risk Weighted Assets:  |  |                      |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $                    | 117,885 |       | 14.38                    | % |                                           | $                                 | 65,601 |  | At least 8.0 | %      |  | $     | 82,002 |  | At least 10.0 | %
|Bank                                    |  |                      | 40,968  |       | 11.17                    | % |                                           |                                   | 65,170 |  | At least 8.0 | %      |  |       | 81,462 |  | At least 10.0 | %
|Tier 1 Capital to Risk Weighted Assets: |  |                      |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $                    | 111,516 |       | 13.60                    | % |                                           | $                                 | 32,801 |  | At least 4.0 | %      |  | $     | 49,201 |  | At least 6.0  | %
|Bank                                    |  |                      | 84,637  |       | 10.39                    | % |                                           |                                   | 32,585 |  | At least 4.0 | %      |  |       | 48,877 |  | At least 6.0  | %
|Tier 1 Capital to Average Assets:       |  |                      |         |       |                          |   |                                           |                                   |        |  |              |        |  |       |        |  |               |  
|Company                                 |  | $                    | 111,516 |       | 10.08                    | % |                                           | $                                 | 44,253 |  | At least 4.0 | %      |  | $     | 55,316 |  | At least 5.0  | %
|Bank                                    |  |                      | 84,637  |       | 7.67                     | % |                                           |                                   | 44,162 |  | At least 4.0 | %      |  |       | 55,202 |  | At least 5.0  | %

Dividend Policy and Share Repurchase Program. The current dividend policy is to retain
earnings to support the future growth of the Company. However, the Board of Directors periodically reviews this policy and the Companys cash flow requirements in order to determine whether to modify this policy to provide for the payment of
cash dividends.



29



---

##### Table of Contents

In June 2005, our Board of Directors concluded that, at prevailing market prices, the Companys
shares represented an attractive investment opportunity and, therefore, that repurchases of Company shares would be a good use of Company funds. As a result, the Board of Directors approved a share repurchase program, which authorizes the Company to
purchase up to two percent (2%) of the Companys outstanding common shares, which are approximates 200,000 shares in total. Purchases may be made in the open market or in private transactions, in accordance with applicable Securities and
Exchange Commission rules, when opportunities become available to purchase shares at prices believed to be attractive. The Company is under no obligation to repurchase shares under the share repurchase program and the timing, actual number and value
of shares that are repurchased by the Company under this program will depend on a number of factors, including the Companys future financial performance and available cash resources, competing uses for its corporate funds, prevailing market
prices of its common stock and the number of shares that become available for sale at prices that the Company believes are attractive, as well as any regulatory requirements applicable to the Company.

During June 2007, the Company made open market purchases of an aggregate of 50,000 shares of its common stock pursuant to this program for an aggregate
purchase price of $687,500, which results in an average per share price of $13.75.

Risks That Could Affect Our Future Financial Performance

This Report, including the discussion and analysis of our financial condition and results of operations set forth above, contains
certain forward-looking statements. Forward-looking statements set forth are estimates of, or our expectations, beliefs or views regarding our future financial performance that are based on current information and that are subject to a number of
risks and uncertainties that could cause our actual operating results and financial performance in the future to differ significantly from those expected at the current time. Those risks and uncertainties include, although they are not limited to,
the following:

We face intense competition from other banks and financial institutions that could hurt our business

We conduct our business operations in Southern California, where the banking business is highly competitive and is dominated by a
relatively small number of large multi-state banks with offices operating over wide geographical areas. We also compete with other financial service businesses, mutual fund companies, and securities brokerage and investment banking firms that offer
competitive banking and financial products and services. Increased competition may prevent us from (i) achieving increases, or could even result in a decrease, in our loan volume or deposit accounts or (ii) increasing interest rates on
loans or reducing interest rates we pay to attract or retain deposits, any of which could cause a decline in interest income or an increase in interest expense, that could cause our net interest income and our earnings to decline.

Adverse changes in economic conditions in Southern California could disproportionately harm our business

The large majority of our customers and the properties securing a large proportion of our loans are located in Southern California. A worsening of
economic conditions in Southern California could harm our business by:



| |  |  | reducing loan demand which, in turn, would lead to reduced net interest margins and net interest income;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | affecting the financial capability of borrowers to meet their loan obligations which could, in turn, result in increases in loan losses and require increases in
provisions made for possible loan losses, thereby reducing our earnings; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | leading to reductions in real property values that, due to our reliance on real property to secure many of our loans, could make it more difficult for us to prevent
losses from being incurred on non-performing loans through the sale of such real properties.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, real estate
values in California have been increasing rapidly in recent years. In the event that these values are not sustained or other events, such as earthquakes or fires, that may be more prevalent in Southern California than other geographic areas, cause a
decline in real estate values, our collateral coverage for our loans will be reduced and we may suffer increased loan losses.

National economic conditions and changes in Federal Reserve Board monetary policies could affect our operating result.

