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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-30777
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PACIFIC MERCANTILE BANCORP
(Exact name of Registrant as specified in its charter)
California 33-0898238
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
450 Newport Center Drive, Suite 100, 92660
Newport Beach, California (Zip Code)
(Address of principal executive
offices)
(949) 644-8040
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 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. [_]
As of February 28, 2001, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $37,225,000.
As of February 28, 2001, there were 6,332,020 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference from the Registrant's
Definitive Proxy Statement for its 2001 Annual Meeting, which is expected to be
filed with the Commission on or before April 30, 2001.
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PACIFIC MERCANTILE BANCORP
ANNUAL REPORT ON FORM 10K
FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
No.
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FORWARD LOOKING STATEMENTS................................................ 1
PART I.
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 14
Item 3. Legal Proceedings............................................... 15
Item 4. Submission of Matters to a Vote of Securities Holders........... 15
Item 4A. Executive Officers of the Registrant........................... 15
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 16
Item 6. Selected Financial Data......................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 18
Item 8. Financial Statements and Supplementary Data..................... 31
Reports of Independent Certified Public Accountants................. 32
Consolidated Statements of Financial Condition
December 31, 2000 and 1999.......................................... 34
Consolidated Statements of Operations
Years ended December 31, 2000 and 1999 and for the Period from
Inception (May 29, 1998) to December 31, 1998...................... 35
Consolidated Statements of Stockholders' Equity
For the Period from Inception (May 29, 1998) to December 31, 1998
and for the
Years ended December 31, 1999 and 2000.............................. 36
Consolidated Statements of Cash Flows
Years ended December 31, 2000 and 1999 and for the Period of
Inception (May 29, 1998) to December 31, 1998...................... 37
Notes to Consolidated Financial Statements.......................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures........................................... 54
PART III.
Item 10. Directors and Executive Officers of the Registrant............. 54
Item 11. Executive Compensation......................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 54
Item 13. Certain Relationships and Related Transactions................. 54
PART IV.
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K... 55
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FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not historical facts or that
discuss our expectations or beliefs regarding our financial performance in the
future constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E
of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Forward-
looking statements are estimates of, or expectations or beliefs regarding our
future financial performance that are based on current information and that are
subject to a number of risks and uncertainties that could cause our actual
operating results in the future to differ significantly from those expected at
the current time. Those risks and uncertainties are described in Part II of
this Report under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Forward Looking Information and
Uncertainties Regarding Future Financial Performance" and readers of this
Report are urged to read the cautionary statements contained in that section of
this Report.
PART I
ITEM 1. BUSINESS.
Background.
Pacific Mercantile Bancorp is a California corporation that owns all of the
stock of Pacific Mercantile Bank (which, for convenience, will be referred to
in this report as the "Bank" or "our Bank"). The Bank holds a California state
banking chartered and operates a commercial banking business primarily in
Orange County, California, approximately 60 miles south of Los Angeles. The
Bank also is 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"). The Bank commenced
business in March 1999, with the opening of its first commercial banking
office, located in Newport Beach, California and in April 1999 it launched its
internet web site, at www.pmbank.com, where our customers are able to conduct
many of their commercial banking transactions, more conveniently and less
expensively, with us, 24 hours a day, 7 days a week. We have achieved rapid
growth since then, opening a second banking office, located in San Clemente,
California, in August 1999, and by December 31, 2000 our assets, net loans and
total deposits had grown to $163 million, $98 million and $124 million,
respectively. Additionally, as of that date we were serving a total of
approximately 2,600 deposit customers, of which approximately 62% were
conducting at least some of their banking transactions with us over the
internet and business customers accounted for approximately 50% of our
deposits. It is our plan to expand our operations into other areas of Southern
California and, in furtherance of that plan, we recently received regulatory
approvals to open two more commercial banking offices, one of which will be
located in Costa Mesa, California, near the South Coast Plaza Shopping Center,
and which is expected to open for business in the second quarter of 2001. The
other office, which will be our first office in Los Angeles County, will be
located in the heart of the Beverly Hills, California and is currently expected
to open for business in the second quarter of 2001.
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").
Pacific Mercantile Bancorp was organized by the Bank in January 2000 to
become a bank holding company for the Bank. In June 2000, it did so, following
receipt of required regulatory approvals, by acquiring all of the stock of the
Bank in a merger in which (i) the shareholders of the Bank became the
shareholders of Pacific Mercantile Bancorp, exchanging their shares of common
stock of the Bank, on a one share-for-one share basis, for shares of Pacific
Mercantile Bancorp common stock, and (ii) the Bank became our wholly-owned
subsidiary. In June 2000, we completed an initial public offering of Pacific
Mercantile Bancorp stock,
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registered under the Securities Act of 1933. We sold a total of 2,611,608
shares of our common stock in that offering for a price of $8 per share. The
net proceeds of that offering (after deducting underwriting commissions and
offering expenses) totaled $18,527,200. See the Section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Capital Resources" in Part II of this Report for additional information
regarding that public offering.
