##### 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 March 31, 2011

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 has submitted electronically and
posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

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.

10,434,665 shares of Common Stock as of May 2, 2011









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##### Table of Contents

QUARTERLY REPORT ON FORM 10Q

FOR

THE
QUARTER ENDED MARCH 31, 2011

TABLE OF CONTENTS



|                                                                                                          |  |                                                                                                     |     |      |    | 
|--------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                                                                          |  |                                                                                                     |     | Page |   
|Part I. Financial Information                                                                             |  |                                                                                                     |     |     
|                                                                                                          |  |                                                                                                    
|Item 1.                                                                                                   |  | Financial Statements (unaudited)                                                                    |     |      |    | 
|                                                                                                          |  |                                                                                                    
|                                                                                                          |  | Consolidated Statements of Financial Condition at March 31, 2011 and December 31,
2010              |     |      | 1  | 
|                                                                                                          |  |                                                                                                    
|                                                                                                          |  | Consolidated Statements of Operations for the Three Months ended March 31, 2011 and
2010            |     |      | 2  | 
|                                                                                                          |  |                                                                                                    
|                                                                                                          |  | Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2011 and 
2010 |     |      | 3  | 
|                                                                                                          |  |                                                                                                    
|                                                                                                          |  | Consolidated Statements of Cash Flows for the Three Months ended March 31, 2011 and
2010            |     |      | 4  | 
|                                                                                                          |  |                                                                                                    
|                                                                                                          |  | Consolidated Statement of Shareholders Equity for the Three Months ended March 31,
2011            |     |      | 6  | 
|                                                                                                          |  |                                                                                                    
|                                                                                                          |  | Notes to Consolidated Financial Statements                                                          |     |      | 7  | 
|                                                                                                          |  |                                                                                                    
|Item 2.                                                                                                   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations               |     |      | 29 | 
|                                                                                                          |  |                                                                                                    
|Item 4T.                                                                                                  |  | Controls and Procedures                                                                             |     |      | 52 | 
|                                                                                                          | 
|Part II. Other Information                                                                                |  |                                                                                                     |     |     
|                                                                                                          |  |                                                                                                    
|Item 1.                                                                                                   |  | Legal Proceedings                                                                                   |     |      | 52 | 
|                                                                                                          |  |                                                                                                    
|Item 1A.                                                                                                  |  | Risk Factors                                                                                        |     |      | 52 | 
|                                                                                                          |  |                                                                                                    
|Item 6.                                                                                                   |  | Exhibits                                                                                            |     |      | 53 | 
|                                                                                                          | 
|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 |  |                                                                                                     |     |     



(i)



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##### Table of Contents

PART I.  FINANCIAL INFORMATION



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

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except per share data)

(Unaudited)



|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                                                        |  | March 31,2011 |         |   | December 31,2010 |  
|ASSETS                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                                                                                 |  | $             | 9,063   |   |                  | $ | 7,306     |  
|Interest bearing deposits with financial institutions                                                                                                                                                                                                                   |  |               | 44,691  |   |                  |   | 25,372    |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                                                                                               |  |               | 53,754  |   |                  |   | 32,678    |  
|Interest-bearing time deposits with financial institutions                                                                                                                                                                                                              |  |               | 1,978   |   |                  |   | 2,078     |  
|Federal Reserve Bank and Federal Home Loan Bank Stock, at cost                                                                                                                                                                                                          |  |               | 12,408  |   |                  |   | 12,820    |  
|Securities available for sale, at fair value                                                                                                                                                                                                                            |  |               | 167,947 |   |                  |   | 178,301   |  
|Loans held for sale, at lower of cost or market                                                                                                                                                                                                                         |  |               | 19,260  |   |                  |   | 12,469    |  
|Loans (net of allowances of $18,366 and $18,101, respectively)                                                                                                                                                                                                          |  |               | 699,084 |   |                  |   | 722,210   |  
|Investment in unconsolidated subsidiaries                                                                                                                                                                                                                               |  |               | 682     |   |                  |   | 682       |  
|Other real estate owned                                                                                                                                                                                                                                                 |  |               | 27,766  |   |                  |   | 33,170    |  
|Accrued interest receivable                                                                                                                                                                                                                                             |  |               | 3,000   |   |                  |   | 3,259     |  
|Premises and equipment, net                                                                                                                                                                                                                                             |  |               | 971     |   |                  |   | 935       |  
|Other assets                                                                                                                                                                                                                                                            |  |               | 9,675   |   |                  |   | 17,268    |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Total assets                                                                                                                                                                                                                                                            |  | $             | 996,525 |   |                  | $ | 1,015,870 |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                    |  |               |         |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                                                                               |  |               |         |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                                                                                     |  | $             | 154,650 |   |                  | $ | 144,079   |  
|Interest-bearing                                                                                                                                                                                                                                                        |  |               | 674,930 |   |                  |   | 672,147   |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Total deposits                                                                                                                                                                                                                                                          |  |               | 829,580 |   |                  |   | 816,226   |  
|Borrowings                                                                                                                                                                                                                                                              |  |               | 78,000  |   |                  |   | 112,000   |  
|Accrued interest payable                                                                                                                                                                                                                                                |  |               | 1,018   |   |                  |   | 985       |  
|Other liabilities                                                                                                                                                                                                                                                       |  |               | 6,089   |   |                  |   | 5,716     |  
|Junior subordinated debentures                                                                                                                                                                                                                                          |  |               | 17,527  |   |                  |   | 17,527    |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                                                                       |  |               | 932,214 |   |                  |   | 952,454   |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Commitments and contingencies (Note 2)                                                                                                                                                                                                                                  |  |               |        |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                                                                                                                   |  |               |         |   |                  |   |           |  
|Preferred stock, no par value, 2,000,000 shares authorized, 126,550 shares issued and outstanding at March 31, 2011 and
December 31, 2010, liquidation preference $100 per share plus accumulated declared and unpaid dividends at March 31, 2011 and December 31, 2010 |  |               | 12,655  |   |                  |   | 12,655    |  
|Common stock, no par value, 20,000,000 shares authorized, 10,434,665 shares issued and outstanding at March 31, 2010 and
December 31, 2010                                                                                                                              |  |               | 73,122  |   |                  |   | 73,058    |  
|Accumulated deficit                                                                                                                                                                                                                                                     |  |               | (15,873 | ) |                  |   | (17,553   | )
|Accumulated other comprehensive loss                                                                                                                                                                                                                                    |  |               | (5,593  | ) |                  |   | (4,744    | )
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                                                                              |  |               | 64,311  |   |                  |   | 63,416    |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                                                                              |  | $             | 996,525 |   |                  | $ | 1,015,870 |  
|                                                                                                                                                                                                                                                                        |  |               |         |   |                  |   |           |  

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



1



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##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars
in thousands, except for shares and per share data)

(Unaudited)



|                                                                                               |  |                             |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                               |  | Three Months EndedMarch 31, |           
|                                                                                               |  | 2011                        |            |   | 2010 |  
|Interest income:                                                                               |  |                             |            |   |      |   |            |  
|Loans, including fees                                                                          |  | $                           | 10,162     |   |      | $ | 11,965     |  
|Securities available for sale and stock                                                        |  |                             | 1,273      |   |      |   | 1,584      |  
|Interest-bearing deposits with financial institutions                                          |  |                             | 26         |   |      |   | 110        |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Total interest income                                                                          |  |                             | 11,461     |   |      |   | 13,659     |  
|Interest expense:                                                                              |  |                             |            |   |      |   |            |  
|Deposits                                                                                       |  |                             | 2,497      |   |      |   | 4,288      |  
|Borrowings                                                                                     |  |                             | 358        |   |      |   | 924        |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Total interest expense                                                                         |  |                             | 2,855      |   |      |   | 5,212      |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Net interest income                                                                            |  |                             | 8,606      |   |      |   | 8,447      |  
|Provision for loan losses                                                                      |  |                             |           |   |      |   | 1,200      |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Net interest income after provision for loan losses                                            |  |                             | 8,606      |   |      |   | 7,247      |  
|Noninterest income                                                                             |  |                             |            |   |      |   |            |  
|Total other-than-temporary impairment of securities                                            |  |                             | 41         |   |      |   | (1,754     | )
|Less: Portion of other-than-temporary impairment losses recognized in other comprehensive loss |  |                             | 93         |   |      |   | 1,720      |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Net impairment loss recognized in earnings                                                     |  |                             | (52        | ) |      |   | (34        | )
|Service fees on deposits and other banking services                                            |  |                             | 273        |   |      |   | 339        |  
|Mortgage banking (including net gains on sales of loans held for sale)                         |  |                             | 839        |   |      |   | 569        |  
|Net gains on sale of securities available for sale                                             |  |                             | 11         |   |      |   | 205        |  
|Net gains on sale of other real estate owned                                                   |  |                             | 107        |   |      |   |           |  
|Other                                                                                          |  |                             | 180        |   |      |   | 266        |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Total noninterest income                                                                       |  |                             | 1,358      |   |      |   | 1,345      |  
|Noninterest expense                                                                            |  |                             |            |   |      |   |            |  
|Salaries and employee benefits                                                                 |  |                             | 3,977      |   |      |   | 4,337      |  
|Occupancy                                                                                      |  |                             | 630        |   |      |   | 681        |  
|Equipment and depreciation                                                                     |  |                             | 357        |   |      |   | 354        |  
|Data processing                                                                                |  |                             | 163        |   |      |   | 180        |  
|Customer expense                                                                               |  |                             | 65         |   |      |   | 101        |  
|FDIC expense                                                                                   |  |                             | 802        |   |      |   | 458        |  
|Other real estate owned expense                                                                |  |                             | 374        |   |      |   | 334        |  
|Professional fees                                                                              |  |                             | 961        |   |      |   | 913        |  
|Other operating expense                                                                        |  |                             | 955        |   |      |   | 1,009      |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Total noninterest expense                                                                      |  |                             | 8,284      |   |      |   | 8,367      |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Income before income taxes                                                                     |  |                             | 1,680      |   |      |   | 225        |  
|Income tax provision                                                                           |  |                             |           |   |      |   | 99         |  
|                                                                                               |  |                             |            |   |      |   |            |  
|Net income                                                                                     |  |                             | 1,680      |   |      |   | 126        |  
|Accumulated undeclared dividends on preferred stock                                            |  |                             | (312       | ) |      |   | (208       | )
|                                                                                               |  |                             |            |   |      |   |            |  
|Net income (loss) allocable to common shareholders                                             |  | $                           | 1,368      |   |      | $ | (82        | )
|                                                                                               |  |                             |            |   |      |   |            |  
|Income (loss) per common share:                                                                |  |                             |            |   |      |   |            |  
|Basic                                                                                          |  | $                           | 0.13       |   |      | $ | (0.01      | )
|Diluted                                                                                        |  | $                           | 0.13       |   |      | $ | (0.01      | )
|Weighted average number of common shares outstanding:                                          |  |                             |            |   |      |   |            |  
|Basic                                                                                          |  |                             | 10,434,665 |   |      |   | 10,434,665 |  
|Diluted                                                                                        |  |                             | 10,456,249 |   |      |   | 10,434,665 |  

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



2



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##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



|                                                                                                  |  |                             |       |   |      |   |     |  
|------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | --- | -
|                                                                                                  |  | Three Months EndedMarch 31, |      
|                                                                                                  |  | 2011                        |       |   | 2010 |  
|Net income                                                                                        |  | $                           | 1,680 |   |      | $ | 126 |  
|Other comprehensive (loss) gain, net of tax:                                                      |  |                             |       |   |      |   |     |  
|Change in unrealized (loss) gain on securities available for sale                                 |  |                             | (807  | ) |      |   | 554 |  
|Change in net unrealized loss and prior service benefit on supplemental executive retirement plan |  |                             | (42   | ) |      |   | (6  | )
|                                                                                                  |  |                             |       |   |      |   |     |  
|Total comprehensive income                                                                        |  | $                           | 831   |   |      | $ | 674 |  
|                                                                                                  |  |                             |       |   |      |   |     |  

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



3



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##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In
thousands)

(Unaudited)



|                                                                                                |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                |  | Three MonthsEnded March 31, |        
|                                                                                                |  | 2011                        |         |   | 2010 |  
|Cash Flows From Operating Activities:                                                           |  |                             |         |   |      |   |         |  
|Net income                                                                                      |  | $                           | 1,680   |   |      | $ | 126     |  
|Adjustments to reconcile net income to net cash used in operating activities:                   |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                   |  |                             | 122     |   |      |   | 132     |  
|Provision for loan losses                                                                       |  |                             |        |   |      |   | 1,200   |  
|Net amortization of premium on securities                                                       |  |                             | 166     |   |      |   | 189     |  
|Net gains on sales of securities available for sale                                             |  |                             | (11     | ) |      |   | (205    | )
|Net gains on sales and mark to market of mortgage loans held for sale                           |  |                             | (605    | ) |      |   | (473    | )
|Proceeds from sales of mortgage loans held for sale                                             |  |                             | 48,253  |   |      |   | 27,013  |  
|Originations and purchases of mortgage loan held for sale                                       |  |                             | (54,439 | ) |      |   | (35,897 | )
|Other than temporary impairment on securities available for sale                                |  |                             | 52      |   |      |   | 34      |  
|Net amortization of deferred fees and unearned income on loans                                  |  |                             | (154    | ) |      |   | (125    | )
|Net gain on sales of other real estate owned                                                    |  |                             | (107    | ) |      |   |        |  
|Net gain on sale of fixed assets                                                                |  |                             | (8      | ) |      |   |        |  
|Write downs of other real estate owned                                                          |  |                             |        |   |      |   | 28      |  
|Stock-based compensation expense                                                                |  |                             | 64      |   |      |   | 45      |  
|Capitalized cost of other real estate owned                                                     |  |                             | (155    | ) |      |   | (547    | )
|Changes in operating assets and liabilities:                                                    |  |                             |         |   |      |   |         |  
|Accrued interest receivable                                                                     |  |                             | 259     |   |      |   | 58      |  
|Other assets                                                                                    |  |                             | 62      |   |      |   | (338    | )
|Deferred taxes                                                                                  |  |                             |        |   |      |   | 317     |  
|Income taxes receivable                                                                         |  |                             | 7,531   |   |      |   | 185     |  
|Accrued interest payable                                                                        |  |                             | 33      |   |      |   | (883    | )
|Other liabilities                                                                               |  |                             | 331     |   |      |   | (472    | )
|                                                                                                |  |                             |         |   |      |   |         |  
|Net cash used in operating activities                                                           |  |                             | 3,074   |   |      |   | (9,613  | )
|Cash Flows From Investing Activities:                                                           |  |                             |         |   |      |   |         |  
|Net decrease (increase) in interest-bearing time deposits with financial institutions           |  |                             | 100     |   |      |   | (150    | )
|Maturities of and principal payments received for securities available for sale and other stock |  |                             | 3,378   |   |      |   | 22,122  |  
|Purchase of securities available for sale and other stock                                       |  |                             |        |   |      |   | (59,813 | )
|Proceeds from sale of securities available for sale and other stock                             |  |                             | 6,374   |   |      |   | 31,589  |  
|Proceeds from sale of other real estate owned                                                   |  |                             | 7,112   |   |      |   |        |  
|Net decrease in loans                                                                           |  |                             | 20,303  |   |      |   | 22,051  |  
|Purchases of premises and equipment                                                             |  |                             | (158    | ) |      |   | (33     | )
|Proceeds from sales of loans                                                                    |  |                             | 1,586   |   |      |   |        |  
|Net gain on sales of loans                                                                      |  |                             | (55     | ) |      |   |        |  
|Proceeds from sale of premises and equipment                                                    |  |                             | 8       |   |      |   |        |  
|                                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by investing activities                                                       |  |                             | 38,648  |   |      |   | 15,766  |  
|Cash Flows From Financing Activities:                                                           |  |                             |         |   |      |   |         |  
|Net increase in deposits                                                                        |  |                             | 13,354  |   |      |   | 36,049  |  
|Proceeds from issuances of Series A Cumulative Preferred Stock                                  |  |                             |        |   |      |   | 800     |  
|Net decrease in borrowings                                                                      |  |                             | (34,000 | ) |      |   | (32,978 | )
|                                                                                                |  |                             |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                             |  |                             | (20,646 | ) |      |   | 3,871   |  
|                                                                                                |  |                             |         |   |      |   |         |  

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



4



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##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                                       |  |                             |        |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                                       |  | Three Months EndedMarch 31, |       
|                                                                                                                       |  | 2011                        |        |   | 2010 |  
|Net increase in cash and cash equivalents                                                                              |  | $                           | 21,076 |   |      | $ | 10,024  |  
|Cash and Cash Equivalents, beginning of period                                                                         |  |                             | 32,678 |   |      |   | 141,651 |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Cash and Cash Equivalents, end of period                                                                               |  | $                           | 53,754 |   |      | $ | 151,675 |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Supplementary Cash Flow Information:                                                                                   |  |                             |        |   |      |   |         |  
|Cash paid for interest on deposits and other borrowings                                                                |  | $                           | 2,821  |   |      | $ | 6,095   |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Cash paid for income taxes                                                                                             |  | $                           |       |   |      | $ |        |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Non-Cash Investing Activities:                                                                                         |  |                             |        |   |      |   |         |  
|Net increase in net unrealized losses and prior year service cost on supplemental employee retirement plan, net of
tax |  | $                           | (42    | ) |      | $ | (6      | )
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Net (decrease) increase in net unrealized gains and losses on securities held for sale, net of income tax              |  | $                           | (807   | ) |      | $ | 554     |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Transfer into other real estate owned                                                                                  |  | $                           | 1,446  |   |      | $ |        |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Transfer of loans held for sale to loans held for investment                                                           |  | $                           |       |   |      | $ | 1,800   |  
|                                                                                                                       |  |                             |        |   |      |   |         |  
|Mark to market gain adjustment of equity securities                                                                    |  | $                           | (21    | ) |      | $ | (29     | )
|                                                                                                                       |  |                             |        |   |      |   |         |  

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



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##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(Shares and dollars in thousands)

(Unaudited)

For The Three Months Ended March 31, 2011



|                                                                    |  |                 |     |  |              |   |        |                 |  |  |                  |  |  |                    |        |  |                     |   |         |       |  |   |        |   |  |   |        |  
|------------------------------------------------------------------- |  | --------------- | --- |  | ------------ | - | ------ | --------------- |  |  | ---------------- |  |  | ------------------ | ------ |  | ------------------- | - | ------- | ----- |  | - | ------ | - |  | - | ------ | -
|                                                                    |  | Preferred Stock |     |  | Common Stock |   |        |                 |  |  | AccumulatedOther |  |  |                    |       
|                                                                    |  | Numberof Shares |     |  | Amount       |   |        | Numberof Shares |  |  | Amount           |  |  | AccumulatedDeficit |        |  | Comprehensive(Loss) |   |         | Total | 
|Balance at December 31, 2010                                        |  |                 | 127 |  |              | $ | 12,655 |                 |  |  | 10,435           |  |  | $                  | 73,058 |  |                     | $ | (17,553 | )     |  | $ | (4,744 | ) |  | $ | 63,416 |  
|Stock based compensation expense                                    |  |                 |    |  |              |   |       |                 |  |  |                 |  |  |                    | 64     |  |                     |   |        |       |  |   |       |   |  |   | 64     |  
|Comprehensive income:                                               |  |                 |     |  |              |   |        |                 |  |  |                  |  |  |                    |        |  |                     |   |         |       |  |   |        |   |  |   |        |  
|Net income                                                          |  |                 |    |  |              |   |       |                 |  |  |                 |  |  |                    |       |  |                     |   | 1,680   |       |  |   |       |   |  |   | 1,680  |  
|Change in unrealized loss on securities held for sale, net of taxes |  |                 |    |  |              |   |       |                 |  |  |                 |  |  |                    |       |  |                     |   |        |       |  |   | (807   | ) |  |   | (807   | )
|Change in unrealized loss on supplemental executive retirement plan |  |                 |    |  |              |   |       |                 |  |  |                 |  |  |                    |       |  |                     |   |        |       |  |   | (42    | ) |  |   | (42    | )
|                                                                    |  |                 |     |  |              |   |        |                 |  |  |                  |  |  |                    |        |  |                     |   |         |       |  |   |        |   |  |   |        |  
|Balance at March 31, 2011                                           |  |                 | 127 |  |              | $ | 12,655 |                 |  |  | 10,435           |  |  | $                  | 73,122 |  |                     | $ | (15,873 | )     |  | $ | (5,593 | ) |  | $ | 64,311 |  
|                                                                    |  |                 |     |  |              |   |        |                 |  |  |                  |  |  |                    |        |  |                     |   |         |       |  |   |        |   |  |   |        |  

The accompanying notes are an integral part of this consolidated financial statement.



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##### Table of Contents

Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim 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 and subject to regulation by 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 and from financial services organizations 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 of $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. The financial statements of these trusts are not included in the Companys consolidated
financial statements. 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 in August 2007, we redeemed the $5.155
million principal amount of junior subordinated debentures issued in conjunction with the organization of PMB Capital Trust I. Those trusts were dissolved as a result of those redemptions.



|2. | Significant Accounting Policies, Recent Accounting Pronouncements, Commitments and Contingencies
|-- | ------------------------------------------------------------------------------------------------

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 required for a full 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
financial position and our results of operations for the interim periods 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, 2010, and the notes thereto, included in our
Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934.

Our consolidated financial position at March 31, 2011, and the consolidated results of operations for the three month period ended
March 31, 2011, are not necessarily indicative of what our financial position will be as of December 31, 2011, or of the results of our operations that may be expected for the full year ending December 31, 2011.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|2. | Significant Accounting Policies, Recent Accounting Pronouncements, Commitments and Contingencies (Cont.-)
|-- | ---------------------------------------------------------------------------------------------------------



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 could affect the reported amounts of certain of our assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of our revenues and expenses during the reporting
periods. For the fiscal periods covered by this Report, those estimates related primarily to our determinations of the allowance for loan losses, the fair value of securities available for sale, loans held for sale and the valuation of our deferred
tax assets. If circumstances or financial trends on which those estimates were based were to change in the future or there were to occur any currently unanticipated events affecting the amounts of those estimates, our future financial position or
results of operations could differ, possibly materially, from those expected at the current time.

Recent Accounting
Pronouncements

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, A Creditors
Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU No. 2011-02). ASU No. 2011-02 requires a creditor to separately conclude that 1) the restructuring constitutes a concession and 2) the debtor is
experiencing financial difficulties in order for a modification to be considered a troubled debt restructuring (TDR). The guidance was issued to provide clarification and to address diversity in practice in identifying
TDRs. It is effective for the Company in the third quarter of 2011 and will be applied retrospectively to the beginning of the year. Although evaluation of the impact is not complete, it is not expected to have a material impact on
the Companys results of operations, financial position, or disclosures.

In July 2010, the FASB issued guidance
that requires enhanced disclosures surrounding the credit characteristics of Companys loan portfolio. Under the new guidance, the Company is required to disclose its accounting policies, the methods it uses to determine the components of the
allowance for credit losses, and qualitative and quantitative information about the credit risk inherent in the loan portfolio, including additional information on certain types of loan modifications. For the Company, the new disclosures became
effective for the 2010 annual report. For additional information, see Note 9. The adoption of this guidance only affects the Companys disclosures of financing receivables and not its consolidated balance sheets or results of operations. In
January 2011, the FASB issued guidance that deferred the effective date of certain disclosures in this guidance regarding troubled debt restructurings (TDR), pending resolution on the FASBs project to amend the scope of TDR
guidance.

In January 2010, the FASB issued Accounting Standards Update No. 2010-6, Improving Disclosures About
Fair Value Measurements (ASU 2010-6). The ASU amends Codification Topic 820 Fair Value Measurements and Disclosures to add new disclosure requirements for transfers into and out of Levels 1 and 2 fair value measurements, as well as
separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 fair value measurements. ASU 2010-6 is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. ASU 2010-6
only adds new disclosure requirements regarding the breakout of purchases, issuances, sales, and settlements of Level 3 fair value measurements, and as a result, its adoption did not have an impact on the Companys consolidated financial
statements.

Commitments and Contingencies

Commitments

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 March 31, 2011, loan
commitments and letters of credit totaled $132 million and $3 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 were to default, and the value of any existing collateral securing the customers payment obligation become worthless.

As a result, we use the same credit policies in making commitments to extend credit and conditional obligations as we do 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. We
evaluate 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 any, 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.

Legal Proceedings

James Laliberte, et al. vs. Pacific Mercantile Bank, filed in May 2003 in the California Superior Court for the County of Orange (Case No. 030007092). Information regarding this law suit is
contained under the caption Commitments and ContingenciesLegal Proceeding in, and is incorporated herein by reference to, Note 15 of Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010 (the 2010 10-K) filed with the SEC on March 31, 2011.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|2. | Significant Accounting Policies, Recent Accounting Pronouncements, Commitments and Contingencies (Cont.-)
|-- | ---------------------------------------------------------------------------------------------------------



We also are subject to legal actions that arise from time to time in the ordinary course
of our business. Currently there are no such pending legal proceedings that we believe will become material to our financial condition or results of operations.

