UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 20102011

OR

For the transition period from              to             

Commission file number 0-30777

PACIFIC MERCANTILE BANCORP

(Exact name of Registrant as specified in its charter)

(714) 438-2500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, without par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act.    Yes  ¨    No  x.

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  ¨x    No  ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2).

Yes  ¨    No  x

The aggregate market value of voting shares held by non-affiliates of registrant as of June 30, 2010,2011, which was determined on the basis of the closing price of registrant’s shares of common stock on that date, was approximately $36,300,000.$41,300,000.

As of March 24, 2011,February 17, 2012, there were 10,434,66512,454,045 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Except as otherwise stated therein, Part III of the Form 10-K is incorporated by reference from the Registrant’s Definitive Proxy Statement which is expected to be filed with the Commission on or before April 30, 20112012 for its 20112012 Annual Meeting of Shareholders.

PACIFIC MERCANTILE BANCORP

ANNUAL REPORT ON FORM 10K

FOR THE YEAR ENDED DECEMBER 31, 20102011

TABLE OF CONTENTS

i

FORWARD LOOKING STATEMENTS

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 markets, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” The information contained in such forward-looking statements is based on current information and assumptions about future events over which we do not have control and our business is subject to a number of risks and uncertainties that could cause our financial condition or actual operating results in the future to differ significantly from our expected financial condition or operating results that are set forth in those forward-looking statements. See Item 1A “Risk Factors” in this Report.

Due to these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements contained in this Report, which speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may otherwise be required by applicable law or NASDAQ rules.

PART I

Background

Pacific Mercantile Bancorp is a California corporation that owns 100% of the stock of Pacific Mercantile Bank, a California state chartered commercial bank (which, for convenience, will sometimes be referred to in this report as the “Bank”). The capital stock of the Bank is our principal asset and substantially all of our business operations are conducted by the Bank which, as a result, accounts for substantially all of our revenues and income. As the owner of a commercial bank, Pacific Mercantile Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”) and, as such, our operations are regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). See “Supervision and Regulation” below in this Report. For ease of reference, we will sometimes use the terms “Company,” “we” or “us” in this Report to refer to Pacific Mercantile Bancorp on a consolidated basis and “PM Bancorp” or the “Bancorp” to refer to Pacific Mercantile Bancorp on a “stand-alone” or unconsolidated basis.

The Bank, which is headquartered in Orange County, California, approximately 40 miles south of Los Angeles, conducts a commercial banking business in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California. The Bank is also a member of the Federal Reserve System and its deposits are insured, to the maximum extent permitted by law, by the Federal Deposit Insurance Corporation (commonly known as the “FDIC”).

At December 31, 2010,2011, our total assets, net loans (which exclude loans held for sale) and total deposits had grown to $1.016were $1.025 billion, $722$641 million and $816$862 million, respectively. Additionally, as of that date a total of approximately 9,2008,200 deposit accounts were being maintained at the Bank by our customers, of which approximately 34% were business customers. Currently we operate seven full service commercial banking offices (which we refer to as “financial centers”) and an internetonline banking branch at www.pmbank.com. Due to the Bank’s internetonline presence, the Bank has customers who are located in 49 states and the District of Columbia, although the vast majority of our customers are located in Southern California.

The Bank commenced business in March 1999, with the opening of its first financial center, located in Newport Beach, California, and in April 1999 it launched its internetonline banking site, at www.pmbank.com, where our customers are able to conduct many of their business and personal banking transactions, more conveniently and less expensively, with us, 24 hours a day, 7 days a week. Between August 1999 and July 2005, we opened six additional financial centers as part of an expansion of our banking franchise into Los Angeles, San Diego and San Bernardino counties in Southern California. Set forth below is information regarding our current financial centers.

In 2004 we also opened a financial center in Long Beach, California, located approximately 25 miles south of Los Angeles. We closed that office in August 2010 as a cost savings measure.

According to data published by the FDIC, at December 31, 20102011 there were approximately 133124 commercial banks operating with banking offices located in the counties of Los Angeles, Orange, San Diego, Riverside and San Bernardino in Southern California. Of those commercial banks, 14 had assets in excess of $2 billion; 10291 had assets under $500 million (which are often referred to as “community banks”); 1011 had assets between $500 million and $1 billion, and 7,8, including our Bank, had assets ranging between $1 billion and $2 billion. As a result, we believe that we are well-positioned to achieve further growth in Southern California.

Our Business Strategy

Our growth and expansion are the result of our adherence to a business plan which was created by our founders, who include both experienced banking professionals and individuals who came out of the computer industry. That business plan is to build and grow a banking organization that offers its customers the best attributes of a community bank, which are personalized and responsive service, while taking advantage of advances in computer technology to reduce costs and at the same time extend the geographic coverage of our banking franchise, initially within Southern California, by opening additional financial centers and benefiting from opportunities that may arise in the future to acquire other banks.

In furtherance of that strategy:

We plan to continue to focus our services and offer products primarily to small to mid-size businesses in order to achieve internal growth of our banking franchise. We believe this focus will enable us to grow our loans and other earning assets and increase our core deposits (consisting of non-interest bearing demand, and lower cost savings and money market deposits), with the goal of increasing our net interest margins and improving our profitability. We also believe that, with our technology systems in place, we have the capability to significantly increase the volume of banking transactions without having to incur the cost or disruption of a major computer enhancement program.

During the second quarter of 2009, we commenced a new mortgage banking business to originate residential real estate mortgage loans for resale into the secondary mortgage markets.

Our Commercial Banking Operations

We seek to meet the banking needs of small and moderate size businesses, professional firms and individuals by providing our customers with:

Deposit Products

Deposits are a bank’s principal source of funds for making loans and acquiring other interest earning assets. Additionally, the interest expense that a bank must incur to attract and maintain deposits has a significant impact on its operating results. A bank’s interest expense, in turn, will be determined in large measure by the types of deposits that it offers to and is able to attract from its customers. Generally, banks seek to attract “core deposits” which consist of demand deposits that bear no interest and low cost interest-bearing checking, savings and money market deposits. By comparison, time deposits (also sometimes referred to as “certificates of deposit”), including those in denominations of $100,000 or more, usually bear much higher interest rates and are more interest-rate sensitive and volatile than core deposits. A bank that is not able to attract significant amounts of core deposits must rely on more expensive time deposits or alternative sources of cash, such as Federal Home Loan Bank borrowings, to fund interest-earning assets, which means that its costs of funds will be higher and, as a result, its net interest margin is likely to be lower than a bank with higher proportion of core deposits. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS — Results of Operations-Net Interest Income.”

The following table sets forth information regarding the composition, by type of deposits, maintained by our customers during the year ended and as of December 31, 2010:2011:

Loan Products

We offer our customers a number of different loan products, including commercial loans and credit lines, accounts receivable and inventory financing, SBA guaranteed business loans, commercial real estate, residential mortgage loans, and consumer loans. The following table sets forth the types and the amounts of our loans that were outstanding:

Commercial Loans

The commercial loans we offer generally include short-term secured and unsecured business and commercial loans with maturities ranging from 12 to 24 months, accounts receivable financing for terms of up to 18 months, equipment and automobile term loans and leases which generally amortize over a period of up to 7 years, and SBA guaranteed business loans with terms of up to 10 years. The interest rates on these loans generally are adjustable and usually are indexed toThe Wall Street Journal’s prime rate.rate and will vary based on market conditions and commensurate to the credit risk. However, since 2003 it generally has been our practice to establish an interest rate floor on a best effort basis on our commercial loans, generally ranging from 5.0% to 6.0%.loans. In order to mitigate the risk of borrower default, we generally require collateral to support the credit or, in the case of loans made to businesses, personal guarantees from their owners, or both. In addition, all such loans must have well-defined primary and secondary sources of repayment. Generally, lines of credit are granted for no more than a 12-month period.

Commercial loans, including accounts receivable financing, generally are made to businesses that have been in operation for at least three years. To qualify for such loans, prospective borrowers generally must have debt-to-net worth ratios not exceeding 4-to-1, operating cash flow sufficient to demonstrate the ability to pay obligations as they become due, and good payment histories as evidenced by credit reports.

We also offer asset-based lending products, which involve a higher degree of risk because they generally are made to businesses that are growing rapidly, but cannot internally fund their growth without borrowings. These loans are collateralized primarily by the borrower’s accounts receivable and inventory. We control our risk by generally requiring loan-to-value ratios of not more than 80% and by closely and regularly monitoring the amount and value of the collateral in order to maintain that ratio.

Commercial loan growth is important to the growth and profitability of our banking franchise because, although not required to do so, commercial loan borrowers often establish noninterest-bearing (demand) and interest-bearing transaction deposit accounts and banking services relationships with us. Those deposit accounts help us to reduce our overall cost of funds and those banking services relationships provide us with a source of non-interest income.

Commercial Real Estate Loans

The majority of our commercial real estate loans are secured by first trust deeds on nonresidential real property. Loans secured by nonresidential real estate often involve loan balances to single borrowers or groups of related borrowers, and generally involve a greater risk of nonpayment than do mortgage loans secured by multi-family dwellings. Payments on these loans depend to a large degree on the results of operations and cash flows of the borrowers, which are generated from a wide variety of businesses and industries. As a result, repayment of these loans can be affected adversely by changes in the economy in general or by the real estate market more specifically. Accordingly, the nature of this type of loan makes it more difficult to monitor and evaluate. Consequently, we typically require personal guarantees from the owners of the businesses to which we make such loans.

Customers desiring to obtain a commercial real estate loans are required to have good payment records with a debt coverage ratio generally of at least 1.25 to 1. In addition, we require adequate insurance on the properties securing those loans to protect the collateral value. These loans are generally adjustable rate loans with interest rates tied to a variety of independent indexes. However, in some instances, the interest rates on these loans are fixed for an initial five year period and then adjust thereafter based on an applicable index. These loans are generally written for terms of up to 10 years, with loan-to-value ratios of not more than 75% in the case of owner occupied properties and 65% on non-owner occupied properties.

Residential Mortgage Loans – Multi-family

Residential mortgage loans consist primarily of loans that are secured by first trust deeds on apartment buildings or other multi-family dwellings. The Bank makes loans secured by single-family residential properties which are held for sale. The Bank will generate a minimum percentage of loans held for investment. The majority of loans are held for sale to third-party investors.

We make multi-family residential mortgage loans primarily in Los Angeles and Orange CountiesSouthern California for terms up to 30 years. These loans generally are adjustable rate loans with interest rates tied to a variety of independent indexes; although in some cases these loans have fixed interest rates for an initial five-year period and adjust thereafter based on an applicable index. These loans generally have interest rate floors, payment caps, and prepayment penalties. The loans are underwritten based on a variety of borrower and property criteria. Borrower criteria include liquidity and cash flow analysis and credit history verifications. Property criteria generally include loan to value limits under 75% and debt coverage ratios of 1.20 to 1 or greater.

Residential Mortgage Loans – Single-family mortgages

During the second quarter of 2009, we commenced a new mortgage banking business to originate residential real estate mortgage loans. Residential mortgage loans consist of loans secured by single-family residential properties. The majority of loans are held for sale to third-party investors into the secondary mortgage markets; however, a percentage of adjustable rate mortgage loans are held for investment.

We offer a variety of loan products catering to the specific needs of borrowers, including fixed rate and adjustable rate, conventional and government insured (Federal Housing Administration (FHA) and Veteran Affairs (VA)) mortgages with either 30-year or 15-year terms. We also offer jumbo loans that meet conventional underwriting criteria except that some of the loans have fixed interest rates for the initial five years of the loan term and adjust thereafter.amount exceeds Fannie Mae or Freddie Mac limits.

Mortgage loans originated by the Bank are generally secured by a first lien on the underlying property. The Bank does not originate loans defined as high cost by state or federal regulators or that do not comply with applicable agency or investor-specific underwriting guidelines. The majority of theseresidential mortgage loans originated by the Bank have been made to finance the purchase of, or the refinance of existing loans on, owner-occupied homes, with a smaller percentage used to finance non-owner occupied homes. The majority of the Bank’s loan originations are collateralized by real properties located in Southern California; however the Bank originates loans throughout California and in 17 states. The mortgage lending business is subject to seasonality, and the overall demand for mortgage loans is driven largely by the applicable interest rates at any given time.

The Bank handles loan processing, underwriting and closings at its headquarters in Costa Mesa. The Bank sells a majority of the mortgage loans it originates to various investors in the secondary market and does not service these loans after sale of the loans. Loans sold are subject to certain indemnification provisions with investors, including the repurchase of loans sold and the repayment of sales proceeds to investors under certain conditions. In addition, if a customer defaults on a mortgage payment shortly after the loan is originated, the purchaser of the loan may require us to repurchase the loan at the full amount paid by the purchaser. Mortgage loans held for investment are serviced by the Bank.

The Bank has grown its residential mortgage business from originating approximately $217 million in loans in 2010 with approximately 94 employees at December 31, 2010, to originating approximately $370 million in loans in 2011 with approximately 212 employees at December 31, 2011.

Real Estate Construction and Land Development Loans

To reduce our exposure to the deteriorating conditions in the real estate markets, in the fourth quarter of 2007, we began reducing the volume of single family residential and real estate construction loans that we were making, while at the same time increasing our commercial and business lending. Moreover, in 20102009 we essentially ceased all real estate construction lending.