As a matter of convenience, we will be using the term "Company" or "us" to
refer to Pacific Mercantile Bancorp, together with the Bank. In certain
instances in this Report where we discuss Pacific Mercantile Bancorp as a
corporation separate from the Bank, such as the discussion of regulatory
requirements that are applicable to Pacific Mercantile Bancorp, but not to the
Bank, we will refer to Pacific Mercantile Bancorp as the "Bancorp".
Our Commercial Banking Operations
Through our banking offices and by means of the Internet, we seek to meet
the banking needs of small and medium size businesses, professional firms and
individuals by providing:
. A broad range of banking and financial service products, more typical of
larger banks, in order to gain a competitive advantage over independent
or community banks that do not provide the same range or breadth of
services that we are able to provide to our customers.
. A high level of personal service and responsiveness, more typical of
independent and community banks, giving us a competitive advantage over
large out-of-state and other large multi-regional banks that are unable
or, due to the expense involved, are unwilling to provide that same
level of personal service to this segment of the banking market.
. The added flexibility, convenience and efficiency of conducting banking
transactions with us over the Internet, which further differentiates us
from our competitors and will enable us to reduce the costs of providing
service to our customers.
The specific products and services we offer include the following:
Deposit Products. We offer a number of different types of deposit accounts,
including non-interest demand and interest bearing checking accounts, money
market accounts, savings accounts and certificates of deposit. As of December
31, 2000, our deposits totaled $124,286,500. The following table sets forth, by
type of deposit account, the average balances and total amounts of deposits
maintained by customers at our Bank as of December 31, 2000:
Average Total of
Account Account
Type of Deposit Account Balance Balances
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Non-interest bearing checking accounts................. $27,200 $ 48,553,100
Interest bearing transaction accounts (1).............. $46,100 $ 54,461,800
Certificates of Deposit (2)............................ $71,000 $ 21,271,600
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Totals............................................. $47,114 $124,286,500
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(1) Includes money market accounts. Excludes $6,546,900 of money market
deposits maintained at the Bank by Bancorp.
(2) Time certificates of deposit in varying denominations under and over
$100,000. Excludes a $250,000 certificate of deposit maintained at the Bank
by Bancorp.
Loan Products. We offer a diverse line of loan products, including
commercial loans and credit lines, SBA guaranteed business loans, accounts
receivable and inventory financing, real estate mortgage and construction loans
and consumer loans. We also have established a mortgage banking division which
originates
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and purchases residential mortgages that, for the most part, qualify for resale
to long-term investors in the secondary residential mortgage market. Our
mortgage loan products include conforming and non-conforming agency-quality
one-to-four family first mortgages, investor-quality home equity second
mortgages and investor-quality home equity lines of credit secured by second
trust deeds or mortgages. In most instances, we fund these loans at the time of
origination and sell the loans to investors in the secondary market within 30
days of funding. We earn loan origination and processing fees and, prior to
their resale, interest income on such qualifying mortgage loans.
The following table sets forth the types and amount of our loans that were
outstanding as of December 31, 2000:
Type of Loan
Real estate loans.......................................... $46,156,100(1)
Residential mortgage loans................................. 3,964,800
Commercial loans........................................... 33,732,400
Consumer loans............................................. 4,393,700
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Total.................................................... $88,247,000(2)
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(1) These loans include approximately $23,673,800 of real estate loans
purchased from an unrelated mortgage banking firm in the fourth quarter of
1999 and the first quarter of 2000.
(2) Excludes loans held for sale of $11,084,400 and deferred loan fees of
$159,300.
Commercial Loans. The commercial loans we offer include short-term secured
and unsecured loans with maturities ranging from 12 to 24 months; SBA
guaranteed business loans with a term not to exceed 10 years; accounts
receivable financing for terms not exceeding 12 months; and equipment and
automobile loans and leases which generally amortize over a period not to
exceed 7 years. The interest rates on these loans generally are adjustable and
usually are indexed to The Wall Street Journal's prime rate. In order to
mitigate the risk of borrower default, we generally require collateral to
support the credit or personal guarantees from the owners of the borrowers, or
both. In addition, all loans must have a well-defined primary and secondary
source of repayment. Generally, lines of credit are granted for no more than a
12-month period and are subject to a more frequent periodic review.
