Pacific Mercantile Bancorp : 2020 Janney West Coast CEO Forum

J a n u a r y 2 0 2 0

INV ESTOR P R ES ENTAT ION

FORWARD LOOKING STATEMENTS

This presentation contains statements regarding our expectations, beliefs and views about our future financial performance and our business, trends and expectations regarding the markets in which we operate, and our future plans. Those statements 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, 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," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may". Forward-looking statements are based on current information available to us and our assumptions about future events over which we do not have control. Moreover, our business and our markets are subject to a number of risks and uncertainties which could cause our actual financial performance in the future, and the future performance of our markets (which can affect both our financial performance and the market prices of our shares), to differ, possibly materially, from our expectations as set forth in the forward-looking statements contained in this presentation. In addition to the risk of incurring loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: the risk that the economic recovery in the United States, which is still relatively fragile, will be adversely affected by domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our results of operations in the future will continue to be adversely affected by our exit from the wholesale residential mortgage lending business and the risk that our commercial banking business will not generate the additional revenues needed to fully offset the decline in our mortgage banking revenues within the next two to three years; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of other real estate owned and would continue to incur expenses associated with the management and disposition of those assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect that government regulation of banking and other financial services organizations will increase, causing our costs of doing business to increase and restricting our ability to take advantage of business and growth opportunities. Additional information regarding these and other risks and uncertainties to which our business is subject are contained in our Annual Report on Form 10-K for the year ended December 31, 2018 which is on file with the SEC as well as subsequent Quarterly Reports on Form 10-Q that we file with the SEC. Due to these and other risks and uncertainties to which our business is subject, you are cautioned not to place undue reliance on the forward-looking statements contained in this news release, which speak only as of its date, or to make predictions about our future financial performance based solely on our historical financial performance. We disclaim any obligation to update or revise any of the forward-looking statements as a result of new information, future events or otherwise, except as may be required by law.

2

CORPORATE OVERVIEW

_________________________________

Pacific Mercantile Bank is a full service business bank serving Southern California

• Bank founded in 1999
• $1.4 billion in total assets
• 7 locations in Southern California
• Focused on middle-market businesses with revenues between $10 to $75 million

CORPORATE HEADQUARTERS

COSTA MESA, CALIFORNIA

3

INVESTMENT HIGHLIGHTS

_________________________________

• Growing commercial bank operating in attractive Southern California markets
• New CEO hired in September 2019 to accelerate growth and profitability
• Well defined value proposition drives new client acquisition without compromising on pricing and terms
• Favorable shifts in loan and deposit mix adding to franchise value
• Disciplined expense management driving improved efficiencies
• Attractive valuation trading at 1.10x tangible book value(1)

(1) Based on closing price on January 27, 2020

4

OFFICE LOCATIONS

_________________________________

Newport Beach

Century City

Irvine Spectrum

Costa Mesa

La Habra

Ontario

San Diego

5

EXECUTIVE MANAGEMENT TEAM

_________________________________

		Financial	Tenure at
Name	Title	Services		Select Experience
PMB
		Experience
	President &		Started in	 Corporate EVP at SunTrust Banks
Brad R. Dinsmore	~32 years		Head of U.S. Retail Banking at Citigroup
Chief Executive Officer	Sep. 2019
			Orange County Market President at Bank of America
				 EVP & CFO of Carpenter Community BancFund
Curt A. Christianssen	Executive Vice President &	~22 years	~5 years	 Interim CFO at Manhattan Bancorp
Chief Financial Officer		CFO and Director of Corporate Development for Dartmouth
					Capital Group and Eldorado Bancshares
	Executive Vice President &			 Chief Banking Officer at Pacific Mercantile Bank
Robert Anderson	~23 years	~6 years		Various positions at Silicon Valley Bank including head of
Interim Chief Credit Officer
				Orange County office
	Executive Vice President &			 Chief Information Officer at Bank of Manhattan
Curtis Birkmann	~9 years	~4 years		Senior Software Engineer and Senior Program Manager at
Chief Technology Officer
				Corcen Data International
Maxwell G. Sinclair	Executive Vice President &	~23 years	~8 years	 Vice President/Compliance and BSA Manager at California
Chief Compliance Officer		Bank & Trust