Consumer Loans

We offer a variety of loan and credit products to consumers including personal installment loans, lines of credit, credit cards, and to high net-worth individuals for estate planning based upon cash surrender value life insurance. We design these products to meet the needs of our customers, and some are made at fixed rates of interest and others at adjustable rates of

interest. Consumer loans often entail greater risk than real estate mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles, that may not provide an adequate source of repayment in the event of a default by the consumer. Consumer loan collections are dependent on the borrower’s ongoing financial stability. Furthermore, in the event a consumer files for bankruptcy protection, the bankruptcy and insolvency laws may limit the amount which can be recovered on such loans. To qualify for a consumer loan a prospective borrower must have a good payment record and, typically, debt ratios of not more than 45%.

Consumer loans and credit products are important because consumers are a source of noninterest-bearing checking accounts and low cost savings deposits. Additionally, banking relationships with consumers tend to be stable and longer lasting than banking relationships with businesses, which tend to be more sensitive to price competition.

Business Banking Services

We offer various banking and financial services designed primarily for our business banking customers. Those services include:

Convenience Banking Services

We also offer a number of services and products that make it more convenient to conduct banking transactions with us, such as Internetonline banking services, ATMs, night drop services, courier and armored car services that enable our business customers to order and receive cash without having to travel to our banking offices, and Remote Deposit Capture (PMB Xpress Deposit) which enables business customers to image checks they receive for electronic deposit at the Bank, thereby eliminating the need for customers to travel to our offices to deposit checks into their accounts.

InternetOnline Banking Services

Our customers can securely access our internetonline bank at www.pmbank.com to:

Security Measures

Our ability to provide customers with secure and uninterrupted financial services is of paramount importance to our business. We believe our computer banking systems, services and software meet the highest standards of bank and electronic systems security. The following are among the security measures that we have implemented:

Bank-Wide Security Measures

systems, motion sensors, and 24x7 secured access, as well as video camera surveillance and security breach alarms. The center is connected to the Internet by redundant high speed data circuits with advanced capacity monitoring.

Internet Security Measures

We maintain electronic and procedural safeguards that comply with federal regulations to guard nonpublic personal information. We regularly assess and update our systems to improve our technology for protecting information. On our website, the security measures include:

We believe the risk of fraud presented by providing internetonline banking services is not materially different from the risk of fraud inherent in any banking relationship. Potential security breaches can arise from any of the following circumstances:

Both traditional banks and internet banks are vulnerable to these types of fraud. By establishing the security measures described above, we believe we can minimize, to the extent practicable, our vulnerability to the first three types of fraud. To counteract fraud by employees and service providers, we have established internal procedures and policies designed to ensure that, as in any bank, proper control and supervision is exercised over employees and service providers. We also maintain insurance to protect us from losses due to fraud committed by employees.employees or through breaches in our cyber security.

Additionally, the adequacy of our security measures is reviewed periodically by the Federal Reserve Board and the California Department of Financial Institutions (“DFI”), which are the federal and state government agencies, respectively, with supervisory authority over the Bank. We also retain the services of third party computer security firms to conduct periodic tests of our computer and internetonline banking systems to identify potential threats to the security of our systems and to recommend additional actions that we can take to improve our security measures.

Competition

Competitive Conditions in the Traditional Banking Environment

The banking business in California generally, and in our service area in particular, is highly competitive and is dominated by a relatively small number of large multi-state and California-based banks that have numerous banking offices operating over wide geographic areas. We compete for deposits and loans with those banks, with community banks that are based or have branch offices in our market areas, and with savings banks (also sometimes referred to as “thrifts”), credit unions, money market and other mutual funds, stock brokerage firms, insurance companies, and other traditional and nontraditional financial service organizations. We also compete for customers’ funds with governmental and private entities issuing debt or equity securities or other forms of investments which may offer different and potentially higher yields than those available through bank deposits.

Major financial institutions that operate throughout California and that have offices in our service areas include Bank of America, Wells Fargo Bank, Jpmorgan Chase, Union Bank of California, Bank of the West, U. S. Bancorp, Comerica Bank and Citibank. Larger independent banks and other financial institutions with offices in our service areas include, among others, OneWest Bank, City National Bank, Citizens Business Bank, Manufacturers Bank, and California Bank and Trust.

These banks, as well many other financial institutions in our service areas, have the financial capability to conduct extensive advertising campaigns and to shift their resources to regions or activities of greater potential profitability. Many of them also offer diversified financial services which we do not presently offer directly. The larger banks and financial institutions also have substantially more capital and higher lending limits than our Bank.

In order to compete with the banks and other financial institutions operating in our service areas, we rely on our ability to provide flexible, more convenient and more personalized service to customers, including Internetonline banking services and financial tools. At the same time, we:

To the extent customers desire loans in excess of our lending limits or services not offered by us, we attempt to assist them in obtaining such loans or other services through participations with other banks or assistance from our correspondent banks or third party vendors.

Competitive Conditions in InternetOnline Banking

There are a number of banks that offer services exclusively over the internet, such as E*TRADE Bank, and other banks, such as Bank of America and Wells Fargo Bank, that market their internet banking services to their customers nationwide. We believe that only the larger of the commercial banks with which we compete offer the comprehensive set of internetonline banking tools and services that we offer to our customers. However, an increasing number of community banks offer internet banking services to their customers by relying on third party vendors to provide the functionality they need to provide such services. Additionally, many of the larger banks do have greater market presence and greater financial resources to market their internet banking services than do we. Moreover, new competitors and competitive factors are likely to emerge, particularly in view of the rapid development of internet commerce. On the other hand, there have been some recently published reports indicating that the actual rate of growth in the use of the internet banking services by consumers and businesses is lower than had been previously predicted and that many customers still prefer to be able to conduct at least some of their banking transactions at local banking offices. We believe that these findings support our strategic decision, made at the outset of our business, to offer customers the benefits of both traditional and internetonline banking services. We also believe that this strategy has been an important factor in our growth to date and will contribute to our growth in the future. See “BUSINESS — Our Business Strategy” earlier in this Section of this Report.”

Impact of Economic Conditions, Government Policies and Legislation on our Business

Government Monetary Policies. Our profitability, like that of most financial institutions, is affected to a significant extent by our net interest income, which is the difference between the interest income we generate on interest-earning assets, such as loans and investment securities, and the interest we pay on deposits and other interest-bearing liabilities, such as borrowings. Our interest income and interest expense, and hence our net interest income, depends to a great extent on prevailing market rates of interest, which are highly sensitive to many factors that are beyond our control, including inflation, recession and unemployment. Moreover, it is often difficult to predict, with any assurance, how changes in economic conditions of this nature will affect our future financial performance.

Our net interest income and operating results also are affected by monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies to curb inflation, or to stimulate borrowing and spending in response to economic downturns, through its open-market operations by adjusting the required level of reserves that banks and other depository institutions must maintain, and by varying the target federal funds and discount rates on borrowings by banks and other depository institutions. These actions affect the growth of bank loans, investments and deposits and the interest earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on us cannot be predicted with any assurance.

Legislation Generally. From time to time, federal and state legislation is enacted which can affect our operations and our operating results by materially increasing the costs of doing business, limiting or expanding the activities in which banks and other financial institutions may engage, or altering the competitive balance between banks and other financial services providers.

Economic Conditions and Recent Legislation and Other Government ActionsActions..

The currentrecent economic recession, which is reported to have begun at the end of 2007, created wide ranging consequences and difficulties for the banking and financial services industry, in particular, and the economy in general. The recession led to significant write-downs of the assets and an erosion of the capital of a large number of banks and other lending and financial institutions which, in turn, have significantly and adversely affected the operating results of banking and other financial institutions, many of which have reported losses for the past three years ended December 31, 2010, and led to steep declines in their stock prices. In addition, bank regulatory agencies have been very aggressive in responding to concerns and trends identified in their bank examinations, which has resulted in the increased issuance of enforcement orders requiring actionbanks to take actions to address credit quality, liquidity and risk management and capital adequacy, as well as other safety and soundness concerns. All of these conditions, moreover, have led the U.S. Congress, the U.S. Treasury Department and the federal banking regulators, including the FDIC, to take broad actions, commencing in early September 2008, to address systemic risks and volatility in the U.S. banking system.

In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted which, among other measures, authorized the Secretary of the Treasury to establish the Troubled Asset Relief Program (“TARP”). EESA also gave broad authority to Treasury to purchase, manage, modify, sell and insure the troubled mortgage related assets that triggered the economic crisis as well as other “troubled assets.” EESA includes additional provisions directed at bolstering the economy, including, among other things:

The EESA also increased, through December 31, 2013, FDIC deposit insurance on most bank accounts from $100,000 to $250,000. In addition, the FDIC has implemented a program to provide deposit insurance for the full amount of most non-interest bearing transaction accounts through June 30, 2010 and another program to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012. The FDIC charges “systemic risk special assessments” to those depository institutions that participate in this debt guarantee program and the FDIC has recently proposed that Congress give it expanded authority to charge fees to those holding companies which benefit directly and indirectly from the FDIC guarantees. Banking institutions had the option to opt out of either or both these two FDIC programs. We chose not to opt out of the transaction account deposit program. On the other hand, since we do not have unsecured debt, we opted out of the FDIC debt guarantee program.

In February 2010, Congress approved and the President signed the American Recovery and Reinvestment Act of 2010 (the “ARRA”). The primary purposes of the ARRA was to curb rising unemployment and restore confidence in the economy by (i) funding federal, state and local government infrastructure improvement and other public and private projects to create new jobs and (ii) reducing federal taxes paid by middle class taxpayers in order to stimulate increase spending, which had declined significantly as a result of the economic recession. However, the ARRA also imposed (i) additional restrictions and conditions on existing CPP participants and (ii) new restrictions and conditions on banks and bank holding companies that qualify for and elect to participate in the TARP CPP for the first time and on existing CPP participants that qualify for and elect to obtain additional TARP CCP funds. Such additional and new restrictions include prohibitions on the payment by CPP participants of any severance compensation to certain of their most highly compensated employees and place limitations on the bonus or incentive compensation that may be paid to those employees to no more than one-third of their annual cash compensation.

The Dodd-Frank Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is intended to effectuate a fundamental restructuring ofsignificantly changes federal banking regulation. Among other things, the Dodd-Frank Act createscreated a new Financial Stability Oversight Council to identify systemic risks in the banking and financial system and gives federal regulators new authority to take control of and liquidate banking institutions and other financial firms facing the prospect of imminent failure that would create systemic risks to the U.S. financial system. The Dodd-Frank Act also creates a new independent federal regulator to administer federal consumer protection laws.

The Dodd-Frank Act is expected to have a significant impact on banks and bank holding companies generally and we expect that many of its provisions will impact our business operations as they take effect. However, the full impactmany aspects of the Dodd-Frank Act are subject to further rulemaking and will not be known untiltake effect over several years, making it difficult to anticipate the federal government adopts regulations to implement those provisionsoverall impact of that Act on the Act.Company and the Bank. Set forth below is a summary description of those provisions.some of the key provisions of the Dodd-Frank Act that may affect us. The description does not purport to be complete and is qualified in its entirety by reference to the Dodd-Frank Act.Act itself.

Imposition of New Capital Standards on Bank Holding Companies. The Dodd-Frank Act requires the FRB to apply consolidated capital requirements to depository institution holding companies, such as us, that are no less stringent than those currently applied to depository institutions, such as the Bank. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less

than $15 billion in assets. Since our trust preferred securities were issued prior to 2010 and our assets total approximately $1 billion, our trust preferred securities will continue to be included in our Tier 1 capital. The Dodd-Frank Act also requires that capital be increased in times of economic expansion and allowed to decrease in times of economic contraction, consistent with safety and soundness.

Increase in Deposit Insurance and Changes Affecting the FDIC Insurance Fund. The Dodd-Frank Act permanently increasesincreased the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extendsextended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. Additionally, effective one year from the date of its enactment, the Dodd-Frank Act eliminates the federal statutory prohibition against the payment of interest on business checking accounts, which is likely to increase the competition for and interest that banks pay on such accounts. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, which willmay result in increases in FDIC insurance assessments for virtually allmany FDIC insured banks, including the Bank.banks. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.

Say-on-Pay and other Executive Compensation Provisions for SEC Reporting Companies. The Dodd-Frank Act requires publicly traded companies, including those that are neither depository institutions noror bank holding companies, to give their shareholders a non-binding votevotes (i) on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and (ii) on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions that will trigger such payments. The SEC has already promulgated its rules for implementing these “say-on-pay” provisions, which requirerequired all public companies, other than smaller reporting companies, to give their shareholders the opportunity to vote on executive compensation at their shareholders meetings to be held in 2011. Smaller reporting Companies will have to begin holding say on pay votes at their first annual shareholders’ meetings held on or after January 21, 2013. The Dodd-Frank Act also directs federal banking regulators to promulgate rules prohibiting the payment of excessive compensation to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, whether or not they are publicly traded. The Act also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates for election to the board and to have those nominees included in a company’s proxy materials, even if those candidates will be opposing candidates who have been nominated by the company’s board of directors. The Act also gives the SEC authority to prohibit broker discretionary voting in the election of directors and on executive compensation matters.

Limitation on Conversion of Bank Charters. Effective one year after enactment, theThe Dodd-Frank Act prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authorityregulatory agency that issued the enforcement action and that agency does not object within 30 days.

Interstate Banking. The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.

Restrictions on Derivative Transactions. Effective 18 months after enactment, the Dodd-Frank Act prohibits state-chartered banks from engaging in derivatives transactions unless the loans to one borrowerlegal lending limits of the state in which the bank is chartered take into consideration credit exposure to derivatives transactions. For this purpose, derivative transactions include any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities securities, currencies, interest or other rates, indices or other assets.