We also offer asset-based lending products which involve a higher degree of
risk in that the loan is designed for those borrowers who do not quality for
unsecured lending. Typically, these borrowers consist of companies that are
growing rapidly, are profitable but cannot internally fund their growth without
borrowings. In addition, the collateral usually consists of accounts
receivable. We control our risk by 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 loans, including accounts receivable financing, are generally
made to businesses that have been in operation for at least three years. In
addition, these companies have debt-to-worth ratios that generally do not
exceed four-to-one. Operating cash flow of these borrowers must be sufficient
to demonstrate the ability to pay obligations as they become due. The borrowers
must also have good payment histories as evidenced by credit reports.
Real Estate Loans. Approximately 51% of our real estate loans outstanding as
of December 31, 2000 were purchased from an unrelated mortgage banking firm.
Most of these purchased loans are secured by multi-family dwellings. The
remainder of the real estate portfolio consists primarily of nonresidential
real estate loans, of which approximately 86% were secured by first trust
deeds.
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 single
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and multi-family dwellings. Payments on these loans depend to a large degree on
results of operations and dependable cash flows for the borrowers generated
from a wide variety of businesses and industries. In addition, repayment of
these loans may 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,
personal guarantees from the owners of the borrowers are typically required.
Customers wishing to obtain a commercial real estate loan must 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 property to protect the
collateral value. Generally, these types of loans are indexed to The Wall
Street Journal prime rate and are written for maximum terms of 7 years with
loan-to-value ratios of not more than 75%.
Residential Real Estate Loans. Generally, these loans are funded by our
mortgage banking division at the time of origination and are sold to investors
in the secondary market, usually within thirty days of funding. We earn loan
origination and processing fees, and also interest income during the period
from origination to sale. We also offer equity lines of credit secured by
residential real estate which are tied to an outside index (such as The Wall
Street Journal prime rate).
Generally, residential real estate loans must have loan-to-value ratios that
do not exceed secondary market requirements. A borrower must demonstrate a good
payment history as evidenced by credit reports. In accordance with investor
criteria, the mortgage payment ratio may not exceed 28% of income and total
debt of the borrower may not exceed 40% of income.
Consumer Loans. We offer a wide variety of products to consumers including
personal installment loans, lines of credit and credit cards. 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. Consumer loans often entail greater
risk than residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. Further, any repossessed collateral for a defaulted consumer loan
may not provide an adequate source of repayment of the outstanding loan
balance. Consumer loan collections are dependent on borrowers' ongoing
financial stability. Furthermore, bankruptcy and insolvency laws may limit the
amount which can be recovered on such loans. Consumer loans require a good
payment record and, typically, debt ratios of not more than 40%.
Business Services. We offer various financial services directed primarily at
our business banking customers, including:
. Merchant bankcard services to process credit card payments made by their
customers;
. Automated clearinghouse origination services that enable any businesses
that charge for their services or products on a monthly or other
periodic basis to obtain payment from their customers through an
automatic, pre-authorized debit from their customers' bank accounts
anywhere in the United States;
. Electronic check origination and processing that allows businesses,
including Internet retailers, to accept payment from their customers in
the form of an electronic check that we are able to debit electronically
from any bank in the United States; and
. Financial management tools, including multiple account control, account
analysis, transaction security and verification, wire transfers,
universal bill payment, payroll and lock box services.
Convenience Banking Services. We offer a number of services and products
that make it more convenient to conduct banking transactions with us, such as
our Internet banking system, ATM's, phone banking, night drop services and
armored car services to order and receive cash without having to travel to our
banking offices.
Automated Clearinghouse Origination Services. The Federal Reserve operates
an automated or "electronic" clearing house system (which is commonly referred
to as "ACH") which enables businesses, with
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the authorization of their customers, to obtain payments of their charges by
electronically debiting the banking accounts of their customers. ACH services
enable businesses that sell products or services to customers to reduce their
costs and improve their cash flow by:
. Eliminating the need to issue monthly invoices; and
. Substituting electronic checks, in place of conventional paper checks
that must be prepared and mailed and then processed through the Federal
Reserve's traditional clearing house system, thereby significantly
shortening the time within which they can receive payments from their
customers.
Typical businesses that use ACH services include insurance companies (to
collect insurance premiums), lenders (to collect monthly mortgage or automobile
payments) and health, fitness and other clubs (to collect monthly fees or
dues).