Current Regulatory Matters

On August 31, 2010, the members of the
respective Boards of Directors of Pacific Mercantile Bancorp (the Company) and its the wholly-owned banking subsidiary, Pacific Mercantile Bank (the Bank), entered into a Written Agreement (the Agreement) with the
Federal Reserve Bank of San Francisco (the FRB). On the same date, the Bank consented to the issuance of a Final Order (the Order) by the California Department of Financial Institutions (the DFI). The principal
purposes of the Agreement and Order, which constitute formal supervisory actions by the FRB and the DFI, are to require us to adopt and implement formal plans and take certain actions, as well as to continue to implement other measures that we
previously adopted, to address the adverse consequences that the economic recession has had on the performance of our loan portfolio and our operating results, to improve our operating results, and to increase our capital to strengthen our ability
to weather any further adverse conditions that might arise if the hoped-for improvement in the economy does not materialize.

The Agreement and Order contain substantially similar provisions. They require the Boards of Directors of the Company and the Bank to
prepare and submit written plans to the FRB and the DFI that address the following matters: (i) strengthening board oversight of the management operations of the Bank; (ii) strengthening credit risk management practices;
(iii) improving credit administration policies and procedures; (iv) improving the Banks position with respect to problem assets; (v) maintaining adequate reserves for loan and lease losses in accordance with applicable
supervisory guidelines; (vi) improving the capital position of the Bank and, in the case of the FRB Agreement, the capital position of the Company; (vii) improving the Banks earnings through the formulation, adoption and
implementation of a strategic plan and a budget for fiscal 2011; and (viii) submitting a satisfactory funding contingency plan for the Bank that identifies available sources of liquidity and includes a plan for dealing with adverse economic and
market conditions. The Bank is also prohibited from paying dividends to the Company without the prior approval of the DFI, and the Company may not declare or pay cash dividends, repurchase any of its shares, make payments on its trust preferred
securities or incur or guarantee any debt, without the prior approval of the FRB.

Under the Agreement, the Company also must
submit a capital plan to the FRB that will meet with its approval and then implement that plan. Under the Order, the Bank was required to achieve a ratio of adjusted tangible shareholders equity to its tangible assets to 9.0% by
January 31, 2011, by raising additional capital, generating earnings or reducing the Banks tangible assets (subject to a 15% limitation on such a reduction) or a combination thereof and, upon achieving that ratio, to thereafter maintain
that ratio during the Term of the Order.

However, as previously reported, notwithstanding those efforts, which are
continuing, we were not able to raise the capital needed to increase the Banks ratio of tangible equity-to-tangible assets to 9.0% by January 31, 2011, as required by the DFI Order. Nevertheless, the DFI has notified us that it will not take
any action against the Bank at this time because the Bank has not, as yet, met that capital requirement. We understand that this decision was based on the progress we have made since August 31, 2010 in increasing the Banks capital ratio,
improvements made in the Banks financial condition, including reductions in loan charge-offs, and the Banks classification as a well-capitalized banking institution under federal bank regulatory guidelines and federally
established prompt corrective action regulations.

We cannot, however, predict when or even if we will succeed in meeting the
capital requirements of the DFI Order in the near term and the DFI is not precluded from taking enforcement action against the Bank if its financial condition were to worsen or if Bank failed to achieve further improvements in its capital ratio.



|3. | Earnings Per Share (EPS)
|-- | --------------------------

Basic EPS excludes dilution and is computed by dividing net income or loss available to common shareholders 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 months ended March 31, 2011 and 2010, outstanding
options to purchase 900,020 and 1,146,344 shares, respectively, were not considered in computing diluted earnings (loss) per common share because they were anti-dilutive.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|3. | Earnings Per Share (EPS) (Cont-)
|-- | ----------------------------------



The following table shows how we computed basic and diluted EPS for the three month
periods ended March 31, 2011 and 2010.



|                                                        |  |                             |        |   |                            |   |        |  
|------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | -
|                                                        |  | Three Months EndedMarch 31, |        |   | Three Months EndedMarch 31 |  
|                                                        |  | 2011                        |        |   | 2010                       |  
|Net income                                              |  | $                           | 1,680  |   |                            | $ | 126    |  
|Accumulated undeclared dividends on preferred stock     |  |                             | (312   | ) |                            |   | (208   | )
|                                                        |  |                             |        |   |                            |   |        |  
|Net income (loss) allocable to common shareholders (A)  |  | $                           | 1,368  |   |                            | $ | (82    | )
|                                                        |  |                             |        |   |                            |   |        |  
|Weighted average outstanding shares of common stock (B) |  |                             | 10,435 |   |                            |   | 10,435 |  
|Dilutive effect of employee stock options and warrants  |  |                             | 21     |   |                            |   |       |  
|                                                        |  |                             |        |   |                            |   |        |  
|Common stock and common stock equivalents (C)           |  |                             | 10,456 |   |                            |   | 10,435 |  
|                                                        |  |                             |        |   |                            |   |        |  
|Income (Loss) per common share:                         |  |                             |        |   |                            |   |        |  
|Basic (A/B)                                             |  | $                           | 0.13   |   |                            | $ | (0.01  | )
|Diluted (A/C)                                           |  | $                           | 0.13   |   |                            | $ | (0.01  | )



|4. | Stock-Based Employee Compensation Plans
|-- | ---------------------------------------

At the Companys 2010 Annual Meeting, held on May 25, 2010, our shareholders approved a 2010 Equity Incentive Plan (the 2010 Plan), which provides for the grant of equity incentives,
consisting of options, restricted shares and stock appreciation rights (SARs) to officers, other key employees and directors of the Company and the Bank. The 2010 Plan sets aside, for the grant or awarding of such equity incentives,
400,000 shares of our common stock, plus an additional 158,211 shares of common stock which was equal to the total of the shares that were then available for the grant of equity incentives under our shareholder-approved 2008 and 2004 Plans (the
Previously Approved Plans). At the same time, those 158,211 shares ceased to be issuable under the Previously Approved Plans. As a result, upon approval of the 2010 Plan by our shareholders, a total of 558,211 shares were available for
the grant or awarding of equity incentives under the that plan.

Options to purchase a total of 1,143,844 shares of our common
stock granted under the Previously Approved Plans were outstanding on the date the 2010 Plan was adopted. Those plans had provided that, if any of the outstanding options were to expire or otherwise terminate, rather than being exercised, the shares
that had been subject to those options would become available for the grant of new options under those plans. However, the 2010 Plan provides that if any of the outstanding options granted under the Previously Approved Plans expire or are terminated
for any reason, then, the number of shares that would become available for grants or awards of equity incentives under the 2010 Plan would be increased by an equivalent number of shares, instead of becoming available for new equity incentive grants
under the Previously Approved Plans. Assuming that all of the options that were outstanding under the Previously Approved Plans on the date the 2010 Plan was adopted were to expire or be cancelled, then the maximum number of shares that could be
issued pursuant to equity incentives under the 2010 Plan would be 1,704,555 shares.

Stock options entitle the recipients to
purchase common stock at a price per share that may not be less than 100% of the fair market value of the Companys shares on the respective grant dates of the stock options. Restricted shares may be granted at such purchase prices and on such
other terms, including restrictions and Company repurchase rights, as are fixed by the Compensation Committee at the time rights to purchase such restricted shares are granted. SARs entitle the recipient to receive a cash payment in an amount equal
to the difference between the fair market value of the Companys shares on the date of vesting and a base price (which, in most cases, will be equal to fair market value of the Companys shares on the date of grant), subject to
the right of the Company to make such payment in shares of its common stock at their then fair market value. Options, restricted shares and SARs may vest immediately or in installments over various periods generally ranging up to five years, subject
to the recipients continued employment or service or the achievement of specified performance goals, as determined by the Compensation Committee at the time it grants or awards the options, the restricted shares or the SARs. Stock options and
SARs may be granted for terms of up to 10 years after the date of grant, but will terminate sooner upon or shortly after a termination of service occurring prior to the expiration of the term of the option or SAR. The Company will become entitled to
repurchase any unvested restricted shares, at the same price that was paid for the shares by the recipient, in the event of a termination of employment or service of the holder of such shares or if any performance goals specified in the award are
not satisfied. To date, the Company has not granted any restricted shares or any SARs.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|4. | Stock-Based Employee Compensation Plans (Cont-)
|-- | -----------------------------------------------



Under ASC 718-10, we recognize in our financial statements the fair values of the
options or any restricted shares that we grant as compensation cost over their respective service periods.

The fair values of
the options that were outstanding at March 31, 2011 under the 2010 Plan or the Previously Approved Plans (collectively referred to as the Plans) were estimated as of their respective dates of grant using the Black-Scholes
option-pricing model. For additional information regarding the Companys stock based compensation plans, refer to Note 12  Stock-Based Employee Compensation Plans in the Notes to Consolidated Financial Statement included in
the Companys Form 10-K for the year ended December 31, 2010. The table below summarizes the weighted average assumptions used to determine the fair values of the options granted during the following periods:



|                                                             |  |                              |   |  |      |   |      |  
|------------------------------------------------------------ |  | ---------------------------- | - |  | ---- | - | ---- | -
|                                                             |  | Three Months Ended March 31, |  
|                                                             |  | 2011(1)                      |   |  | 2010 |  
|Assumptions with respect to:                                 |  |                              |   |  |      |   |      |  
|Expected volatility                                          |  |                              |  |  |      |   | 34   | %
|Risk-free interest rate                                      |  |                              |  |  |      |   | 3.07 | %
|Expected dividends                                           |  |                              |  |  |      |   | 0.26 | %
|Expected term (years)                                        |  |                              |  |  |      |   | 6.9  |  
|Weighted average fair value of options granted during period |  | $                            |  |  |      | $ | 1.20 |  



|(1) | There were no options granted in the first quarter of 2011.
|--- | -----------------------------------------------------------

The following tables summarize the stock option activity under the Plans during the three months ended March 31, 2011 and 2010, respectively.



|                                |  |                 |           |   |                                        |   |      |                 |  |  |                                        |   |  |   |       | 
|------------------------------- |  | --------------- | --------- | - | -------------------------------------- | - | ---- | --------------- |  |  | -------------------------------------- | - |  | - | ----- | 
|                                |  | Number ofShares |           |   | Weighted-AverageExercisePricePer Share |   |      | Number ofShares |  |  | Weighted-AverageExercisePricePer Share |  
|                                |  | 2011            |           |   | 2010                                   |  
|Outstanding  January 1,        |  |                 | 1,177,642 |   |                                        | $ | 7.57 |                 |  |  | 1,162,744                              |   |  | $ | 8.93  | 
|Granted                         |  |                 |          |   |                                        |   |     |                 |  |  | 169,122                                |   |  |   | 2.97  | 
|Exercised                       |  |                 |          |   |                                        |   |     |                 |  |  |                                       |   |  |   |      | 
|Forfeited/Canceled              |  |                 | (1,000    | ) |                                        |   | 3.11 |                 |  |  | (185,522                               | ) |  |   | 7.44  | 
|                                |  |                 |           |   |                                        |   |      |                 |  |  |                                        |   |  |   |       | 
|Outstanding  March 31,         |  |                 | 1,176,642 |   |                                        |   | 7.57 |                 |  |  | 1,146,344                              |   |  |   | 8.29  | 
|                                |  |                 |           |   |                                        |   |      |                 |  |  |                                        |   |  |   |       | 
|Options Exercisable  March 31, |  |                 | 751,180   |   |                                        | $ | 9.80 |                 |  |  | 796,047                                |   |  | $ | 10.11 | 

There were no options
exercised during either of the three months ended March 31, 2011 and 2010. The fair values of vested options at March 31, 2011 and 2010, were $68,000 and $82,000, respectively.

The following table provides additional information regarding the vested and unvested options that were outstanding at March 31,
2011.



|                |  |                                          |         |  |                                            |  |         |                              |  |   |                                                 |  |  |        |      |  |                               |  |         |  |  |   |       | 
|--------------- |  | ---------------------------------------- | ------- |  | ------------------------------------------ |  | ------- | ---------------------------- |  | - | ----------------------------------------------- |  |  | ------ | ---- |  | ----------------------------- |  | ------- |  |  | - | ----- | 
|                |  | Options Outstanding as of March 31, 2011 |         |  | Options Exercisable as ofMarch 31, 2011(1) | 
|                |  | Vested                                   |         |  | Unvested                                   |  |         | WeightedAverageExercisePrice |  |   | WeightedAverageRemainingContractualLife (Years) |  |  | Shares |      |  | WeightedAverageExercise Price | 
|$ 2.97  $5.99  |  |                                          | 125,920 |  |                                            |  | 410,702 |                              |  | $ | 3.36                                            |  |  |        | 8.95 |  |                               |  | 125,920 |  |  | $ | 3.37  | 
|$ 6.00  $9.99  |  |                                          | 180,877 |  |                                            |  | 7,200   |                              |  |   | 7.60                                            |  |  |        | 0.96 |  |                               |  | 180,877 |  |  |   | 7.63  | 
|$10.00  $12.99 |  |                                          | 311,100 |  |                                            |  |        |                              |  |   | 11.23                                           |  |  |        | 2.88 |  |                               |  | 311,100 |  |  |   | 11.23 | 
|$13.00  $17.99 |  |                                          | 113,783 |  |                                            |  | 7,560   |                              |  |   | 15.09                                           |  |  |        | 4.39 |  |                               |  | 113,783 |  |  |   | 15.07 | 
|$18.00  $18.84 |  |                                          | 19,500  |  |                                            |  |        |                              |  |   | 18.06                                           |  |  |        | 4.84 |  |                               |  | 19,500  |  |  |   | 18.06 | 
|                |  |                                          |         |  |                                            |  |         |                              |  |   |                                                 |  |  |        |      |  |                               |  |         |  |  |   |       | 
|                |  |                                          | 751,180 |  |                                            |  | 425,462 |                              |  | $ | 7.57                                            |  |  |        | 5.53 |  |                               |  | 751,180 |  |  | $ | 9.80  | 



|(1) | The weighted average remaining contractual life of the options that were exercisable as of March 31, 2011 was 3.58 years.
|--- | -------------------------------------------------------------------------------------------------------------------------



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Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|4. | Stock-Based Employee Compensation Plans (Cont-)
|-- | -----------------------------------------------



The aggregate intrinsic values of options that were outstanding and exercisable under
the Plans at March 31, 2011, and 2010, were $107,000 and zero, respectively.

A summary of the status of the unvested
options as of December 31, 2010, and changes in the number of shares subject to and in the weighted average grant date fair values of the unvested options during the three months ended March 31, 2011, are set forth in the following table.



|                              |  |                                  |         |   |                                     |   |      | 
|----------------------------- |  | -------------------------------- | ------- | - | ----------------------------------- | - | ---- | 
|                              |  | Numberof SharesSubjectto Options |         |   | WeightedAverageGrant DateFair Value |  
|Unvested at December 31, 2010 |  |                                  | 461,480 |   |                                     | $ | 1.43 | 
|Granted                       |  |                                  |        |   |                                     |   |     | 
|Vested                        |  |                                  | (35,018 | ) |                                     |   | 1.93 | 
|Forfeited/Cancelled           |  |                                  | (1,000  | ) |                                     |   | 1.17 | 
|                              |  |                                  |         |   |                                     |   |      | 
|Unvested at March 31, 2011    |  |                                  | 425,462 |   |                                     | $ | 1.39 | 
|                              |  |                                  |         |   |                                     |   |      | 

The aggregate amounts of stock based compensation expense recognized in our consolidated
statements of operations for the three months ended March 31, 2011 and 2010, were $64,000 and $82,000, respectively, in each case net of taxes. At March 31, 2011, the weighted average period over which nonvested awards were expected to be
recognized was 1.43 years.

The following table sets forth the compensation expense which was expected to be recognized during
the periods presented below in respect of non-vested stock options outstanding at March 31, 2011:



|                               |  |                                         |     | 
|------------------------------ |  | --------------------------------------- | --- | 
|                               |  | Estimated StockBasedCompensationExpense |    
|                               |  | (In thousands)                          |    
|For the years ending March 31, |  |                                         |     | 
|2011                           |  | $                                       | 179 | 
|2012                           |  |                                         | 206 | 
|2013                           |  |                                         | 121 | 
|2014                           |  |                                         | 13  | 
|2015                           |  |                                         | 8   | 
|                               |  |                                         |     | 
|                               |  | $                                       | 527 | 
|                               |  |                                         |     | 



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Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|5. | Employee Benefit Plan
|-- | ---------------------



The Company has established a Supplemental Retirement Plan (SERP) for its Chief Executive Officer. The components of net
periodic benefit cost for the SERP are set forth in the table below:



|                                   |  |                             |    |  |      |   |    | 
|---------------------------------- |  | --------------------------- | -- |  | ---- | - | -- | 
|                                   |  | Three Months EndedMarch 31, |   
|                                   |  | 2011                        |    |  | 2010 |  
|                                   |  | (In thousands)              |   
|Service cost                       |  | $                           | 49 |  |      | $ | 47 | 
|Interest cost                      |  |                             | 35 |  |      |   | 32 | 
|Expected return on plan assets     |  |                             |   |  |      |   |   | 
|Amortization of prior service cost |  |                             | 4  |  |      |   | 4  | 
|Amortization of net actuarial loss |  |                             | 1  |  |      |   | 6  | 
|                                   |  |                             |    |  |      |   |    | 
|Net periodic SERP cost             |  | $                           | 89 |  |      | $ | 89 | 
|                                   |  |                             |    |  |      |   |    | 



|6. | Income Taxes
|-- | ------------

We record
as a deferred tax asset on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (tax benefits) that we believe will be available to us to offset or reduce the amounts of our income
taxes in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the
amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we
conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in
full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full
prior to their expiration, then, we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount which we believe we are more likely than not to be able to utilize. Such a
reduction is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that we would otherwise have recorded in our statements of operations. The determination of
whether and the extent to which we will be able to utilize our deferred tax asset involves significant management judgments and assumptions that are subject to period to period changes as a result of changes in tax laws, changes in market or
economic conditions that could affect our operating results or variances between our actual operating results and our projected operating results, as wells as other factors.

During the fourth quarter of 2008, we concluded that it had become more likely than not that our taxable income in the foreseeable future would not be sufficient to enable us to realize our deferred tax
asset in its entirety. That conclusion was based on our consideration of the relative weight of the available evidence, including the rapid deterioration in market and economic conditions, and the uncertainties regarding the duration of and how our
future operating results would be affected by those conditions. As a result, we recorded a $3.0 million valuation allowance against our deferred tax asset for the portion of the tax benefits which, based on our assessment, we were more likely, than
not, to be unable to use prior to their expiration.

At June 30, 2010 we conducted an assessment of the realizability of
our remaining deferred tax asset. Based on that assessment and due, in part, to continued weakness in the economy and financial markets, we concluded that it had become more likely, than not, that we would be unable to utilize our remaining tax
benefits comprising our deferred tax asset prior to their expiration. Therefore, we recorded an additional valuation allowance against our net deferred tax asset in the amount of $10.7 million by means of a non-cash charge to income tax expense in
the quarter ended June 30, 2010.



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Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|6. | Income Taxes (Cont.-)
|-- | ---------------------



If, in the future, market and economic conditions and our financial performance were to
improve and, as a result, it were to become more likely than not that we will be able to utilize a portion of the tax benefits with respect to which we had established that valuation allowance, then we would be able to reverse that portion of the
valuation allowance, which would then become available to reduce income tax expense that we would otherwise have to record in future periods. For example, we were able to reverse the valuation allowance by an amount sufficient to offset fully the
provision for income taxes which we would otherwise have recorded for the three months ended March 31, 2011.

The Company
files income tax returns with the U.S. federal government and the state of California. As of March 31, 2011, we were subject to examination by the Internal Revenue Service with respect to our U.S. federal tax returns and the Franchise Tax Board
for California, for the 2006 to 2009 tax years. We do not believe there will be any material adverse changes in our unrecognized tax benefits over the next 12 months.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of tax expense. We did not have any accrued interest or penalties associated with any unrecognized
tax benefits, and no interest expense was recognized during the three months ended March 31, 2011 and 2010. Our effective tax rate differs from the federal statutory rate primarily due to tax free income on municipal bonds and certain
non-deductible expenses recognized for financial reporting purposes and state taxes.



|7. | Fair Value Measurements
|-- | -----------------------

Fair Value Hierarchy. Under ASC 820-10, we group assets and liabilities at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



|        |  |                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Valuation is based upon quoted prices for identical instruments traded in active markets.                                                                                                                                                                                                                                                                                         
|        | 
|Level 2 |  | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the market.                                                                                                      
|        | 
|Level 3 |  | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Assets Measured at Fair Value on a Recurring Basis

Investment Securities Available for Sale. Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available.
If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securitys credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1 investments securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active
over-the-counter markets and money market funds. Level 2 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include
asset-backed securities in less liquid markets.

The following table shows the recorded amounts of assets measured at fair
value on a recurring basis.



|                                         |  |                                         |         |  |         |   |       |         |  |   |         |  |  |   |       | 
|---------------------------------------- |  | --------------------------------------- | ------- |  | ------- | - | ----- | ------- |  | - | ------- |  |  | - | ----- | 
|                                         |  | At March 31, 2011(Dollars in thousands) |        
|                                         |  | Total                                   |         |  | Level 1 |   |       | Level 2 |  |   | Level 3 | 
|Investment securities available for sale |  | $                                       | 167,947 |  |         | $ | 4,230 |         |  | $ | 162,489 |  |  | $ | 1,228 | 
|                                         |  |                                         |         |  |         |   |       |         |  |   |         |  |  |   |       | 



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Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|7. | Fair Value Measurements (Cont.-)
|-- | --------------------------------



The changes in Level 3 assets measured at fair value on a recurring basis are summarized
in the following table:



|                                                            |  |                                                               |        |  
|----------------------------------------------------------- |  | ------------------------------------------------------------- | ------ | -
|                                                            |  | Investment SecuritiesAvailable for Sale(Dollars in thousands) |       
|Balance of recurring Level 3 instruments at January 1, 2011 |  | $                                                             | 1,243  |  
|Total gains or losses (realized/unrealized):                |  |                                                               |        |  
|Included in earnings-realized                               |  |                                                               |       |  
|Included in earnings-unrealized(1)                          |  |                                                               | (52    | )
|Included in other comprehensive income                      |  |                                                               | 2,088  |  
|Purchases, sales, issuances and settlements, net            |  |                                                               |       |  
|Transfers in and/or out of Level 3                          |  |                                                               | (2,051 | )
|                                                            |  |                                                               |        |  
|Balance of Level 3 assets at March 31, 2011                 |  | $                                                             | 1,228  |  
|                                                            |  |                                                               |        |  



|(1) | Amount reported as other than temporary impairment loss in the noninterest income portion of the Statement of Operations.
|--- | -------------------------------------------------------------------------------------------------------------------------

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S.
generally accepted accounting principles. These include assets that are measured at the lower of cost or market or that were recognized at a fair value below cost at the end of the period.

Impaired Loans. ASC 820-10 applies to loans measured for impairment in accordance with ASC 310-10, Accounting by
Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), and at the fair value of the loans collateral (if the loan is collateral dependent). The fair value of an impaired loan is
estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance for possible losses represent loans for
which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan at
Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan at Level 3.

Foreclosed Assets. Foreclosed assets are adjusted to fair value, less estimated costs to sell, at the time the loans are
transferred to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the
collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value
is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.



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Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|7. | Fair Value Measurements (Cont.-)
|-- | --------------------------------

|
|



Information regarding assets measured at fair value on a nonrecurring basis is set forth
in the table below.



|                    |  |                                 |        |  |         |   |   |         |  |   |         |  |  |   |        | 
|------------------- |  | ------------------------------- | ------ |  | ------- | - | - | ------- |  | - | ------- |  |  | - | ------ | 
|                    |  | At March 31, 2011(in
thousands) |       
|                    |  | Total                           |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|Loans               |  | $                               | 28,551 |  |         | $ |  |         |  | $ | 10,358  |  |  | $ | 18,193 | 
|Loans held for sale |  |                                 | 19,260 |  |         |   |  |         |  |   |        |  |  |   | 19,260 | 
|Other assets(1)     |  |                                 | 27,766 |  |         |   |  |         |  |   | 27,766  |  |  |   |       | 
|                    |  |                                 |        |  |         |   |   |         |  |   |         |  |  |   |        | 
|Total               |  | $                               | 75,577 |  |         | $ |  |         |  | $ | 38,124  |  |  | $ | 37,453 | 
|                    |  |                                 |        |  |         |   |   |         |  |   |         |  |  |   |        | 



|(1) | includes foreclosed assets.
|--- | ---------------------------

There were no transfers in or out of level 3 measurements for nonrecurring items during the three months ended March 31, 2011.

We have elected to use fair value measurements to record fair value adjustments to certain assets and liabilities and to
determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as loans held for
investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial
instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various
financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally unexpected changes in events or circumstances can occur that
could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.

In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer
relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned.

The following methods and assumptions were used to estimate the fair value of financial instruments.

Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.

Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within ninety days approximate their carrying values.

Investment Securities Available for Sale. Investment securities available-for-sale are recorded at fair value on a recurring
basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash
flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.
Securities classified as level 3 include asset-backed securities in less liquid markets.

Federal Home Loan Bank and
Federal Reserve Bank Stock. The Bank is a member of the Federal Home Loan Bank (the FHLB) and the Federal Reserve Bank of San Francisco (the FRB). As members, we are required to own stock of the FHLB and the FRB, the
amount of which is based primarily on the level of our borrowings from those institutions. We also have the right to acquire additional shares of stock in either or both of the FHLB and the FRB;



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Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|7. | Fair Value Measurements (Cont.-)
|-- | --------------------------------



however, to date, we have not done so. The fair values of that stock are equal to their respective carrying amounts, are classified as restricted securities and are periodically evaluated for
impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.