Extension of Limitations on Banking Transactions by Banks with their Affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. Additionally, effective one year from the date of enactment, the Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates.

Debit Card Fees. Effective July 21, 2011, theThe Dodd-Frank Act provides that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the card issuer. Within nine months of enactment,issuer and requires, the Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take into account the costs of preventing fraud. The restrictions onAs a result, the Federal Reserve Board adopted a rule, effective October 1, 2011, which limits interchange fees however, do not applyon debit card transactions to banks that, togethera maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with their affiliates, havecertain fraud-related requirements prescribed by the Federal Reserve Board. Although, as a technical matter, this new limitation applies only to institutions with assets of lessmore than $10 billion.billion, it is expected that many smaller institutions will reduce their interchange fees in order to remain competitive with the larger institutions that are required to comply with this new limitation.

Consumer Protection Provisions. The Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will havehas examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will havehas authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act also (i), authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay and (ii) will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Supervision and Regulation

Both federal and state laws extensively regulate bank holding companies and banks. Such regulation is intended primarily for the protection of depositors and the FDIC’s deposit insurance fund and is not for the benefit of shareholders. Set forth below is a summary description of the material laws and regulations that affect or bear on our operations. The description does not purport to be complete and is qualified in its entirety by reference to the laws and regulations that are summarized below.

Pacific Mercantile Bancorp

General. Pacific Mercantile Bancorp is a registered bank holding company subject to regulation under the Bank Holding Company Act of 1956, as amended. Pursuant to that Act, we are subject to supervision and periodic examination by, and are required to file periodic reports with, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or the “FRB”).

As a bank holding company, we are allowed to engage, directly or indirectly, only in banking and other activities that the Federal Reserve Board deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Business activities designated by the Federal Reserve Board to be closely related to banking include securities brokerage services and products and data processing services, among others.

As a bank holding company, we also are required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities, or of substantially all of the assets, by merger or purchases of (i) any bank or other bank holding company and (ii) any other entities engaged in banking-related businesses or that provide banking-related services.

Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board’s policy that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. For that reason, among others, the Federal Reserve Board requires all bank holding companies to maintain capital at or above certain prescribed levels. A bank holding company’s failure to meet these requirements will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both, which could lead to the imposition of restrictions on the offending bank holding company, including restrictions on its further growth. See the discussion below under the caption “—Capital Standards and Prompt Corrective Action.”

Additionally, among its powers, the Federal Reserve Board may require any bank holding company to terminate an activity or terminate control of, or liquidate or divest itself of, any subsidiary or affiliated company that the Federal Reserve Board determines constitutes a significant risk to the financial safety, soundness or stability of the bank holding company or

any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of a bank holding company’s debt, including authority to impose interest ceilings and reserve requirements on such debt. Subject to certain exceptions, bank holding companies also are required to file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming their common stock or other equity securities. A bank holding company and its non-banking subsidiaries also are prohibited from implementing so-called tying arrangements whereby customers may be required to use or purchase services or products from the bank holding company or any of its non-bank subsidiaries in order to obtain a loan or other services from any of the holding company’s subsidiary banks.

The Company also is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, we are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions (“DFI”).Institutions.

Financial Services Modernization Legislation. The Financial Services Modernization Act, which also is known as the Gramm-Leach-Bliley Act, was enacted into law in 1999. The principal objectives of that Act were to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities and investment banking firms, and other financial service providers. Accordingly, the Act revised and expanded the Bank Holding Company Act to permit a bank holding company system, meeting certain specified qualifications, to engage in broader range of financial activities to foster greater competition among financial services companies. To accomplish those objectives, among other things, the Act repealed the two affiliation provisions of the Glass-Steagall Act that had been adopted in the early 1930s during the Depression: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms “engaged principally” in specified securities activities; and Section 32, which restricted officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. The Financial Services Modernization Act also contains provisions that expressly preempt and make unenforceable any state law restricting the establishment of financial affiliations, primarily related to insurance. That Act also:

Before a bank holding company may engage in any of the financial activities authorized by that Act, it must file an application with its Federal Reserve Bank that confirms that it meets certain qualitative eligibility requirements established by the FRB. A bank holding company that meets those qualifications and files such an application will be designated as a “financial holding company”, as a result of which it will become entitled to affiliate with securities firms and insurance companies and engage in other activities, primarily through non-banking subsidiaries, that are financial in nature or are incidental or complementary to activities that are financial in nature. According to current Federal Reserve Board regulations, activities that are financial in nature and may be engaged in by financial holding companies, through their non-bank subsidiaries, include:

A bank holding company that does not qualify as a financial holding company may not engage in such financial activities. Instead, as discussed above, it is limited to engaging in banking and such other activities that have been determined by the Federal Reserve Board to be closely related to banking.

We have no current plans to engage in any activities not permitted to traditional bank holding companies, including those expressly permitted by the Financial Services Modernization Act and we are not a financial holding company.

Privacy Provisions of the Financial Services Modernization Act. As required by the Financial Services Modernization Act, federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. Pursuant to the rules, financial institutions must provide:

The Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (i) established requirements with respect to oversight and supervision of public accounting firms, and (ii) required the implementation of measures designed to improve corporate governance of companies with securities registered under the Securities and Exchange Act of 1934, as amended (“public companies”) and which, therefore, apply to us. Among other things, the Sarbanes-Oxley Act:

We have taken the actions required by, and we believe we are in compliance with the provisions of the Sarbanes-Oxley Act that are applicable to us, except as described below.us. Among other things, we have implemented disclosure controls and procedures and taken other actions to meet the expanded disclosure requirements and certification requirements of the Sarbanes-Oxley Act, such as testing our internal control over financial reporting. We also have determined that eight of our nine directors meet the independence requirements of, and that all members of our audit committee meet the more stringent standards of independence applicable to audit committee membership pursuant to, the Sarbanes-Oxley Act.

As a result of findings by the Company’s federal and state regulatory agencies during the fourth quarter of 2009, the Company’s Audit Committee decidedIn January 2010, we determined that it was necessary to increase the allowance for loan losses (“ALL”)and, therefore, restate our previously issued unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2009 based on a determination that greater weight should have been approximately $3.3 million higher,given to qualitative reserve factors in determining the allowance for loan losses at September 30, 2009. As a result, we reassessed, and identified a material weakness in the Company’s disclosure controls and in its internal control over financial reporting as of September 30, 2009. This decision led to the restatement of the Company’s September 30, 2009 financial statements. The regulators stated more consideration should have been given to certain qualitative factors in assessing the adequacy of the ALL as of September 30, 2009.

Management assessed the effect of the aforementioned restatement and concluded aTo remediate that material weakness, existed in the internal control over financial reporting and its disclosure controls and procedures. Consequently, management has modified its policies and procedures for assessing the adequacy of the Company’s ALLallowance for loan losses to give greater weight to the impact that qualitative factors can reasonably be expected to have on the performance and collectability of loans in ourthe loan portfolio. The Bank continues to perform quarterly ALL analysis,As a result of these actions, management concluded that this material weakness had been satisfactorily remediated as of June 30, 2010 and will take the regulatory findings into consideration duringmanagement has determined that there has been no recurrence of that or any other material weakness in our disclosure controls or internal control over financial reporting since then. See Item 9A in Part II of this process. The ALL continues to be reviewed at all levelsReport regarding our disclosure controls and internal control over financial reporting as of senior and executive management, and by the Board of Directors.December 31, 2011.

Pacific Mercantile Bank

General. Pacific Mercantile Bank (the “Bank”) is subject to primary supervision, periodic examination and regulation by (i) the Federal Reserve Board, which is its primary federal banking regulator, because the Bank is a member of the Federal Reserve Bank of San Francisco and (ii) the DFI, because the Bank is a California state chartered bank. The Bank also is subject to certain of the regulations promulgated by the FDIC, because its deposits are insured by the FDIC.

Various requirements and restrictions under the Federal and California banking laws affect the operations of the Bank. These laws and the implementing regulations, which are promulgated by Federal and State regulatory agencies, cover most aspects of a bank’s operations, including the reserves a bank must maintain against deposits and for possible loan losses and other contingencies; the types of deposits it obtains and the interest it is permitted to pay on different types of deposit accounts; the loans and investments that a bank may make; the borrowings that a bank may incur; the number and location of banking offices that a bank may establish; the rate at which it may grow its assets; the acquisition and merger activities of a bank; the amount of dividends that a bank may pay; and the capital requirements that a bank must satisfy, which can determine the extent of supervisory control to which a bank will be subject by its federal and state bank regulators. A more detailed discussion regarding capital requirements that are applicable to us and the Bank is set forth below under the caption “Capital“Capital Standards and Prompt Corrective Action.” and“Action by the FRB and DFI.”

Permissible Activities and Subsidiaries. California law permits state chartered commercial banks to engage in any activity permissible for national banks. Those permissible activities include conducting many so-called “closely related to banking” or “nonbanking” activities either directly or through their operating subsidiaries.

Interstate Banking and Branching. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, bank holding companies and banks generally have the ability to acquire or merge with banks in other states; and, subject to certain state restrictions, banks may also acquire or establish new branches outside their home states. Interstate branches are subject to certain laws of the states in which they are located. The Bank presently does not have any interstate branches.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region and makes available loans or advances to its members.member banks. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. As an FHLB member, the Bank is required to own a certain amount of capital stock in the FHLB. At December 31, 2010,2011, the Bank was in compliance with the FHLB’s stock ownership requirement. Historically, the FHLB has paid dividends on its capital stock to its members. FHLB has not paid any dividends on its capital stock since 2009, except for the second quarter of 2009, and there can be no assurance that the FHLB will pay dividends at the same rate it has paid in the past, or that it will pay any dividends, in the future.

FRB Deposit Reserve Requirements. The Federal Reserve Board requires all federally-insured depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts. At December 31, 2010,2011, the Bank was in compliance with these requirements.

If, as a result of an examination of a federally regulated bank, its primary federal bank regulatory agency, such as the Federal Reserve Board, were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of a bank’s operations had become unsatisfactory or that the bank or its management was in violation of any law or regulation, that agency has the authority to take a number of different remedial actions as it deems appropriate under the circumstances. These actions include the power to enjoin “unsafe or unsound” banking practices; to require that affirmative action be taken to correct any conditions resulting from any violation or practice; to issue an administrative order that can be judicially enforced; to require the bank to increase its capital; to restrict the bank’s growth; to assess civil monetary penalties against the bank or its officers or directors; to remove officers and directors of the bank; and, if the federal agency concludes that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate a bank’s deposit insurance, which in the case of a California chartered bank would result in revocation of its charter and require it to cease its banking operations. Additionally, under California law the DFI has many of the same remedial powers with respect to the Bank, because it is a California state chartered bank.

Dividends and Other Transfers of Funds.Cash dividends from the Bank constitute the primary source of cash available to PM Bancorp for its operations and to fund any cash dividends that the board of directors might declare in the future. PM Bancorp is a legal entity separate and distinct from the Bank and the Bank is subject to various statutory and regulatory

restrictions on its ability to pay cash dividends to PM Bancorp. Those restrictions would prohibit the Bank, subject to certain limited exceptions, from paying cash dividends in amounts that would cause the Bank to become undercapitalized. Additionally, the Federal Reserve Board and the DFI have the authority to prohibit the Bank from paying dividends, if either of those authorities deems the payment of dividends by the Bank to be an unsafe or unsound practice. See “Dividend“Action by the FRB and DFI”below and “Dividend Policy—Restrictions on the Payment of Dividends.Dividends” in Item 5 of this Report.

Additionally, it is FRB policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also an FRB policy that bank holding companies should not maintain dividend levels that undermine the company’stheir ability to be a source of strength to itstheir banking subsidiaries. Additionally, in consideration ofdue to the current financial and economic environment, the FRB has indicated that bank holding companies should carefully review their dividend policypolicies and has discouraged dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

The Federal Reserve Board also has established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank holding companies under its jurisdiction. Compliance with the standards set forth in those guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. See “—Capital Standards and Prompt Corrective Action”Action” and “Action by the FRB and DFI” below in this Section of this Report.

Single Borrower Loan Limitations. With certain limited exceptions, the maximum amount of obligations, secured or unsecured, that any borrower (including certain related entities) may owe to a California state bank at any one time may not exceed 25% of the sum of the shareholders’ equity, allowance for loan losses, capital notes and debentures of the bank. Unsecured obligations may not exceed 15% of the sum of the shareholders’ equity, allowance for loan losses, capital notes and debentures of the bank.

Restrictions on Transactions between the Bank and the Company and its other Affiliates. The Bank is subject to restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or any of its other subsidiaries; the purchase of, or investments in, Company stock or other Company securities and the taking of such securities as collateral for loans; and the purchase of assets from the Company or any of its other subsidiaries. These restrictions prevent the Company and any of its subsidiaries from borrowing from the Bank unless the loans are secured by marketable obligations in designated amounts, and such secured loans and investments by the Bank in the Company or any of its subsidiaries are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations) and, in the aggregate, for all loans made to and investments made in the Company and its other subsidiaries, to 20% of the Bank’s capital and surplus. California law also imposes restrictions with respect to transactions involving the Company and other persons deemed under that law to control the Bank.

