Pacific Mercantile Bancorp : January 2021 Investor Presentation

J a n u a r y 2 5 , 2 0 2 1

I N V E S TO R P R E S E N TAT I O N

FORWARD LOOKING STATEMENTS

This news 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, including the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic. 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 news release. 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: deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk that steps we have taken to strengthen our overall credit administration are not effective; 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; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Readers of this presentation are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that are contained in our Annual Report on Form 10-K for the year ended December 31, 2019 which is on file with the Securities and Exchange Commission (the "SEC"). Additional information is set forth in our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2020, which is on file with the SEC, and readers of this presentation are urged to review the additional information that is contained in that report. 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 presentation, 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

FOURTH QUARTER 2020 SUMMARY

_________________________________

• QTD net income of $3.7 million, or $0.16 per fully diluted share, with YTD net income of $8.3 million, or $0.35 per fully diluted share
• Higher revenue and stable expenses drove improvement in efficiency ratio to 60.4% from 70.4% in 4Q19
• NIM contracted 3 bps to 3.31% due primarily to adjustment in PPP fee income recognition and increase in loans on nonaccrual
• Continued improvement in deposit mix - non-maturing deposits represent 84.6% of total deposits
• Increase in loan production and funding in 4Q20, although PPP loan forgiveness resulted in decline in total loan balances
• Lower loan balances and prior quarter provisions resulted in no provision expense in 4Q20, although ALLL/total loans increased 6 bps to 1.43%

3

STRONG EXECUTION ON STRATEGIC PRIORITIES

_________________________________

Improve Deposit Mix and Reduce Cost of Deposits

Streamline Cost Structure and Increase Operating Leverage

Increase Contributions of

Non-Interest Income

Generate Higher Level

of Profitability

Expansion of Commercial

Banking Team

•Non-maturity deposits increased to 84.6% of total deposits at 12/31/20 from 76.9% at 12/31/19

•Spot rate cost of deposits declined to 0.27% at 12/31/20 from 0.99% at 12/31/19

•Expense management initiative implemented in 1H20 resulting in $3 million in annualized run rate cost savings

•Efficiency ratio improved to 60.4% in 4Q20 from 70.4% in 4Q19

•New fee structure resulted in service fees increasing by 129% in 4Q20 compared to 4Q19

•Focus on SBA loan production driving meaningful revenue from the gain on loan sale income

•Net income increased 740% in 4Q20 compared to 4Q19

•ROAA improved to 1.03% in 4Q20 from 0.12% in 4Q19

•ROAE improved to 10.37% in 4Q20 from 1.16% in 4Q19

•Hired new Chief Banking Officer in Q2

•Added five proven Southern California commercial lenders in 2H20

•Expanding presence in Los Angeles footprint

4

CALIFORNIA COVID RE-OPENING REGULATIONS

• California Department of Public Health has developed a complex set of metrics that determine risk level by county

• Resultant color coding used for determined re-opening tiers

• Re-opening tiers establish operating parameters for businesses, such as occupancy rates

Detail of re-opening parameters by Industry Sector available here: https://www.cdph.ca.gov/Programs/CID/DCDC/CDPH%20Document%20Library/COVID-19/Dimmer-Framework-September_2020.pdf

5

CALIFORNIA REOPENING STATUS BY COUNTY

As of 1-12-2021

_________________________________

• Nearly every county in California under more strict reopening guidelines compared to Q3 2020
• Cases per day per 100K in Southern California well below state average but higher positivity rates
• New metric of ICU availability at 0% in Southern California region - places more restrictive operating guidelines for businesses

6

"WELLNESS CHECKS" ON CLIENTS

_________________________________

Mar

Jun

Sep

Dec

42%	43%	57%		55%
		48%
	36%	42%
				35%
	14%	7%	10%	9%
	Heavy	Moderate but Acceptable	Stable to Positive

• Initial contacts with clients beginning in early February centered on supply chain impacts associated with China trade, extended client outreach regarding business impact of COVID-19
• RYG* qualitative assessment regarding degree of impact on core clients, including rolling cash flow forecasts
• December review covered $827 million in total loan balances, or 83% of the loan portfolio (excluding PPP)

*Red rating related to those businesses that were heavily impacted, Yellow for those businesses that impact was moderate but acceptable, and Green for those businesses who were stable to positive.