Loans Held for Sale.Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale
is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 3. There were no fair value adjustments
related to the $19.3 million of loans held for sale at March 31, 2011.

Loans. The fair value for loans with
variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans. All loans have been
adjusted to reflect changes in credit risk.

Impaired Loans. ASC 820-10 applies to loans measured for impairment in
accordance with ASC 310-10, Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), and at the fair value of the loans collateral (if the loan is collateral
dependent) less selling cost. The fair value of an impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans
not requiring an allowance for possible losses represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. When the fair value of the collateral is based on an observable market
price or a current appraised value, we record the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is
no observable market price or a discounted cash flow has been used to determine the fair value, we record the impaired loan at nonrecurring Level 3.

Foreclosed Assets. Foreclosed assets are adjusted to the lower of cost or fair value, less estimated costs to sell, at the time the loans are transferred to foreclosed assets. Subsequently,
foreclosed assets are carried at the lower of carrying value or fair value, less estimated costs to sell. Fair value is determined on the basis of independent market prices, appraised values of the collateral or managements estimation of the
value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at nonrecurring Level 3.

Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on
demand at quarter-end. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.

Borrowings. The fair value of borrowings is the carrying amount for those borrowings that mature on a daily basis. The fair value
of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company.

Junior Subordinated Debentures. The fair value of the junior subordinated debentures is based on quoted market prices of the
underlying securities. These securities are variable rate in nature and reprice quarterly.

Commitments to Extend Credit
and Standby Letters of Credit. The fair value of commitments to extend credit and standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the
counterparties credit standing. These fees were not material in amount either at March 31, 2011, or December 31, 2010.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|7. | Fair Value Measurements (Cont.-)
|-- | --------------------------------



The estimated fair values and related carrying amounts of the Companys financial
instruments are as follows:



|                                                      |  |                        |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|----------------------------------------------------- |  | ---------------------- | ------- |  | ------------------- | - | ------- | -------------- |  | - | ------------------- |  |  | - | ------- | 
|                                                      |  | March 31, 2011         |         |  | December 31, 2010   |  
|                                                      |  | CarryingAmount         |         |  | EstimatedFair Value |   |         | CarryingAmount |  |   | EstimatedFair Value | 
|                                                      |  | (Dollars in thousands) |        
|Financial Assets:                                     |  |                        |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|Cash and cash equivalents                             |  | $                      | 53,754  |  |                     | $ | 53,754  |                |  | $ | 32,678              |  |  | $ | 32,678  | 
|Interest-bearing deposits with financial institutions |  |                        | 1,978   |  |                     |   | 1,978   |                |  |   | 2,078               |  |  |   | 2,078   | 
|Federal Reserve Bank and Federal Home Loan Bank stock |  |                        | 12,408  |  |                     |   | 12,408  |                |  |   | 12,820              |  |  |   | 12,820  | 
|Securities available for sale                         |  |                        | 167,947 |  |                     |   | 167,947 |                |  |   | 178,301             |  |  |   | 178,301 | 
|Mortgage loans held for sale                          |  |                        | 19,260  |  |                     |   | 19,260  |                |  |   | 12,469              |  |  |   | 12,469  | 
|Loans, net                                            |  |                        | 699,084 |  |                     |   | 686,310 |                |  |   | 722,210             |  |  |   | 712,878 | 
|Financial Liabilities:                                |  |                        |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|Noninterest bearing deposits                          |  |                        | 154,650 |  |                     |   | 154,650 |                |  |   | 144,079             |  |  |   | 144,079 | 
|Interest-bearing deposits                             |  |                        | 674,930 |  |                     |   | 677,369 |                |  |   | 672,147             |  |  |   | 674,264 | 
|Borrowings                                            |  |                        | 78,000  |  |                     |   | 78,665  |                |  |   | 112,000             |  |  |   | 112,763 | 
|Junior subordinated debentures                        |  |                        | 17,527  |  |                     |   | 17,527  |                |  |   | 17,527              |  |  |   | 17,527  | 



|8. | Investment Securities Available For Sale
|-- | ----------------------------------------

The following table sets forth the major components of securities available for sale and compares the amortized costs and estimated fair market values of, and the gross unrealized gains and losses on,
these securities at March 31, 2011 and December 31, 2010:



|                                                            |  |                        |         |  |                   |      |    |           |  |   |               |   |  |                  |         |  |           |   |         |  |  |   |    |  |  |   |        |   |  |   |         | 
|----------------------------------------------------------- |  | ---------------------- | ------- |  | ----------------- | ---- | -- | --------- |  | - | ------------- | - |  | ---------------- | ------- |  | --------- | - | ------- |  |  | - | -- |  |  | - | ------ | - |  | - | ------- | 
|                                                            |  | March 31, 2011         |         |  | December 31, 2010 |     
|                                                            |  | AmortizedCost          |         |  | Gross Unrealized  |      |    | FairValue |  |   | AmortizedCost |   |  | Gross Unrealized |         |  | FairValue |  
|                                                            |  |                        | Gain    |  |                   | Loss |    |           |  |   | Gain          |   |  | Loss             |         | 
|                                                            |  | (Dollars in thousands) |        
|Securities Available for Sale                               |  |                        |         |  |                   |      |    |           |  |   |               |   |  |                  |         |  |           |   |         |  |  |   |    |  |  |   |        |   |  |   |         | 
|Mortgage backed securities issued by U.S. Agencies(1)       |  |                        | 157,043 |  |                   |      | 31 |           |  |   | (2,847        | ) |  |                  | 154,227 |  |           |   | 166,421 |  |  |   | 24 |  |  |   | (2,009 | ) |  |   | 164,436 | 
|Municipal securities                                        |  |                        | 6,389   |  |                   |      |   |           |  |   | (539          | ) |  |                  | 5,850   |  |           |   | 6,389   |  |  |   |   |  |  |   | (417   | ) |  |   | 5,972   | 
|Collateralized mortgage obligations issued by non agency(1) |  |                        | 3,399   |  |                   |      | 25 |           |  |   | (187          | ) |  |                  | 3,237   |  |           |   | 3,500   |  |  |   | 21 |  |  |   | (244   | ) |  |   | 3,277   | 
|Asset backed securities(2)                                  |  |                        | 2,441   |  |                   |      |   |           |  |   | (2,038        | ) |  |                  | 403     |  |           |   | 2,493   |  |  |   |   |  |  |   | (2,122 | ) |  |   | 371     | 
|Mutual funds(3)                                             |  |                        | 4,230   |  |                   |      |   |           |  |   |              |   |  |                  | 4,230   |  |           |   | 4,245   |  |  |   |   |  |  |   |       |   |  |   | 4,245   | 
|                                                            |  |                        |         |  |                   |      |    |           |  |   |               |   |  |                  |         |  |           |   |         |  |  |   |    |  |  |   |        |   |  |   |         | 
|Total Securities Available for Sale                         |  | $                      | 173,502 |  |                   | $    | 56 |           |  | $ | (5,611        | ) |  | $                | 167,947 |  |           | $ | 183,048 |  |  | $ | 45 |  |  | $ | (4,792 | ) |  | $ | 178,301 | 
|                                                            |  |                        |         |  |                   |      |    |           |  |   |               |   |  |                  |         |  |           |   |         |  |  |   |    |  |  |   |        |   |  |   |         | 



|(1) | Secured by closed-end first lien 1-4 family residential mortgages.
|--- | ------------------------------------------------------------------

|(2) | Comprised of a security that represents an interest in a pool of trust preferred securities issued by U.S.-based banks and insurance companies
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists primarily of mutual fund investments in closed-end first lien 1-4 family residential mortgages.
|--- | --------------------------------------------------------------------------------------------------------

At March 31, 2011 and December 31, 2010, U.S. agencies/mortgage backed securities and collateralized mortgage obligations with
an aggregate fair market value of $19 million and $13 million, respectively, were pledged to secure Federal Home Loan Bank borrowings, repurchase agreements, local agency deposits and Treasury, tax and loan accounts.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|8. | Investment Securities Available For Sale (Cont.-)
|-- | -------------------------------------------------



The amortized cost and estimated fair values of securities available for sale at
March 31, 2011 and December 31, 2010, are shown in the table below by contractual maturities and historical prepayments based on the prior twelve months of principal payments. Expected maturities will differ from contractual maturities and
historical prepayments, particularly with respect to collateralized mortgage obligations, primarily because prepayment rates are affected by changes in conditions in the interest rate market and, therefore, future prepayment rates may differ from
historical prepayment rates.



|                                                    |  |                                  |        |   |                                |   |        |                                 |  |   |               |   |  |       |         |   |  |   |         |  
|--------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | ------------------------------- |  | - | ------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                    |  | At March 31, 2011 Maturing in    |       
|(Dollars in thousands)                              |  | One yearor less                  |        |   | Over oneyear throughfive years |   |        | Over fiveyears throughten years |  |   | Over tenYears |   |  | Total |        
|Securities available for sale, amortized cost       |  | $                                | 9,826  |   |                                | $ | 33,838 |                                 |  | $ | 32,069        |   |  | $     | 97,769  |   |  | $ | 173,502 |  
|Securities available for sale, estimated fair value |  |                                  | 9,719  |   |                                |   | 33,384 |                                 |  |   | 31,209        |   |  |       | 93,635  |   |  |   | 167,947 |  
|Weighted average yield                              |  |                                  | 2.72   | % |                                |   | 2.77   | %                               |  |   | 2.81          | % |  |       | 2.73    | % |  |   | 2.75    | %
|                                                    | 
|                                                    |  | At December 31, 2010 Maturing in |       
|(Dollars in thousands)                              |  | One yearor less                  |        |   | Over oneyear throughfive years |   |        | Over fiveyears throughten years |  |   | Over tenYears |   |  | Total |        
|Securities available for sale, amortized cost       |  | $                                | 11,892 |   |                                | $ | 33,652 |                                 |  | $ | 29,542        |   |  | $     | 107,962 |   |  | $ | 183,048 |  
|Securities available for sale, estimated fair value |  |                                  | 11,813 |   |                                |   | 33,334 |                                 |  |   | 28,939        |   |  |       | 104,215 |   |  |   | 178,301 |  
|Weighted average yield                              |  |                                  | 2.31   | % |                                |   | 2.69   | %                               |  |   | 2.86          | % |  |       | 2.79    | % |  |   | 2.75    | %

The Company recognized net
gains on sales of securities available for sale of $11,000 on sale proceeds of $6 million during the three months ended March 31, 2011 and $121,000, net of $84,000 of taxes, on sale proceeds of $32 million, during the first quarter ended
March 31, 2010.

The table below shows, as of March 31, 2011, the gross unrealized losses and fair values of our
investments, in thousands of dollars, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.



|                                                   |  |                                                   |         |  |                   |   |        |            |  |   |                |  |  |            |        |   |                |   |         |  |  |   |        |  
|-------------------------------------------------- |  | ------------------------------------------------- | ------- |  | ----------------- | - | ------ | ---------- |  | - | -------------- |  |  | ---------- | ------ | - | -------------- | - | ------- |  |  | - | ------ | -
|                                                   |  | Securities with Unrealized Loss at March 31, 2011 |        
|                                                   |  | Less than 12 months                               |         |  | 12 months or more |   |        | Total      | 
|                                                   |  | Fair Value                                        |         |  | UnrealizedLoss    |   |        | Fair Value |  |   | UnrealizedLoss |  |  | Fair Value |        |   | UnrealizedLoss |  
|Mortgage backed securities issued By U.S. Agencies |  | $                                                 | 151,506 |  |                   | $ | (2,846 | )          |  | $ | 41             |  |  | $          | (1     | ) |                | $ | 151,547 |  |  | $ | (2,847 | )
|Municipal securities                               |  |                                                   | 5,442   |  |                   |   | (477   | )          |  |   | 408            |  |  |            | (62    | ) |                |   | 5,850   |  |  |   | (539   | )
|Non-agency collateralized mortgage obligations     |  |                                                   |        |  |                   |   |       |            |  |   | 2,276          |  |  |            | (187   | ) |                |   | 2,276   |  |  |   | (187   | )
|Asset backed securities                            |  |                                                   |        |  |                   |   |       |            |  |   | 403            |  |  |            | (2,038 | ) |                |   | 403     |  |  |   | (2,038 | )
|                                                   |  |                                                   |         |  |                   |   |        |            |  |   |                |  |  |            |        |   |                |   |         |  |  |   |        |  
|Total temporarily impaired securities              |  | $                                                 | 156,948 |  |                   | $ | (3,323 | )          |  | $ | 3,128          |  |  | $          | (2,288 | ) |                | $ | 160,076 |  |  | $ | (5,611 | )
|                                                   |  |                                                   |         |  |                   |   |        |            |  |   |                |  |  |            |        |   |                |   |         |  |  |   |        |  

We regularly monitor investments for significant declines in fair value. We have determined that declines in
the fair values of these investments below their respective amortized costs, as set forth in the table above, are temporary because (i) those declines were due to interest rate changes and not 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.

Effective April 1, 2009 we adopted ASC 320-10 and, as a result, we recognize other-than-temporary impairments (OTTI) for our available-for-sale debt securities in accordance with ASC
320-10. Therefore, when there are credit losses associated with an impaired debt security, but we have no intention to sell, and it is more likely than not that we will not have to sell, the security before recovery of its cost basis, we will
separate the amount of impairment, or OTTI, between the amount that is credit related and the amount that is related to non-credit factors. Credit-related impairments are recognized in our consolidated statements of operations. Any
non-credit-related impairments are recognized and reflected in other comprehensive income (loss).



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|8. | Investment Securities Available For Sale (Cont.-)
|-- | -------------------------------------------------



Through the impairment assessment process, we determined that the available-for-sale
securities discussed below were other-than-temporarily impaired at March 31, 2011. We recorded in our consolidated statements of operations for the three month period ended March 31, 2011 impairment credit losses of $52,000 on
available-for-sale securities. The OTTI related to factors other than credit losses, in the aggregate amount of $2.1 million, was recognized as other comprehensive loss in our balance sheet.

Certain of the other-than-temporary impairments (OTTI) amounts were related to credit losses and recognized as a charge to
income in our statement of operations, with the remainder recognized in other comprehensive loss. The table below presents a roll-forward of OTTI where a portion attributable to non-credit related factors was recognized in other comprehensive loss
for the three months ended March 31, 2011:



|                                                                                          |  |                                       |        |   |                                                                    |   |        |                                                                  |  |   |      |  
|----------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------------------------------------ | - | ------ | ---------------------------------------------------------------- |  | - | ---- | -
|                                                                                          |  | Gross Other-Than-TemporaryImpairments |        |   | Other-Than-TemporaryImpairmentsIncluded in 
OtherComprehensiveLoss |   |        | Net Other-Than-TemporaryImpairmentsIncluded inRetained 
Earnings | 
|                                                                                          |  | (Dollars in thousands)                |       
|Balance  December 31, 2010                                                               |  | $                                     | (2,666 | ) |                                                                    | $ | (2,181 | )                                                                |  | $ | (485 | )
|Additions for credit losses on securities for which an OTTI was not previously recognized |  |                                       | 41     |   |                                                                    |   | 93     |                                                                  |  |   | (52  | )
|                                                                                          |  |                                       |        |   |                                                                    |   |        |                                                                  |  |   |      |  
|Balance  March 31, 2011                                                                  |  | $                                     | (2,625 | ) |                                                                    | $ | (2,088 | )                                                                |  | $ | (537 | )
|                                                                                          |  |                                       |        |   |                                                                    |   |        |                                                                  |  |   |      |  

In determining the component of OTTI related to credit losses, we compare the amortized cost basis of each
OTTI security to the present value of its expected cash flows, discounted using the effective interest rate implicit in the security at the date of acquisition.

As a part of our OTTI assessment process with respect to securities held for sale with unrealized losses, we consider available information about (i) the performance of the collateral underlying each
such security, including credit enhancements, (ii) historical prepayment speeds, (iii) delinquency and default rates, (iv) loss severities, (v) the age or vintage of the security, and, (vi) rating agency reports
on the security. Significant judgments are required with respect to these and other factors in order to make a determination of the future cash flows that can be expected to be generated by the security.

Based on our OTTI assessment process, we determined that there were two different investment securities in our portfolio of securities
held for sale that had become or were impaired as of March 31, 2011: An asset backed security and a non-agency collateralized mortgage obligation (CMO).

Asset-Backed Securities. At March 31, 2011, we had one asset backed security in our portfolio of investment securities available for sale. This security is a multi-class, cash flow
collateralized bond obligation backed by a pool of trust preferred securities issued by a diversified pool of 56 issuers consisting of 45 U.S. depository institutions and 11 insurance companies at the time of the securitys
issuance in November 2007. This security was part of a $363 million issuance. The security that we own (CUSIP 74042CAE8) is the mezzanine class B piece security with a variable interest rate of 3 month LIBOR +60 basis points and had a rating of
Aa2/AA by Moodys and Fitch at the time of issuance. We purchased $3.0 million face value of this security in November 2007 at a price of 95.21% for a total purchase price of $2,856,420.



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|8. | Investment Securities Available For Sale (Cont.-)
|-- | -------------------------------------------------



As of March 31, 2011 the book value of this security was $2.4 million with a fair
value of $403,000 for an approximate unrealized loss of $2.0 million. Currently, the security has a Ca rating from Moodys and CC rating from Fitch and has experienced $42.5 million in defaults (12% of total current collateral) and $36.5
million in payment deferrals (10% of total current collateral) from issuance to March 31, 2011. The security did not pay its scheduled first quarter interest payment. The Company is not currently accruing interest on this security. The Company
estimates that the security could experience another $69 million in defaults before the issuer would not receive all of its contractual cash flows. This analysis is based on the following assumptions: future default rates of 2.3%, prepayment rates
of 1% until maturity, and 15% recovery of future defaults. We have recognized impairment losses in earnings of $52,000 for the three months ended March 31, 2011 and $34,000 for the three months ended March 31, 2010.

Non Agency CMO. Through our impairment analysis, we identified one non-agency collateralized mortgage obligation security
(a CMO) with respect to which we recognized OTTI at March 31, 2011. This CMO is a Super Senior Support bond, which was originated in 2005, was then rated AAA by Standard & Poors and Aa1 by Moodys,
and had a credit support of 2.5% of the total balance at issuance. As of March 31, 2011, the security was rated BBB and Caa3 by Standard and Poors and Moodys, respectively, and was determined to have a fair value of $825,000, as
compared to an amortized cost of $875,000, resulting in an unrealized loss of approximately $50,000. The CMO is collateralized by a pool of one-to-four family, fully amortizing residential first mortgage loans that bear interest at a fixed rate for
approximately five years, after which they bear interest at variable rates with annual resets.

At March, 31, 2011,
credit support underlying this CMO was approximately 5.6% and delinquencies that were 60 days or over totaled approximately 6.1%. Factors considered in determining that this security was impaired included the changes in the ratings of the
security, the current level of subordination from other CMO classes, anticipated prepayment rates, cumulative default rates and the loss severity given a default. There was no credit impairment of this security for the three month period ending
March 31, 2011.

We have made a determination that the remainder of our securities with respect to which there were
unrealized losses as of March 31, 2011 are not other-than-temporarily impaired, because we have concluded that we have the ability to continue to hold those securities until their respective fair market values increase above their respective
amortized costs or, if necessary, until their respective maturities. In reaching that conclusion we considered a number of factors and other information, which included: (i) the significance of each such security, (ii) the amount of the
unrealized losses attributable to each such security, (iii) our liquidity position, (iv) the impact that retention of those securities could have on our capital position and (v) our evaluation of the expected future performance of
these securities (based on the criteria discussed above).



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses
|-- | -----------------------------------



The composition of the Companys loan portfolio as of March 31, 2011 and December 31, 2010 was as follows:



|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ----------------- |  | ----- | ------ |  | - | ------- | - |  |  | ----- | -
|                                              |  | March 31, 2011         |         |   | December 31, 2010 | 
|                                              |  | Amount                 |         |   | Percent           |  |       | Amount |  |   | Percent |  
|                                              |  | (Dollars in thousands) |        
|Commercial loans                              |  | $                      | 206,719 |   |                   |  | 28.8  | %      |  | $ | 218,690 |   |  |  | 29.5  | %
|Commercial real estate loans  owner occupied |  |                        | 169,535 |   |                   |  | 23.6  | %      |  |   | 178,085 |   |  |  | 24.0  | %
|Commercial real estate loans  all other      |  |                        | 142,577 |   |                   |  | 19.9  | %      |  |   | 136,505 |   |  |  | 18.4  | %
|Residential mortgage loans  multi-family     |  |                        | 83,340  |   |                   |  | 11.6  | %      |  |   | 84,553  |   |  |  | 11.4  | %
|Residential mortgage loans  single family    |  |                        | 68,945  |   |                   |  | 9.6   | %      |  |   | 72,442  |   |  |  | 9.8   | %
|Construction loans                            |  |                        | 2,185   |   |                   |  | 0.3   | %      |  |   | 3,048   |   |  |  | 0.5   | %
|Land development loans                        |  |                        | 26,120  |   |                   |  | 3.6   | %      |  |   | 29,667  |   |  |  | 4.0   | %
|Consumer loans                                |  |                        | 18,696  |   |                   |  | 2.6   | %      |  |   | 18,017  |   |  |  | 2.4   | %
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|Gross loans                                   |  |                        | 718,117 |   |                   |  | 100.0 | %      |  |   | 741,007 |   |  |  | 100.0 | %
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|Deferred fee (income) costs, net              |  |                        | (667    | ) |                   |  |       |        |  |   | (696    | ) |  |  |       |  
|Allowance for loan losses                     |  |                        | (18,366 | ) |                   |  |       |        |  |   | (18,101 | ) |  |  |       |  
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|Loans, net                                    |  | $                      | 699,084 |   |                   |  |       |        |  | $ | 722,210 |   |  |  |       |  
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  

At March 31, 2011 and December 31, 2010, real estate loans of approximately $203 million
and $211 million, respectively, were pledged to secure borrowings obtained from the Federal Home Loan Bank.

Allowance
for Loan Losses

The allowance for loan losses represents our estimate of credit losses inherent in the loan portfolio
at the balance sheet date. We employ economic models that are based on bank regulatory guidelines, industry standards and our own historical loan loss experience, as well as a number of more subjective qualitative factors, to 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.

The allowance for loan losses is first determined by assigning reserve ratios for all loans. All non-accrual loans and other loans classified as special mention, substandard or
doubtful (classified loans or classification categories) are then assigned certain allocations according to type of loans, with greater reserve ratios or percentages applied to loans deemed to be of a higher risk.
These ratios are determined based on prior loss history and industry guidelines and loss factors, by type of loan, adjusted for current economic and other qualitative factors.

On a quarterly basis, we utilize a classification migration model and individual loan review analysis tools as starting points for determining the adequacy of the allowance for loan losses. Our loss
migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain loans (automobile, mortgage and credit cards), which
are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances. We also conduct individual loan review analysis, as part of the allowance for loan losses allocation process, applying specific
monitoring policies and procedures in analyzing the existing loan portfolios.