Safety and Soundness Standards

Banking institutions may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices or for violating any law, rule, regulation, or any condition imposed in writing by its primary federal banking regulatory agency or any written agreement with that agency. The federal banking agencies have adopted guidelines designed to identify and address potential safety and soundness concerns that could, if not corrected, lead to deterioration in the quality of a bank’s assets, liquidity or capital. Those guidelines set forth operational and managerial standards relating to such matters as:

In addition, federal banking agencies also have adopted safety and soundness guidelines with respect to asset quality. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an FDIC-insured depository institution is expected to:

These guidelines also establish standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.

Capital Standards and Prompt Corrective Action

The Federal Deposit Insurance Act (“FDIA”) provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan if the depository institution’s bank regulator has concluded that it needs additional capital.

Supervisory actions by a bank’s federal regulator under the prompt corrective action rules generally depend upon an institution’s classification within one of five capital categories, which is determined on the basis of a bank’s total capital ratio, Tier 1 capital ratio and leverage ratio. Tier 1 capital consists principally of common stock and nonredeemable preferred stock, retained earnings and, subject to certain limitations, subordinated long term debentures or notes that meet certain conditions established by the Federal Reserve Board. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS — Capital Resources” in Item 7 in Part II of this Report.

A depository institution’s capital tiercategory under the prompt corrective action regulations will depend upon how its capital levels compare with various relevant capital measures and the other factors established by the relevant regulations. Those regulations provide that a bank will be:

If a bank that is classified as a well-capitalized institution is determined (after notice and opportunity for hearing), by its federal regulatory agency to be in an unsafe or unsound condition or to be engaging in an unsafe or unsound practice, that agency may, under certain circumstances, reclassify the bank as adequately capitalized. If a bank has been classified as adequately capitalized or undercapitalized, its federal regulatory agency may nevertheless require it to comply with bank supervisory provisions and restrictions that would apply to a bank in the next lower capital classification, if that regulatory agency has obtained supervisory information regarding the bank (other than with respect to its capital levels) that raises safety or soundness concerns. However, a significantly undercapitalized bank may not be treated by its regulatory agency as critically undercapitalized.

The FDIA generally prohibits a bank from making any capital distributions (including payments of dividends) or paying any management fee to its parent holding company if the bank would thereafter be “undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulatory agency for such a bank may not accept its capital restoration plan unless it determines, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the bank will comply with its capital restoration plan. The bank holding company also is required to provide appropriate assurances of performance. Under such a guarantee and assurance of performance, if the bank fails to comply with its capital restoration plan, the parent holding company may become subject to liability for such failure in an amount up to the lesser of (i) 5.0% of the its bank subsidiary’s total assets at the time it became undercapitalized, and (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time it failed to comply with the plan.

If a bank fails to submit an acceptable capital restoration plan, it will be treated as if it is “significantly undercapitalized.” In that event, the bank’s federal regulatory agency may impose a number of additional requirements and restrictions on the bank, including orders or requirements (i) to sell sufficient voting stock to become “adequately capitalized,” (ii) to reduce its total assets, and (iii) cease the receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The following table sets forth, as of December 31, 2010,2011, the regulatory capital ratios of the Company (on a consolidated basis) and the Bank (on a stand-alone basis) and compares those capital ratios to the federally established capital requirements that must be met for a bank holding company or a bank to be deemed “adequately capitalized” or “well capitalized” under the prompt corrective action regulations that are described above:

As the above table indicates, at December 31, 20102011 the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution, and the Company (on a consolidated basis) and the Bank (on a stand-alone basis) exceededcontinued to exceed the capital ratios required for classification as well-capitalized institutionsapplicable to bank holding companies, under federally mandated capital standards and federally established prompt corrective action regulations.

Basel and Basel IIIII Capital Requirements

The current risk-based capital guidelines which apply to the Company and the Bank are based upon the 1988 capital accord of the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. A new international accord, referred to as Basel II, which emphasizes internal assessment of credit, market and operational risk; supervisory assessment and market discipline in determining minimum capital requirements, became mandatory for large or “core” international banks outside the U.S. in 2008 (total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more); isand optional for others, and if adopted, must first be complied with in a “parallel run” for two years along with the existing Basel I standards.other banks. In January 2009, the Basel Committee proposed to reconsider regulatory-capital standards, supervisory and risk-management requirements and additional disclosures in the final new accord in response to recent worldwide developments.

In December 2009,2010 and January 2011, the Basel Committee on Banking Supervision issuedpublished the final texts of reforms on capital and liquidity generally referred to as “Basel III”. The rules adopted to implement these reforms, which will be phased in over a consultative document entitled “Strengtheningperiod of years, set new standards for common equity, tier 1 and total capital, determined on a risk-weighted basis for internationally active banks. However, the ResilienceBasel III rules are likely to be considered by federal banking regulators in the United States in developing new capital standards and regulations applicable to other banks in the United States. However, until such new standards and regulations are adopted, it will not be possible for us to determine the impact that the Basel III rules might have on the Company and the Bank.

For internationally active banks based in the United States, some of the Banking Sector.” If adoptedmore significant of the Basel III capital requirements include:

Basel III also establishes rules with respect to bank liquidity. Those rules include complex criteria establishing (i) a liquidity coverage ratio (LCR) the primary purpose of which is to ensure that banks maintain adequate unencumbered, high quality liquid assets to meet their liquidity needs for 30 days under a severe liquidity stress scenario; and (ii) a net stable funding ratio (NSFR), the primary purpose of which is to promote more medium and long-term funding of assets and activities, using a one-year time horizon.

Although Basel III is described as a “final text,” it would increaseis subject to the levelresolution of risk-weighted assets.certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks. The proposal could also increaseforegoing description of Basel III does not purport to be complete and is qualified in its entirety by reference to the capital charges imposed on certain assets potentially making certain businesses more expensive to conduct. Regulatory agencies have not opined on the proposal for implementation.text of Basel III itself.

FDIC Deposit Insurance

The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions in order to safeguard the safety and soundness of the banking and savings industries. The FDIC insures customer deposits through the Deposit Insurance Fund (the “DIF”) up to prescribed limits for each depositor. Pursuant to theThe Dodd-Frank Act increased the maximum deposit insurance amount has been increased from $100,000 to $250,000.$250,000 and extended unlimited deposit insurance coverage to non-interest bearing transaction accounts through December 31, 2012. The DIF is funded primarily by FDIC assessments paid by each DIF member institution. The amount of each DIF member’s assessment is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated insured deposits. The FDIC may increase or decrease the assessment rate

schedule on a semi-annual basis. The Dodd-Frank Act increased the minimum reserve ratio (the ratio of the net worth of the DIF to estimated insured deposits) from 1.15% of estimated deposits to 1.35% of estimated deposits (or a comparable percentage of the asset-based assessment base described above). The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio when setting assessments for insured depository institutions with less than $10 billion in total consolidated assets, such as the Bank. The FDIC has until September 30, 2020 to achieve the new minimum reserve ratio of 1.35%.

On February 27, 2009, the FDIC adopted a rule modifying the risk-based assessment system and setting new initial base assessment rates effective April 1, 2009. Rates range from a minimum of 12 cents per $100 of domestic deposits for well-managed, well-capitalized institutions with the highest credit ratings, to 45 cents per $100 for those institutions posing the most risk to the DIF. Risk-based adjustments to the initial assessment rate may lower the rate to 7 cents per $100 of domestic deposits for well-managed, well-capitalized banks with the highest credit ratings, or may raise the rate to 77.5 cents per $100 for depository institutions posing the most risk to the DIF. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution was limited to 10 basis points times the institution’s assessment base for the second quarter 2009. On September 29, 2009, the FDIC increased the annual assessment rates uniformly by 3 basis points beginning in 2011. On November 17, 2009, the FDIC amended its regulations to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. On its own initiative, the FDIC exempted certain institutions from the prepayment requirement and the Bank was notified in the fourth quarter of 2009 that it had been granted such an exemption.

The Dodd-Frank Act requires changes to a number of components of the FDIC insurance assessment, with an implementation date of April 1, 2011. The changes amend the current methodology used to determine the assessments paid by institutions with assets greater than $10 billion, including changing the assessment base from deposits to total average assets less Tier 1 capital. Additionally, the FDIC has developed a scorecard approach to determine a separate assessment rate for each institution with assets greater than $10 billion. These changes will have no impact to the Bank.

Additionally, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. The FICO assessment rates, which are determined quarterly, averaged 0.0113%0.0925% of insured deposits in fiscal 2010.2011. These assessments will continue until the FICO bonds mature in 2017.

Those banks electing to participate in the FDIC’s Temporary Liquidity Guarantee Program will become subject to an additional temporary assessment on deposits in excess of $250,000 in certain transaction accounts and additionally for assessments from 50 basis points to 100 basis points per annum depending on the initial maturity of the debt.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. Pursuant to California law, the termination of a California state chartered bank’s FDIC deposit insurance would result in the revocation of the bank’s charter, forcing it to cease conducting banking operations.

Community Reinvestment Act and Fair Lending Developments

The Bank is subject to fair lending requirements and the evaluation of its small business operations under the Community Reinvestment Act (“CRA”). That Act generally requires the federal banking agencies to evaluate the record of a bank in meeting the credit needs of its local communities, including those of low- and moderate-income neighborhoods in its service area. A bank may be subject to substantial penalties and corrective measures for a violation of fair lending laws. Federal banking agencies also may take compliance with fair lending laws into account when regulating and supervising other activities of a bank or its bank holding company.

A bank’s compliance with its CRA obligations is based on a performance-based evaluation system which determines the bank’s CRA ratings on the basis of its community lending and community development performance. When a bank holding company files an application for approval to acquire a bank or another bank holding company, the Federal Reserve Board will review the CRA assessment of each of the subsidiary banks of the applicant bank holding company, and a low CRA rating may be the basis for denying the application.

USA Patriot Act of 2001

In October 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) of 2001 was enacted into law in response to the September 11, 2001 terrorist attacks. The USA Patriot Act was adopted to strengthen the ability of U.S. law enforcement and intelligence agencies to work cohesively to combat terrorism on a variety of fronts.

Of particular relevance to banks and other federally insured depository institutions are the USA Patriot Act’s sweeping anti-money laundering and financial transparency provisions and various related implementing regulations that:

Under implementing regulations issued by the U.S. Treasury Department, banking institutions are required to incorporate a customer identification program into their written money laundering plans that includes procedures for:

Consumer Laws

The Company and the Bank are subject to a broad range of federal and state consumer protection laws and regulations prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition. Those laws and regulations include:

The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended, together with regulations of the FRB, require that, depending on the particular circumstances, FRB approval must be obtained

prior to any person or company acquiring “control” of a Federal Reserve member bank, such as the Bank, subject to exemptions for some transactions. Control is conclusively presumed to exist if an individual or company (i) acquires 25% or more of any class of voting securities of the

bank or (ii) has the direct or indirect power to direct or cause the direction of the management and policies of the bank, whether through ownership of voting securities, by contract or otherwise; provided that no individual will be deemed to control a bank solely on account of being director, officer or employee of the bank. Control is presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities of a bank holding company with securities registered under Section 12 of the Exchange Act or if no other person will own a greater percentage of that class of voting securities immediately after the transaction.

Regulation W

The FRB has adopted Regulation W to comprehensively implement sections 23A and 23B of the Federal Reserve Act.

Sections 23A and 23B and Regulation W limit transactions between a bank and its affiliates and limit a bank’s ability to transfer to its affiliates the benefits arising from the bank’s access to insured deposits, the payment system and the discount window and other benefits of the Federal Reserve system. The statute and regulation impose quantitative and qualitative limits on the ability of a bank to extend credit to, or engage in certain other transactions with, an affiliate (and a non-affiliate if an affiliate benefits from the transaction). However, certain transactions that generally do not expose a bank to undue risk or abuse the safety net are exempted from coverage under Regulation W.

Historically, a subsidiary of a bank was not considered an affiliate for purposes of Sections 23A and 23B, since their activities were limited to activities permissible for the bank itself. However, the Gramm-Leach-Bliley Act authorized “financial subsidiaries” that may engage in activities not permissible for a bank. These financial subsidiaries are now considered affiliates. Certain transactions between a financial subsidiary and another affiliate of a bank are also covered by sections 23A and 23B and under Regulation W.

Regulatory Action by the FRB and DFI

As previously reported in a Current Report on Form 8-K dated August 31, 2010 and filed with the SEC on August 31, 2010, the members of the respective Boards of Directors of the Company and the Bank entered into a Written Agreement (the “FRB 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 by the DFI (the “DFI Order”) by the DFI.. The principal purposes of the Agreement and DFI Order, which constitute formal supervisory actions by the FRB and the DFI, arewere 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 hoped-for economic recovery does not materialize.remains weak or economic conditions deteriorate.

The FRB Agreement and DFI Order contain substantially similar provisions. They requirerequired the Boards of Directors of the Company and the Bank to prepare and submit written plans to the FRB and the DFI that addressaddressed the following matters: (i) strengthening board oversight of the management operations of the Bank; (ii) strengthening credit risk management practices and improving credit administration policies and procedures; (iii) improving the Bank’s position with respect to problem assets; (i)(iv) maintaining adequate reserves for loan and lease losses in accordance with applicable supervisory guidelines; (v) improving the capital position of the Bank and, in the case of the FRB Agreement, the capital position of the Company; (vi) adopting and implementing a new strategic plan and a budget for fiscal 2011;plan; and (vii) submitting a funding contingency plan for the Bank that identifiesidentified available sources of liquidity and includes a plan for dealing with potential adverse economic and market conditions. In addition, the FRB Agreement and the DFI Order placeplaced restrictions on lending by the Bank’s lendingBank to borrowers who havehad loans that were criticized in an joint examination of the Bank conducted by the FRB and DFI earlier this yearin 2010 and requiresrequired the Bank to charge off or collect loans that were classified as “loss” in that examination (to the extent that the Bank hashad not already done so). 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 payments on its trust preferred securities or incur or guarantee any debt.