6

BOARD OF DIRECTORS

_________________________________

Name	Title	Tenure		Select Experience
	Chairman of the		 Founder, Chairman, Chief Executive Officer and Principal of Seapower Carpenter
Edward J. Carpenter	~6 years		Capital, Inc.
Board
			Founder, Chairman, Chief Executive Officer and Principal of Carpenter & Company
James Deutsch	Director	~2 years	 Partner, Patriot Financial Partners
	President and Chief Executive Officer of Team Capital Bank
Brad R. Dinsmore	Director	Added in		President and CEO of Pacific Mercantile Bancorp
Sep 2019
Manish Dutta	Director	Added in		Co-Founder and Chief Executive Officer of Alpha Ledger Technologies
Nov 2019		SVP and Senior Manager of PIMCO
Shannon F. Eusey	Director	Added in		Co-Founder, President and Chief Executive Officer of Beacon Pointe Advisors
May 2019		Managing Director and Portfolio Manager at Roxbury Capital Management
Michael P. Hoopis	Director	~6 years		Chief Executive Officer and President of Targus Group International, Inc.
Denis P. Kalscheur	Director	~4 years		Vice Chairman and Chief Executive Officer of Aviation Capital Group Corp.
Michele S. Miyakawa	Director	Added in		Managing Director of Moelis & Company
May 2019		Investment banking positions at UBS and Donaldson, Lufkin & Jenrette
David J. Munio	Director	~3 years	 Chief Credit Officer of Wells Fargo & Company
	Various executive positions at First Interstate Bank
Stephen P. Yost	Director	~5 years	 Principal of Kestrel Advisors
	Regional Chief Credit Officer for Comerica Bank

7

MARKET POSITIONING

_________________________________

Differentiating Strategy to Target Business Clients

"We Help Companies Succeed"

Middle-Market

Businesses

• Need for financial guidance
• Limited internal financial sophistication
• Limited outside advisory support

Horizon Analytics®	Service/Products
• Financial analysis	• Customized Commercial
• Business planning	Loans
• Modeling and forecasting	• Asset Based Lending
• Balance sheet	• Owner Occupied RE
management	• Treasury Management
• Scenario analysis	• Value driven pricing

Majority of new relationships being brought into the Bank are C&I operating companies

8

HORIZON ANALYTICS®

_________________________________

A unique, game-changing tool that provides a deeper understanding of a Client's company

and industry, which enables us to tailor business discussions to Client needs

Peer Company Financial

Performance Comparison

Synthesis and	Company Valuation Impact Analysis
Scenario Modeling	for Modeled Scenarios

Recommended Next Steps

Partnering with

Pacific Mercantile Bank

• Competitive advantage with 70% success rate when using Horizon Analytics
• Relationships include loans, deposits and treasury management services

• Streamlines underwriting and allows loan pricing flexibility (+25 to 50 bps)
• Increases retention by providing ongoing analysis and recommendations

9

OPERATING COMPANY HIGHLIGHTS

_________________________________

• Target operating companies with annual revenues between $10 million and $75 million
• Identified industry verticals for which there are over 20,000 businesses in service area
• Primarily manufacturing, distribution and service industries
• Operating company characteristics:
• • Total loans and deposits of at least $1.0 million;
  • Average loan commitment of ~$2.5 million;
  • 30% - 40% self funded in core deposits

10

SOCAL REPRESENTS LARGEST MARKET FOR OPERATING COMPANIES

_________________________________

MARKET COMPARISONS FOR OPERATING COMPANIES

Relative size of MSAs where there are more than 2,000 target clients

11

ENHANCING BANKER PRODUCTIVITY

_________________________________

More effectively leverage Horizon Analytics®

Dedicated CRE and small business lending groups created

Increase time spent on business development

Align development goals and incentives

• All C&I bankers being trained in Horizon Analytics®
• Horizon Analytics® incorporated into all business development efforts
• Horizon Analytics® increases win rate and improves loan pricing
• 30% of assets will be managed by 20% of bankers
• Enables 80% of sales force to focus solely on operating companies
• Reduced administrative responsibilities for relationship managers
• Allows C&I bankers to spend more time with existing clients and new prospects
• More focus on operating companies
• Higher variable opportunity for top performers

12

FINANCIAL PERFORMANCE OVERVIEW

_________________________________

Adjusted Pre-TaxPre-Provision Income*

($ in millions)

$20.0										$17.0
$15.0									$15.0
$10.0
$5.0	$2.9	$3.5	$3.8	$4.8	$4.6	$3.9	$4.3	$4.1
$0.0
	1Q18	2Q18	3Q18	4Q18	1Q19	2Q19	3Q19	4Q19	FY 2018	FY 2019