Set forth below is a summary of the
Companys activity in the allowance for loan losses for the three months ended March 31, 2011 and the year ended December 31, 2010:



|                                           |  |                                  |        |   |                             |   |         |  
|------------------------------------------ |  | -------------------------------- | ------ | - | --------------------------- | - | ------- | -
|                                           |  | Three Months EndedMarch 31, 2011 |        |   | Year EndedDecember 31, 2010 |  
|                                           |  | (In thousands)                   |       
|Balance, beginning of period               |  | $                                | 18,101 |   |                             | $ | 20,345  |  
|Provision for loan losses                  |  |                                  |       |   |                             |   | 8,288   |  
|Recoveries on loans previously charged off |  |                                  | 735    |   |                             |   | 3,033   |  
|Charged off loans                          |  |                                  | (470   | ) |                             |   | (13,565 | )
|                                           |  |                                  |        |   |                             |   |         |  
|Balance, end of period                     |  | $                                | 18,366 |   |                             | $ | 18,101  |  
|                                           |  |                                  |        |   |                             |   |         |  



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses (Cont.-)
|-- | --------------------------------------------



Set forth below is information regarding loan balances and the related allowance for
loan losses, by portfolio type, for the three months ended March 31, 2011 and the year ended December 31, 2010.



|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|---------------------------------------------- |  | ---------------------- | ------- | - | ----------- | - | ------- | ------------------------------- |  | - | ---------------------------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                               |  | Commercial             |         |   | Real Estate |   |         | Constructionand LandDevelopment |  |   | Consumer andSingle FamilyMortgages |   |  | Total |        
|                                               |  | (Dollars in thousands) |        
|March 31, 2011                                 |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Allowance for loan losses:                     |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Balance at beginning of period                 |  | $                      | 10,017  |   |             | $ | 6,351   |                                 |  | $ | 830                                |   |  | $     | 903     |   |  | $ | 18,101  |  
|Charge offs                                    |  |                        | (450    | ) |             |   |        |                                 |  |   |                                   |   |  |       | (20     | ) |  |   | (470    | )
|Recoveries                                     |  |                        | 709     |   |             |   | 3       |                                 |  |   |                                   |   |  |       | 23      |   |  |   | 735     |  
|Provision                                      |  |                        |        |   |             |   |        |                                 |  |   |                                   |   |  |       |        |   |  |   |        |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Balance at end of period                       |  | $                      | 10,276  |   |             | $ | 6,354   |                                 |  | $ | 830                                |   |  | $     | 906     |   |  | $ | 18,366  |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Allowance balance at end of period related to: |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans individually evaluated for impairment    |  | $                      | 1,056   |   |             | $ | 3,084   |                                 |  | $ | 221                                |   |  | $     | 82      |   |  | $ | 4,443   |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans collectively evaluated for impairment    |  | $                      | 9,220   |   |             | $ | 3,270   |                                 |  | $ | 609                                |   |  | $     | 824     |   |  | $ | 13,923  |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans balance at end of period:                |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans individually evaluated for impairment    |  | $                      | 2,088   |   |             | $ | 22,536  |                                 |  | $ | 2,621                              |   |  | $     | 1,306   |   |  | $ | 28,551  |  
|Loans collectively evaluated for impairment    |  |                        | 204,631 |   |             |   | 289,576 |                                 |  |   | 25,684                             |   |  |       | 169,675 |   |  |   | 689,566 |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Ending Balance                                 |  | $                      | 206,719 |   |             | $ | 312,112 |                                 |  | $ | 28,305                             |   |  | $     | 170,981 |   |  | $ | 718,117 |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|December 31, 2010                              |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Allowance for loan losses:                     |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Balance at beginning of period                 |  | $                      | 11,119  |   |             | $ | 5,968   |                                 |  | $ | 2,179                              |   |  | $     | 1,079   |   |  | $ | 20,345  |  
|Charge offs                                    |  |                        | (11,473 | ) |             |   | (660    | )                               |  |   | (649                               | ) |  |       | (783    | ) |  |   | (13,565 | )
|Recoveries                                     |  |                        | 2,327   |   |             |   | 345     |                                 |  |   | 4                                  |   |  |       | 357     |   |  |   | 3,033   |  
|Provision                                      |  |                        | 8,044   |   |             |   | 698     |                                 |  |   | (704                               | ) |  |       | 250     |   |  |   | 8,288   |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Balance at end of period                       |  | $                      | 10,017  |   |             | $ | 6,351   |                                 |  | $ | 830                                |   |  | $     | 903     |   |  | $ | 18,101  |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Allowance balance at end of period related to: |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans individually evaluated for impairment    |  | $                      | 141     |   |             | $ | 3,155   |                                 |  |   |                                   |   |  | $     | 128     |   |  | $ | 3,424   |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans collectively evaluated for impairment    |  | $                      | 9,876   |   |             | $ | 3,196   |                                 |  | $ | 830                                |   |  | $     | 775     |   |  | $ | 14,677  |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans balance at end of period:                |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Loans individually evaluated for impairment    |  | $                      | 2,036   |   |             | $ | 24,318  |                                 |  | $ | 2,624                              |   |  | $     | 2,473   |   |  | $ | 31,451  |  
|Loans collectively evaluated for impairment    |  |                        | 216,654 |   |             |   | 374,825 |                                 |  |   | 30,091                             |   |  |       | 87,986  |   |  |   | 709,556 |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  
|Ending Balance                                 |  | $                      | 218,690 |   |             | $ | 399,143 |                                 |  | $ | 32,715                             |   |  | $     | 90,459  |   |  | $ | 741,007 |  
|                                               |  |                        |         |   |             |   |         |                                 |  |   |                                    |   |  |       |         |   |  |   |         |  



23



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PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses (Cont.-)
|-- | --------------------------------------------



Credit Quality

The quality of the loans in the Companys loan portfolio is assessed as a function of net credit losses, levels of nonperforming
assets and delinquencies, as defined by the Company. These factors are an important part of the Companys overall credit risk management process and its evaluation of the adequacy of the allowance for loan losses.

The following table provides a summary of the delinquency status of the Banks loans by portfolio type:



|                                              |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 
|--------------------------------------------- |  | ---------------------- | ------ |  | ------------------ | - | ------ | ------------------ |  | - | ------------- |  |  | ------- | ------ |  | ---------------------- | - | ------- | ------------------------- |  | - | ------- |  |  | - | ----- | 
|                                              |  | 30-59 DaysPast Due     |        |  | 60-89 DaysPast Due |   |        | 90 Days andGreater |  |   | TotalPast Due |  |  | Current |        |  | Total LoansOutstanding |   |         | Loans >90Days andAccruing | 
|                                              |  | (Dollars in thousands) |       
|March 31, 2011                                |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 
|Commercial loans                              |  | $                      | 1,615  |  |                    | $ | 464    |                    |  | $ | 5,851         |  |  | $       | 7,930  |  |                        | $ | 198,789 |                           |  | $ | 206,719 |  |  | $ | 4,500 | 
|Commercial real estate loans  owner-occupied |  |                        |       |  |                    |   | 8,200  |                    |  |   |              |  |  |         | 8,200  |  |                        |   | 161,335 |                           |  |   | 169,535 |  |  |   |      | 
|Commercial real estate loans  all other      |  |                        | 1,937  |  |                    |   | 9,908  |                    |  |   |              |  |  |         | 11,845 |  |                        |   | 130,732 |                           |  |   | 142,577 |  |  |   |      | 
|Residential mortgage loans  multi-family     |  |                        | 863    |  |                    |   |       |                    |  |   |              |  |  |         | 863    |  |                        |   | 82,477  |                           |  |   | 83,340  |  |  |   |      | 
|Residential mortgage loans  single family    |  |                        | 167    |  |                    |   |       |                    |  |   |              |  |  |         | 167    |  |                        |   | 68,778  |                           |  |   | 68,945  |  |  |   |      | 
|Construction loans                            |  |                        |       |  |                    |   |       |                    |  |   | 2,185         |  |  |         | 2,185  |  |                        |   |        |                           |  |   | 2,185   |  |  |   |      | 
|Land development loans                        |  |                        | 554    |  |                    |   |       |                    |  |   |              |  |  |         | 554    |  |                        |   | 25,566  |                           |  |   | 26,120  |  |  |   |      | 
|Consumer loans                                |  |                        |       |  |                    |   |       |                    |  |   | 129           |  |  |         | 129    |  |                        |   | 18,567  |                           |  |   | 18,696  |  |  |   |      | 
|                                              |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 
|Total                                         |  | $                      | 5,136  |  |                    | $ | 18,572 |                    |  | $ | 8,165         |  |  | $       | 31,873 |  |                        | $ | 686,244 |                           |  | $ | 718,117 |  |  | $ | 4,500 | 
|                                              |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 
|December 31, 2010                             |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 
|Commercial loans                              |  | $                      | 782    |  |                    | $ | 624    |                    |  | $ | 1,784         |  |  | $       | 3,190  |  |                        | $ | 215,500 |                           |  | $ | 218,690 |  |  | $ | 250   | 
|Commercial real estate loans  owner occupied |  |                        |       |  |                    |   |       |                    |  |   |              |  |  |         |       |  |                        |   | 178,085 |                           |  |   | 178,085 |  |  |   |      | 
|Commercial real estate loans  all other      |  |                        | 9,958  |  |                    |   | 239    |                    |  |   | 1,111         |  |  |         | 11,308 |  |                        |   | 125,197 |                           |  |   | 136,505 |  |  |   |      | 
|Residential mortgage loans  multi-family     |  |                        |       |  |                    |   |       |                    |  |   |              |  |  |         |       |  |                        |   | 84,553  |                           |  |   | 84,553  |  |  |   |      | 
|Residential mortgage loans  single family    |  |                        | 432    |  |                    |   |       |                    |  |   | 636           |  |  |         | 1,068  |  |                        |   | 71,374  |                           |  |   | 72,442  |  |  |   |      | 
|Construction loans                            |  |                        |       |  |                    |   |       |                    |  |   | 2,185         |  |  |         | 2,185  |  |                        |   | 863     |                           |  |   | 3,048   |  |  |   |      | 
|Land development loans                        |  |                        |       |  |                    |   |       |                    |  |   |              |  |  |         |       |  |                        |   | 29,667  |                           |  |   | 29,667  |  |  |   |      | 
|Consumer loans                                |  |                        |       |  |                    |   |       |                    |  |   | 129           |  |  |         | 129    |  |                        |   | 17,888  |                           |  |   | 18,017  |  |  |   |      | 
|                                              |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 
|Total                                         |  | $                      | 11,172 |  |                    | $ | 863    |                    |  | $ | 5,845         |  |  | $       | 17,880 |  |                        | $ | 723,127 |                           |  | $ | 741,007 |  |  | $ | 250   | 
|                                              |  |                        |        |  |                    |   |        |                    |  |   |               |  |  |         |        |  |                        |   |         |                           |  |   |         |  |  |   |       | 

Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more
than 90 days past due, unless management believes the loan is adequately collateralized and it is in the process of collection. However, in certain instances, when a loan is placed on non-accrual status, previously accrued but unpaid interest is
reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual
loans may be restored to accrual status when principal and interest become current and full repayment is expected.

As the
above table indicates, total past due loans increased by $14 million, to $31.9 million as of March 31, 2011, from $17.9 million as of December 31, 2010. That increase was primarily related to two loans. One of those loans, in the amount $8.2
million, became more than 30-days past due during the first quarter of 2011. However, we did not have to set aside any reserves for this loan at March 31, 2011, because we established a specific reserve for this loan, within the allowance for loan
losses, at December 31, 2010. The other of those loans, in the amount of $4.5 million, is covered by general reserves within the allowance for loan losses, rather than a specific reserve.



24



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##### Table of Contents

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses (Cont.-)
|-- | --------------------------------------------



The following table provides information as of March 31, 2011 and December 31,
2010, with respect to loans on nonaccrual status, by portfolio type:



|                                              |  |                        |        |  |                   |   |        | 
|--------------------------------------------- |  | ---------------------- | ------ |  | ----------------- | - | ------ | 
|                                              |  | March 31, 2011         |        |  | December 31, 2010 |  
|                                              |  | (Dollars in thousands) |       
|Nonaccrual loans:                             |  |                        |        |  |                   |   |        | 
|Commercial loans                              |  | $                      | 1,868  |  |                   | $ | 1,800  | 
|Commercial real estate loans  owner occupied |  |                        | 8,200  |  |                   |   | 297    | 
|Commercial real estate loans  all other      |  |                        | 14,336 |  |                   |   | 15,808 | 
|                                              |  |                       
|Residential mortgage loans  single family    |  |                        | 1,177  |  |                   |   | 1,832  | 
|Construction loans                            |  |                        | 2,185  |  |                   |   | 2,185  | 
|                                              |  |                       
|Consumer loans                                |  |                        | 129    |  |                   |   | 129    | 
|                                              |  |                        |        |  |                   |   |        | 
|Total                                         |  | $                      | 27,895 |  |                   | $ | 22,051 | 
|                                              |  |                        |        |  |                   |   |        | 



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##### Table of Contents

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses (Cont.-)
|-- | --------------------------------------------



The Company classifies its loan portfolios using internal credit quality ratings. The
following table provides a summary of loans by portfolio type and the Companys internal credit quality ratings as of March 31, 2011 and December 31, 2010.



|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|--------------------------------------------- |  | ---------------------- | ------- |  | ---------------- | - | ------- | ------------------ |  | - | ------- | -
|                                              |  | March 31,2011          |         |  | December 31,2010 |   |         | Increase(Decrease) | 
|                                              |  | (Dollars in thousands) |        
|Pass:                                         |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 172,322 |  |                  | $ | 187,054 |                    |  | $ | (14,732 | )
|Commercial real estate loans  owner occupied |  |                        | 141,866 |  |                  |   | 162,330 |                    |  |   | (20,464 | )
|Commercial real estate loans  all other      |  |                        | 117,039 |  |                  |   | 112,093 |                    |  |   | 4,946   |  
|Residential mortgage loans  multi family     |  |                        | 76,893  |  |                  |   | 81,482  |                    |  |   | (4,589  | )
|Residential mortgage loans  single family    |  |                        | 66,727  |  |                  |   | 70,171  |                    |  |   | (3,444  | )
|Construction loans                            |  |                        |        |  |                  |   | 863     |                    |  |   | (863    | )
|Land development loans                        |  |                        | 4,828   |  |                  |   | 24,028  |                    |  |   | (19,200 | )
|Consumer loans                                |  |                        | 18,529  |  |                  |   | 17,847  |                    |  |   | 682     |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total pass loans                              |  | $                      | 598,204 |  |                  | $ | 655,868 |                    |  | $ | (57,664 | )
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Special Mention:                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 8,829   |  |                  | $ | 9,748   |                    |  | $ | (919    | )
|Commercial real estate loans  owner occupied |  |                        | 12,263  |  |                  |   | 456     |                    |  |   | 11,807  |  
|Commercial real estate loans  all other      |  |                        | 2,612   |  |                  |   |        |                    |  |   | 2,612   |  
|Residential mortgage loans  multi family     |  |                        | 5,361   |  |                  |   | 1,974   |                    |  |   | 3,387   |  
|Residential mortgage loans  single family    |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Construction loans                            |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Land development loans                        |  |                        | 20,738  |  |                  |   | 5,639   |                    |  |   | 15,099  |  
|Consumer loans                                |  |                        | 38      |  |                  |   | 41      |                    |  |   | (3      | )
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total special mention loans                   |  | $                      | 49,841  |  |                  | $ | 17,858  |                    |  | $ | 31,983  |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Substandard:                                  |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 24,570  |  |                  | $ | 21,887  |                    |  | $ | 2,683   |  
|Commercial real estate loans  owner occupied |  |                        | 15,406  |  |                  |   | 15,299  |                    |  |   | 107     |  
|Commercial real estate loans  all other      |  |                        | 22,926  |  |                  |   | 24,412  |                    |  |   | (1,486  | )
|Residential mortgage loans  multi family     |  |                        | 1,086   |  |                  |   | 1,097   |                    |  |   | (11     | )
|Residential mortgage loans  single family    |  |                        | 2,218   |  |                  |   | 2,271   |                    |  |   | (53     | )
|Construction loans                            |  |                        | 2,185   |  |                  |   | 2,185   |                    |  |   |        |  
|Land development loans                        |  |                        | 554     |  |                  |   |        |                    |  |   | 554     |  
|Consumer loans                                |  |                        | 129     |  |                  |   |        |                    |  |   | 129     |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total substandard loans                       |  | $                      | 68,945  |  |                  | $ | 67,151  |                    |  | $ | 1,794   |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Doubtful:                                     |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 998     |  |                  | $ | 1       |                    |  | $ | 997     |  
|Commercial real estate loans  owner occupied |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Commercial real estate loans  all other      |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Residential mortgage loans  multi family     |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Residential mortgage loans  single family    |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Construction loans                            |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Land development loans                        |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Consumer loans                                |  |                        | 129     |  |                  |   | 129     |                    |  |   |        |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total doubtful loans                          |  | $                      | 1,127   |  |                  | $ | 130     |                    |  | $ | 997     |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total Outstanding Loans, gross:               |  | $                      | 718,117 |  |                  | $ | 741,007 |                    |  | $ | (22,890 | )
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  

As the above table indicates, total loans with credit quality ratings of pass decreased by
$57 million, from $656 million at December 31, 2010, to $598 million at March 31, 2011, due primarily to the overall decrease in total loans outstanding and the net transfer of approximately $32 million in loans to the special
mention category. The transfer of these loans to the special mention category was primarily attributable to identified emerging weaknesses in the individual borrowers financial condition and/or identified secondary sources of
repayment on seven loans which indicated that, although the loans were performing, the borrowers were facing potential cash flow issues. However, at March 31, 2011, all of the loans transferred to special mention were fully
collateralized by first priority real property mortgages.



26



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##### Table of Contents

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses (Cont.-)
|-- | --------------------------------------------



Impaired Loans

A loan is generally classified as impaired and placed on nonaccrual status when, in managements opinion, the principal or interest
will not be collectible in accordance with the contractual terms of the loan agreement. The Company measures and reserves for impairment on a loan-by-loan basis, using either the present value of expected future cash flows discounted at the
loans effective interest rate, or the fair value of the collateral if the loan is collateral dependent.

The following
table sets forth information regarding nonaccrual loans and restructured loans, at March 31, 2011 and December 31, 2010:



|                                                                                 |  |                        |        |  |                  |   |        | 
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ |  | ---------------- | - | ------ | 
|                                                                                 |  | March 31,2011          |        |  | December 31,2010 |  
|                                                                                 |  | (Dollars in thousands) |       
|Impaired loans:                                                                  |  |                        |        |  |                  |   |        | 
|Nonaccruing loans                                                                |  | $                      | 13,108 |  |                  | $ | 6,743  | 
|Nonaccruing restructured loans                                                   |  |                        | 14,787 |  |                  |   | 15,308 | 
|Accruing restructured loans                                                      |  |                        | 656    |  |                  |   | 1,187  | 
|Accruing impaired loans                                                          |  |                        |       |  |                  |   | 8,213  | 
|                                                                                 |  |                        |        |  |                  |   |        | 
|Total impaired loans                                                             |  | $                      | 28,551 |  |                  | $ | 31,451 | 
|                                                                                 |  |                        |        |  |                  |   |        | 
|Impaired loans less than 90 days delinquent and included in total impaired loans |  | $                      | 24,886 |  |                  | $ | 25,856 | 
|                                                                                 |  |                        |        |  |                  |   |        | 

The table below contains additional information with respect to impaired loans, by portfolio type, for the
periods ended March 31, 2011 and December 31, 2010:



|                                              |  |                        |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |   | 
|--------------------------------------------- |  | ---------------------- | ------ |  | ---------------------- | - | ------ | ------------------- |  | - | ------------------------- |  |  | ------------------------ | ------ |  |  | - | - | 
|                                              |  | RecordedInvestment     |        |  | UnpaidPrincipalBalance |   |        | RelatedAllowance(1) |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |       
|                                              |  | (Dollars in thousands) |       
|March 31, 2011                                |  |                        |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |   | 
|With no related allowance recorded:           |  |                        |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |   | 
|Commercial loans                              |  | $                      | 1,032  |  |                        | $ | 1,889  |                     |  | $ |                          |  |  | $                        | 1,392  |  |  | $ |  | 
|Commercial real estate loans  owner occupied |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 149    |  |  |   |  | 
|Commercial real estate loans  all other      |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |  | 
|Residential mortgage loans  multi-family     |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |  | 
|Residential mortgage loans  single family    |  |                        | 727    |  |                        |   | 768    |                     |  |   |                          |  |  |                          | 1,303  |  |  |   |  | 
|Construction loans                            |  |                        | 436    |  |                        |   | 436    |                     |  |   |                          |  |  |                          | 1,296  |  |  |   |  | 
|Land development loans                        |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 220    |  |  |   |  | 
|Consumer loans                                |  |                        | 129    |  |                        |   | 238    |                     |  |   |                          |  |  |                          | 129    |  |  |   |  | 
|With an allowance recorded:                   |  |                        |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |   | 
|Commercial loans                              |  | $                      | 1,056  |  |                        | $ | 1,056  |                     |  | $ | 1,056                     |  |  | $                        | 670    |  |  | $ |  | 
|Commercial real estate loans  owner occupied |  |                        | 8,200  |  |                        |   | 8,200  |                     |  |   | 2,170                     |  |  |                          | 4,100  |  |  |   |  | 
|Commercial real estate loans  all other      |  |                        | 14,336 |  |                        |   | 15,727 |                     |  |   | 914                       |  |  |                          | 19,200 |  |  |   |  | 
|Residential mortgage loans  multi-family     |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |  | 
|Residential mortgage loans  single family    |  |                        | 450    |  |                        |   | 458    |                     |  |   | 82                        |  |  |                          | 458    |  |  |   |  | 
|Construction loans                            |  |                        | 2,185  |  |                        |   | 2,215  |                     |  |   | 221                       |  |  |                          | 1,108  |  |  |   |  | 
|Land development loans                        |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |  | 
|Consumer loans                                |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |  | 
|Total:                                        |  |                        |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |   | 
|Commercial loans                              |  | $                      | 2,088  |  |                        | $ | 2,945  |                     |  | $ | 1,056                     |  |  | $                        | 2,062  |  |  | $ |  | 
|Commercial real estate loans  owner occupied |  |                        | 8,200  |  |                        |   | 8,200  |                     |  |   | 2,170                     |  |  |                          | 4,249  |  |  |   |  | 
|Commercial real estate loans  all other      |  |                        | 14,336 |  |                        |   | 15,727 |                     |  |   | 914                       |  |  |                          | 19,179 |  |  |   |  | 
|Residential mortgage loans  multi-family     |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |  | 
|Residential mortgage loans  single family    |  |                        | 1,177  |  |                        |   | 1,226  |                     |  |   | 82                        |  |  |                          | 1,761  |  |  |   |  | 
|Construction loans                            |  |                        | 2,621  |  |                        |   | 2,651  |                     |  |   | 221                       |  |  |                          | 2,403  |  |  |   |  | 
|Land development loans                        |  |                        |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 220    |  |  |   |  | 
|Consumer loans                                |  |                        | 129    |  |                        |   | 238    |                     |  |   |                          |  |  |                          | 129    |  |  |   |  | 



27



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##### Table of Contents

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Cont-)

(Unaudited)



|9. | Loans and Allowance for Loan Losses (Cont.-)
|-- | --------------------------------------------



|                                              |  |                    |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |    | 
|--------------------------------------------- |  | ------------------ | ------ |  | ---------------------- | - | ------ | ------------------- |  | - | ------------------------- |  |  | ------------------------ | ------ |  |  | - | -- | 
|                                              |  | RecordedInvestment |        |  | UnpaidPrincipalBalance |   |        | RelatedAllowance(1) |  |   | AverageRecordedInvestment |  |  | InterestIncomeRecognized |       
|December 31, 2010                             |  |                    |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |    | 
|With no related allowance recorded:           |  |                    |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |    | 
|Commercial loans                              |  | $                  | 1,752  |  |                        | $ | 3,125  |                     |  | $ |                          |  |  | $                        | 4,202  |  |  | $ | 18 | 
|Commercial real estate loans  owner occupied |  |                    | 297    |  |                        |   | 960    |                     |  |   |                          |  |  |                          | 1,948  |  |  |   |   | 
|Commercial real estate loans  all other      |  |                    | 1,349  |  |                        |   | 1,382  |                     |  |   |                          |  |  |                          | 3,630  |  |  |   |   | 
|Residential mortgage loans  multi-family     |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 1,525  |  |  |   |   | 
|Residential mortgage loans  single family    |  |                    | 1,887  |  |                        |   | 2,134  |                     |  |   |                          |  |  |                          | 1,477  |  |  |   | 14 | 
|Construction loans                            |  |                    | 2,185  |  |                        |   | 2,215  |                     |  |   |                          |  |  |                          | 2,992  |  |  |   |   | 
|Land development loans                        |  |                    | 439    |  |                        |   | 439    |                     |  |   |                          |  |  |                          | 3,782  |  |  |   |   | 
|Consumer loans                                |  |                    | 129    |  |                        |   | 238    |                     |  |   |                          |  |  |                          | 123    |  |  |   | 26 | 
|With an allowance recorded:                   |  |                    |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |    | 
|Commercial loans                              |  | $                  | 284    |  |                        | $ | 787    |                     |  | $ | 141                       |  |  | $                        | 4,921  |  |  | $ |   | 
|Commercial real estate loans  owner occupied |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 1,150  |  |  |   |   | 
|Commercial real estate loans  all other      |  |                    | 22,672 |  |                        |   | 23,978 |                     |  |   | 3,155                     |  |  |                          | 13,664 |  |  |   |   | 
|Residential mortgage loans  multi-family     |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          |       |  |  |   |   | 
|Residential mortgage loans  single family    |  |                    | 457    |  |                        |   | 461    |                     |  |   | 128                       |  |  |                          | 537    |  |  |   |   | 
|Construction loans                            |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 1,185  |  |  |   |   | 
|Land development loans                        |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 1,071  |  |  |   |   | 
|Consumer loans                                |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 59     |  |  |   |   | 
|Total:                                        |  |                    |        |  |                        |   |        |                     |  |   |                           |  |  |                          |        |  |  |   |    | 
|Commercial loans                              |  | $                  | 2,036  |  |                        | $ | 3,912  |                     |  | $ | 141                       |  |  | $                        | 9,123  |  |  | $ | 18 | 
|Commercial real estate loans  owner occupied |  |                    | 297    |  |                        |   | 960    |                     |  |   |                          |  |  |                          | 3,098  |  |  |   |   | 
|Commercial real estate loans  all other      |  |                    | 24,021 |  |                        |   | 25,360 |                     |  |   | 3,155                     |  |  |                          | 17,294 |  |  |   |   | 
|Residential mortgage loans  multi-family     |  |                    |       |  |                        |   |       |                     |  |   |                          |  |  |                          | 1,525  |  |  |   |   | 
|Residential mortgage loans  single family    |  |                    | 2,344  |  |                        |   | 2,595  |                     |  |   | 128                       |  |  |                          | 2,014  |  |  |   | 14 | 
|Construction loans                            |  |                    | 2,185  |  |                        |   | 2,215  |                     |  |   |                          |  |  |                          | 4,177  |  |  |   |   | 
|Land development loans                        |  |                    | 439    |  |                        |   | 439    |                     |  |   |                          |  |  |                          | 4,853  |  |  |   |   | 
|Consumer loans                                |  |                    | 129    |  |                        |   | 238    |                     |  |   |                          |  |  |                          | 182    |  |  |   | 26 | 



|(1) | When the discounted cash flows and collateral value or market price equals or exceeds the recorded investment in the loan, then the loan does not require an allowance.
This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the loan balance.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The allowance for loan losses at March 31, 2011 included $4.4 million of reserves for $27.9 million in impaired loans as compared to $3.4 million of reserves for $31.5 million of impaired loans at
December 31, 2010. At March 31, 2011 and December 31, 2010 there were impaired loans of $1.7 million and $5.9 million, respectively, for which no specific reserves were allocated because these loans were sufficiently collateralized.