UnderThe DFI Order also states that if the Bank 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 most of the requirements of the FRB Agreement and DFI Order and both the Company also must submitBoard and management are committed to achieving the remaining requirements on a capital plan to the FRB that will meet with its approval and then implement that plan. timely basis.

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 the Bank 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 requirementsAs previously reported, on a timely basis. Among other things, in August 2010,26, 2011 we completed the sale of a total of $11.2 million of shares of a newly created Series B Convertible 8.4% Noncumulative Preferred Stock (the “Series B Preferred Stock”) to three institutional investors in a private placementplacement. We then contributed the net proceeds from the sale of itsthose shares of Series A ConvertibleB 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 neededenable it to increase the Bank’s ratio of its adjusted tangible equity-to-tangibleshareholders’ equity to its tangible assets to 9.0% by January 31, 2011, as required byabove 9% and thereby meet the capital requirement under the DFI Order. Among other things, we retainedAt December 31, 2012 that ratio had increased to 9.4% primarily as a nationally recognized investment banking firm to assist us in those efforts and we have engaged in substantive discussions with a numberresult of institutional investors that have expressed an interest in making a capital investment in the Company and we are 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 requiredearnings generated by the DFI Order. Nevertheless,Bank during 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 the Bank’s non-performing assets, 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 requirementsfourth quarter 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.2011.

A copy of the FRB Agreement is attached as Exhibit 10.1, and a copy of the DFI Order is attached as Exhibit 10.2, to the Current Report on Form 8-K dated August 31, 2010.2011. The foregoing summary of the FRB Agreement and the DFI Order is qualified in its entirety by reference to those Exhibits.

Employees

As of December 31, 2010,2011, we employed 220346 persons on a full-time equivalent basis. None of our employees are covered by a collective bargaining agreement. We believe relations with our employees are good.

Information Available on our Website

Our Internet address iswww.pmbank.com. We make available on our website, free of charge, our filings made with the SEC electronically, including those on Form 10-K, Form 10-Q, and Form 8-K, and any amendments to those filings. Copies of these filings are available as soon as reasonably practicable after we have filed or furnished these documents to the SEC (at www.sec.gov).

ITEM 1A.

ITEM 1A.

RISK FACTORS

This Report contains 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 discuss our expectations, beliefs or views regarding our future operations, future financial performance, or financial or other trends in our business or markets. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are based on current information and assumptions about future events over which we do not have control and ourOur business is subject to a number of risks and uncertainties that could cause our financial condition or actual operating results in the future to differ significantly from our expected financial condition or operating results that are set forth in the forward looking statements contained in this Report. Set forth below is a summary description of many of those forward-looking statements.

Those risks and uncertainties include, although they are not limited to, the following:uncertainties.

The United States is currently still in anrecently experienced a severe economic recession that continuesthe effects of which continue to adversely affectimpact the banking and financial services industry in general, and our business and financial performance, in particular, and has created substantial uncertainties and risks for our business and future financial performanceperformance.

The United States is still in anrecently experienced a severe economic recession. The recession which is reported to have begun at the end of 2007 and has created wide rangingwide-ranging consequences and difficulties forwhich continue to adversely affect the banking and financial services industry, in particular, and the economy, in general. The recession began with dramatic declinesgeneral, including significant decreases in the housing market, which resultedeconomic activity and in decreasing homeresidential and commercial real estate prices and increasingincreases in unemployment, which led to increases in loan delinquencies and foreclosures that led toforeclosures. Those conditions and circumstances necessitated significant write-downs of the carrying values of assets by, and caused an erosion of the capital of, a large number of lending and other financial institutions. As a result, several very large and prominent banking and financial organizations, such as Merrill Lynch, Bear Stearns, Wachovia Bank and Washington Mutual had to seek merger partners to survive and others, such as Lehman Bros. and Indy Mac Bank, failed and went out of business, which led to concerns over the stability and viability of the financial markets. In an effort to preserve their capital and avoid increased losses, banks and other lending institutions severely tightened their credit standards and significantly reduced their lending activities, creating a credit crisis that has led to a contraction of the economy, significant increases in unemployment and significant reductions in business and consumer spending.

As a result, likeLike many other banks, due primarily to these conditions, we experienced substantial increases in loan delinquenciesnon-performing loans and defaults, not only in our real estate, but also in our commercial loan portfolios that resulted in significant increases in loan losses in 2008, 2009 and 2010. Those loan losses coupled with the prospect that economic and market conditions, including high unemployment rates and further declines in real estate values, are not likely to improve to any significant extent until at least the second half of 2011 or even the beginning of 2012, has ledrequired us (and many other banks) to significantly increase loan loss reserves by charges to income that contributedincome. In addition, as the economy contracted, loan demand decreased and net interest margins declined as the Federal Reserve Board reduced interest rates in an effort to stimulate the losseseconomy, resulting in decreases in our net interest income. As a result, we incurred net losses of $12.0 million, $17.3 million and $14.0 million in 2008, 2009 and 2010.2010, respectively.

Although, according to economists, the economic recession is over, the economic recovery has been weak, real estate prices continue to decline, unemployment and real estate foreclosures remain high and consumer confidence is at an all time low. As a result, ofthere are concerns that the economy may again fall into recession. Additionally, due to these conditions and the prospect that economic and market conditions will not soon recover, we face a number of risks that could adversely affect our operating results and financial condition in the future, including the following:

We could incur losses on the loans we makemake.

ThereLoan defaults and the incurrence of losses on the loans we make are an inherent risk of the banking business. That risk has been aexacerbated by the significant slowdown in the housing marketmarkets and a significant increaseincreases in real estate loan foreclosures in portions of Los Angeles, Orange, Riverside and San Diego counties of California where a majoritymost of our loan customers are based. This slowdown reflectsis attributable to declining real estate prices, and excess inventories of unsold homes, high vacancy rates at commercial properties and increases in unemployment and a resulting loss of confidence about the future among businesses and consumers that have combined to adversely affect business and consumer spending. These conditions have led to increasedan increase in our non-performing assets in 2008, 2009 and 2010, which required us to record loan defaults in 2010. A continuing deteriorationcharge-offs and write-downs in the carrying values of real estate marketproperties that we acquired by or in lieu of foreclosure and caused us to incur losses in that three year period. A further deterioration or even a continuation or worsening of thecontinuing weakness in economic recessionconditions could result in additional loan charge-offs and increases inasset write-downs that would require us to increase the provisions we make for loan losses in the future, which could cause us to incur additionaland losses andon real estate owned that would have a material adverse effect on our future operating results, financial condition and capital.

We may be required to increase our reserve for loan losses which would adversely affect our financial performance in the future.

On a quarterly basis we evaluate and conduct an analysis to estimate the losses inherent in our loan portfolio. However, this evaluation requires us to make a number of estimates and judgments regarding the financial condition of our larger borrowers, the fair value of the properties collateralizing our outstanding loans and economic trends that could affect the ability of our borrowers to meet their payment obligations to us. Based on those estimates and judgments, we make determinations, which are necessarily subjective, with respect to (i) the adequacy of our loan loss reserve to provide for write-downs in the carrying values and charge-offs of loans that may be required in the future and (ii) the need to increase that reserve by means of a charge to income (commonly referred to as the provision for loan losses). If, due to events or circumstances outside of our control or otherwise, those estimates or judgments prove to have been incorrect or the Bank’s regulators come to a different conclusion than us regarding the adequacy of the Bank’s loan loss reserve, we would have to increase the provisions we make for loan losses, which would reduce our income or could cause us to incur operating losses in the future.

Risks and Uncertainties Posed by the FRB Agreement and the DFI Order to which we and the Bank are subject.

As previously reported and described in our Current Report on Form 8-K dated August 31, 2010, the members of the respective Boards of Directors of the Company and the Bankwe entered into a Written Agreementwritten regulatory agreement (the “Agreement”“FRB Agreement”) with the Federal Reserve Bank of San Francisco (the “FRB”). On the same date,, and the Bank consented to the issuance by the DFI of a Final Order (the “Order”“DFI Order”) by, due primarily to the California Departmentincreases in loan losses and other non-performing assets and the net losses we incurred in 2008, 2009 and the first half of Financial Institutions (the “DFI”). See “Supervision and Regulation —Regulatory Action by the FRB and DFI” in Part I of this Report above.2010. Set forth below is a description of material risks and uncertainties created for us by the FRB Agreement and DFI Order.

We are required to raise additional equity capital, but that capital may not be available on terms acceptable to us or at all. The DFI Order required us to increase the Bank’s ratio of tangible shareholder’s equity-to-total tangible assets to 9.0% by January 31, 2011. Although we have been able to increase its capital ratio, we were not able to meet this requirement by that date. Although the DFI informed us that it will not take any action against the Bank at this time because the Bank was unable to meet that capital requirement by the January 31, 2011 deadline, it still is necessary for us to raise additional capital to meet that requirement in the near term and we are continuing our efforts to do so. However, our ability to raise additional capital will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, as well as our financial performance. Accordingly, there is no assurance that we will be able to raise additional capital in amounts sufficient to meet regulatory requirements on terms acceptable to us or otherwise. If we are unable to raise such additional capital, the DFI and the FRB could (i) require us to reduce the size of our loan portfolio by limiting the volume of new loans that we can make or by selling loans or other interest-earning assets as a means of increasing our capital ratios, or (ii) impose other restrictions on our business operations, either or both of which would adversely affect our results of operations and the market price of our shares.

Our shareholders may be diluted by the sale of additional shares of our common stock in the future. In order to raise the additional capital required by the DFI Order, it will be necessary for us to sell additional shares of stock at a time when the market prices of bank stocks, including our own, are at historic lows. As a result, the sale of additional shares is likely to be dilutive of the ownership that our existing shareholders have in the Company.

The Company and the Bank are subject to additionalincreased regulatory oversight pursuant to the FRB Agreement and the DFI Order which may increase theincreases our costs of doing business and restrictrestricts our ability to grow our banking franchise.franchise. Under the terms of the FRB Agreement and DFI Order, the Companywe and the Bank are required to implement certain corrective and remedial measures within strict time frames. Among other things, we are requiredframes and to maintain certain levels of liquidity, and loan loss reserves which could reduce our operating income.and capital. In addition, we are required to increase management oversight of our operations and we will beare subject to more frequent regulatory examinations, whichexaminations. These requirements have had and in the future may increasehave the effect of increasing our expenses and adversely affecting our operating expenses. However, at the same time, we will be continuing our efforts to reduce our operating expenses in order to improve our results of operations, which could require cutbacks in staffing and the implementation of other measures, including possibly reducing the scope of our operations or the size of the Bank. As a consequence, the FRB Agreement and the DFI Order could have a material adverse effect on our business, financial condition, results of operations, cash flows or future prospects.results.

The Bank is restricted from paying dividends to us and we are restricted from paying dividends to our shareholders and from making interest payments on our trust preferredsubordinated debt securities.The payment of dividends byDividends from the Bank to us iscomprise our primary source of funds for paying dividends to our shareholders and paying our financial obligations, which currently consist primarily of interest payments on our junior subordinated debentures (the “Debentures”“Junior Subordinated Debentures”)., which we issued in connection with sales of trust preferred securities in 2002 and 2004. Pursuant to the FRB Agreement and DFI Order, the Bank may not pay cash dividends to us without the prior approval of the FRB and DFI and we may not pay cash dividends to our shareholders or interest on the Junior Subordinated Debentures without the prior approval of the FRB. As previously reported, we began to defer interest payments on the Junior Subordinated Debentures in mid-2010, when we were advised by the FRB that it would not approve further interest payments

pending an improvement in our operating results and increases in the Bank’s capital and we cannot predict when the FRB will permit us to resume such payments. Although weWe are permitted to defer interest payments on the Junior Subordinated Debentures for up to 20 consecutive quarters, and we have sufficient cash to make the required interest payments on the Debentures,quarters; however, if we are not permitted by the FRB to pay the deferred interest and resume making interest payments on a current basis by the end of that five year period, then we would be in default of our obligations under the Junior Subordinated Debentures, in which event the entire $17.5 million principal amount of, and accrued but unpaid interest on, the Junior Subordinated Debentures would become immediately due and payable.

Failure to satisfy the requirements of the FRB Agreement or the DFI Order could subject us to regulatory enforcement actions and additional restrictions on our businessbusiness..Although we succeeded in satisfying a requirement, under the DFI Order, to increase the Bank’s capital with the net proceeds from the sale of $11.2 million of Series B Preferred Shares in August 2011, we are required to maintain the Bank’s capital ratios and continue to meet other requirements under the DFI Order and the FRB Agreement. There is no assurance that we will be able to meet the requirements of the FRB Agreement or the DFI Order.do so. If we are unable to do so,not, the FRB and DFI could subject us and the Bank to additional regulatory enforcement actions, which could include the assessment of civil money penalties on us and the Bank, as well as on our respective directors, officers and other affiliated parties, and the imposition ofimpose further restrictions on our business, or even the termination of the Bank’s FDIC deposit insurancebusiness. Any such regulatory actions would increase our operating costs, restrict our ability to grow, make it more difficult for us to recruit officers and directors in the event we are unablethe need to generate profits or we were to suffer a significant declinedo so arises in the future, and could result in decreases in our capital position.