7

"WELLNESS CHECKS" ON CLIENTS RYG by Loan Grade - 12/31/2020

_________________________________

Pass

Watch/Special Mention

Classified

47%33%

64%

19%

23%

34%

2%

30%

49%

8

"WELLNESS CHECKS" ON CLIENTS

RYG by Loan Type - 12/31/2020

_________________________________

C&I	Commercial Real Estate*

57%

26%

52%

42%

17%	6%
	LTV** of 58%

• CRE-Owneroccupied, CRE-Non-owner occupied, Multifamily and Construction
• Dollar weighted average based upon LTV at origination

9

COMMERCIAL LOAN PORTFOLIO*

Exposure to High Risk Sectors

_________________________________

		Percent	Classified	Percent
	Amount	Of Total	Amount	Classified
NAICS Category	(millions)	Loans	(millions)	Loans
		(Dollars in millions)
Health care and social assistance (62)	$ 13.0	1.0%	$ -	-
Entertainment/movie theaters (71/5121)	31.7	2.6%	18.5	20.6%
Accommodation and food services (72)	36.0	3.0%	-	-
Retail trade (44/45)	30.1	2.5%	0.3	0.4%
Wholesale (42)	26.2	2.2%	0.6	0.8%
Transportation/distribution (48)	20.0	1.6%	12.0	13.4%
Total high risk sectors	$157.0	12.9%	$31.4	34.7%

*Includes C&I and Commercial Real Estate, excluding PPP as of December 31, 2020

10

"WELLNESS CHECKS" ON CLIENTS

RYG by COVID High Impact Industries - 12/31/2020

_________________________________

100%

Healthcare

71%

29%

Retail

34%

9%

57%

Entertainment/Movie Theatres

44%

11%

45%

Wholesale

45% 39%

16%

Accommodation/Food Service

59%

33%

8%

Transportation/Distribution

11

CURRENT* LOAN PAYMENT DEFERRALS

By Loan Category

_________________________________

1st Deferral

2nd Deferral

3rd Deferral

Loan Category	$	#	$	#		$	#
			(Dollars in millions)
Commercial & industrial	$ -	-	$ 3.98	6	$	-	-
Commercial real estate - owner occupied	-	-	-	-	16.03	1
Commercial real estate - non-owner occupied	-	-	-	-		-	-
Multifamily	-	-	-	-		-	-
Consumer	0.07	3	0.30	5		0.04	1
Residential	-	-	0.14	1		-	-
Totals	$0.07	3	$4.42	12	$16.07	2

* Loans under deferred payment status as of December 31, 2020

12

LOAN PORTFOLIO 12-31-20

Asset Quality Ratings by Category

_________________________________

		Special	Sub
Loan Category	Pass	Mention	Standard	Doubtful	Total
			(Dollars in millions)
Commercial & industrial	$493.4	$13.7	$59.4	$0.6	$567.1
Commercial real estate - owner occupied	162.2	6.9	28.2	-	197.3
Commercial real estate - non-owner occupied	192.3	0.8	1.8	-	194.9
Multifamily	158.8	0.4	-	-	159.2
Construction and land development	11.8	-	-	-	11.8
Consumer	80.6	-	0.2	-	80.8
Residential	12.8	-	-	-	12.8
Totals	$1,111.9	$21.8	$89.6	$0.6	$1,223.9

13

LOAN PORTFOLIO 12-31-20

Reserve Coverage by Category

_________________________________

				Reserve to	Reserve to
Loan Category	Balance	Classified	Reserve	Balance	Classified
			(Dollars in millions)
Commercial & industrial (excluding PPP)	$ 337.4	$60.0	$11.3	3.34%	18.74%
Commercial real estate - owner occupied	197.3	28.2	2.6	1.34%	9.35%
Commercial real estate - non-owner occupied	194.9	1.8	0.8	0.39%	41.11%
Multifamily	159.2	-	0.6	0.36%	-
Construction and land development	11.8	-	0.1	1.16%	-
Consumer	80.8	0.2	1.8	2.18%	965.72%
Residential	12.8	-	.3	2.62%	-
Totals (excluding PPP)	994.2	90.2	17.5	1.76%	19.33%
PPP (100% SBA guarantee)	229.7	-	-	-	-
Total gross loans	$1,223.9	$90.2	$17.5	1.43%	19.33%

14

PAYCHECK PROTECTION PROGRAM (PPP)