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##### Table of Contents

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

Introduction

Pacific Mercantile Bancorp is a bank holding company (the
Company) which 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, expenses and operating income. For ease of reference we will sometimes refer to the Company as we, us or our.

The following discussion presents information about (i) our consolidated results of operations for the three months ended March 31, 2011 and comparisons of those results with the results of
operations for the corresponding three month period of 2010, and (ii) our consolidated financial condition, liquidity and capital resources at March 31, 2011. The information in the following discussion should be read in conjunction with
our interim consolidated financial statements and the notes thereto included elsewhere in this Report.

Forward-Looking
Information

Statements contained in this Report that are not historical facts or that discuss our expectations,
beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, 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 words such as believe, expect, anticipate, intend, plan, estimate, project, forecast 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 on assumptions that we make
about future events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Unexpected future events and such risks and uncertainties 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 the forward looking statements contained in this Report and could, therefore, also
affect the price performance of our shares. Certain of those risks and uncertainties are discussed below in this Item 2 of this Report, and in Item 1A, entitled Risk Factors contained in our Annual Report on Form 10-K for
our fiscal year ended December 31, 2010 (our 2010 10-K). Therefore, you are urged to read not only the information contained in this section of this Report, but also the risk factors that are discussed in our 2010 10-K in
conjunction with your review of the following discussion regarding our results of operations for the three months ended, and our financial condition at, March 31, 2011.

Due to those risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to
make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this Report or in our 2010 10-K, except as may otherwise be required by law
or Nasdaq rules.



29



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##### Table of Contents

Overview of Operating Results in the Three Months Ended March 31, 2011

The following table provides comparative information with respect to our results of operations for the three month periods ended
March 31, 2011 and 2010, respectively.



|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|------------------------------------------------------------ |  | --------------------------------------------- | ---------- | - | ------ | - | ---------- | ------------- |  |  | ------- | --
|                                                             |  | Three Months Ended March 31,                  |           
|                                                             |  | 2011                                          |            |   | 2010   |   |            | 2011 vs. 2010 | 
|                                                             |  | Amount                                        |            |   | Amount |   |            | % Change      | 
|                                                             |  | (Dollars in thousands, except per share data) |           
|Interest income                                              |  | $                                             | 11,461     |   |        | $ | 13,659     |               |  |  | (16.1   | )%
|Interest expense                                             |  |                                               | 2,855      |   |        |   | 5,212      |               |  |  | (45.2   | )%
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Net interest income                                          |  |                                               | 8,606      |   |        |   | 8,447      |               |  |  | 1.9     | % 
|Provision for loan losses                                    |  |                                               |           |   |        |   | 1,200      |               |  |  | (100.0  | )%
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Net interest income after provision for loan losses          |  |                                               | 8,606      |   |        |   | 7,247      |               |  |  | 18.8    | % 
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Noninterest income                                           |  |                                               | 1,358      |   |        |   | 1,345      |               |  |  | 1.0     | % 
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Noninterest expense                                          |  |                                               | 8,284      |   |        |   | 8,367      |               |  |  | (1.0    | )%
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Income before income taxes                                   |  |                                               | 1,680      |   |        |   | 225        |               |  |  | 646.7   | % 
|Income tax expense                                           |  |                                               |           |   |        |   | 99         |               |  |  | N/M     |   
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Net income                                                   |  |                                               | 1,680      |   |        |   | 126        |               |  |  | 1,233.3 | % 
|Accumulated undeclared dividends on Series A Preferred Stock |  |                                               | (312       | ) |        |   | (208       | )             |  |  | 50.0    | % 
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|Net income (loss) allocable to common shareholders           |  | $                                             | 1,368      |   |        | $ | (82        | )             |  |  | 1,768.3 | % 
|                                                             |  |                                               |            |   |        |   |            |               |  |  |         |   
|                                                             |  |                                               |           
|Net income income (loss) per common share-diluted            |  | $                                             | 0.13       |   |        | $ | (0.01      | )             |  |  | N/M     |   
|                                                             |  |                                               |           
|Weighted average number of diluted shares outstanding        |  |                                               | 10,456,000 |   |        |   | 10,435,000 |               |  |  |         |   

As the above table indicates, our results of operations improved significantly in this years
first quarter, as compared to the same quarter of 2010. During the quarter ended March 31, 2011, we generated net income of $1.7 million, of which $1.4 million, or $0.13 per diluted share, was allocable to the Companys common
shareholders and $300,000 was allocable to accrued but unpaid dividends on the Companys Series A Preferred Stock (the Series A Shares). By comparison, in the same quarter of 2010 we reported net income of $126,000 which, however,
was more than offset by $208,000 allocated for accrued but unpaid dividends on the Series A Shares. As a result, we recorded a loss allocable to common shareholders of $82,000, or $0.01 per diluted common share, in the first quarter of 2010.

The improvement in our operating results in the first quarter of 2011 was primarily attributable to (i) a
$1.2 million, or 100%, reduction in the provision we made for loan losses, (ii) a $159,000, or 2%, increase in net interest income and (iii) an $83,000, or 1%, reduction in noninterest expense, as compared to the first quarter of
2010.

The increase in net interest income in the first quarter of 2011 was due to a reduction in interest expense of $2.3
million, or 45%, which more than offset a decrease of $2.2 million, or 16%, in interest income. The reduction in interest expense was primarily attributable to a decline in rates at which we paid interest on our deposit accounts and our decision,
implemented in the last six months of 2010, to de-leverage the balance sheet by reducing higher cost time deposits. As a result, time deposits declined in absolute dollars by $141 million, or 22%, to $505 million at March 31, 2011 from
$646 million at March 31, 2010 and, as a percentage of total deposits, to 61% at March 31, 2011 from 65% at March 31, 2010. The decrease in interest income in the first quarter of 2011 was primarily due to a $102 million, or 12%,
decrease in average gross loans outstanding and, to a much lesser extent, a decline in prevailing rates of interest, during the first quarter of 2011, as compared to the same quarter of 2010.

In the quarter ended March 31, 2011, noninterest income increased only by 1%, notwithstanding a $270,000, or 47.5%, increase in
mortgage banking revenues and a $107,000 increase in gains on sale of other real estate owned (OREO), as those increases were substantially offset primarily by decreases in net gains on sales of securities and in deposit charges of
$194,000 and $66,000, respectively.

Noninterest expense declined by $83,000, or 1%, in this years first quarter due
primarily to decreases of $360,000 in compensation expense and $107,000 in other expenses, which were largely offset by a $344,000 increase in FDIC insurance premiums and increases in professional fees and OREO expenses of $48,000 and $40,000,
respectively. Due primarily to the increases in net interest income and noninterest income and the reduction in noninterest expense in the first quarter of 2011, our efficiency ratio improved to 83.1% in this years first quarter from 85.4% in
the same quarter of the prior year.



30



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##### Table of Contents

The following table indicates the impact that the increase in our net interest income and
the improvement in our operating results in the three months ended March 31, 2011 had on our net interest margin and the returns on average assets and average equity during that period, as compared to the same three months of 2010:



|                                          |  |                              |       |   |      |  |      |  
|----------------------------------------- |  | ---------------------------- | ----- | - | ---- |  | ---- | -
|                                          |  | Three Months Ended March 31, |      
|                                          |  | 2011                         |       |   | 2010 | 
|Net interest margin(1)(2)                 |  |                              | 3.60  | % |      |  | 2.96 | %
|Return on average assets(1)               |  |                              | 0.67  | % |      |  | 0.04 | %
|Return on average shareholders equity(1) |  |                              | 10.72 | % |      |  | 0.69 | %



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

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

Critical Accounting Policies

Introduction.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 assumptions and judgments 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, such as securities available for sale and our deferred tax
assets. Those assumptions and judgments are necessarily based on current information available to us regarding those economic conditions or trends or other circumstances. If adverse changes were to occur in the events, trends or other circumstances
on which our assumptions or judgments had been based, or other unanticipated events were to happen that might affect our operating results, under GAAP it could become necessary for us to reduce the carrying values of the affected assets on our
balance sheet. In addition, because reductions in the carrying value of assets are sometime effectuated by or require charges to income, such reductions also may have the effect of reducing our income.

Our critical accounting policies consist of the accounting policies and practices we follow in determining (i) the sufficiency of
the allowance we establish for loan losses; (ii) the fair values of our investment securities that we hold for sale, and (iii) the amount of our deferred tax asset, consisting primarily of tax loss carryforwards and tax credits, that we
believe will be able to use to offset income taxes in future periods. Additional information regarding our critical accounting policies is contained in the sections captioned Critical Accounting Policies and Allowance for Loan
Losses in Item 7, entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, and in Note 2Significant Accounting Policies in the Notes to our Consolidated Financial Statements
contained in Item 8 of our 2010 10-K and readers of this Report are urged to read those sections of the 2010 10-K. There were no significant changes in the Companys critical accounting policies or their application during the quarter
ended March 31, 2011.

Results of Operations

Net Interest Income

One of the principal determinants of a
banks income is its 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. As a general rule, all other things being equal, the greater the
difference or spread between the amount of our interest income and the amount of our interest expense, the greater will be our net income; whereas, a decline in that difference or spread will generally result in a decline in
our net income.

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, competition in the market place for loans and deposits, and 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.



31



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##### Table of Contents

The following table sets forth our interest income, interest expense and net interest income
(in thousands of dollars) and our net interest margin for the three months ended March 31, 2011 and 2010, respectively:



|                    |  |                              |        |   |        |   |        |                   |  |  |       |   
|------------------- |  | ---------------------------- | ------ | - | ------ | - | ------ | ----------------- |  |  | ----- | --
|                    |  | Three Months Ended March 31, |       
|                    |  | Amount                       |        |   | Amount |   |        | Percentage Change | 
|                    |  | 2011                         |        |   | 2010   |   |        | 2011 vs. 2010     | 
|Interest income     |  | $                            | 11,461 |   |        | $ | 13,659 |                   |  |  | (16.1 | )%
|Interest expense    |  |                              | 2,855  |   |        |   | 5,212  |                   |  |  | (45.2 | )%
|                    |  |                              |        |   |        |   |        |                   |  |  |       |   
|Net interest income |  | $                            | 8,606  |   |        | $ | 8,447  |                   |  |  | 1.9   | % 
|                    |  |                              |        |   |        |   |        |                   |  |  |       |   
|Net interest margin |  |                              | 3.60   | % |        |   | 2.96   | %                 |  |  |       |   

Our net interest income increased by $159,000, or 1.9%, in the first quarter of 2011, as compared
to the same quarter of 2010, due to a $2.4 million, or 45.2%, decrease in interest expense that more than offset a decrease in interest income of $2.2 million, or 16.1%, in the three months ended March 31, 2011. The decline in interest expense
was primarily attributable to (i) decreases in market rates of interest, which enabled us to reduce the interest we paid on time deposits and resulted in a lowering of the rates at which we pay interest on our borrowings and (ii) a change
in the mix of deposits to a lower proportion of higher cost time deposits, which was primarily attributable to a decision we made not to seek the renewal of some of those deposits upon their expiration.

As indicated in the table above, our net interest margin increased by 64 basis points to 3.60% in the three months ended
March 31, 2011, due primarily to the significant decrease in interest expense that more than offset the decrease in interest income in this years first quarter, during which the average interest rate that we paid on interest bearing
liabilities decreased to 1.46% from 2.21% in the same quarter of 2010.

The following table sets forth, in thousands of
dollars, the changes in our interest income, including loan fees, and interest expense in the three months ended March 31, 2011, as compared to the same respective periods of 2010, and the extent to which those changes were attributable to
changes in (i) the volumes of or in the rates of interest earned on interest-earning assets and (ii) the volumes of or the rates of interest paid on our interest-bearing liabilities.



|                                           |  |                                           |        |   |      |   |        |       |  |   |        |  
|------------------------------------------ |  | ----------------------------------------- | ------ | - | ---- | - | ------ | ----- |  | - | ------ | -
|                                           |  | Three Months EndedMarch 31, 2011 vs. 2010 |       
|                                           |  | Increase (Decrease) due to:               |        |   |      |  
|                                           |  | Volume                                    |        |   | Rate |   |        | Total | 
|Interest income:                           |  |                                           |        |   |      |   |        |       |  |   |        |  
|Short term investments(1)                  |  | $                                         | (57    | ) |      | $ | (27    | )     |  | $ | (84    | )
|Securities available for sale and stock(2) |  |                                           | (105   | ) |      |   | (206   | )     |  |   | (311   | )
|Loans                                      |  |                                           | (1,303 | ) |      |   | (500   | )     |  |   | (1,803 | )
|                                           |  |                                           |        |   |      |   |        |       |  |   |        |  
|Total earning assets                       |  |                                           | (1,465 | ) |      |   | (733   | )     |  |   | (2,198 | )
|Interest expense                           |  |                                           |        |   |      |   |        |       |  |   |        |  
|Interest bearing checking accounts         |  |                                           | (19    | ) |      |   | (31    | )     |  |   | (50    | )
|Money market and savings accounts          |  |                                           | 47     |   |      |   | (130   | )     |  |   | (83    | )
|Certificates of deposit                    |  |                                           | (752   | ) |      |   | (906   | )     |  |   | (1,658 | )
|Borrowings                                 |  |                                           | (63    | ) |      |   | (513   | )     |  |   | (576   | )
|Junior subordinated debentures             |  |                                           |       |   |      |   | 10     |       |  |   | 10     |  
|                                           |  |                                           |        |   |      |   |        |       |  |   |        |  
|Total interest bearing liabilities         |  |                                           | (787   | ) |      |   | (1,570 | )     |  |   | (2,357 | )
|                                           |  |                                           |        |   |      |   |        |       |  |   |        |  
|Net interest income                        |  | $                                         | (678   | ) |      | $ | 837    |       |  | $ | 159    |  
|                                           |  |                                           |        |   |      |   |        |       |  |   |        |  



|(1) | Short-term investments consist of federal funds sold and interest bearing deposits with financial institutions.
|--- | ---------------------------------------------------------------------------------------------------------------

|(2) | Stock consists of Federal Home Loan Bank Stock and Federal Reserve Bank Stock.
|--- | ------------------------------------------------------------------------------



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##### Table of Contents

Average Balances

Information Regarding Average Assets and Average Liabilities

The
following table sets forth information regarding our average balance sheet, yields on interest earning assets, interest expense on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three months ended
March 31, 2011 and 2010.



|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|------------------------------------------ |  | ---------------------------- | --------- |  | ------------------- | - | ------ | ----------------- |  |  | -------------- | - |  | ------------------- | --------- |  | ----------------- | - | ------ |  |  |  | ---- | -
|                                           |  | Three Months Ended March 31, |          
|                                           |  | 2011                         |           |  | 2010                |  
|                                           |  | AverageBalance               |           |  | InterestEarned/Paid |   |        | AverageYield/Rate |  |  | AverageBalance |   |  | InterestEarned/Paid |           |  | AverageYield/Rate |  
|                                           |  | (Dollars in thousands)       |          
|Interest earning assets:                   |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Short-term investments(1)                  |  | $                            | 41,833    |  |                     | $ | 26     |                   |  |  | 0.25           | % |  | $                   | 122,795   |  |                   | $ | 110    |  |  |  | 0.36 | %
|Securities available for sale and stock(2) |  |                              | 188,455   |  |                     |   | 1,273  |                   |  |  | 2.74           | % |  |                     | 202,597   |  |                   |   | 1,584  |  |  |  | 3.17 | %
|Loans(3)                                   |  |                              | 739,169   |  |                     |   | 10,162 |                   |  |  | 5.58           | % |  |                     | 832,785   |  |                   |   | 11,965 |  |  |  | 5.83 | %
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Total earning assets                       |  |                              | 969,457   |  |                     |   | 11,461 |                   |  |  | 4.79           | % |  |                     | 1,158,177 |  |                   |   | 13,659 |  |  |  | 4.72 | %
|Noninterest earning assets                 |  |                              | 46,307    |  |                     |   |        |                   |  |  |                |   |  |                     | 38,358    |  |                   |   |        |  |  |  |      |  
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Total Assets                               |  | $                            | 1,015,764 |  |                     |   |        |                   |  |  |                |   |  | $                   | 1,196,535 |  |                   |   |        |  |  |  |      |  
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Interest-bearing liabilities:              |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Interest-bearing checking accounts         |  | $                            | 27,459    |  |                     |   | 24     |                   |  |  | 0.35           | % |  | $                   | 40,810    |  |                   |   | 74     |  |  |  | 0.74 | %
|Money market and savings accounts          |  |                              | 139,395   |  |                     |   | 312    |                   |  |  | 0.91           | % |  |                     | 123,248   |  |                   |   | 395    |  |  |  | 1.30 | %
|Certificates of deposit                    |  |                              | 497,246   |  |                     |   | 2,161  |                   |  |  | 1.76           | % |  |                     | 641,254   |  |                   |   | 3,819  |  |  |  | 2.42 | %
|Other borrowings                           |  |                              | 108,633   |  |                     |   | 223    |                   |  |  | 0.83           | % |  |                     | 118,694   |  |                   |   | 799    |  |  |  | 2.73 | %
|Junior subordinated debentures             |  |                              | 17,682    |  |                     |   | 135    |                   |  |  | 3.10           | % |  |                     | 17,682    |  |                   |   | 125    |  |  |  | 2.87 | %
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Total interest-bearing liabilities         |  |                              | 790,415   |  |                     |   | 2,855  |                   |  |  | 1.46           | % |  |                     | 941,688   |  |                   |   | 5,212  |  |  |  | 2.21 | %
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Noninterest-bearing liabilities            |  |                              | 161,796   |  |                     |   |        |                   |  |  |                |   |  |                     | 180,557   |  |                   |   |        |  |  |  |      |  
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Total Liabilities                          |  |                              | 952,211   |  |                     |   |        |                   |  |  |                |   |  |                     | 1,122,245 |  |                   |   |        |  |  |  |      |  
|Shareholders equity                       |  |                              | 63,553    |  |                     |   |        |                   |  |  |                |   |  |                     | 74,290    |  |                   |   |        |  |  |  |      |  
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Total Liabilities and Shareholders Equity |  | $                            | 1,015,764 |  |                     |   |        |                   |  |  |                |   |  | $                   | 1,196,535 |  |                   |   |        |  |  |  |      |  
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Net interest income                        |  |                              |           |  |                     | $ | 8,606  |                   |  |  |                |   |  |                     |           |  |                   | $ | 8,447  |  |  |  |      |  
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Interest rate spread                       |  |                              |           |  |                     |   |        |                   |  |  | 3.33           | % |  |                     |           |  |                   |   |        |  |  |  | 2.51 | %
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  
|Net interest margin                        |  |                              |           |  |                     |   |        |                   |  |  | 3.60           | % |  |                     |           |  |                   |   |        |  |  |  | 2.96 | %
|                                           |  |                              |           |  |                     |   |        |                   |  |  |                |   |  |                     |           |  |                   |   |        |  |  |  |      |  



|(1) | Short-term investments consist of federal funds sold and interest bearing deposits with financial institutions that we maintain at other financial institutions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Stock consists of Federal Home Loan Bank Stock and Federal Reserve Bank Stock.
|--- | ------------------------------------------------------------------------------

|(3) | Loans include the average balance of nonaccrual loans.
|--- | ------------------------------------------------------

The above table indicates that the increases in our net interest income of $159,000 in the three months ended March 31, 2011, was primarily due to $2.4 million, or 75 basis points, decrease in
interest rates paid on interest bearing liabilities, which more than offset the $2.2 million decrease in interest rates on average earning assets.

Provision for Loan Losses

Like virtually all banks and other
financial institutions, we follow the practice of maintaining reserves to provide 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 (written down) to what management believes is its realizable value or, if it is determined that a loan no longer has any realizable value, the carrying value of the loan is
written off in its entirety (a loan charge-off). Loan charge-offs and write-downs are charged against those reserves (which are commonly referred to as the Allowance for Loan Losses or the ALL). The amount of the
ALL is increased periodically (i) to replenish the ALL after it has been reduced due to



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loan write-downs and charge-offs, (ii) to reflect increases in the volume of outstanding loans, and (iii) to take account of changes in the risk of potential loan losses due to a
deterioration in the condition of borrowers or in the value of property securing nonperforming loans or adverse changes in economic conditions. See Financial ConditionNonperforming Loans and the Allowance for Loan
Losses below in this Item 2. Increases in the ALL are made through a charge, recorded as an expense in the statement of operations, referred to as the provision for loan losses. Recoveries of loans previously charged-off are
added back to the ALL and, therefore, have the effect of increasing the ALL and reducing the amount of the provision that might otherwise have had to be made to replenish or increase the ALL.

We employ economic models that are based on bank regulatory guidelines, industry standards and our own historical loan loss experience,
as well as a number of more subjective qualitative factors, to determine both the sufficiency of the ALL and the amount of the provisions that need to be made for potential loan losses. However, those determinations involve judgments and assumptions
about trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us and a weighting among the quantitative and qualitative factors we consider in determining the amount of the
ALL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by number of risks and circumstances that are outside of our ability to control. See the discussion below in this
Item 2 under the caption Financial ConditionNonperforming Loans and the Allowance for Loan Losses. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank
regulatory guidelines or industry standards that are used to assess the sufficiency of the ALL, it could become necessary for us to record additional, and possibly significant, 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 FRB and the DFI, as an integral part of their
examination processes, periodically review the adequacy of our ALL. These agencies may require us to make additional provisions for possible loan losses, over and above the provisions that we have already made, the effect of which would be to reduce
our income or increase any losses we might incur.

During the three months ended March 31, 2011, we made $265,000 in net
recoveries of previously charged-off loans, which were added back to the allowance for loan losses. Due to those recoveries, a $16.9 million, or 37.7%, decrease in non-performing loans and a reduction in outstanding loans at March 31, 2011
as compared to March 31, 2010, we made a determination that the allowance for loan losses was adequate and, as a result, it was not necessary to make any provisions for loan losses in this years first quarter. By comparison, in the first
quarter of 2010, we recorded net loan charge-offs of $682,000 and made provisions for loan losses totaling $1.2 million. Even though we did not make any provisions for loan losses during this years first quarter, the allowance for loan
losses at March 31, 2011 totaled nearly $18.4 million, or 2.56% of the loans then outstanding, as compared to $18.1 million, or 2.44% of the loans outstanding at December 31, 2010 and $20.9 million, or 2.57% of the loans
outstanding at March 31, 2010.

Noninterest Income

The following table identifies the components of and the percentage changes in noninterest income in the three months ended March 31,
2011, as compared to the same period of 2010:



|                                                                                               |  |                              |       |   |                   |   |        |               |  |  |        |   
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | - | ----------------- | - | ------ | ------------- |  |  | ------ | --
|                                                                                               |  | Three Months Ended March 31, |      
|                                                                                               |  | Amounts                      |       |   | Percentage Change |  
|                                                                                               |  | 2011                         |       |   | 2010              |   |        | 2011 vs. 2010 | 
|                                                                                               |  | (Dollars in thousands)       |      
|Total other-than-temporary impairment of securities                                            |  | $                            | 41    |   |                   | $ | (1,754 | )             |  |  | (102.3 | )%
|Less: Portion of other-than-temporary impairment losses recognized in other comprehensive loss |  |                              | 93    |   |                   |   | 1,720  |               |  |  | (94.6  | )%
|                                                                                               |  |                              |       |   |                   |   |        |               |  |  |        |   
|Net impairment loss recognized in earnings                                                     |  |                              | (52   | ) |                   |   | (34    | )             |  |  | 52.9   | % 
|Service fees on deposits and other banking services                                            |  |                              | 273   |   |                   |   | 339    |               |  |  | (19.5  | )%
|Mortgage banking (including net gains on sales of loans held for sale)                         |  |                              | 839   |   |                   |   | 569    |               |  |  | 47.5   | % 
|Net gains on sale of securities available for sale                                             |  |                              | 11    |   |                   |   | 205    |               |  |  | (94.6  | )%
|Net gains on sale of other real estate owned                                                   |  |                              | 107   |   |                   |   |       |               |  |  | N/M    |   
|Other                                                                                          |  |                              | 180   |   |                   |   | 266    |               |  |  | (32.3  | )%
|                                                                                               |  |                              |       |   |                   |   |        |               |  |  |        |   
|Total noninterest income                                                                       |  | $                            | 1,358 |   |                   | $ | 1,345  |               |  |  | 1.0    | % 
|                                                                                               |  |                              |       |   |                   |   |        |               |  |  |        |   



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In 2011, noninterest income increased by $13,000, or 1.0%, to nearly $1.4 million in
the first quarter of 2011, from $1.3 million in the first quarter of 2010, primarily as a result of a $270,000, or 47.5%, increase in income generated by the mortgage banking division and a $107,000 gain on the sale of other real estate owned,
largely offset by a $194,000, or 94.6%, decrease in gains on sales of securities held for sale and a $66,000, or 19.5%, decrease in service charges and fees on deposit transactions.