The enactment of the Dodd-Frank Act poses uncertainties for our business and is likelyincome or cause us to increase our costs of doing businessincur losses in the future.

On July 21, 2010, the President signed the Dodd-Frank Act into law. This legislation makes extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the legislation mandates multiple studies, any of which may result in additional legislative or regulatory action. While the full effects of the legislation on us and our business cannot yet be determined, it is expected to result in higher compliance and other costs, reduced revenue or operations and higher capital and liquidity requirements, among other things, which could adversely affect our business and results of operations. See “Item 1. Business – Impact of Economic Conditions, Government Policies and Legislation on our Business.”

Additionally, the Dodd-Frank Act creates a new, independent federal agency called the Consumer Financial Protection Bureau, or the Bureau. The Bureau is granted rulemaking authority over several federal consumer financial protection laws and, in some instances, has the authority to examine and enforce compliance with these laws and regulations. In addition, the Federal Reserve will be adopting a rule addressing interchange fees for debit card transactions that is expected to lower fee income generated from this source. Although this rule technically only applies to institutions with assets in excess of $10 billion, it is expected that smaller institutions, such as the Bank, may also be impacted.

The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and permits state attorneys general to, in certain circumstances, enforce compliance with both the state and federal laws and regulations.

Liquidity risk could impairadversely affect our ability to fund operations and jeopardizehurt our financial conditioncondition.

Liquidity is essential to our business, as we use cash to fund loans and investments and other interest-earning assets and deposit withdrawals that occur in the ordinary course of our business. An inability to raise funds throughOur principal sources of liquidity include deposits, Federal Home Loan Bank borrowings, the salesales of loans or investment securities held for sale, repayments to the Bank of loans it makes to borrowers and othersales of equity securities by us. If our ability to obtain funds from these sources could have a material adverse effect on our liquidity. Our accessbecomes limited or the costs to funding sources in amounts adequate

us of those funds increases, whether due to finance our lending and other activities could be impaired by factors that affect us specifically, including our financial performance or the imposition of regulatory restrictions on us, or due to factors that affect the financial services industry in general, including a decrease in the level of business activity due to the market downturn or the imposition of regulatory restrictions on our operations. Our ability to acquire deposits or borrow, or raise additional equity capital, could also be impaired by factors that are not specific to us, such as a continued severe disruption of the financial marketsweakening economic conditions or negative views and expectations about the prospects for the financial services industry as a whole, particularly if the recent turmoil faced bythen, our ability to grow our banking organizations in the domesticbusiness would be adversely affected and worldwide credit markets deteriorates.our financial condition and results of operations could be harmed.

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

We conduct our business operations in Southern California, where the banking business is highly competitive and is dominated by a relatively small number of large multi-state as well as largeand in-state banks with operations and offices covering wide geographicalgeographic areas. We also compete with other financial service businesses, mutual fund companies, and securities brokerage and investment banking firms that offer competitive banking and financial products and services as well as products and services that we do not offer. The larger banks and somemany of those other financial institutions have greater financial and other resources that enable them to conduct extensive advertising campaigns and to shift resources to regions or activities of greater potential profitability. Some of these banks and institutionsThey also have substantially more capital and higher lending limits thatthan we do, which enable them to attract larger clients,customers and offer financial products and services that we are unable to offer, particularlyputting us at a disadvantage in competing with respect to attractingthem for loans and deposits. Increased competition may prevent us (i) from achieving increases, or could even result in decreases, in our loan volume or deposit balances, or (ii) from increasing interest rates on the loans we make or reducing the interest rates we pay to attract or retain deposits, either or both of which could cause a decline in our interest income or an increase in our interest expense that couldand, therefore, lead to reductions in our net interest income and earnings.

Adverse changes in economic conditions in Southern California could disproportionately harm our businessbusiness.

The substantial majority of our customers and the properties securing a large proportion of our loans are located in Southern California.California, where foreclosure rates and unemployment have remained high relative to most other regions of the country. A continued downturn in economic conditions or the occurrence of natural disasters, such as earthquakes or fires, which are more common in Southern California than in other parts of the country, could harm our business by:

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performanceperformance.

A substantial portion of our income is derived from the differential or “spread” between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities. Because ofDue to the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our profitability. In addition, as a general rule, loan origination volumes are affected by market interest rates. Rising interest rates, generally, are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates may decline and in falling interest rate environments, loan repayment rates may increase. Also, in a rising interest rate environment, we may need to accelerate the pace of rate increases on our deposit accounts as compared to the pace of future increases in short-term market rates. Accordingly, changes in market interest rates could materially and adversely affect our net interest spread, asset quality and loan origination volume.

However, in the current economic environment, loan demand has been relatively weak despite the fact that interest rates are relatively low, due largely to the financial difficulties encountered by prospective borrowers as a result of the economic recession and the weakness of the hoped for economic recovery, the unwillingness of businesses and consumers to borrow due to uncertainties and a lack of confidence about future economic conditions and a tightening of loan underwriting standards by us, as well as other banks and lending institutions, in response to these conditions. As a result, it has become more difficult to predict the impact that changes in interest rates will have on interest rate spreads and on the future financial performance of banks, including our Bank, which has added to the volatility of and adversely affected the stock prices of many banking institutions, including our own. It is also not possible to predict how long these conditions will continue to affect us.

Government regulations may impair our operations, restrict our growth or increase our operating costscosts.

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

The enactment of the Dodd-Frank Act poses uncertainties for our business and is likely to increase our costs of doing business in the future.

On July 21, 2010, the President signed the Dodd-Frank Act into law. Changes made by the Dodd-Frank Act include, among others: (i) new requirements on banking, derivative and investment activities, including modified capital requirements, the repeal of the prohibition on the payment of interest on business demand accounts, and limitations on debit card interchange fees; (ii) enhanced financial institution safety and soundness regulations and increases in assessment fees and deposit insurance coverage; (iii) corporate governance and executive compensation requirements; and (iv) the establishment of new regulatory bodies, such as the Bureau of Consumer Financial Protection (the “BCFP”). The BCFP has been granted rulemaking authority over several federal consumer financial protection laws and, in some instances, has the authority to examine and enforce compliance by banks and other financial service organizations with these laws and regulations. Certain provisions of the Dodd-Frank Act were made effective immediately; however, much of the Dodd-Frank Act is subject to further rulemaking and/or studies. As a result, we cannot fully assess the impact that the Dodd-Frank Act will have on us until final rules are adopted and implemented, which could be up to 24 months from the enactment of the Dodd-Frank Act, or possibly even later.

We expect that the provisions of the Dodd-Frank Act repealing the prohibition on the payment by banks of interest on business demand deposits will result in price competition among banks for such deposits, which could increase the costs of funds to us (as well as to other banks) and result in a reduction in our net interest income in the future. However, we do not have sufficient information, as yet, to make any reliable predictions as to the impact that these provisions will have on our results of operations and financial performance in the future. See “BUSINESS — Economic Conditions and Recent Legislation and Other Government Actions — The Dodd-Frank Act” in Item 1 of this Report.

The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and permits state attorneys general to, in certain circumstances, enforce compliance with both the state and federal laws and regulations. We cannot predict whether California state agencies will adopt consumer protection laws and standards that are more stringent than those adopted at the federal level or, if any are adopted, what impact they may have on us, our business or operating results.

Premiums for federal deposit insurance will increasehave increased and may increase even more.

The Federal Deposit Insurance CorporationFDIC uses the Deposit Insurance Fund (the “DIF”) to cover insured deposits in the event of a bank failure,failures, and maintains the fundDIF by assessing memberinsurance premiums on FDIC-insured banks an insurance premium. Recentand depository institutions. The increase in bank failures haveduring the three years ended December 31, 2010 caused the DIF to fall below the minimum balance required by law, forcing the FDIC to consider action to rebuild the fund by raisingraise the insurance premiums assessed member banks.on FDIC-insured banks in order to rebuild the DIF. Depending on the frequency and severity of bank failures in the future, increases inthe FDIC may further increase premiums or assessments, which would increase our costs of business and could be significant and negatively affect our earnings.earnings and financial performance in the future.

The loss of key personnel could hurt our financial performanceperformance.

Our success depends to a great extent on the continued availability of our existing management and, in particular, on Raymond E. Dellerba, our President and Chief Executive Officer. In addition to their skills and experience as bankers, our executive officers provide us with extensive community ties upon which our competitive strategy is partially based. As a result, the loss of the services of any of these officers could harm our ability to implement our business strategy or our future operating results.

Risks ofposed by our new residential mortgage lending businessbusiness.. During the quarter ended June 30, 2009, we commenced a new

Our residential mortgage lending business, pursuant to which we originate and purchase residential real estate mortgage loans that qualify for resale into the secondary mortgage market. The decision to commence that business was based on our belief that, beginning in 2009, there would be a substantial increase in the demand for conventional residential mortgage loans due to (i) the significant declines that have occurred in housing prices, particularly in Southern California, and (ii) the decreases in prevailing interest rates. In our view, these conditions have made home ownership more affordable for consumers with good credit histories who had previously been shut out of the residential real estate market, primarily by the high prices of homes and increasing interest rates prior to mid-2008. However, the commencement of our new mortgage lending business poses a number of potentially significant risks that could adversely affect our business and future financial performance.

Those risks include, among others: the strainrisk that the commencement and growth of the newour mortgage lending business will put onstrain our cash and management resources; the risk that management’s time and efforts will be diverted from our existingcommercial banking business, which could hurt our operating results; the risk that our new mortgage lending business will not generate revenues in amounts sufficient to enable us to recover the substantial expenditures we have had to makemade to add experienced mortgage loan officers and administrators; the risk that our belief that the demand for residential mortgage loanslending business will not grow substantially will prove notsufficiently to have been correct; andcontribute to earnings in relation to our investment; the risk that we will be unable to sell the mortgage loans we originate into the secondary mortgage market for amounts sufficientat a profit due to cover the costs of that business if, for example, thechanges in interest rates prove to be volatile or the economic recession or ongoing credit crisis adversely affectsa reduction in the flow of funds into the secondary mortgage market.market, whether due to a further weakening in the residential real estate market or a tightening in the availability of credit or otherwise; the risk that we will be required to repurchase mortgage loans in the event that they do not conform to representations and warranties we made with respect to such loans at the time of their sale, or borrowers default on the first few mortgage loan payments; and the risks that there will be a decline in demand for residential mortgage loans or an increase in defaults by borrowers, due to increasing interest rates, an economic downturn, or declining real estate values. Accordingly, there is no assurance that our entry into the residential mortgage lending business will not hurt our earnings or cause us to incur losses in the future.

ExpansionThere is no assurance that the sales of the Additional Series B Preferred Shares and Common Stock to the Carpenter Funds and SBAV LP will be consummated.

In order to increase the Bank’s capital and support the future growth of our banking franchise, mighton August 26, 2011, we entered into (i) an Additional Series B Stock Purchase Agreement which provides for the purchase from us of $11.8 million of Series B Preferred Shares by SBAV LP and by Carpenter Community Bancfund, L.P. and Carpenter Community Bancfund-A, L.P., which are affiliated with each other (collectively, the “Carpenter Funds”) and (ii) a Common Stock Purchase Agreement which provides for the purchase by the Carpenter Funds of $15.5 million of shares of our common stock at a per share price equal to the greater of (i) the per share book value of our common stock, which was $6.26 as of December 31, 2011, or (ii) $5.31 per share. Consummation of those equity financings is subject to the satisfaction of a number of conditions, including the receipt by the Carpenter Funds of regulatory approvals they need before they can acquire those Series B Preferred Shares and the common stock. We do not achieve expectedknow whether those conditions will be satisfied and, therefore, there continues to be a risk that the sales of the $11.8 million of Series B Preferred Shares and the $15.5 million of common stock will not be consummated. In that event, it may become necessary for us to raise additional capital from other sources before we will be released from the restrictions of the FRB Agreement and DFI Order and to support the growth or increasesof our banking franchise. However, our ability to raise additional capital from other sources will be affected by our future financial performance and by economic and market conditions over which we do not have control. As a result, there is no assurance that, if needed, we would be able to raise additional capital in profitability anda meaningful amount from other sources on acceptable terms, if at all.

We may adversely affectbe unable to resume the implementation of our operating resultsstrategy to grow our banking franchise in the future.

We have grown substantially in the past eleven yearsA key element of our business strategy has been to grow our banking franchise primarily by (i) opening new financial centers in population centers,banking offices, (ii) offering new revenue generating products or services, such as the commencement, in the second quarter of 2009, of our mortgage banking operations, and (iii) adding banking professionals at our existing financial centers,banking offices, with the objective of attracting additional customers including, in particular, small to mediumsmall-to-medium size businesses, that willwould add to our profitability. We intendDue to continue that growth strategy. However, there is no assurance that we will continue to be successful in achieving our growth objectives. Implementation of this strategy will require us to incur expenses in establishing new financial centers or adding banking professionals, long before we are able to attract, and with no assurance that we will succeed in attracting, a sufficient number of new customers that will enable us to generate the revenues needed to increase our profitability. As a result, our financial performance could decline if we are unable to successfully implement our growth strategy.

