Pacific Mercantile Bancorp (PMBC)

[Enterprising Investor]

PMBC operating under supervisory actions.

On 8/31/10, the members of the respective Boards of Directors of PMBC and its the wholly-owned banking subsidiary, Pacific Mercantile Bank, entered into a Written Agreement with the Federal Reserve Bank of San Francisco. On the same date, the Bank consented to the issuance of a Final Order by the California Department of Financial Institutions. 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 PMBC 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 PMBC without the prior approval of the DFI, and PMBC 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 PMBC 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 is required to achieve a ratio of adjusted tangible shareholders’ equity to its tangible assets to 9.0% by 1/31/11, 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.

PMBC and the Bank already have made progress with respect to several of these requirements, and is exploring alternatives for raising additional capital by 1/31/11, and both the Board of Directors and management are committed to achieving all of the requirements on a timely basis.

http://sec.gov/Archives/edgar/data/1109546/000119312510256517/d10q.htm