Noninterest Expense

The following table compares the amounts of the principal components of noninterest expense in the three months ended March 31, 2011 and 2010.



|                                |  |                              |       |  |                   |   |       |               |  |  |       |   
|------------------------------- |  | ---------------------------- | ----- |  | ----------------- | - | ----- | ------------- |  |  | ----- | --
|                                |  | Three Months Ended March 31, |      
|                                |  | Amounts                      |       |  | Percentage Change |  
|                                |  | 2011                         |       |  | 2010              |   |       | 2011 vs. 2010 | 
|                                |  | (Dollars in thousands)       |      
|Salaries and employee benefits  |  | $                            | 3,977 |  |                   | $ | 4,337 |               |  |  | (8.3  | )%
|Occupancy                       |  |                              | 630   |  |                   |   | 681   |               |  |  | (7.5  | )%
|Equipment and depreciation      |  |                              | 357   |  |                   |   | 354   |               |  |  | 0.8   | % 
|Data processing                 |  |                              | 163   |  |                   |   | 180   |               |  |  | (9.4  | )%
|Customer expense                |  |                              | 65    |  |                   |   | 101   |               |  |  | (35.6 | )%
|FDIC expense                    |  |                              | 802   |  |                   |   | 458   |               |  |  | 75.1  | % 
|Other real estate owned expense |  |                              | 374   |  |                   |   | 334   |               |  |  | 12.0  | % 
|Professional fees               |  |                              | 961   |  |                   |   | 913   |               |  |  | 5.3   | % 
|Other operating expense(1)      |  |                              | 955   |  |                   |   | 1,009 |               |  |  | (5.4  | )%
|                                |  |                              |       |  |                   |   |       |               |  |  |       |   
|Total noninterest expense       |  | $                            | 8,284 |  |                   | $ | 8,367 |               |  |  | (1.0  | )%
|                                |  |                              |       |  |                   |   |       |               |  |  |       |   



|(1) | Other operating expenses primarily consist of telephone, advertising, and investor relations, promotional, business development, and regulatory expenses, insurance
premiums and correspondent bank fees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Noninterest expense declined by $83,000, or 1%, in the three months ended
March 31, 2011, as compared to the same three months of 2010. That decline was, for the most part, due to a reduction of $360,000, or 8%, in salaries and employee benefits and a $107,000, or 8.3%, decrease in other noninterest expenses, which
were attributable primarily to cost cutting measures that we initiated in February 2010, consisting of a work force reduction and a freeze on salaries which continued into the first quarter of 2011. Those decreases were substantially offset,
however, by a $344,000, or 75.1%, increase in FDIC deposit insurance premiums and increases of $48,000, or 5.3%, and $40,000, or 12.0%, in professional fees and OREO expenses, respectively.

A measure of our ability to control noninterest expense is our efficiency ratio, which is the ratio of noninterest expense to net revenue
(net interest income plus noninterest income). As a general rule, a lower efficiency ratio indicates an ability to generate increased revenue without a commensurate increase in the staffing and equipment and third party services and, therefore,
would be indicative of greater operational efficiencies. Our efficiency ratio in the three months ended March 31, 2011 improved to 83.1% from 85.4% in the same three months of 2010, due to the increases in net interest income and noninterest
income and the decrease in noninterest expense in the three months ended March 31, 2011.

Income Tax Provision (Benefit)

In the first quarter of 2010, we recorded a provision for income taxes of $99,000 on pre-tax income of $225,000. By
comparison, notwithstanding the nearly $1.5 million increase in pre-tax income in this years first quarter, we did not record a provision for income taxes, because we were able to use a portion of our valuation allowance against our
deferred tax asset to offset the provision for income taxes we would otherwise have had to record for the three months ended March 31, 2011.

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 of and repricing



35



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these assets and liabilities 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, interest rates for different asset and liability products offered by depository institutions respond differently to
changes in the interest rate environment. As a result, 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, can cause the interest sensitivities to vary.

The table below sets forth information concerning our rate sensitive assets and liabilities at March 31, 2011. 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.



|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|---------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ----------------------------- | - | -------- | ----------------------------- |  | - | ------------- | - |  | -------------------- | ------- | - | ----- | - | -------- | - |  | - | ------- | 
|                                                                             |  | ThreeMonthsorLess      |         |   | Over ThreeThroughTwelveMonths |   |          | Over OneYearThroughFive Years |  |   | OverFiveYears |   |  | Non-Interest-Bearing |         |   | Total |  
|                                                                             |  | (Dollars in thousands) |        
|Assets                                                                       |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Interest-bearing time deposits in other financial institutions               |  | $                      | 1,534   |   |                               | $ | 444      |                               |  | $ |              |   |  | $                    |        |   |       | $ |         |   |  | $ | 1,978   | 
|Investment in unconsolidated trust subsidiaries                              |  |                        |        |   |                               |   |         |                               |  |   |              |   |  |                      | 682     |   |       |   |         |   |  |   | 682     | 
|Securities available for sale                                                |  |                        | 15,095  |   |                               |   | 22,890   |                               |  |   | 76,359        |   |  |                      | 53,603  |   |       |   |         |   |  |   | 167,947 | 
|Federal Reserve Bank and Federal Home Loan Bank stock                        |  |                        | 12,408  |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   |         |   |  |   | 12,408  | 
|Interest bearing deposits with financial institutions                        |  |                        | 53,754  |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   |         |   |  |   | 53,754  | 
|Loans held for sale, at fair value                                           |  |                        | 19,260  |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   |         |   |  |   | 19,260  | 
|Loans, gross                                                                 |  |                        | 273,621 |   |                               |   | 78,183   |                               |  |   | 295,965       |   |  |                      | 69,681  |   |       |   |         |   |  |   | 717,450 | 
|Noninterest earning assets, net                                              |  |                        |        |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   | 23,046   |   |  |   | 23,046  | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Total assets                                                                 |  | $                      | 375,672 |   |                               | $ | 101,517  |                               |  | $ | 372,324       |   |  | $                    | 123,966 |   |       | $ | 23,046   |   |  | $ | 996,525 | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Liabilities and Shareholders Equity                                         |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Noninterest-bearing deposits                                                 |  | $                      |        |   |                               | $ |         |                               |  | $ |              |   |  | $                    |        |   |       | $ | 154,650  |   |  | $ | 154,650 | 
|Interest-bearing deposits(1)(2)                                              |  |                        | 223,895 |   |                               |   | 348,543  |                               |  |   | 102,492       |   |  |                      |        |   |       |   |         |   |  |   | 674,930 | 
|Borrowings                                                                   |  |                        |        |   |                               |   | 54,000   |                               |  |   | 24,000        |   |  |                      |        |   |       |   |         |   |  |   | 78,000  | 
|Junior subordinated debentures                                               |  |                        | 17,527  |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   |         |   |  |   | 17,527  | 
|Other liabilities                                                            |  |                        |        |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   | 7,107    |   |  |   | 7,107   | 
|Shareholders equity                                                         |  |                        |        |   |                               |   |         |                               |  |   |              |   |  |                      |        |   |       |   | 64,311   |   |  |   | 64,311  | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Total liabilities and shareholders equity                                   |  | $                      | 241,422 |   |                               | $ | 402,543  |                               |  | $ | 126,492       |   |  | $                    |        |   |       | $ | 226,068  |   |  | $ | 996,525 | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Interest rate sensitivity gap                                                |  | $                      | 134,250 |   |                               | $ | (301,026 | )                             |  | $ | 245,832       |   |  | $                    | 123,966 |   |       | $ | (203,022 | ) |  | $ |        | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Cumulative interest rate sensitivity gap                                     |  | $                      | 134,250 |   |                               | $ | (166,776 | )                             |  | $ | 79,056        |   |  | $                    | 203,022 |   |       | $ |         |   |  | $ |        | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Cumulative % of rate sensitive assets in maturity period                     |  |                        | 38      | % |                               |   | 48       | %                             |  |   | 85            | % |  |                      | 98      | % |       |   | 100      | % |  |   |         | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Rate sensitive assets to rate sensitive liabilities and shareholders equity |  |                        | 156     | % |                               |   | 25       | %                             |  |   | 294           | % |  |                      | N/A     |   |       |   | 10       | % |  |   |         | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 
|Cumulative ratio                                                             |  |                        | 156     | % |                               |   | 74       | %                             |  |   | 110           | % |  |                      | 126     | % |       |   | 100      | % |  |   |         | 
|                                                                             |  |                        |         |   |                               |   |          |                               |  |   |               |   |  |                      |         |   |       |   |          |   |  |   |         | 



|(1) | Excludes savings accounts that we maintain at the Bank totaling $4.9 million.
|--- | -----------------------------------------------------------------------------

|(2) | Excludes a $250,000 certificate of deposit issued to us by the Bank, which matures January 2012.
|--- | ------------------------------------------------------------------------------------------------



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At March 31, 2011, 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 were to 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 or federal funds sold) 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.

Financial Condition

Assets

Our consolidated assets totaled $997 million at March 31, 2011, which represents a $19 million decrease from our total consolidated assets of $1.016 billion at December 31, 2010.

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



|                                                               |  |               |         |  |                  |   |         | 
|-------------------------------------------------------------- |  | ------------- | ------- |  | ---------------- | - | ------- | 
|                                                               |  | March 31,2011 |         |  | December 31,2010 |  
|Interest-bearing deposits with financial institutions(1)       |  | $             | 44,691  |  |                  | $ | 25,372  | 
|Interest-bearing time deposits with financial institutions     |  |               | 1,978   |  |                  |   | 2,078   | 
|Federal Reserve Bank and Federal Home Loan Bank Stock, at cost |  |               | 12,408  |  |                  |   | 12,820  | 
|Securities available for sale, at fair value                   |  |               | 167,947 |  |                  |   | 178,301 | 
|Loans held for sale, at lower of cost or market                |  |               | 19,260  |  |                  |   | 12,469  | 
|Loans (net of allowances of $18,366 and $18,101, respectively) |  |               | 699,084 |  |                  |   | 722,210 | 



|(1) | Includes interest-earning balances maintained at the Federal Reserve Bank of San Francisco.
|--- | -------------------------------------------------------------------------------------------

Loans Held for Sale

We commenced a new mortgage banking business during the second quarter of 2009 to originate, primarily in Southern California, residential real estate mortgage loans that qualify for resale into the
secondary mortgage markets. Our mortgage originations have been primarily for the financing of purchases of residential property and, to a lesser extent, refinancing of existing residential mortgage loans. In addition to conventional mortgage loans,
we offer loan programs for low to moderate income families that qualify for mortgage assistance, such as the FHLBs Wish Program, Homepath-financing on FNMA repossessed homes, and Southern California Home Financing Authority and various
mortgage assistance programs in counties and cities within our branch network. As a general rule, most of the residential mortgage loans that we originate are sold in the secondary mortgage market within a period of 3 to 14 days following their
origination. The following table reflects the quarterly activity, in thousands of dollars, of our mortgage loan operations.



|                                                |  |                             |        |  |      |   |        | 
|----------------------------------------------- |  | --------------------------- | ------ |  | ---- | - | ------ | 
|                                                |  | Three Months EndedMarch 31, |       
|                                                |  | 2011                        |        |  | 2010 |  
|Single family mortgage loans funded             |  | $                           | 56,804 |  |      | $ | 37,691 | 
|Single family mortgage loan sales               |  |                             | 49,164 |  |      |   | 26,680 | 
|Loans held for sale, at lower of cost or market |  |                             | 19,260 |  |      |   | 16,468 | 



37



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##### Table of Contents

Loans

The following table sets forth the composition, by loan category, of our loan portfolio at March 31, 2011 and December 31, 2010, respectively:



|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|--------------------------------------------- |  | ---------------------- | ------- | - | ----------------- |  | ----- | ------ |  | - | ------- | - |  |  | ----- | -
|                                              |  | March 31, 2011         |         |   | December 31, 2010 | 
|                                              |  | Amount                 |         |   | Percent           |  |       | Amount |  |   | Percent |  
|                                              |  | (Dollars in thousands) |        
|Commercial loans                              |  | $                      | 206,719 |   |                   |  | 28.8  | %      |  | $ | 218,690 |   |  |  | 29.5  | %
|Commercial real estate loans  owner occupied |  |                        | 169,535 |   |                   |  | 23.6  | %      |  |   | 178,085 |   |  |  | 24.0  | %
|Commercial real estate loans  all other      |  |                        | 142,577 |   |                   |  | 19.9  | %      |  |   | 136,505 |   |  |  | 18.4  | %
|Residential mortgage loans  multi-family     |  |                        | 83,340  |   |                   |  | 11.6  | %      |  |   | 84,553  |   |  |  | 11.4  | %
|Residential mortgage loans  single-family    |  |                        | 68,945  |   |                   |  | 9.6   | %      |  |   | 72,442  |   |  |  | 9.8   | %
|Construction loans                            |  |                        | 2,185   |   |                   |  | 0.3   | %      |  |   | 3,048   |   |  |  | 0.5   | %
|Land development loans                        |  |                        | 26,120  |   |                   |  | 3.6   | %      |  |   | 29,667  |   |  |  | 4.0   | %
|Consumer loans                                |  |                        | 18,696  |   |                   |  | 2.6   | %      |  |   | 18,017  |   |  |  | 2.4   | %
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|Gross loans                                   |  |                        | 718,117 |   |                   |  | 100.0 | %      |  |   | 741,007 |   |  |  | 100.0 | %
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|Deferred fee (income) costs, net              |  |                        | (667    | ) |                   |  |       |        |  |   | (696    | ) |  |  |       |  
|Allowance for loan losses                     |  |                        | (18,366 | ) |                   |  |       |        |  |   | (18,101 | ) |  |  |       |  
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  
|Loans, net                                    |  | $                      | 699,084 |   |                   |  |       |        |  | $ | 722,210 |   |  |  |       |  
|                                              |  |                        |         |   |                   |  |       |        |  |   |         |   |  |  |       |  

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 consist primarily of installment loans to consumers.

The following table sets forth the maturity distribution of our loan portfolio (excluding consumer and residential mortgage loans) at March 31, 2011:



|                                      |  |                        |         |  |                                |   |         |                |  |   |        |  |  |   |         | 
|------------------------------------- |  | ---------------------- | ------- |  | ------------------------------ | - | ------- | -------------- |  | - | ------ |  |  | - | ------- | 
|                                      |  | March 31, 2011         |        
|                                      |  | One Yearor Less        |         |  | Over OneYear throughFive Years |   |         | Over FiveYears |  |   | Total  | 
|                                      |  | (Dollars in thousands) |        
|Real estate and construction loans(1) |  |                        |         |  |                                |   |         |                |  |   |        |  |  |   |         | 
|Floating rate                         |  | $                      | 54,620  |  |                                | $ | 98,396  |                |  | $ | 2,602  |  |  | $ | 155,618 | 
|Fixed rate                            |  |                        | 39,121  |  |                                |   | 86,534  |                |  |   | 59,144 |  |  |   | 184,799 | 
|Commercial loans                      |  |                        |         |  |                                |   |         |                |  |   |        |  |  |   |         | 
|Floating rate                         |  |                        | 15,060  |  |                                |   | 1,098   |                |  |   |       |  |  |   | 16,158  | 
|Fixed rate                            |  |                        | 119,353 |  |                                |   | 51,963  |                |  |   | 19,245 |  |  |   | 190,561 | 
|                                      |  |                        |         |  |                                |   |         |                |  |   |        |  |  |   |         | 
|Total                                 |  | $                      | 228,154 |  |                                | $ | 237,991 |                |  | $ | 80,991 |  |  | $ | 547,136 | 
|                                      |  |                        |         |  |                                |   |         |                |  |   |        |  |  |   |         | 



|(1) | Does not include mortgage loans on single and multi-family residences and consumer loans, which totaled $152.3 million and $18.7 million, respectively, at
March 31, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Loans held for sale are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses on loans held for sale, if any, would be recognized through a valuation allowance established by a charge to income. As of March 31, 2011, loans held for sale included $11.0 million of loans with interest
rate lock commitments providing a hedge to interest rates and $6.2 million of loans pending investor commitments.



38



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##### Table of Contents

Non-Performing Loans, Other Non-Performing Assets and Allowance for Loan Losses

Nonperforming Loans and Other Nonperforming Assets. Non-performing loans consist of (i) loans on
non-accrual status because we have ceased accruing interest on those loans, including restructured loans with respect to which there has not been a history of past performance on debt service in accordance with the contractual terms of those loans,
and (ii) loans 90 days or more past due and still accruing interest. Non-performing assets consist, in addition to non-performing loans, of real properties that have been acquired by foreclosure or similar means and which we intend to offer for
sale (OREO). Loans are placed on non-accrual status when, in the opinion of management, the full and timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest
payments become more than 90 days past due, unless management believes the loan is adequately collateralized and the loan is in the process of collection. However, in certain instances, we may place a particular loan on non-accrual status earlier,
depending upon the individual circumstances involved in loans delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of unpaid amounts on such
a loan are applied to reduce principal when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status if and when principal
and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual.

The following table sets forth information regarding nonaccrual loans and other real estate owned which, together, comprise our nonperforming assets, as well as restructured loans, at March 31, 2011
and December 31, 2010:



|                                                       |  |                        |        |  |                      |   |        | 
|------------------------------------------------------ |  | ---------------------- | ------ |  | -------------------- | - | ------ | 
|                                                       |  | At March 31, 2011      |        |  | At December 31, 2010 |  
|                                                       |  | (Dollars in thousands) |       
|Nonaccrual loans:                                      |  |                        |        |  |                      |   |        | 
|Commercial loans                                       |  | $                      | 1,868  |  |                      | $ | 1,800  | 
|Commercial real estate                                 |  |                        | 22,536 |  |                      |   | 16,105 | 
|Residential real estate                                |  |                        | 1,177  |  |                      |   | 1,832  | 
|Construction and land development                      |  |                        | 2,185  |  |                      |   | 2,185  | 
|Consumer loans                                         |  |                        | 129    |  |                      |   | 129    | 
|                                                       |  |                        |        |  |                      |   |        | 
|Total nonaccrual loans                                 |  | $                      | 27,895 |  |                      | $ | 22,051 | 
|                                                       |  |                        |        |  |                      |   |        | 
|Other real estate owned (OREO):                        |  |                        |        |  |                      |   |        | 
|Commercial loans                                       |  | $                      | 3,989  |  |                      |   | 3,989  | 
|Commercial real estate                                 |  |                        | 6,091  |  |                      |   | 4,900  | 
|Residential real estate                                |  |                        | 498    |  |                      |   | 7,093  | 
|Construction and land development                      |  |                        | 17,188 |  |                      |   | 17,188 | 
|                                                       |  |                        |        |  |                      |   |        | 
|Total other real estate owned                          |  |                        | 27,766 |  |                      |   | 33,170 | 
|                                                       |  |                        |        |  |                      |   |        | 
|Total nonperforming assets                             |  | $                      | 55,661 |  |                      | $ | 55,221 | 
|                                                       |  |                        |        |  |                      |   |        | 
|Restructured loans:                                    |  |                        |        |  |                      |   |        | 
|Accruing loans                                         |  | $                      | 656    |  |                      | $ | 1,187  | 
|Nonaccruing loans (included in nonaccrual loans above) |  |                        | 14,787 |  |                      |   | 15,308 | 
|                                                       |  |                        |        |  |                      |   |        | 
|Total restructured loans                               |  | $                      | 15,443 |  |                      | $ | 16,495 | 
|                                                       |  |                        |        |  |                      |   |        | 

As the table above indicates, non-performing loans increased by $5.8 million, or 26.5%, to $27.9 million at
March 31, 2011, as compared to $22.1 million at December 31, 2010. However, non-performing assets remained substantially unchanged, totaling $55.7 million at March 31, 2011 as compared to $55.2 million at December 31,
2010, as a result of a $5.4 million, or 16.3%, decrease in OREO to $27.8 million at March 31, 2011 from $33.2 million at December 31, 2010. That decrease was due to our disposal of OREO properties acquired by or in lieu of foreclosure,
resulting in a $107,000 gain on sales of those properties in the three months ended March 31, 2011. We believe that, if the commercial real estate market improves, we will be able to significantly reduce the OREO over the next nine to twelve
months.

We have allocated specific reserves within the allowance for loan losses to provide for losses we may incur on the
loans that were classified as nonaccrual loans, and we have established specific reserves on the real properties classified as other real estate owned.



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##### Table of Contents

Information Regarding Impaired Loans. At March 31, 2011, there were $28.6
million of loans deemed impaired as compared to $31.5 million at December 31, 2010. We had an average investment in impaired loans for the period ended March 31, 2011 of $30 million as compared to an investment in impaired loans
of $44.3 million for the year ended December 31, 2010. The interest that would have been earned in the first quarter of 2011 had the impaired loans in nonaccrual remained current in accordance with their original terms was $530,000.

The following table sets forth the amount of impaired loans for which there is a related allowance for loan losses determined
in accordance with ASC 310-10 and the amount of that allowance and the amount of impaired loans for which there is no allowance for loan losses, at March 31, 2011 and December 31, 2010:



|                                |  |                        |        |  |                         |   |       |                      |  |  |       |   |  |                         |        |  |                      |   |       |  |  |  |      |  
|------------------------------- |  | ---------------------- | ------ |  | ----------------------- | - | ----- | -------------------- |  |  | ----- | - |  | ----------------------- | ------ |  | -------------------- | - | ----- |  |  |  | ---- | -
|                                |  | March 31, 2011         |        |  | December 31, 2010       |  
|Impaired Loans                  |  | Loans                  |        |  | Reserves forLoan Losses |   |       | % ofReserves toLoans |  |  | Loans |   |  | Reserves forLoan Losses |        |  | % ofReserves toLoans |  
|                                |  | (Dollars in thousands) |       
|Impaired loans with reserves    |  | $                      | 26,227 |  |                         | $ | 4,443 |                      |  |  | 16.9  | % |  | $                       | 25,598 |  |                      | $ | 3,424 |  |  |  | 13.4 | %
|Impaired loans without reserves |  |                        | 2,324  |  |                         |   |      |                      |  |  |      |   |  |                         | 5,853  |  |                      |   |      |  |  |  |     |  
|                                |  |                        |        |  |                         |   |       |                      |  |  |       |   |  |                         |        |  |                      |   |       |  |  |  |      |  
|Total impaired loans            |  | $                      | 28,551 |  |                         | $ | 4,443 |                      |  |  | 15.6  | % |  | $                       | 31,451 |  |                      | $ | 3,424 |  |  |  | 10.9 | %
|                                |  |                        |        |  |                         |   |       |                      |  |  |       |   |  |                         |        |  |                      |   |       |  |  |  |      |  

Allowance for Loan Losses. The allowance for loan losses (the Allowance) was
$18.4 million, and 2.56% of loans outstanding, at March 31, 2011, as compared to $18.1 million, and 2.44% of loans outstanding, at December 31, 2010.

The adequacy of the Allowance is determined through periodic evaluations of the loan portfolio and other factors that can reasonably be expected to affect the ability of borrowers to meet their loan
obligations. Those factors are inherently subjective as the process for determining the adequacy of the Allowance involves some significant estimates and assumptions about such matters as (i) the amounts and timing of expected future cash flows
of borrowers, (ii) the fair value of the collateral securing non-performing loans, (iii) estimates of losses that the Bank may incur on non-performing loans, which are determined on the basis of historical loss experience, industry loss
factors and bank regulatory guidelines, and (iv) various qualitative factors. Those factors are subject to changes in economic and other conditions and changes in regulatory guidelines or circumstances over which we have no control. As a
result, the amount of the Allowance may prove in the future to be insufficient to cover all of the loan losses we might incur in the future and, therefore, it may become necessary for us to increase the Allowance from time to time to maintain its
adequacy.

The amount of the Allowance is first determined by assigning reserve ratios for all loans. All non-accrual loans
and other loans classified as special mention, substandard or doubtful (classified loans or classification categories) are then assigned certain allocations according to type of loans, with
greater reserve ratios or percentages applied to loans deemed to be of a higher risk. These ratios are determined based on prior loss history, industry guidelines and loss factors, by type of loan, adjusted for current economic conditions.

On a quarterly basis, we utilize a classification migration model and individual loan review analysis tools as starting
points for determining the adequacy of the Allowance. Our loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by loan classification category, except certain loans
(automobile, mortgage and credit cards), which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances. We also conduct individual loan review analyses as part of the Allowance allocation
process, applying specific monitoring policies and procedures in analyzing existing loans.



40



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##### Table of Contents

In determining whether and the extent to which we will make adjustments to our loan loss
migration model for purposes of determining the Allowance, we also consider a number of qualitative factors that can affect the performance and the collectability of the loans in our loan portfolio. Such qualitative factors include:



| |  |  | The effects of changes that we may make in our loan policies or underwriting standards on the quality of the loans and the risks in our loan
portfolios;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trends and changes in local, regional and national economic conditions, as well as changes in industry specific conditions, and any other reasonably
foreseeable events that could affect the performance or the collectability of the loans in our loan portfolios;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Material changes that may occur in the mix or in the volume of the loans in our loan portfolios that could alter, whether positively or negatively, the
risk profile of those portfolios;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in management or loan personnel or other circumstances that could, either positively or negatively, impact the application of our loan
underwriting standards, the monitoring of nonperforming loans or our loan collection efforts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in the concentration of risk in the loan portfolio; and
| | - |  | ---------------------------------------------------------------



| |  |  | External factors that, in addition to economic conditions, can affect the ability of borrowers to meet their loan obligations, such as fires,
earthquakes and terrorist attacks.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Determining the effects that these qualitative factors may have on the
performance of our loan portfolio requires numerous judgments, assumptions and estimates about conditions, trends and events which may subsequently prove to have been incorrect due to circumstances outside of our control. Moreover, the effects of
qualitative factors such as these on the performance of our loan portfolio are often difficult to quantify. As a result, we may sustain loan losses in any particular period that are sizable in relation to the Allowance or that may even exceed the
Allowance.