Our ability to achieve and sustain our profitability is substantially dependent on our net interest income. Like most banking organizations and other depository institutions, our interest income is affected by a number of factors outside of
our control, including changes in market rates of interest, which in turn are affected by changes in national economic conditions and events that can adversely affect the credit markets, such as the recent increase in real estate mortgage loan
foreclosures,



30



---

##### Table of Contents

and national monetary policies adopted by the Federal Reserve Board. For example, adverse changes in economic conditions, and increasing rates of interest as
a result of the Federal Reserve Boards monetary policies, could cause prospective borrowers to fail to qualify for our loan products and reduce loan demand, thereby reducing our interest income and net interest margins. Increases in interest
rates as a result of the Federal Reserve Boards monetary policies also could lead depositors to transfer funds from noninterest bearing demand deposits to higher cost certificates of deposit or to mutual funds, which would cause an increase in
our interest expense. In addition, such conditions could adversely affect the financial capability of borrowers to meet their loan obligations, which could result in loan losses and require increases in provisions made for possible loan losses.

Rapid growth could strain our resources and lead to operating problems or inefficiencies

We have grown substantially in the past five years by opening new financial centers. We intend to continue to evaluate the opening of new financial
centers, primarily in Southern California, either by opening new offices or acquiring one or more community banks. The opening of new offices or the acquisition of another bank will result in increased operating expenses until new banking offices or
acquired banking operations attract sufficient business to cover operating expenses, which usually takes at least six to twelve months. There is no assurance, however, as to how long it would take for new financial centers to begin generating
positive cash flow and earnings. Also, we cannot assure that we will be able to adequately manage our growth, which will make substantial demands on the time and attention of management and on our capital resources. The failure to prepare
appropriately and on a timely basis for growth could cause us to experience inefficiencies or failures in our service delivery systems, regulatory problems, and erosion in customer confidence, unexpected expenses or other problems.

We could incur losses on the loans we make

The failure or inability of borrowers to repay their loans is an inherent risk in the banking business. We take a number of measures designed to reduce this risk, including the maintenance of stringent loan
underwriting policies and the establishment of reserves for possible loan losses and the requirement that borrowers provide collateral that we could sell in the event they fail to pay their loans. However, the ability of borrowers to repay their
loans, the adequacy of our reserves and our ability to sell collateral for amounts sufficient to offset loan losses are affected by a number of factors outside of our control, such as changes in economic conditions, increases in market rates of
interest and changes in the condition or value of the collateral securing our loans. As a result, we could incur losses on the loans we make that will hurt our operating results and weaken our financial condition.

Government regulations may impair our operations or restrict our growth

We are subject to extensive supervision and regulation by federal and state bank regulatory agencies. The primary objective of these agencies is to
protect bank depositors and other customers and not shareholders, whose respective interests will often differ. The regulatory agencies have the legal authority to impose restrictions which they believe are needed to protect depositors and customers
of banking institutions, even if such restrictions would adversely affect the ability of the banking institution to expand its business, or result in increases in its costs of doing business or hinder its ability to compete with financial services
companies that are not regulated or banks or financial service organizations that are less regulated. Additionally, due to the complex and technical nature of many of the government regulations to which banking organizations are subject, inadvertent
violations may occur. In such an event, we would be required to correct or implement measures to prevent a recurrence of such violations. If more serious violations were to occur, the regulatory agencies could limit our activities or growth, fine us
or ultimately put us out of business.

The loss of key personnel could hurt our financial performance

Our success depends to a great extent on the continued availability of our existing management, in particular on Raymond E. Dellerba, President and Chief
Executive Officer. In addition to their skills and experience as bankers, our executive officers provide us with extensive community ties upon which our competitive strategy is partially based. We do not maintain key-man life insurance on these
executives, other than Mr. Dellerba. As a result, the loss of the services of any of these officers could harm our ability to implement our business strategy.

Other Risks

Other risks that could affect our future financial performance are described in
Item 1A, entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, and readers are
urged to review those risks as well.



31



---

##### Table of Contents

Due to these and other possible uncertainties and risks, readers are cautioned not to place undue
reliance on the forward looking statements, which speak only as of the date of this Report. We also disclaim any obligation to update forward-looking statements contained in this Report or in our Annual Report on Form 10-K.



|ITEM 3. | MARKET RISK
|------- | -----------

We are exposed to market risk as a
consequence of the normal course of conducting our business activities. The primary market risk to which we are exposed is interest rate risk. Our interest rate risk arises from the instruments, positions and transactions entered into for purposes
other than trading. They include loans, securities, deposit liabilities, and short-term borrowings. Interest rate risk occurs when assets and liabilities reprice at different times as market interest rates change. Interest rate risk is managed
within an overall asset/liability framework for the Company.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to provide reasonable assurance that information required to be disclosed in our reports filed under that Act (the
Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. Our disclosure controls and procedures also are
designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures in effect as of June 30, 2007. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2007, our disclosure controls and
procedures were effective to provide reasonable assurance that material information, relating to the Company and its consolidated subsidiaries, required to be included in our Exchange Act reports, including this Quarterly Report on Form 10-Q, is
made known to management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis.