Adjusted Return on Average Assets*

1.00%		0.98%
0.72%	0.79%	0.77%
0.62%

0.50%	0.45%
	0.25%

0.07%

0.00%

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

*2018 figures exclude income from PMAR and the reversal of the valuation allowance against the Company's deferred tax assets ($11.1 million), applying a normalized tax rate of 30.0%; see Non-GAAP reconciliation table in appendix

Adjusted Return on Average Equity*

10.00%			9.66%
7.03%	8.05%	7.84%			7.55%
5.00%						4.32%
				2.46%
							0.69%
0.00%
1Q18	2Q18	3Q18	4Q18	1Q19	2Q19	3Q19	4Q19

13

	IMPROVING OPERATING LEVERAGE
	_________________________________
100%	Bank Efficiency Ratio
	92.1%
90%	88.9%

80%

78.1%

70%

65.3%

60%

50%

2016

2017

2018

2019

14

LOAN PORTFOLIO

FOCUS ON RELATIONSHIP LENDING

_________________________________

Other

Consumer,2.0%

8.1%

$ 1.13 Billion as of

December 31, 2019

	CRE: all other, 18.5%
Multifamily, 15.7%	Average Yield of 5.20% in 4Q19

CRE: owner-occupied,

19.5%

Commercial, 36.2%

55.7% Relationship Loans

15

LOAN PRODUCTION TRENDS

_________________________________

• Focused sales execution and leveraging the competitive advantages of Horizon Analytics
• Growth in core portfolios (C&I and owner-occupied CRE) mitigated by payoffs and reducing exposure to entertainment-related loans

Fundings/Runoff/Utilization

($ in millions)

$150.0			64%
	63.3%		$130.1
	63.4%
$100.0		$99.2	62%
$92.2

$78.3	$84.5	$81.9

		$54.9	$54.5
$50.0	$38.6		$45.0	60%
		60.1%
			59.7%

59.1%

$0.0				58%
4Q18	1Q19	2Q19	3Q19	4Q19
Loan Fundings		Payoffs/Paydowns	C&I Line Utilization Rate

16

DRIVERS OF LOAN GROWTH

_________________________________

• Focus on operating companies driving growth in C&I and CRE-Owner Occupied loan portfolios over the longer-term
• 2019 outstanding balances in operating company loans impacted by exit of business line ($25mm), lower line utilization ($30mm), and payoffs ($35mm) stemming from imprudent competition in our market (credit structures and pricing)



Balance sheet management resulting in growth in other non-core loan categories

$1,200

Total Loans Outstanding

($ in millions)

$700

Total C&I + CRE-Owner Occupied

Loans Outstanding

($ in millions)

$656

All Other Loans Outstanding

($ in millions)

$600

		$1,126
$1,065	$1,094	$600

$609

$629

$500

$497

$1,000

$800

$500

$947

$400

$300

$547

$456 $438

$399

$400

$300

$200

12/31/16 12/31/17 12/31/18 12/31/19

12/31/16 12/31/17 12/31/18 12/31/19

12/31/16 12/31/17 12/31/18 12/31/19

17

ASSET QUALITY

_________________________________

• Increase in NPAs and NCOs not centered in any specific industry classification
• Identified weaknesses are company specific (e.g., loss of key contracts and management changes)
• Comprehensive review of credit administration processes and loan portfolio largely completed

		NPAs/Total Assets			NCOs/Average Loans
2.00%								(annualized)
					2.40%
							1.96%
1.50%						1.90%
					1.12%	1.40%
				0.93%
1.00%
						0.90%				0.80%
0.50%	0.41%								0.54%
				0.40%
		0.10%	0.10%			-0.02%		0.02%
0.00%						-0.10%
	4Q18	1Q19	2Q19	3Q19	4Q19	4Q18	1Q19	2Q19	3Q19	4Q19

18

DEPOSIT COMPOSITION

FOCUSED ON CORE DEPOSITS

_________________________________

2019 Deposit Trends	$1.20 Billion as of December 31, 2019
Average Cost of Total Deposits
	of 1.08% in 4Q19

Checking accounts up 25% Core deposits up 7% Time deposits up 2% Total deposits up 6%