_________________________________

Launched Online Application Portal

Program

Successes

Key PPP Metrics

100% of Funding Need in Place

•Began accepting applications 1st day, April 3rd

•Received over 300 initial applications day-1

•Processed and funded a total of 700 applications

•Round 1: Funded 430 loans totaling $243 million

•Round 2: Funded 270 loans totaling $49 million

•Funded average loan size of $417 thousand

•Workforce in excess of 36,000 for funded/approved applicants

•Processing fees expected to exceed $7.5 million

•Q4 fee income recognized - $1.6mm QTD and $6.5mm YTD

•Additional $176mm available from FHLB

•$135mm available from Federal Reserve excluding PPP

•PPP loans pledged as collateral with Federal Reserve through PPPLF

15

PAYCHECK PROTECTION PROGRAM (PPP)

Forgiveness Process

				_________________________________
			Cumulative PPP Loan Forgiveness Status - 01-20-2021
	300
			By dollar, 42% of PPP loans						$140
	250
		have been submitted to the					$118	$120
							Amount (in millions)
	200		SBA, half of which have			$94			$100
Number			been forgiven
		$78					$80
150
100					$52					$59	$60
						$49			$40
	50			$24			$29					$20
	14	$8	28	1	66	3	137 66	205	131	235	176
	0											$-
	Aug	Sep	Oct	Nov	Dec	Jan
			# Submitted		# Forgiven	$ Submitted		$ Forgiven
												16

LOAN* PRODUCTION AND PORTFOLIO TRENDS

_________________________________

Millions	$60
$40
	$20
	$0

-$20

-$40

-$60

-$80

Jan-20Feb-20Mar-20	Apr-20May-20Jun-20Jul-20Aug-20	Sep-20	Oct-20Nov-20Dec-20
CY New Loan Origination**	Pre-Existing Loan Draw/(Pay Down)	Pay Offs	C&I Utilization Rate

• Excludes SBA Paycheck Protection Program loans
• Reflects current year cumulative net change in month inclusive of working capital line activity

70%

68%

66%

64%

62%

60%

58%

56%

54%

52%

50%

17

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

SPOT RATE* TRENDS

_________________________________

5.21%	5.19%
		4.83%	4.81%	4.88%	4.77%	4.77%	4.77%	4.78%	4.75%	4.76%	4.64%
4.22%	4.20%			4.39%	4.31%	4.36%	4.38%	4.46%	4.45%	4.47%	4.38%
4.07%	4.13%

Widening spreads - better now than before 150bp of rate reductions

0.99%	1.00%
	0.76%	0.60%	0.49%
		0.46%	0.41%	0.39%	0.33%
			0.30%	0.28%	0.27%
Jan-20	Feb-20Mar-20Apr-20May-20	Jun-20	Jul-20	Aug-20Sep-20	Oct-20	Nov-20	Dec-20
		Note Rate**	Deposit Cost	Spread

*Weighted average rate on the last day of each month **Excludes SBA PPP loans

18

CD REPRICING NEXT 12 MONTHS

_________________________________

Millions

$30		1.40%

1.30%

$25

1.20%

1.10%

$20

											1.00%
$15											0.90%
											0.80%
$10											0.70%
$5											0.60%
											0.50%
$0											0.40%
J-21	F-21	M-21	A-21	M-21	J-21	J-21	A-21	S-21	O-21	N-21	D-21
				Maturing Balance	WAIR*

*Projected weighted average rate assuming all maturing CDs roll at current offering rate of 25 basis points

19

STRONG CAPITAL POSITION AT BANK

_________________________________

• Stock buy-backs on hold 18.0%

 No dividends and none	15.0%
being considered	12.0%

 Not adopting Community	9.0%
Bank Leverage Ratio	6.0%

Framework	3.0%
	0.0%

PM BANK WELL-CAPITALIZED REQUIREMENT

14.6% 14.6% 15.9%

10.0%

8.0%

6.5%

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

As of December 31, 2020

20

STRONG LIQUIDITY POSITION AT BANK

_________________________________

• $676 million of total available liquidity
• $324 million of primary liquidity and liquidity ratio of 20%
• Increased borrowing capacity for funding PPP loans
• • Arranged for PPP loans to be pledged at Federal Reserve
  • Participant in PPPLF-$230mm of additional availability

As of December 31, 2020

FRB Capacity,

$106

FHLB

Capacity,Cash, $288 $242

Unpledged

Securities,

$40

In millions

21

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	22