41



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##### Table of Contents

The following table compares the total amount of loans outstanding, and the allowance for
loan losses, by loan category, in each case, in thousands of dollars, and certain related ratios, as of March 31, 2011 and December 31, 2010.



|                                              |  |                |         |   |                   |   |         |                                    |  |          
|--------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | ---------------------------------- |  | ---------
|                                              |  |                |         |   |                   |   |         | Increase (Decrease)               
|                                              |  | March 31, 2011 |         |   | December 31, 2010 |   |         | December 31, 2010to March 31,
2011
|Commercial loans                              |  | $              | 206,719 |   |                   | $ | 218,690 |                                    |  | $(11,971)
|Loans impaired(1)                             |  | $              | 2,088   |   |                   | $ | 2,036   |                                    |  | $52      
|Loans 90 days past due                        |  | $              | 5,851   |   |                   | $ | 1,784   |                                    |  | $4,067   
|Loans 30 days past due                        |  | $              | 2,079   |   |                   | $ | 1,406   |                                    |  | $673     
|Allowance for loan losses                     |  |                |         |   |                   |   |         |                                    |  |          
|General component                             |  | $              | 9,220   |   |                   | $ | 9,876   |                                    |  | $(656)   
|Specific component(1)                         |  | $              | 1,056   |   |                   | $ | 141     |                                    |  | $915     
|                                              |  |                |         |   |                   |   |         |                                    |  |          
|Total allowance                               |  | $              | 10,276  |   |                   | $ | 10,017  |                                    |  | $259     
|Ratio of allowance to loan category           |  |                | 4.97    | % |                   |   | 4.58    | %                                  |  | 0.39%    
|Real estate loans:                            |  | $              | 395,452 |   |                   | $ | 399,143 |                                    |  | $(3,691) 
|Loans impaired(1)                             |  | $              | 22,536  |   |                   | $ | 24,021  |                                    |  | $(1,485) 
|Loans 90 days past due                        |  | $              |        |   |                   | $ | 1,111   |                                    |  | $(1,111) 
|Loans 30 days past due                        |  | $              | 20,908  |   |                   | $ | 10,197  |                                    |  | $10,711  
|Allowance for loan losses                     |  |                |         |   |                   |   |         |                                    |  |          
|General component                             |  | $              | 3,270   |   |                   | $ | 3,196   |                                    |  | $74      
|Specific component(1)                         |  | $              | 3,084   |   |                   | $ | 3,155   |                                    |  | $(71)    
|                                              |  |                |         |   |                   |   |         |                                    |  |          
|Total allowance                               |  | $              | 6,354   |   |                   | $ | 6,351   |                                    |  | $3       
|Ratio of allowance to loan category           |  |                | 1.61    | % |                   |   | 1.59    | %                                  |  | 0.02%    
|Construction loans and land development       |  | $              | 28,305  |   |                   | $ | 32,715  |                                    |  | $(4,410) 
|Loans impaired(1)                             |  | $              | 2,621   |   |                   | $ | 2,624   |                                    |  | $(3)     
|Loans 90 days past due                        |  | $              | 2,185   |   |                   | $ | 2,185   |                                    |  | $       
|Loans 30 days past due                        |  | $              | 554     |   |                   | $ |        |                                    |  | $554     
|Allowance for loan losses                     |  |                |         |   |                   |   |         |                                    |  |          
|General component                             |  | $              | 609     |   |                   | $ | 830     |                                    |  | $(221)   
|Specific component(1)                         |  | $              | 221     |   |                   | $ |        |                                    |  | $221     
|                                              |  |                |         |   |                   |   |         |                                    |  |          
|Total allowance                               |  | $              | 830     |   |                   | $ | 830     |                                    |  |         
|Ratio of allowance to loan category           |  |                | 2.93    | % |                   |   | 2.54    | %                                  |  | 0.39%    
|Consumer loans and family mortgages           |  | $              | 87,641  |   |                   | $ | 90,459  |                                    |  | $(2,818) 
|Loans impaired(1)                             |  | $              | 1,306   |   |                   | $ | 2,473   |                                    |  | $(1,167) 
|Loans 90 days past due                        |  | $              | 129     |   |                   | $ | 765     |                                    |  | $(636)   
|Loans 30 days past due                        |  | $              | 167     |   |                   | $ | 432     |                                    |  | $(265)   
|Allowance for loan losses                     |  |                |         |   |                   |   |         |                                    |  |          
|General component                             |  | $              | 824     |   |                   | $ | 775     |                                    |  | $49      
|Specific component(1)                         |  | $              | 82      |   |                   | $ | 128     |                                    |  | $(46)    
|                                              |  |                |         |   |                   |   |         |                                    |  |          
|Total allowance                               |  | $              | 906     |   |                   | $ | 903     |                                    |  | $3       
|Ratio of allowance to loan category           |  |                | 1.03    | % |                   |   | 1.00    | %                                  |  | 0.03%    
|Total loans outstanding                       |  | $              | 718,117 |   |                   | $ | 741,007 |                                    |  | $(22,890)
|Loans impaired(1)                             |  | $              | 28,551  |   |                   | $ | 31,154  |                                    |  | $(2,603) 
|Loans 90 days past due                        |  | $              | 8,165   |   |                   | $ | 5,845   |                                    |  | $2,320   
|Loans 30 days past due                        |  | $              | 23,708  |   |                   | $ | 12,035  |                                    |  | $11,673  
|Allowance for loan losses                     |  |                |         |   |                   |   |         |                                    |  |          
|General component                             |  | $              | 13,923  |   |                   | $ | 14,677  |                                    |  | $(754)   
|Specific component(1)                         |  | $              | 4,443   |   |                   | $ | 3,424   |                                    |  | $1,019   
|                                              |  |                |         |   |                   |   |         |                                    |  |          
|Total allowance                               |  | $              | 18,366  |   |                   | $ | 18,101  |                                    |  | $265     
|Ratio of allowance to total loans outstanding |  |                | 2.56    | % |                   |   | 2.44    | %                                  |  | 0.12%    



|(1) | Amounts in impaired loans and in specific components include nonperforming delinquent loans.
|--- | --------------------------------------------------------------------------------------------



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##### Table of Contents

The Company classifies its loan portfolios using internal credit quality ratings. The
following table provides a summary of loans by portfolio type and the Companys internal credit quality ratings as of March 31, 2011 and December 31, 2010.



|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|--------------------------------------------- |  | ---------------------- | ------- |  | ---------------- | - | ------- | ------------------ |  | - | ------- | -
|                                              |  | March 31,2011          |         |  | December 31,2010 |   |         | Increase(Decrease) | 
|                                              |  | (Dollars in thousands) |        
|Pass:                                         |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 172,322 |  |                  | $ | 187,054 |                    |  | $ | (14,732 | )
|Commercial real estate loans  owner occupied |  |                        | 141,866 |  |                  |   | 162,330 |                    |  |   | (20,464 | )
|Commercial real estate loans  all other      |  |                        | 117,039 |  |                  |   | 112,093 |                    |  |   | 4,946   |  
|Residential mortgage loans  multi family     |  |                        | 76,893  |  |                  |   | 81,482  |                    |  |   | (4,589  | )
|Residential mortgage loans  single family    |  |                        | 66,727  |  |                  |   | 70,171  |                    |  |   | (3,444  | )
|Construction loans                            |  |                        |        |  |                  |   | 863     |                    |  |   | (863    | )
|Land development loans                        |  |                        | 4,828   |  |                  |   | 24,028  |                    |  |   | (19,200 | )
|Consumer loans                                |  |                        | 18,529  |  |                  |   | 17,847  |                    |  |   | 682     |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total pass loans                              |  | $                      | 598,204 |  |                  | $ | 655,868 |                    |  | $ | (57,664 | )
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Special Mention:                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 8,829   |  |                  | $ | 9,748   |                    |  | $ | (919    | )
|Commercial real estate loans  owner occupied |  |                        | 12,263  |  |                  |   | 456     |                    |  |   | 11,807  |  
|Commercial real estate loans  all other      |  |                        | 2,612   |  |                  |   |        |                    |  |   | 2,612   |  
|Residential mortgage loans  multi family     |  |                        | 5,361   |  |                  |   | 1,974   |                    |  |   | 3,387   |  
|Residential mortgage loans  single family    |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Construction loans                            |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Land development loans                        |  |                        | 20,738  |  |                  |   | 5,639   |                    |  |   | 15,099  |  
|Consumer loans                                |  |                        | 38      |  |                  |   | 41      |                    |  |   | (3      | )
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total special mention loans                   |  | $                      | 49,841  |  |                  | $ | 17,858  |                    |  | $ | 31,983  |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Substandard:                                  |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 24,570  |  |                  | $ | 21,887  |                    |  | $ | 2,683   |  
|Commercial real estate loans  owner occupied |  |                        | 15,406  |  |                  |   | 15,299  |                    |  |   | 107     |  
|Commercial real estate loans  all other      |  |                        | 22,926  |  |                  |   | 24,412  |                    |  |   | (1,486  | )
|Residential mortgage loans  multi family     |  |                        | 1,086   |  |                  |   | 1,097   |                    |  |   | (11     | )
|Residential mortgage loans  single family    |  |                        | 2,218   |  |                  |   | 2,271   |                    |  |   | (53     | )
|Construction loans                            |  |                        | 2,185   |  |                  |   | 2,185   |                    |  |   |        |  
|Land development loans                        |  |                        | 554     |  |                  |   |        |                    |  |   | 554     |  
|Consumer loans                                |  |                        | 129     |  |                  |   |        |                    |  |   | 129     |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total substandard loans                       |  | $                      | 68,945  |  |                  | $ | 67,151  |                    |  | $ | 1,794   |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Doubtful:                                     |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Commercial loans                              |  | $                      | 998     |  |                  | $ | 1       |                    |  | $ | 997     |  
|Commercial real estate loans  owner occupied |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Commercial real estate loans  all other      |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Residential mortgage loans  multi family     |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Residential mortgage loans  single family    |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Construction loans                            |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Land development loans                        |  |                        |        |  |                  |   |        |                    |  |   |        |  
|Consumer loans                                |  |                        | 129     |  |                  |   | 129     |                    |  |   |        |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total doubtful loans                          |  | $                      | 1,127   |  |                  | $ | 130     |                    |  | $ | 997     |  
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  
|Total Outstanding Loans, gross:               |  | $                      | 718,117 |  |                  | $ | 741,007 |                    |  | $ | (22,890 | )
|                                              |  |                        |         |  |                  |   |         |                    |  |   |         |  

As the above table indicates, the Companys total loans approximated $718 million at March 31, 2011,
down from $741 million at December 31, 2010. The disaggregation of the portfolio by risk rating in the table above reflects the following changes between December 31, 2010 and March 31, 2011. Loans rated pass were $598 million at March
31, 2011, down from $656 million, due primarily to the decline in total loans outstanding and a migration of loans into the special mention risk rating; special mention loans were up from approximately $18 million at December 31, 2010 to
$50 million at March 31, 2011; substandard loans increased modestly to approximately $69 million at March 31, 2011 from $67 million at December 31, 2010; and $1.1 million of loans were rated doubtful at March 31, 2011.

The $32.0 million increase in loans rated Special Mention during the first quarter of 2011 was attributable primarily to one or more
identified emerging weaknesses in the financial condition of the borrowers or in their secondary sources of repayment. The incremental reserves required to support the increased risk attributable to the increase in Special Mention loans was offset
by a reduction in reserves made possible by the $22.9 million net decline in total loans outstanding and the $265,000 of net recoveries of previously charged off loans in the quarter ended March 31, 2011. Furthermore, $32.9 million of loans
that migrated to Special Mention for the quarter are collateralized primarily by first deeds of trust with an average loan to value ratio of 74% with the highest individual loan to value ratio of 87%.

The Company uses a rolling eight quarter loss migration analysis in order to determine loss factors to apply to each of its loan
categories. In the fourth quarter of 2008, the Company incurred charge-offs of approximately $9.2 million. The fourth quarter of 2008 was the second highest quarter of charge-offs with the highest being the fourth quarter of 2009. In determining the
loss factors for the quarter ended March 31, 2011, the fourth quarter 2008 charge-offs are no longer considered in the calculation resulting in slight decreases to the loss factor used. Despite the reduction in the loss factors in the quantitative
component of our March 31, 2011 allowance for loan loss analysis, we have determined that this reasonably reflects the current economic conditions and the risks inherent in our loan portfolio at March 31, 2011. The qualitative factors utilized in
determining the reserves, as discussed above under Allowance for Loan Losses in this section, did increase specifically in the allocation to the commercial real estate portfolio as a result of continued economic weakness in this
sector. This resulted in an overall increase in qualitative reserves by $320,000.

The table below sets forth loan
delinquencies, by quarter, from March 31, 2011 to March 31, 2010.



|                                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|--------------------------------------- |  | ---------- | ------ |  | ------------- | - | ------ | -------------- |  | - | --------- |  |  | ---------- | ------ |  |  | - | ------ | 
|                                        |  | 2011       |        |  | 2010          |  
|                                        |  | AtMarch 31 |        |  | AtDecember 31 |   |        | AtSeptember 30 |  |   | AtJune 30 |  |  | AtMarch 31 |       
|Loans Delinquent:                       |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|90 days or more:                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|Commercial loans                        |  | $          | 5,851  |  |               | $ | 1,784  |                |  | $ | 7,861     |  |  | $          | 5,588  |  |  | $ | 5,830  | 
|Commercial real estate                  |  |            |       |  |               |   | 1,111  |                |  |   | 1,123     |  |  |            | 3,834  |  |  |   | 9,481  | 
|Residential mortgages                   |  |            |       |  |               |   | 636    |                |  |   | 7,660     |  |  |            | 853    |  |  |   |       | 
|Construction and land development loans |  |            | 2,185  |  |               |   | 2,185  |                |  |   | 9,398     |  |  |            | 5,429  |  |  |   | 5,382  | 
|Consumer loans                          |  |            | 129    |  |               |   | 129    |                |  |   |          |  |  |            |       |  |  |   |       | 
|                                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|                                        |  |            | 8,165  |  |               |   | 5,845  |                |  |   | 26,042    |  |  |            | 15,704 |  |  |   | 20,693 | 
|                                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|30-89 days:                             |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|Commercial loans                        |  |            | 2,079  |  |               |   | 1,406  |                |  |   | 1,296     |  |  |            | 5,742  |  |  |   | 4,038  | 
|Commercial real estate                  |  |            | 20,045 |  |               |   | 10,197 |                |  |   | 4,648     |  |  |            | 3,380  |  |  |   | 10,963 | 
|Residential mortgages                   |  |            | 1,030  |  |               |   | 432    |                |  |   | 144       |  |  |            | 8,129  |  |  |   | 695    | 
|Construction and land development loans |  |            | 554    |  |               |   |       |                |  |   |          |  |  |            | 3,999  |  |  |   | 3,228  | 
|Consumer loans                          |  |            |       |  |               |   |       |                |  |   | 142       |  |  |            |       |  |  |   |       | 
|                                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|                                        |  |            | 23,708 |  |               |   | 12,035 |                |  |   | 6,230     |  |  |            | 21,250 |  |  |   | 18,924 | 
|                                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 
|Total Past Due(1):                      |  |            | 31,873 |  |               |   | 17,880 |                |  | $ | 32,272    |  |  | $          | 36,954 |  |  | $ | 39,617 | 
|                                        |  |            |        |  |               |   |        |                |  |   |           |  |  |            |        |  |  |   |        | 



|(1) | Past due balances include nonaccrual loans.
|--- | -------------------------------------------

As indicated above, loans 90 days or more delinquent increased by $2.3 million, or 39.7%, to $8.2 million at March 31, 2011, from $5.8 million at December 31, 2010.

In addition, loans 30 to 89 days delinquent increased by $11.7 million, or 97%, to $23.7 million at March 31, 2011, up from
$12.0 million at December 31, 2010. As a result, total past due loans increased $14 million, or 78.3%, to $31.9 million at March 31, 2011 and from $17.9 million at December 31, 2010.

As the above table indicates, total past due loans increased by $14 million, to $31.9 million as of March 31, 2011, from
$17.9 million as of December 31, 2010. That increase was primarily related to two loans. One of those loans, in the amount $8.2 million, became more than 30-days past due during the first quarter of 2011. This loan was determined by us to be
impaired at December 31, 2010 and we recorded an impairment charge against this loan. No additions to this impairment reserve were required during the quarter ended March 31, 2011 pertaining to this loan. The other loan, in the amount of
$4.5 million, was not determined to be impaired and accordingly any inherent losses related to this loan was covered by our allowance for loan losses, rather than a specific reserve.

During the quarter ended March 31, 2011, we recovered approximately $735 thousand of previously charged off loans, which more than offset
loan charge offs during the quarter of approximately $470 thousand, resulting in a net increase to the allowance for loan losses of approximately $265 thousand at March 31, 2011. Coupled with the decline in dollar amount of outstanding loans and the
factors discussed in the paragraphs above, as a percentage of gross loans the allowance increased from 2.45% at December 31, 2010 to 2.56% at March 31, 2011.

Set forth below is a summary, in thousands of dollars, of the transactions in the allowance for loan losses in the three months ended March 31, 2011 and the year ended December 31, 2010:



|                                           |  |                                 |        |   |                            |   |         |  
|------------------------------------------ |  | ------------------------------- | ------ | - | -------------------------- | - | ------- | -
|                                           |  | Three MonthsEndedMarch 31, 2011 |        |   | Year EndedDecember 31,2010 |  
|Balance, beginning of period               |  | $                               | 18,101 |   |                            | $ | 20,345  |  
|Provision for loan losses                  |  |                                 |       |   |                            |   | 8,288   |  
|Recoveries on loans previously charged off |  |                                 | 735    |   |                            |   | 3,033   |  
|Amounts charged off                        |  |                                 | (470   | ) |                            |   | (13,565 | )
|                                           |  |                                 |        |   |                            |   |         |  
|Balance, end of period                     |  | $                               | 18,366 |   |                            | $ | 18,101  |  
|                                           |  |                                 |        |   |                            |   |         |  





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Deposits

Average Balances of and Average Interest Rates Paid on Deposits

Set forth below are the average amounts (in thousands of dollars) of, and the average rates paid on, deposits in the three months ended
March 31, 2011:



|                                    |  |                                  |         |  |             |  |      |  
|----------------------------------- |  | -------------------------------- | ------- |  | ----------- |  | ---- | -
|                                    |  | Three Months EndedMarch 31, 2011 |        
|                                    |  | AverageBalance                   |         |  | AverageRate | 
|Noninterest-bearing demand deposits |  | $                                | 154,698 |  |             |  |     |  
|Interest-bearing checking accounts  |  |                                  | 27,459  |  |             |  | 0.35 | %
|Money market and savings deposits   |  |                                  | 139,395 |  |             |  | 0.91 | %
|Time deposits                       |  |                                  | 497,246 |  |             |  | 1.76 | %
|                                    |  |                                  |         |  |             |  |      |  
|Average total deposits              |  | $                                | 818,798 |  |             |  | 1.24 | %
|                                    |  |                                  |         |  |             |  |      |  

Deposit Totals. Deposits totaled $830 million at March 31, 2011 as compared to $816 million at
December 31, 2010 and $996 million at March 31, 2010. The following table compares the mix of our deposits, as between lower cost core deposits and higher cost time deposits, at March 31, 2011, December 31, 2010 and
March 31, 2010, respectively:



|                                                        |  |                        |         |  |                         |  |       |                   |  |   |                         |  |  |         |       |   |                         |   |         |  |  |  |       |  
|------------------------------------------------------- |  | ---------------------- | ------- |  | ----------------------- |  | ----- | ----------------- |  | - | ----------------------- |  |  | ------- | ----- | - | ----------------------- | - | ------- |  |  |  | ----- | -
|                                                        |  | At March 31, 2011      |         |  | At December 31, 2010    |  |       | At March 31, 2010 | 
|                                                        |  | Amounts                |         |  | Percent ofTotalDeposits |  |       | Amounts           |  |   | Percent ofTotalDeposits |  |  | Amounts |       |   | Percent ofTotalDeposits |  
|                                                        |  | (Dollars in thousands) |        
|Core deposits                                           |  |                        |         |  |                         |  |       |                   |  |   |                         |  |  |         |       |   |                         |   |         |  |  |  |       |  
|Noninterest bearing demand deposits                     |  | $                      | 154,650 |  |                         |  | 18.6  | %                 |  | $ | 144,079                 |  |  |         | 17.7  | % |                         | $ | 180,339 |  |  |  | 18.1  | %
|Savings and other interest-bearing transaction deposits |  |                        | 170,231 |  |                         |  | 20.5  | %                 |  |   | 163,948                 |  |  |         | 20.0  | % |                         |   | 169,945 |  |  |  | 17.1  | %
|Time deposits                                           |  |                        | 504,699 |  |                         |  | 60.9  | %                 |  |   | 508,199                 |  |  |         | 62.3  | % |                         |   | 646,203 |  |  |  | 64.8  | %
|                                                        |  |                        |         |  |                         |  |       |                   |  |   |                         |  |  |         |       |   |                         |   |         |  |  |  |       |  
|Total deposits                                          |  | $                      | 829,580 |  |                         |  | 100.0 | %                 |  | $ | 816,226                 |  |  |         | 100.0 | % |                         | $ | 996,487 |  |  |  | 100.0 | %
|                                                        |  |                        |         |  |                         |  |       |                   |  |   |                         |  |  |         |       |   |                         |   |         |  |  |  |       |  

As indicated in the above table, savings and other interest-bearing deposits increased to 20.5% of total
deposits at March 31, 2011, from 17.1% of total deposits at March 31, 2010; while time deposits, which bear higher rates of interest than our core deposits, decreased to 60.9% of total deposits at March 31, 2011 from 64.8% of total
deposits at March 31, 2010. That change in the mix of deposits contributed to an improvement in our net interest income and net interest margin in this years first quarter, as compared to the same period of 2010. See Results of
OperationsNet Interest Incomeabove in this Section of this Report.

Set forth below, in thousands of
dollars, is a maturity schedule of domestic time certificates of deposit outstanding at March 31, 2011:



|                                     |  |                                      |         |  |                                           |   |         | 
|------------------------------------ |  | ------------------------------------ | ------- |  | ----------------------------------------- | - | ------- | 
|                                     |  | At March 31, 2011                    |        
|                                     |  | Certificates ofDeposit under$100,000 |         |  | Certificates ofDeposit of$100,000 or More |  
|Maturities                           |  |                                      |         |  |                                           |   |         | 
|Three months or less                 |  | $                                    | 13,403  |  |                                           | $ | 39,840  | 
|Over three and through twelve months |  |                                      | 67,613  |  |                                           |   | 275,613 | 
|Over twelve months                   |  |                                      | 20,490  |  |                                           |   | 87,740  | 
|                                     |  |                                      |         |  |                                           |   |         | 
|Total certificates of deposit        |  | $                                    | 101,506 |  |                                           | $ | 403,193 | 
|                                     |  |                                      |         |  |                                           |   |         | 

Liquidity

We actively manage our liquidity needs to ensure that sufficient funds are available to meet our needs for cash, including to fund new loans to and deposit withdrawals by our customers. We project the
future sources and uses of funds and maintain liquid funds for unanticipated events. Our primary sources of cash include cash we have on deposit at other financial institutions, payments on loans, proceeds from the sale or maturity of securities,
and from sales of residential mortgage loans, increases in deposits and increases in borrowings principally from the Federal Home Loan



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Bank. 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 new residential
mortgage loans, 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 $174 million, which
represented 18% of total assets, at March 31, 2011.

Cash Flow Used in Operating Activities. In the three months
ended March 31, 2011, we used net cash of $2.6 million in operating activities, primarily to fund $54 million in loan originations of mortgages available for sale, partially offset by proceeds from the sale of $48 million in those
mortgages.

Cash Flow Provided by Investing Activities. In the three months ended March 31, 2011, investing
activities provided net cash of $39 million, primarily attributable to $20 million of loan repayments and $6 million of proceeds from sales of, and $3 million of principal payments on, securities available for sale and $27 million of
loan repayments.

Cash Flow Used by Financing Activities. In the three months ended March 31, 2011, we used net
cash of $21 million in financing activities, primarily to fund a net decrease of $34 million in borrowings, partially offset by a $13 million increase in deposits.

Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a banks
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 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 our assets. At March 31, 2011 and December 31, 2010, the loan-to-deposit ratios were 86% and 90%, respectively.

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 March 31, 2011 and
December 31, 2010, we were committed to fund certain loans, including letters of credit, amounting to approximately $135 million and $141 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 could potentially be 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 a payment obligation 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.



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##### Table of Contents

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.

Contractual Obligations

Borrowings. As a source of additional funds that we have used primarily to fund loans and to purchase other interest earning assets, and to provide us with a supplemental source of liquidity, we
have obtained long and short term borrowings from the Federal Home Loan Bank (the FHLB). As of March 31, 2011, our outstanding FHLB borrowings totaled $78 million, comprised of (i) $24 million of long-term borrowings,
with maturities ranging from August 2012 to August 2013, and (ii) $54 million of short-term borrowings, with maturities ranging from August 2011 to February 2012. These borrowings have a weighted-average annualized interest rate
of 1.05%. By comparison, as of December 31, 2010, our outstanding FHLB borrowings totaled $112 million, comprised of (i) $44 million of long-term borrowings and (ii) $68 million of short-term borrowings which had a
weighted-average annualized interest rate of 0.82%.