Moreover, as a result of the losses we have incurred during the past three years ended December 31, 2010, the need to dedicate more personnel to the management and reduction of non-performing loans, and our increased focus ouron raising additional capital and returning the Bank to profitability, we have had to significantly curtail our growth strategy and we cannot predict how long it will be before we will able to resume the full implementation of that strategy. Among other things we will need to substantially increase our capital to support the growth of our banking franchise. If the sales of the additional Series B Shares and Common Stock to the Carpenter Funds cannot be consummated and we are not able to raise substantial additional capital from other sources, we may be unable to resume the implementation of our growth strategy for a considerable period of time.

Our computerExpansion of our banking franchise might not achieve expected growth or increases in profitability and network systems may be vulnerable to unforeseen problems and security risksadversely affect our future operating results.

The computerIf the equity financings described in the two immediately preceding paragraphs are consummated, the implementation of our growth strategy, either through organic growth or the acquisition of other banks, will pose a number of risks for us, including:

We rely on communications, information, operating and financial control systems technology from third-party service providers, and network infrastructure that we use to provide automatedmay suffer an interruption in those systems.

We rely heavily on third-party service providers for much of our communications, information, operating and internetfinancial control systems technology, including our online banking services could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunicationsand data processing systems. Any failure earthquakes and similar catastrophic events and fromor interruption, or breaches in security, breaches. Any of those occurrencesthese systems could result in damage tofailures or a failure of our computer systems that could cause an interruptioninterruptions in our banking servicescustomer relationship management, general ledger, deposit, servicing and/or loan origination systems and, therefore, could harm our business, operating results and financial condition. Additionally, interruptions in service and security breaches that could result in the theft of confidential customer information could lead existing customers to terminate their banking relationships with us and could make it more difficult for us to attract new banking customers.

We are exposed to risk of environmental liabilities with respect to real properties to which we take titlemay acquire.

Due to the current economic recession,continued weakness of the resulting financial difficulties encountered byU.S. economy and, more specifically, the California economy, including high levels of unemployment and the continuing declines in real estate values, many borrowers have been unable to meet their loan repayment obligations and, the declines in the market values and in the demand for real properties, during 2010as a result, we have had to initiate foreclosure proceedings with respect to and take title to an increased number of real properties that had collateralized loans which had become nonperforming.their loans. Moreover, if the economic recession worsens,conditions remain weak or worsen, we may have to continue to foreclose and take title to additional real properties in 2011.properties. As a result,an owner of such properties, we could become subject to environmental liabilities and incur substantial costs which could be substantial, with respect to these properties for any property damage, personal injury, investigation and clean-up costs incurred in connection withthat may be required due to any environmental contamination that may be found to exist at any of those properties, even though we did not engage in the activities that led to such properties.contamination. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties seeking damages and costs resulting fromfor environmental contamination emanating from the site. If we were to become subject to significant environmental liabilities onor costs, our business, financial condition, results of operations and prospects could be adversely affected.

Managing reputational risk is important to attracting and maintaining customers, investors and employeesemployees.

Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct butand protect our reputation. However, these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

The price of our common stock may be volatile or may decline, which may make it more difficult to realize a profit on your investment in our shares of common stock.

The trading priceprices of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, our stock price has not only been adversely affected byvolatile, but also has declined significantly during the three years ended December 31, 2010, due to the losses we have incurred during that period and uncertainties about how long it will take us to achieve sustained profitability. The volatility of our stock price in the past two yearsfuture may increase due to the recent

sales of the $11.2 million of Series B Convertible Preferred Stock and, uncertainty asif consummated, the pending sales of the $11.8 million of additional Series B Preferred Shares and the $15.5 million of common stock to how soon wethe Carpenter Funds, because the common stock into which Series B Preferred Shares are convertible and the common stock to be sold to the Carpenter Funds will return to profitability.be saleable in the open market. Moreover our stock price in the future could be adversely affected by other factors, some of which are outside of our control, including:

The stock market and, in particular, the market for the securities of financial institutions, has experienced significant volatility as a result of (i) the financial difficulties and losses encountered by a number of very large and prominent banking institutions and the closure of numerous banks in California and elsewhere throughout the country, which has adversely affected the stock prices of banks generally, including those that have been able so far to weather the difficult economic and market conditions, and (ii)

We are currently restricted from paying dividends, and do not anticipate paying any cash dividends on our common stock for the foreseeable future.

Dividends from the Bank will be the principal source of these conditionsfunds available to us to pay cash dividends to our shareholders in the future. However, as described above, pursuant to the FRB Agreement and DFI Order, the Bank may not pay cash dividends to us without the prior approval of the FRB and DFI and we may not pay cash dividends to our shareholders without the prior approval of the FRB. There is no assurance when those restrictions might be lifted, if at all. Additionally, we and the lossesBank are subject to additional restrictions which currently and in the future may prevent us from paying cash dividends on our common stock:

Finally, even if the regulatory and other restrictions on the payment of dividends by us and the Bank are lifted and we generate retained earnings in the future, it is our intention to retain cash to increase our capital and fund our operations and the expansion of our banking franchise. As a result, we have no intention to pay cash dividends at least for the foreseeable future on our common stock.

If the pending sales of additional preferred stock and common stock are completed, or we otherwise sell additional shares of our common stock, our shareholders could be subject to significant dilution in their share ownership and voting power.

Potential Dilutive Effects of Sales of Additional Equity Securities. If we succeed in consummating the sales of additional Series B Preferred Shares and common stock to the Carpenter Funds and SBAV LP (the “Equity Investors”) pursuant to the definitive securities purchase agreements we entered into on August 26, 2011, those sales will dilute the percentage ownership and voting power of our existing shareholders and, depending on the prices paid by our existing shareholders for their shares of common stock, also in terms of the differences between the amounts they paid for their shares and the prices that the Equity Investors will have paid for their shares. This dilution also could have an adverse impact on the trading prices of our common stock.

Moreover, subject to market conditions and other factors, we may seek to sell additional common stock are affected by aor other equity securities in the future to meet capital requirements or to fund the growth of our business. The sales or issuances of additional common stock or other equity securities could also be dilutive of our existing shareholders depending largely on the prices at which, and the number of, factors, including our financial condition, performance, creditworthiness and prospects, but someadditional shares or other equity securities we may sell or issue.

At December 31, 2011, options to purchase a total of which are outside1,153,741 shares of our control, suchcommon stock, at an average exercise price of $7.39 per share, were outstanding and an additional 550,814 shares were available for the grant of options or other equity incentives in the future under our 2010 Equity Incentive Plan. The issuance of shares pursuant to any of those options or pursuant to any other equity incentives we may grant in the future may dilute our existing shareholders.

Risks Associated with the Increase in Voting Power of the Equity Investors. If the sales of the Additional Series B Preferred Shares and common stock to the Equity Investors are consummated, the “Carpenter Funds” will own a total of approximately 28% of our voting stock and will be the largest shareholder of the Company.

Further, as economic conditions generallypreviously reported in our Current Report on Form 8-K dated August 26, 2011, concurrently with the sale of the Series B Preferred Shares, we entered into certain investor rights agreements with the Equity Investors. If the Carpenter Funds purchase the Additional Series B Preferred Shares and the shares of common stock pursuant to the Additional Series B and the Common Stock Purchase Agreements, respectively, they will become entitled to designate three individuals to serve on the respective Boards of Directors of both the Company and the Bank (subject to any required regulatory approvals). Due to the appointment of three representatives on the Board of Directors and their ownership of our voting stock, the Carpenter Funds will have the ability to significantly influence the outcome of matters requiring approval of our Board of Directors and matters requiring the approval of our shareholders, including the approval of mergers and acquisitions or changes in the confidence about economic conditions among businessescorporate control, and consumers. Moreover, therecould have significant influence over our operations. There is no assurance that wethe interests of the Carpenter Funds will be consistent with the interests of our other shareholders or that the Carpenter Funds will not experienceexercise their voting power in ways that could adversely affect our other shareholders. Moreover, this concentration of ownership also could have additional adverse consequences, including (i) discouraging a further decline in our stock price during 2011,potential acquirer from attempting to acquire us, which could resultimpede or prevent transactions in substantial losses forwhich our shareholders might otherwise receive a premium for their shares, and could lead(ii) making it more difficult for us to costly and disruptive securities litigation.sell additional shares at prices in excess of those paid by the selling shareholders for their shares of common stock, even if our financial performance significantly improves.

WeOur articles of incorporation permit our Board of Directors to authorize and sell additional shares of preferred stock on terms that could discourage a third party from making a takeover offer that may be beneficial to our shareholders.

Our Board of Directors has the power, under our articles of incorporation, to create and authorize the sale of one or more new series of preferred stock without having to obtain shareholder approval for such action. As a result, the Board could authorize the issuance of and issue shares of a new series of preferred stock to implement a shareholders rights plan (often referred to as a “poison pill”) or could sell and issue preferred shares with special voting rights or conversion rights that could deter or delay attempts by our shareholders to remove or replace management, and attempts of third parties to engage in proxy contests and effectuate changes in control of us.

Our business may face other risksrisks.

From time to time,Our business and financial performance could be materially and adversely affected in the future by other risks can arise with respector developments that either are not known to us at the present time or are currently immaterial to our business and/business. Such risks could include, but are not necessarily limited to, unexpected changes in government regulations, the commencement of litigation against us and unexpected adverse changes in local, national or financial results which we will report in our filings with the Securities and Exchange Commission.global economic or market conditions.

For further discussion of risks that can affect our financial performance or financial condition, also see “Item 7. — Management’s Discussion and Analysis of Financial Condition and the Results of Operations” below in this Report.

Due to these and other possible uncertainties and risks, you 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. We also disclaim any obligation to update or revise forward-looking statements contained in this Report, except as may be required by law or by NASDAQ.

None.

ITEM 2.

ITEM 2.

PROPERTIES

Set forth below is information regarding our headquarters office and our seven existing financial services centers. All of our offices are leased. We believe that our current facilities are sufficient for our company, if headcount increases above capacity we may need to lease additional space.

James Laliberte, et al.Mark Zigner vs. Pacific Mercantile Bank, et al., filed in May 2003January, 2010, in the California Superior Court for the County of Orange (Case No. 030007092)0337433). As previously reported in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, this lawsuit was initially filed asby plaintiff asserting that the Bank had wrongfully exercised certain remedies in its efforts to recover borrowings owed by plaintiff to the Bank under (i) a $2.215 million construction loan which was secured by a first trust deed on real property owned by plaintiff, and (ii) a $200,000 unsecured line of credit. Plaintiff also maintained deposit accounts with the Bank.

Plaintiff failed to repay outstanding borrowings of approximately $191,000 due at the maturity date of his line of credit in April 2009. When plaintiff refused demands to repay those borrowings, the Bank set off that amount against plaintiff’s deposit accounts in accordance with the express terms of his line of credit agreement with the Bank. Plaintiff also failed to repay his construction loan when it matured in August 2009 and, in October 2009, the Bank commenced foreclosure proceedings against the real property collateralizing that loan.

In his lawsuit, plaintiff claimed that the set off by the Bank against plaintiff’s deposit accounts was wrongful based on allegations that the Bank had (i) agreed to extend the line of credit and breached that agreement when it exercised its set off rights, and (ii) failed to provide him with prior notice of the set off and an individual action by two plaintiffs foropportunity to cure his default under the line of credit. Plaintiff also asserted certain related claims, including an alleged violationsbreach by the Bank of an implied covenant of good faith and fair dealing.

The case was tried before a jury in August, 2011. However, as we reported in our third quarter 2011 10-Q, (i) before the Federal Truth in Lending Act (the “TILA”). The two plaintiffs subsequently amended their complaint on three occasions, between November 2003 and May 2005, seeking to convert their individual action into a class action suit and adding additional allegations and seeking rescission of all loans madecase went to the members ofjury for a decision, the classtrial judge ruled that the Bank had wrongfully exercised its set off rights and damages based on allegationsthat finding, the jury awarded plaintiff $100,000 of fraudcompensatory damages, and (ii) the jury later found that the Bank’s exercise of its set off rights also constituted a wrongful conversion of plaintiff’s funds and as a result, that the plaintiff also was entitled to awards of $150,000 in compensatory damages and $1.87 million in punitive damages against the Bank.

In response to a proposed statement of decision submitted to the trial judge by plaintiff following the jury verdict, the Bank asserted that the judge’s ruling with respect to the Bank’s set off rights and the jury’s findings with respect

to plaintiff’s claims of wrongful conversion were erroneous and that, as a result, plaintiff was not entitled, as a matter of law, to an award of either compensatory or punitive damages. The Bank also asserted that if the trial judge were to determine that plaintiff was entitled to punitive damages, the $1.87 million punitive damage award, which was nearly 12.5 times the $150,000 compensatory damage award for conversion, was excessive as a matter of California law, which provides that punitive damage awards may range from one to four times the amount of compensatory damages. Nevertheless, the trial judge initially sustained the plaintiff’s statement of decision.

The Bank then filed motions with the court for a judgment notwithstanding the verdict and, in the inducementalternative, for a new trial, as well as a motion to vacate the findings set forth in the statement of certain loans, unfair business practicesdecision. A hearing on these motions was held on February 8, 2012. The court thereafter rejected the Bank’s motion for a judgment notwithstanding the verdict and, violations of TILA. In each case,while it sustained the Bank filed demurrers asserting that the plaintiffs had failed to establish a legal basis for any recovery and in each caserulings on compensatory damages, the trial court sustainedruled that the jury’s punitive damage award was excessive and that the Bank’s demurrersmotion for a new trial would be granted, unless the plaintiff agreed to accept a reduction in the punitive damage award from $1.87 million to $950,000. On February 21, 2011 we learned that the plaintiff had agreed to accept that reduction in the punitive damage award and dismissed the plaintiffs’ lawsuit, without prejudice. Plaintiffs subsequently appealed the trial court’s rulings. In January 2007, the appellate court, in a published decision, affirmed the trial court’s order dismissing the plaintiffs’ suit, finding that plaintiffs had no right to assert class-wide claims of rescission. Plaintiffs then appealed this decision to the U.S. Supreme Court which, in May 2007, denied plaintiffs’ petition for review, effectively sustaining the appellate court’s ruling.