Certificates

of Deposit

23.1%

Savings/Money

Market

34.7%

Non-Interest

Bearing

33.1%

Interest

Checking

9.1%

19

NET INTEREST MARGIN

_________________________________

Well Positioned for Stable to Increasing Net Interest Margin

• Positive factors impacting cost of funds
• • Growth in DDAs allowing for reduced reliance on time deposits
  • Continued opportunities to reduce rates on non-maturity deposits
  • Approximately 2/3 of CD portfolio will mature in 2020 (current rates approximately 70 bps lower than maturing rates)
  • Deposit base has shifted to less rate sensitive clients over past two years
• Positive factors impacting loan yields
• • New loan production focused on higher yielding C&I loans
  • Repricing from recent Fed Funds rate cuts largely complete
  • 60% of total loans are fixed rate
  • $120 million of variable rate loans within 0-50 bps of floors at 12/31/19
  • $140 million of variable rate loans within 50-100 bps of floors at 12/31/19

20

STRONG CAPITAL POSITION

_________________________________

	PM BANK	WELL-CAPITALIZED REQUIREMENT
15.0%	12.7%	12.7%	13.8%

10.0%

10.0%8.0%

6.5%

5.0%

0.0%

COMMON EQUITY TIER 1	TIER 1 CAPITAL RATIO	TOTAL CAPITAL RATIO
CAPITAL RATIO

As of December 31, 2019

21

Strategic Priorities

_________________________________

• Accelerate growth and profitability - double acquisition of new operating companies 2019-2020
• Increase business development productivity through realignment of resources to allow bankers more time to spend with clients and new prospects
• Leverage success in winning deposit relationships to expand lending opportunities with high quality operating companies
• Continue to improve deposit mix with increases in core deposits and reduced reliance on CDs
• Maintain stable to increasing net interest margin
• Generate higher non-interest income through further growth in SBA gain on sale income
• Keep expenses stable to generate increasing operating leverage
• Maintain strong asset quality with manageable credit costs

22

I n v e s t o r R e l a t i o n s :
C u r t C h r i s t i a n s s e n
( 7 1 4 ) 4 3 8 - 2 5 3 1
C u r t . c h r i s t i a n s s e n @ p m b a n k . c o m	23

Non-GAAP Reconciliation

_________________________________

			Q1:18			Q2:18			Q3:18			Q4:18			Q1:19			Q2:19			Q3:19			Q4:19		12M:18		12M:19
															(Dollars in thousands)
A	Net interest income	$	12,185	$	12,447	$	11,689	$	12,601	$	12,051	$	12,219	$	12,743	$	12,543	$	48,922	$	49,556
B	PMAR interest recoveries		791			811			32			-			-			-			-			-			1,634			-
C	Adjusted net interest income (A - B)		11,394			11,636			11,657			12,601			12,051			12,219			12,743			12,543			47,288			49,556
D	Non-interest income		1,055			1,136			1,115			1,329			1,490			1,386			1,342			1,369			4,635			5,588
E	Non-interest expense		9,533			9,299			9,002			9,135			8,983			9,707			9,697			9,790			36,970			38,179
F
Adjusted net income before provision for		2,916			3,473			3,770			4,795			4,558			3,898			4,388			4,122			14,953			16,965
	loan losses and taxes (C + D - E)
G	Provision for loan losses		-			-			-			-			3,300			-			2,100			3,750			-			9,150
H	Adjusted net income before tax (F - G)		2,916			3,473			3,770			4,795			1,258			3,898			2,288			372			14,953			7,815
I	Normalized tax provision (H x 30%)		875			1,042			1,131			1,439			377			1,169			686			112			4,487			2,344
J	Adjusted net income (H - I)	$	2,041	$	2,431	$	2,639	$	3,356	$	881	$	2,729	$	1,602	$	260	$	10,466	$	5,471
K	Average assets	$	1,308,729	$	1,349,530	$	1,330,648	$	1,364,721	$	1,389,850	$	1,410,713	$	1,437,816	$	1,435,195	$	1,338,716	$	1,418,571
L	Average equity	$	116,184	$	120,854	$	134,593	$	138,961	$	143,206	$	144,639	$	148,381	$	150,048	$	127,730	$	146,592
M	Adjusted ROAA (J / K, annualized)		0.62%			0.72%			0.79%			0.98%			0.25%			0.77%			0.45%			0.07%			0.78%			0.39%
N	Adjusted ROAE (J / L, annualized)		7.03%			8.05%			7.84%			9.66%			2.46%			7.55%			4.32%			0.69%			8.19%			3.73%

24