At March 31, 2011, U.S. agency and mortgage backed securities, U.S.
Government agency securities and collateralized mortgage obligations with an aggregate fair market value of $19.1 million and $182 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 FHLB borrowings that were outstanding at any month-end during the three months ended March 31, 2011 totaled $114 million. During 2010, the highest amount of borrowings outstanding at any month-end consisted of
$132 million of FHLB borrowings and $11.8 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 were permitted to issue long term subordinated debt instruments that, subject to certain
conditions, would qualify as and, therefore, augment capital for regulatory purposes. At March 31, 2011, we had outstanding approximately $17.5 million principal amount of 30-year junior subordinated floating rate debentures (the
Debentures), of which $16.8 million qualified as Tier 1 capital for regulatory purposes as of March 31, 2011. See discussion below under the subcaption Capital Resources-Regulatory Capital Requirements.

Set forth below is certain information regarding the Debentures:



|               |  |                  |        |  |               |  |                 |                   |  |  |                | 
|-------------- |  | ---------------- | ------ |  | ------------- |  | --------------- | ----------------- |  |  | -------------- | 
|               |  | Principal Amount |        |  | Interest Rate |  |                 | Maturity Dates(1) | 
|September 2002 |  | $                | 7,217  |  |               |  | Libor plus 3.40 | %                 |  |  | September 2030 | 
|October 2004   |  |                  | 10,310 |  |               |  | Libor plus 2.00 | %                 |  |  | October 2034   | 
|               |  |                  |        |  |               |  |                 |                   |  |  |                | 
|Total          |  | $                | 17,527 |  |               |  |                 |                   |  |  |                | 
|               |  |                  |        |  |               |  |                 |                   |  |  |                | 



|(1) | Subject to the receipt of prior regulatory approval, we may redeem the Debentures, in whole or in part, without premium or penalty, at any time prior to maturity.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest on the Debentures is payable quarterly. However, subject to certain conditions, we have the right to
defer those interest payments for up to five years.

As previously reported, since July 2009 we have been required to obtain
the prior approval of the Federal Reserve Bank of San Francisco (the FRBSF) to make interest payments on the Debentures. During the quarter ended June 30, 2010, we were advised by the FRBSF that it would not approve the payments of
interest on the Debentures scheduled to be made on June 24 and July 19, 2010. As a result, we exercised our right, pursuant to the terms of the Debentures, to defer those interest payments. In the fourth quarter of 2010 we were advised by
the FRBSF that it would not approve our payment of the next two interest payments scheduled to be made in December 2010 and January 2011, respectively, and during the quarter ended March 31, 2011, we were advised by the FRBSF that it would not
approve the payments of interest on the Debentures scheduled to be made on March 25 and April 18, 2011. As a result we have deferred those interest payments as well. If we are unable to obtain FRBSF approval to pay the interest payments
that will become due in June 2011 and July 2011, then, it will be necessary for us to exercise our deferral rights with respect



46



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to those payments as well. Since we have the right, under the terms of the Debentures to defer interest payments for up to five years, the deferral of interest payments to date did not, and any
deferral of the June and July 2011 interest payments will not, constitute a default under or with respect to the Debentures. Set forth below in this Item 2 under the caption Capital Resources-Capital and Other Requirements under FRB
Agreement and DFI Order and our 2010 10-K in Item 1 under the caption Supervision and Regulation-Regulatory Action by the FRB and DFI and in Item 1A, entitled RISK FACTORS, is additional information
regarding the above-described dividend restrictions, as well as other regulatory restrictions that apply to us and the Bank under a regulatory agreement entered into with the FRBSF, and an Order of the California Department of Financial Institutions
(the DFI Order) issued, in August 2010.

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 aggregate weighted average life of U.S. Government obligations and federal agency securities exclusive of variable rate securities
cannot, without approval by the Board of Directors, exceed 10 years and municipal obligations cannot exceed 25 years;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provides that time deposits must be placed with federally insured financial institutions, cannot exceed the current federally insured amount in any one
institution and may not have a maturity exceeding 60 months, unless that time deposit is matched to a liability instrument issued by the Bank; 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.

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 March 31, 2011 and December 31, 2010:



|                                                    |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 
|--------------------------------------------------- |  | ---------------------- | ------- |  | -------------------- | - | -- | -------------------- |  | - | ------------------- | - |  | - | ------- | 
|                                                    |  | Amortized Cost         |         |  | GrossUnrealized Gain |   |    | GrossUnrealized Loss |  |   | EstimatedFair Value |  
|                                                    |  | (Dollars in thousands) |        
|Securities available for sale at March 31, 2011:    |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 
|Mortgage-backed securities issued by US agencies    |  | $                      | 157,043 |  |                      | $ | 31 |                      |  | $ | (2,847              | ) |  | $ | 154,227 | 
|Municipal securities                                |  |                        | 6,389   |  |                      |   |   |                      |  |   | (539                | ) |  |   | 5,850   | 
|Non-agency collateralized mortgage obligations      |  |                        | 3,399   |  |                      |   | 25 |                      |  |   | (187                | ) |  |   | 3,237   | 
|Asset backed securities                             |  |                        | 2,441   |  |                      |   |   |                      |  |   | (2,038              | ) |  |   | 403     | 
|Mutual fund                                         |  |                        | 4,230   |  |                      |   |   |                      |  |   |                    |   |  |   | 4,230   | 
|                                                    |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 
|Total securities available for sale                 |  | $                      | 173,502 |  |                      | $ | 56 |                      |  | $ | (5,611              | ) |  | $ | 167,947 | 
|                                                    |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 
|Securities available for sale at December 31, 2010: |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 
|Mortgage-backed securities issued by US agencies    |  | $                      | 166,421 |  |                      | $ | 24 |                      |  | $ | (2,009              | ) |  | $ | 164,436 | 
|Municipal securities                                |  |                        | 6,389   |  |                      |   |   |                      |  |   | (417                | ) |  |   | 5,972   | 
|Non-agency collateralized mortgage obligations      |  |                        | 3,500   |  |                      |   | 21 |                      |  |   | (244                | ) |  |   | 3,277   | 
|Asset backed securities                             |  |                        | 2,493   |  |                      |   |   |                      |  |   | (2,122              | ) |  |   | 371     | 
|Mutual fund                                         |  |                        | 4,245   |  |                      |   |   |                      |  |   |                    |   |  |   | 4,245   | 
|                                                    |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 
|Total securities available for sale                 |  | $                      | 183,048 |  |                      | $ | 45 |                      |  | $ | (4,792              | ) |  | $ | 178,301 | 
|                                                    |  |                        |         |  |                      |   |    |                      |  |   |                     |   |  |   |         | 



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At March 31, 2011, U.S. agencies and mortgage backed securities, U.S. Government agency
securities, collateralized mortgage obligations and time deposits with an aggregate fair market value of $19 million were pledged to secure Federal Home Loan Bank borrowings, repurchase agreements, local agency deposits, to secure lines of credit at
our correspondent banks and treasury, tax and loan accounts.

The amortized cost, at March 31, 2011, of securities
available for sale are shown 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.



|                                                   |  |                            |       |  |                                |  |      |                                 |  |   |                      |  |  |           |      |   |                      |   |        |           |  |  |                      |   |  |           |        |  |                      |  |      |   |  |   |         |  |  |  |      |  
|-------------------------------------------------- |  | -------------------------- | ----- |  | ------------------------------ |  | ---- | ------------------------------- |  | - | -------------------- |  |  | --------- | ---- | - | -------------------- | - | ------ | --------- |  |  | -------------------- | - |  | --------- | ------ |  | -------------------- |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                                   |  | March 31, 2011 Maturing in |      
|                                                   |  | One yearor less            |       |  | Over oneyear throughfive years |  |      | Over fiveyears throughten years |  |   | Over tenyears        |  |  | Total     |     
|                                                   |  | BookValue                  |       |  | WeightedAverageYield           |  |      | BookValue                       |  |   | WeightedAverageYield |  |  | BookValue |      |   | WeightedAverageYield |   |        | BookValue |  |  | WeightedAverageYield |   |  | BookValue |        |  | WeightedAverageYield | 
|                                                   |  | (Dollars in thousands)     |      
|Securities available for sale:                     |  |                            |       |  |                                |  |      |                                 |  |   |                      |  |  |           |      |   |                      |   |        |           |  |  |                      |   |  |           |        |  |                      |  |      |   |  |   |         |  |  |  |      |  
|Mortgage-backed securities issued by U.S. Agencies |  | $                          | 8,888 |  |                                |  | 2.73 | %                               |  | $ | 29,608               |  |  |           | 2.74 | % |                      | $ | 29,135 |           |  |  | 2.74                 | % |  | $         | 89,411 |  |                      |  | 2.70 | % |  |   | 157,042 |  |  |  | 2.72 | %
|Non-agency collateralized mortgage obligations     |  |                            | 937   |  |                                |  | 2.74 | %                               |  |   |                     |  |  |           |     |   |                      |   | 1,587  |           |  |  | 3.07                 | % |  |           | 875    |  |                      |  | 3.85 | % |  |   | 3,399   |  |  |  | 3.15 | %
|Municipal securities                               |  |                            |      |  |                                |  |     |                                 |  |   |                     |  |  |           |     |   |                      |   | 1,347  |           |  |  | 4.10                 | % |  |           | 5,042  |  |                      |  | 4.29 | % |  |   | 6,389   |  |  |  | 4.25 | %
|Asset backed securities                            |  |                            |      |  |                                |  |     |                                 |  |   |                     |  |  |           |     |   |                      |   |       |           |  |  |                     |   |  |           | 2,441  |  |                      |  | 0.00 | % |  |   | 2,441   |  |  |  | 0.00 | %
|Mutual funds                                       |  |                            |      |  |                                |  |     |                                 |  |   | 4,230                |  |  |           | 3.04 | % |                      |   |       |           |  |  |                     |   |  |           |       |  |                      |  |     |   |  |   | 4,230   |  |  |  | 3.04 | %
|                                                   |  |                            |       |  |                                |  |      |                                 |  |   |                      |  |  |           |      |   |                      |   |        |           |  |  |                      |   |  |           |        |  |                      |  |      |   |  |   |         |  |  |  |      |  
|Total Securities Available for sale                |  | $                          | 9,825 |  |                                |  | 2.72 | %                               |  | $ | 33,838               |  |  |           | 2.77 | % |                      | $ | 32,069 |           |  |  | 2.81                 | % |  | $         | 97,769 |  |                      |  | 2.73 | % |  | $ | 173,501 |  |  |  | 2.75 | %
|                                                   |  |                            |       |  |                                |  |      |                                 |  |   |                      |  |  |           |      |   |                      |   |        |           |  |  |                      |   |  |           |        |  |                      |  |      |   |  |   |         |  |  |  |      |  

The table below shows, as of March 31, 2011, the gross unrealized losses and fair values of our
investments, aggregated by investment category, and the length of time that the individual securities have been in a continuous unrealized loss position.



|                                                   |  |                                                      |         |  |                   |   |        |            |  |   |                |  |  |            |        |   |                |   |         |  |  |   |        |  
|-------------------------------------------------- |  | ---------------------------------------------------- | ------- |  | ----------------- | - | ------ | ---------- |  | - | -------------- |  |  | ---------- | ------ | - | -------------- | - | ------- |  |  | - | ------ | -
|                                                   |  | Securities With Unrealized Loss as of March 31, 2011 |        
|                                                   |  | Less than 12 months                                  |         |  | 12 months or more |   |        | Total      | 
|(Dollars In thousands)                             |  | Fair Value                                           |         |  | UnrealizedLoss    |   |        | Fair Value |  |   | UnrealizedLoss |  |  | Fair Value |        |   | UnrealizedLoss |  
|Mortgage backed securities issued by U.S. Agencies |  | $                                                    | 151,506 |  |                   | $ | (2,846 | )          |  | $ | 41             |  |  | $          | (1     | ) |                | $ | 151,547 |  |  | $ | (2,847 | )
|Municipal securities                               |  |                                                      | 5,442   |  |                   |   | (477   | )          |  |   | 408            |  |  |            | (62    | ) |                |   | 5,850   |  |  |   | (539   | )
|Non-agency collateralized mortgage obligations     |  |                                                      |        |  |                   |   |       |            |  |   | 2,276          |  |  |            | (187   | ) |                |   | 2,276   |  |  |   | (187   | )
|Asset-backed securities                            |  |                                                      |        |  |                   |   |       |            |  |   | 403            |  |  |            | (2,038 | ) |                |   | 403     |  |  |   | (2,038 | )
|                                                   |  |                                                      |         |  |                   |   |        |            |  |   |                |  |  |            |        |   |                |   |         |  |  |   |        |  
|Total temporarily impaired securities              |  | $                                                    | 156,948 |  |                   | $ | (3,323 | )          |  | $ | 3,128          |  |  | $          | (2,288 | ) |                | $ | 160,076 |  |  | $ | (5,611 | )
|                                                   |  |                                                      |         |  |                   |   |        |            |  |   |                |  |  |            |        |   |                |   |         |  |  |   |        |  

Impairment exists when the fair value of the security has declined below its cost. We perform a quarterly
assessment of the securities that have an unrealized loss to determine whether the decline in fair value of those securities below their cost is other-than-temporary.

We adopted ASC 321-10 effective April 1, 2009 and, accordingly, we recognize other-than-temporary impairments (OTTI) to our available-for-sale debt securities. In accordance with ASC
321-10, when there are credit losses associated with an impaired debt security and (i) we do not have the intent to sell the security and (ii) it is more likely than not that we will not have to sell the security before recovery of its
cost basis, then, we will separate the amount of an impairment that is credit-related from the amount thereof related to non-credit factors. The credit-related impairment is recognized in our consolidated statements of operations. The
non-credit-related impairment is recognized and reflected in Other Comprehensive Income.



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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, which
are based primarily on those quantitative measures, each bank holding company must meet a minimum capital ratio and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital
adequacy categories on the basis of its capital ratios.



| |  |  | 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 banking institution is subject to greater operating restrictions and
increased regulatory supervision by its federal bank regulatory agency.

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 March 31, 2011, as compared to the respective regulatory requirements applicable to them.



|                                        |  |        |        |  |                                            |  |      |                                           |  |   |        |  |  |        |              |   |       |   |        |  |  |  |               |  
|--------------------------------------- |  | ------ | ------ |  | ------------------------------------------ |  | ---- | ----------------------------------------- |  | - | ------ |  |  | ------ | ------------ | - | ----- | - | ------ |  |  |  | ------------- | -
|                                        |  |        |        |  |                                            |  |      | Applicable Federal Regulatory Requirement | 
|                                        |  | Actual |        |  | To be Categorized asAdequately Capitalized |  |      | To be Categorized as WellCapitalized      | 
|                                        |  | Amount |        |  | Ratio                                      |  |      | Amount                                    |  |   | Ratio  |  |  | Amount |              |   | Ratio |  
|Total Capital to Risk Weighted Assets:  | 
|Company                                 |  | $      | 96,073 |  |                                            |  | 11.8 | %                                         |  | $ | 65,114 |  |  |        | At least 8.0 | % |       |   | N/A    |  |  |  | N/A           |  
|Bank                                    |  |        | 92,935 |  |                                            |  | 11.4 | %                                         |  |   | 65,094 |  |  |        | At least 8.0 | % |       | $ | 81,367 |  |  |  | At least 10.0 | %
|Tier 1 Capital to Risk Weighted Assets: | 
|Company                                 |  | $      | 75,377 |  |                                            |  | 9.3  | %                                         |  | $ | 32,557 |  |  |        | At least 4.0 | % |       |   | N/A    |  |  |  | N/A           |  
|Bank                                    |  |        | 82,660 |  |                                            |  | 10.2 | %                                         |  |   | 32,547 |  |  |        | At least 4.0 | % |       | $ | 48,820 |  |  |  | At least 6.0  | %
|Tier 1 Capital to Average Assets:       | 
|Company                                 |  | $      | 75,377 |  |                                            |  | 7.4  | %                                         |  | $ | 40,592 |  |  |        | At least 4.0 | % |       |   | N/A    |  |  |  | N/A           |  
|Bank                                    |  |        | 82,660 |  |                                            |  | 8.2  | %                                         |  |   | 40,530 |  |  |        | At least 4.0 | % |       | $ | 50,663 |  |  |  | At least 5.0  | %

At March 31, 2011,
the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution, and the Company continued to exceed the minimum required capital ratios, under the capital adequacy guidelines described above.

The consolidated total capital and Tier 1 capital of the Company, at March 31, 2011, includes an aggregate of
$16.8 million principal amount of the $17.5 million of Junior Subordinated Debentures that we issued in 2002 and 2004. We contributed that amount to the Bank over the six year period ended December 31, 2009, thereby providing it with
additional cash to fund the growth of its banking operations and, at the same time, to increase its total capital and Tier 1 capital.

Capital and Other Requirements under FRB Agreement and DFI Order.

On
August 31, 2010, the Company and the Bank entered into the FRB Agreement and the Bank consented to the issuance of the DFI Order. The principal purposes of the FRB Agreement and the DFI Order, which constitute formal supervisory actions by the
FRB and the DFI, are to require us to adopt and implement formal plans and take certain actions, as well as to continue implementing measures that we previously adopted, to address the adverse consequences that the economic recession has had on the
performance of our loan portfolio and our operating results and to increase our capital to strengthen our ability to weather any further adverse conditions that might arise if the improvement in the economy does not materialize or remains sluggish.



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The Agreement and Order contain substantially similar provisions. They require the Boards of
Directors of the Company and the Bank to prepare and submit written plans to the FRB and the DFI that address a number of matters, including improving the Banks position with respect to problem assets, maintaining adequate reserves for loan
and lease losses in accordance with applicable supervisory guidelines, and improving the capital position of the Bank and, in the case of the FRB Agreement, the capital position of the Company. The Bank is also prohibited from paying dividends to
the Company without the prior approval of the DFI, and without the prior approval of the FRB the Company may not declare or pay cash dividends, repurchase any of its shares, make interest or principal payments on its Debentures or incur or guarantee
any debt.

The FRB Agreement also requires us to submit a capital plan to the FRB that will meet with its approval and then to
implement that plan. Under the DFI Order, the Bank was required to achieve a ratio of adjusted tangible shareholders equity to its tangible assets to 9.0% by January 31, 2011, by raising additional capital, generating earnings or reducing
the Banks tangible assets (subject to a 15% limitation on such a reduction) or a combination thereof and, upon achieving that ratio, to thereafter maintain that ratio during the Term of the Order.

The DFI Order also states that if we were to violate or fail to comply with the Order the Bank could be deemed to be conducting business
in an unsafe manner which could subject the Bank to further regulatory enforcement action.

The Company and the Bank already
have made substantial progress with respect to several of these requirements and both the Board and management are committed to achieving all of the requirements on a timely basis. Among other things, in August 2010, we completed a private placement
of Series A Convertible Preferred Stock, raising gross proceeds of $12,655,000, of which $10,250,000 was contributed to the Bank to increase its equity capital.

Since the issuance of the DFI Order, we also have made a concerted effort to raise the additional capital needed to increase the Banks ratio of tangible equity-to-tangible assets to 9.0% by
January 31, 2011, as required by the DFI Order. Among other things, we retained a nationally recognized investment banking firm to assist us in those efforts and we have engaged in substantive discussions with a number of institutional
investors that have expressed an interest in making a capital investment in the Company and we are in negotiations with some of them with respect to the terms of such a capital investment.

However, as previously reported, notwithstanding those efforts, which are continuing, we were not able to raise the capital needed to
increase the Banks ratio of tangible equity-to-tangible assets to 9.0% by January 31, 2011, as required by the DFI Order. Nevertheless, the DFI has notified us that it will not take any action against the Bank at this time because the
Bank has not, as yet, met that capital requirement. We understand that this decision was based on the progress we have made since August 31, 2010 in increasing the Banks capital ratio, improvements made in the Banks financial
condition, including reductions in loan charge-offs, and the Banks classification as a well-capitalized banking institution under federal bank regulatory guidelines and federally established prompt corrective action regulations.

We cannot, however, predict when or even if we will succeed in meeting the capital requirements of the DFI Order in the near
term and the DFI is not precluded from taking enforcement action against the Bank if its financial condition were to worsen or if Bank failed to achieve further improvements in its capital ratio.

Additional information regarding the FRB Agreement and the DFI Order is set forth in the Section entitled Supervision and
Regulation-Regulatory Action by the FRB and DFI in Item 1, and in the Section entitled Risk Factors in Item 1A, of our 2010 10-K.

Sale of Series A Convertible 10% Cumulative Preferred Stock. As previously reported in a Current Report filed with the SEC on Form
8-K dated October 6, 2009, we commenced a private placement to a limited number of accredited investors (as defined in Regulation D under the Securities Act of 1933, as amended) of a new issue of Series A Convertible 10% Cumulative Preferred
Stock (the Series A Shares), at $100 per Series A Share. We sold a total of 126,550 Series A Shares, raising gross proceeds of $12.655 million, in the private placement, which we concluded in August 2010. We have used those
proceeds to make a $10.25 million capital contribution to the Bank to increase its equity capital and to provide it with cash to fund additional loans and other interest-earning assets and meet working capital requirements, and for general corporate
purposes. Dividends accrue and accumulate on the Series A Shares at a rate of 10% per annum until paid and, at March 31, 2011, accumulated but unpaid dividends on the Series A Shares totaled $1,448,000. Moreover, until such dividends are
paid, we may not pay any dividends on our common stock.



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Each outstanding Series A Share is convertible at the option of its holder, at a
conversion price of $7.65 per share, into 13.07 shares of our common stock (as the same may be adjusted pursuant to the anti-dilution provisions applicable to the Series A Shares). On the second anniversary of the original issue date of the Series A
Shares (the Automatic Conversion Date), all Series A Shares then outstanding will automatically convert into common stock at the then conversion price, subject to the payment by the Company, in cash, of the accumulated, but unpaid,
dividends on those Series A Shares. If, however, due to regulatory restrictions or for any other reason, we are unable to pay the accumulated, but unpaid dividends on the Automatic Conversion Date, in cash, then, the Automatic Conversion Date will
be extended, and those Series A Shares will remain outstanding and will continue to accumulate dividends, until such time as we are able to pay such dividends in cash. A more detailed description of the rights, preferences and privileges of and
restrictions on the Series A Shares is contained in the above-referenced Current Report on Form 8-K dated October 6, 2009, and the foregoing summary is qualified by reference to that description.

Although we have cash sufficient to pay the accumulated unpaid dividends on the Series A Shares (the Series A
Dividends), the FRB Agreement requires us to obtain the prior approval of the FRBSF to pay any of those dividends. We have been advised by the FRBSF that it does not intend to approve the payment of any Series A Dividends at least until we
significantly increase our capital and achieve a return to profitability. As a result, we expect that Series A Shares will continue to accrue dividends, at a rate of approximately $316,625 per quarter, for some time. Moreover, for accounting and
public reporting purposes, accrued but unpaid Series A Dividends are recorded, and reduce the earnings or increase the loss allocable to common stockholders set forth, in the Companys statements of operations.

Dividend Policy and Share Repurchase Programs. It is, and since the beginning of 2009 it has been, the policy of the Board of
Directors of the Company and the Bank to preserve cash to enhance their capital positions and the Banks liquidity. Moreover, since mid-2009, bank regulatory restrictions, including those under the FRB Agreement and DFI Order, have precluded
the Company and the Bank from paying cash dividends and we have been precluded from repurchasing our shares without the prior approval of the FRBSF. Accordingly, we do not expect to pay dividends or make share repurchases at least for the
foreseeable future.



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

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed
under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized
that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15 and
15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on the evaluation, our CEO and CFO have concluded that, as of March 31, 2011, the Companys
disclosure controls and procedures were effective to provide reasonable assurance that information required to disclose in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the rules of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including our Chief Executive and Chief Financial Officers, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2011 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

James Laliberte, et al. vs. Pacific Mercantile Bank. This lawsuit was originally filed in May 2003 in the California Superior Court
for the County of Orange (Case No. 030007092). Information regarding this lawsuit is contained in Item 3 of Part I of our 2010 10-K and is incorporated herein by this reference, and there have been no subsequent developments in that case
since we filed the 2010 10-K with the SEC on April 1, 2011.

We also are subject to legal actions that arise from time to
time in the ordinary course of our business. Currently there are no such pending legal proceedings that we believe will become material to our financial condition or results of operations.

Pacific Mercantile Bank v. David Schneider. This lawsuit was filed in the California Superior Court for the County of Orange (Case
No.30-2008-00116202) by the Bank in December 2008, seeking damages for breach of contract by the defendant. On April 18, 2011, the Bank was awarded a $2.1 million judgment by the jury in that case, and will seek to recover its attorneys
fees, as provided for in the loan documents, from the defendant. The defendant has until June 17, 2011 to file an appeal of the jury verdict and the award of damages in favor of the Bank. Based on information disclosed at the trial, we believe
(although no assurance can be given) that the defendant has sufficient assets to satisfy the judgment and any award of attorneys fees to the Bank.



|Item 1A. | Risk Factors.
|-------- | -------------

There are
no material changes in the risk factors previously disclosed in Item 1A of Part 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 that we filed with the SEC on April 1, 2011.



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

The following
documents are filed as Exhibits to this 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



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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: May 10, 2011 |  |  |  | By:                        |  | /s/  NANCY A. GRAY                    
|                   |  |  |  |                            |  | Nancy A. Gray, Chief Financial Officer



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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



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