There were no changes in
our internal control over financial reporting that occurred during the quarter ended June 30, 2007 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



32



---

##### Table of Contents

PART II



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have been no material changes
from the risk factors previously disclosed in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, except as follows:

There has been a recent increase in mortgage loan foreclosures throughout the United States, due primarily to increasing market rates of interest and
declining property values. Although the vast majority of these foreclosures appear to involve borrowers who had financed home purchases or refinanced existing home mortgage loans with so-called subprime mortgage loans, mortgage loan foreclosures can
result in increases in loan losses and require mortgage lenders to take ownership of the foreclosed real properties in order to mitigate potential loan losses, which can result in increased non-interest expenses. Moreover, some economists have
expressed concerns that the recent increase in mortgage loan foreclosures could lead to increases in interest rates that could adversely affect loan demand in general and even adversely affect national economic conditions. We began to reduce our
exposure to these risks when we discontinued our residential mortgage lending business in 2005 and, more recently, have begun reducing the volume of real estate loans that we make. However, there is no assurance that these conditions will not have a
broader impact on prevailing market rates of interest or economic conditions that could adversely affect our operating results in the future.



|ITEM 2. | UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
|------- | ----------------------------------------------------

Share Repurchases.

The following table sets forth information regarding our share repurchases in each of the months during
the quarter ended June 30, 2007.



|                          |  |                                |  |                             |       |                                                                      |        |                                                                     |        
|------------------------- |  | ------------------------------ |  | --------------------------- | ----- | -------------------------------------------------------------------- | ------ | ------------------------------------------------------------------- | -------
|                          |  | (a)                            |  | (b)                         |       | (c)                                                                  |        | (d)                                                                
|                          |  | Total Numberof SharesPurchased |  | Average PricePaid per Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Programs |        | Maximum Number ofShares that May YetBe Purchased Under the Programs
|April 1 to April 30, 2007 |  |                               |  | $                           |      |                                                                      |       |                                                                     | 200,000
|May 1 to May 31, 2007     |  |                               |  | $                           |      |                                                                      |       |                                                                     | 200,000
|June 1 to June 30, 2007   |  | 50,000                         |  | $                           | 13.75 |                                                                      | 50,000 |                                                                     | 150,000
|                          |  |                                |  |                             |       |                                                                      |        |                                                                     |        
|Total                     |  | 50,000                         |  | $                           | 13.75 |                                                                      | 50,000 |                                                                     |        
|                          |  |                                |  |                             |       |                                                                      |        |                                                                     |        

The above shares were purchased pursuant to a stock repurchase program that was publicly announced
on June 3, 2005 and at that time authorized repurchases of up to 200,000 of the Companys shares, in open market and private transactions, in accordance with applicable rules of the Securities and Exchange Commission. This program does not
have an expiration date. However, the Company may elect (i) to suspend share repurchases at any time or from time to time, or (ii) to terminate the program prior to the repurchase of all of the shares authorized for repurchase under this
program. Accordingly, there is no assurance that any additional shares will be repurchased under this program.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

The Annual Meeting of Shareholders of the Company was held on May 17, 2007. At that Meeting, the shareholders elected the Directors of the Company for a term of one year, ending at the next Annual Meeting of Shareholders to be held in
May 2008.

(1) Directors Elected at the Annual Meeting. Set forth below is the name of each Director that was nominated and elected
at the Annual Meeting and the respective numbers of votes cast for their election and the respective number of votes withheld. As the election was uncontested, there were no broker non-votes.



|                    |  |            |  |         
|------------------- |  | ---------- |  | --------
|                    |  | Votes Cast
|Nominee/Director    |  | For        |  | Withheld
|Raymond E. Dellerba |  | 8,646,965  |  | 539,018 
|George H. Wells     |  | 9,082,435  |  | 103,548 
|Ronald W. Chrislip  |  | 9,074,285  |  | 111,698 
|Warren T. Finley    |  | 9,076,785  |  | 109,198 
|John Thomas, M.D.   |  | 9,082,435  |  | 103,548 
|Robert E. Williams  |  | 9,079,435  |  | 106,548 



33



---

##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------

The following documents are filed
Exhibits to the Quarterly Report on Form 10-Q:



|             |  |                                                                                             
|------------ |  | --------------------------------------------------------------------------------------------
|Exhibit No.  |  | Description of Exhibit                                                                      
|Exhibit 31.1 |  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.1 |  | Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.2 |  | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002



34



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |  |  |                            |  |                                       
|-------------------- |  |  |  | -------------------------- |  | --------------------------------------
|                     |  |  |  | PACIFIC MERCANTILE BANCORP
|                     |  |  | 
|Date: August 8, 2007 |  |  |  | By:                        |  | /s/ NANCY A. GRAY                     
|                     |  |  |  |                            |  | Nancy A. Gray, Chief Financial Officer



S-1



---

##### Table of Contents

EXHIBIT INDEX



|             |  |                                                                                             
|------------ |  | --------------------------------------------------------------------------------------------
|Exhibit No.  |  | Description of Exhibit                                                                      
|Exhibit 31.1 |  | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.1 |  | Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
|             | 
|Exhibit 32.2 |  | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002



E-1