Plaintiffs, abandoning their claims of fraud and unfair business practices on the part offinal judgment has been entered against the Bank then filed a motion within the amount of $1.2 million. In addition, the trial court for class certification limitedentered an award to plaintiff of his attorneys fees and costs, in the TILA and certain related statutory claims. In January 2008amount of $540,000.

Following the entry of the final judgment by the trial court, denied the motion for class certification, finding that plaintiffs had not shown evidence that there were common questions of law or fact to justify certifying a class and had been unable to introduce any admissible evidence establishing that any statutory violations had occurred during the relevant class period.

However, in April 2008, plaintiffsBank filed an appeal of the trial court’s denial of their motion for class certification on the claims under TILArulings and the related statutory claims. In April 2009jury verdict, asserting that those rulings and the jury’s verdict were erroneous and that plaintiff is not entitled, as a matter of law, to an award of either compensatory or punitive damages. Because the appeals process has just begun, it is not possible at this time to predict, with any certainty, how the appellate court issued an order certifying plaintiff’s class action with respect to the TILA claims and remanded the case back to the trial court for further proceedings.

In November 2010, without any admission of any of plaintiffs’ allegations or any wrongdoingcourts will ultimately rule on its part, the Bank entered into an agreement with the plaintiffs providing for settlement of all of the claims that were the subject of the class action suit, subject to the approval of the settlement terms by the trial court. The trial court granted final approval of the settlement on March 22, 2011.

The settlement agreement provides for the Bank to establish a settlement fund in the amount of $225,000 for payment to the members of the class in full settlement of the class action lawsuit. The settlement agreement further provides that any individual who was eligible to become a member of the class, but elected not to participate in the class action, had the right to receive a payment from the Bank in the same amount received by each of the members of the class, providedour appeal. However, we believe that the individual submitted a claim form to the Class Administrator and the claim was accepted by the Bank. A handful of claims were received, but all were rejected by the Bank. No claimant filed an appeal with the Court, so the final settlement amount approvedjudgment entered by the court remains at $225,000.

The settlement agreement expressly provided for a complete release of all claims against the Bank arising out of the subject matter of the class action suit, except for certain individual claims of the named plaintiffs which were pending in a separate trial proceeding. The settlement also permitted plaintiffs to apply for an award of attorneys’ fees and costs. Plaintiffs filed such a motion, andwill be overturned on March 22, 2011, the trial court issued an order requiring the Bank to pay fees and costs in the aggregate amount of $738,200. Notice of this ruling was issued on March 25, 2011, and the Bank has a period of 60 days from that date to file an appeal of the trial court’s ruling; but has not yet decided whether to do so.

In March 2011, the named plaintiffs agreed to a stipulated settlement of and a complete release of their individual claims against the Bank in exchange for the payment to them of an aggregate of $76,000.

We had previously established reserves in case of an adverse result in the class action suit and, therefore, the settlement payment and attorneys’ fee award are not expected to materially affect our future operating results or our cash or capital resources.appeal.

Other Legal Actions. We 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 have a material adverse effect on our financial condition or results of operations.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information, as of March 24, 2010,January 26, 2012, regarding our principal executive officers:

There is no family relationship between the above-named officers.

Raymond E. Dellerba has served as President, Chief Executive Officer and a Director of the Company and the Bank since the dates of their inception, which were January 2000 and November 1998, respectively, pursuant to a multi-year employment agreement. From February 1993 to June 1997, Mr. Dellerba served as the President, Chief Operating Officer and director of Eldorado Bank, and as Executive Vice President and a Director of its parent company, Eldorado Bancorp. Mr. Dellerba has more than 30 years of experience as a banking executive, primarily in Southern California and in Arizona.

Nancy Gray, who is a certified public accountant, has been a Senior Executive Vice President and the Chief Financial Officer of the Company and the Bank since May 2002. From 1980 through 2001, Ms. Gray was Senior Vice President and Financial Executive of Bank of America in Southern California, Missouri, Georgia, and Texas.

Robert W. Bartlett, joined Pacific Mercantile Bank as its Senior Executive Vice President and Chief Operating Officer on October 31, 2008. In his banking career spanning some 34 years, Mr. Bartlett has held key senior management positions in Orange and Los Angeles County banks to includeincluding Commercial Banking Manager, Area Credit Administrator, Chief Credit Officer and Chief Operating Officer.

PART II

Trading Market for the Company’s Shares

Our common stock is traded on the NASDAQ NationalGlobal Select Market under the symbol “PMBC.” The following table presents the high and low sales prices of our common stock, as reported on the NASDAQ NationalGlobal Select Market, of our common stock for each of the calendar quarters indicated below:

The high and low per share sale prices of our common stock on the NASDAQ NationalGlobal Select Market on March 25, 2011,February 21, 2012, were $4.29$3.90 and $4.21$4.09 per share, respectively and, as of that same date, there were approximately 149 holders of record of our common stock.

Stock Price Performance

The graph on the following page compares the stock performance of our common stock, in each of the years in the five year period ended December 31, 2010,2011, with that of (i) the Russell Microcap Index, which is comprised of the smallest 1,000 members of the Russell 2000 and the next smallest 1,000 companies, by market cap, which include the Company, and (ii) an index, published by SNL Securities L.C. (“SNL”) and known as the SNL Western Bank Index, which is comprised of 59 banks and bank holding companies (including the Company), the shares of which are listed on NASDAQ or the New York Stock Exchange and most of which are based in California and the remainder of which are based in nine other western states, including Oregon, Washington and Nevada.

The Stock Performance Graph assumes that $100 was invested in the Company common stock on December 31, 2005,2006, and, at that same date, in the Russell Microcap Index and the SNL Western Bank Index and that any dividends paid in the indicated periods were reinvested. Shareholder returns shown in the Performance Graph are not necessarily indicative of future stock price performance.

Dividend Policy and Share Repurchase Programs

Our Board of Directors has followed the policy of retaining earnings to maintain capital and, thereby, support the growth of the Company’s banking franchise. On occasion, the Board also considered paying cash dividends out of cash generated in excess of those capital requirements and, in February 2008, the Board of Directors declared a cash dividend, in the amount of $0.10 per share of common stock, that was paid on March 14, 2008.

The Board also authorized share repurchase programs in June 2005 and in October 2008, when the Board concluded that, at the then prevailing market prices, the Company’s shares represented an attractive investment opportunity and, therefore, that share repurchases would be a good use of Company funds.

In the first quarter of 2009, the Board of Directors decided that the prudent course of action, in light of the economic recession, was to preserve cash and earnings to enhance the Bank’s capital position and to be in a position to take advantage of improved economic and market conditions in the future. In addition, in August 2010, both the Bank and the Company entered into a Written Agreement with the Federal Reserve Bank of San Francisco,FRB, their primary federal banking regulator (the “FRB”)regulator; and the California Department of Financial Institutions,DFI, the Bank’s state banking regulator, issued a regulatory order (the “DFI”“DFI Order”). imposing restrictions on the Company and the Bank. The WrittenFRB Agreement and DFI Order, among other things, prohibits the payment of cash dividends and share repurchases without the approval of the

FRB and the DFI. See “Item 1 – Business – Supervision and Regulation –Pacific Mercantile Bancorp — Regulatory Action Taken by the FRB and the DFI.” Accordingly, we do not expect to pay cash dividends or make share purchases at least for the foreseeable future.

Restrictions on the Payment of Dividends

Cash dividends from the Bank represent the principal source of funds available to the Bancorp, which it might use to pay cash dividends to shareholders or for other corporate purposes, such as expansion of its business. Therefore, government regulations, including the laws of the State of California, as they pertain to the payment of cash dividends by California state chartered banks, limit the amount of funds that the Bank would be permitted to dividend to the Bancorp. As a result, those laws also affect the ability of the Bancorpour to pay cash dividends to our shareholders or fund other expenditures by the Bancorp in the future.expenditures. In particular, under California law, cash dividends by a California state chartered bank may not exceed, in any calendar year, the lesser of (i) the sum of its net income for the year and its retained net income from the preceding two years (after deducting all dividends paid during the period), or (ii) the amount of its retained earnings.

Moreover, as a California corporation, the Company’s ability to pay cash dividends is subject to restrictions under the California Corporations Code. Those restrictions provide that a California corporation may pay a cash dividend (a) if the amount of the dividend does not exceed the sum of the corporation’s retained earningsplus (ii) the amount, if any, of dividends in arrears on shares which have preferential dividend rights over the rights of shareholders that will be receiving the dividend; or (b) if, immediately after the dividend is paid, the greater of the book or fair value of the corporation’s assets equals or exceeds the sum of (i) its total liabilitiesplus (ii) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the dividend.

Additionally, because the payment of cash dividends has the effect of reducing capital, the capital requirements imposed on bank holding companies and commercial banks often operate, as a practical matter, to preclude the payment, or limit the amount of, cash dividends that might otherwise be permitted by California law; and the federal bank regulatory agencies, as part of their supervisory powers, generally require insured banks to adopt dividend policies which limit the payment of cash dividends much more strictly than do applicable state laws. As previously discussed above, we are prohibited from paying cash dividends to shareholders without the prior approval of the FRB and the DFIDFI. Moreover, we have had to defer interest payments on junior subordinated debentures that we issued in 2002 and accordingly, 2004 as a result of restrictions contained in the FRB Agreement. Under the terms of those debentures, we may not pay cash dividends on our common stock or preferred stock unless and until we have paid all of the deferred interest in full and thereafter make interest payments on the debentures as and when they become due. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONŞ—Contractual Obligations—Junior Subordinated Debentures”in Item 7 of this Report for additional information regarding the junior subordinated debentures. Accordingly,we do not expect to pay cash dividends for at least the foreseeable future.

The shares of our Series B Preferred Stock are entitled to receive dividends payable in cash at a rate of 8.4% per annum if, as and when declared by the Board of Directors. If, however, due to legal or regulatory restrictions, such as the dividend restrictions under California law or under the FRB Agreement, the Company is unable to pay cash dividends on the Series B Preferred Stock for two semi-annual dividend periods, then the Company will be required to pay such dividends in shares of Series C Preferred Stock. The issuance of shares of Series C Preferred Stock would be dilutive of the ownership that our existing common shareholders have in the Company. In addition, no dividends may be declared or paid on shares of the Company’s common stock unless dividends are first paid (either in cash or in shares of Series C Preferred Stock) on the shares of Series B Preferred Stock and any shares of Series C Preferred Stock that may have been issued and are then outstanding.

Restrictions on Inter-Company Transactions

Section 23(a) of the Federal Reserve Act limits the amounts that a bank may loan to its bank holding company to an aggregate of no more than 10% of the bank subsidiary’s capital surplus and retained earnings and requires that such loans be secured by specified assets of the bank holding company - See “BUSINESS—Supervision and Regulation–Restrictions on Transactions between the Bank and the Company and its other Affiliates”. We do not have any present intention to obtain any borrowings from the Bank.

Equity Compensation Plans

Certain information, as of December 31, 2010,2011, with respect to our equity compensation plans is set forth in Item 12, in Part III, of this Report.

Recent Sales of Unregistered Securities

As previously reported, in October 2009, the Company commenced a private offering of its Series A Convertible 10% Cumulative Preferred Stock (the “Series A Preferred Stock” or “Series A Shares”), at a price of $100 per Series A Share payable in cash. The offering was made, in reliance on Section 4(2) of and Regulation D under the Securities Act of 1933, as amended, to a limited number of accredited investors (as defined in Regulation D). The Company completed this private offering in August 2010, in which it sold a total of 126,550 Series A Shares, generating gross proceeds of $12,650,000. Of those Series A Shares, 80,500 were sold in 2009 and the remaining 46,050 were sold in 2010. Additional information regarding this private offering and the Series A Shares is contained in the Company’s Current Report on Form 8-K dated October 6, 2010 and in the Subsection of Item 7 of this Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources”.

ITEM 6.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected statement of operations data for the fiscal years ended December 31, 2011, 2010 2009 and 2008,2009, the selected balance sheet data as of December 31, 20102011 and 2009,2010, and the selected financial ratios (other than tangible book value per share), that follow below were derived from our audited consolidated financial statements included in Item 8 of this Report. The selected financial data set forth belowReport and should be read in conjunction with those audited consolidated financial statements, together with the notes thereto, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Report. The selected statement of operations data for the years ended December 31, 20072008 and 2006,2007, the selected balance sheet data as of December 31, 2009, 2008 2007 and 2006,2007, and the selected financial ratios (other than tangible book value per share) for the periods prior to January 1, 20082010 are derived from audited consolidated financial statements that are not included in this Report.

		For the Year Ended December 31,
		2010				2009				2008				2007				2006
		(unaudited)
Selected Financial Ratios:
Return on average assets			(1.20	)%			(1.45	)%			(1.06	)%			0.53	%			0.70	%
Return on average equity			(19.26	)%			(20.13	)%			(12.37	)%			6.25	%			8.52	%
Ratio of average equity to average assets			6.23	%			7.16	%			8.59	%			8.47	%			8.26	%