However, for a business to be able to use ACH services, it must have a
banking relationship with a bank that has the computer systems needed to be
able, and that is authorized by the Federal Reserve, to originate ACH charges
or "credits." While virtually all banks can receive ACH debits made against the
accounts of their customers, there are a limited number of banks, particularly
among independent and community banks, that have become authorized by the
Federal Reserve, and have the computer systems necessary, to originate ACH
debits for their business customers. The Bank has qualified with the Federal
Reserve to do so and originates ACH transactions for a number of its customers.
We have also been retained to provide similar ACH services to clients of
eFunds Corporation, which provides a number of automated collection services
primarily to businesses that sell their products to consumers in person, by
mail or over the Internet. Among the methods of collection that eFunds employs
is an "electronic debit" process by which a consumer that buys products from
any eFunds client may authorize the charges on a per transaction basis to be
paid by means of an electronic debit or "electronic check" that can be
transmitted electronically to and charged against the consumer's bank account
at any U.S. based bank via a privately established automated clearing house
system. Like the Federal Reserve's automated clearing house system, these
automated payment services enable businesses to improve their cash flow and
reduce expenses by reducing their dependence on conventional paper checks and
credit cards for payment and enabling them to receive payments from their
customers generally within two to three business days following the
transactions which generate the electronic debits.
We act as an originating depository financial institution for a number of
eFunds' clients, electronically debiting the bank accounts of and receiving the
resulting payments from their customers and transferring those payments to
banks designated by those eFunds clients who utilize this service. Neither
eFunds' clients nor the consumers need to have accounts with us to avail
themselves of this service and we generate interest earnings on the funds
received as a result of the debits pending their electronic transmission to
eFunds' clients. We believe that currently there are only about 30 banks in the
United States that have qualified to participate as originating depository
financial institutions in this program, most of which are much larger multi-
regional and out-of-state banks. We are able to offer this service to our own
business customers and, as a result, we believe that our investment in
electronic information and processing systems enables us to offer a relatively
unique service not provided by the independent and community banks with which
we compete.
Internet Banking Services
Banking transactions that customers can conduct and banking products and
services that customers can access at our Web site include:
. Establishing business and consumer checking and savings accounts;
. Purchasing and renewing certificates of deposit;
. Transferring funds between accounts;
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. Printing bank statements;
. Viewing the front and back of their paid checks;
. Submitting loan applications;
. Transferring funds from credit lines to, and making loan payments from,
their deposit accounts;
. Paying bills, payroll and taxes;
. Ordering cash through our Web site and having the funds delivered to
them by armored car service;
. Utilizing business cash management services, including currency
converters for international transactions and electronic wire transfers;
. Merchant banking services, including credit card processing, automated
clearing house originations and electronic check processing; and
. A number of consumer and personal banking services, including financial
planning for home buying and financing, retirement planning and discount
brokerage services offered through a strategic alliance with UVest
Financial Services Group, Inc., an online discount securities brokerage
firm.
Opening an Account. Our customers can access our Web site and our Internet
banking services through any Internet service provider by means of secure Web
browsers such as Netscape's Navigator (Version 4.0 or higher) or Microsoft's
Internet Explorer (Version 4.0 or higher). When customers access our menu of
products and services at our Web site, they can open a new account, review the
history and status of their existing accounts, and effectuate several different
types of banking transactions.
To apply for a new account, a customer completes an online account
application, prints out that application and mails it to us. A customer may
also apply for a new account by calling our toll-free telephone number, which
is 1-877-450-BANK.
Security. Our ability to provide our customers with secure financial
services over the Internet is of paramount importance. We believe our Internet
systems, services and software meet the highest standards of bank security. The
following are among the security measures that are in place:
. Encrypted Transactions. All banking transactions and Internet
communications are encrypted so that sensitive information is not
available on the Internet in a form that can be read or easily
deciphered.
. Secure Logon. To eliminate the possibility that a third party may
download the Bank's or any customer's password file, user identification
and passwords are stored behind a secure firewall on the Web server.
Additionally, passwords are variable length strings of five to eight
alphanumeric characters, which makes the chance that a password can be
randomly guessed less than one in one trillion.
. Firewalls. All of our Internet banking services are routed from our
Internet server through a firewall. The firewall is a combined software
and hardware product that precisely defines, controls and limits access
to "internal" computers from "outside" computers across a network. Use
of this firewall means that only authenticated Bank customers or
administrators may send or receive transactions through it, and the
firewall itself is immune to penetration from the Internet. In other
words, the firewall is a mechanism used to protect our computers from
unauthorized access through the Internet by customers or by third
parties.
. Physical Security. All servers and network computers reside in secure
facilities. Currently, computer operations supporting our Internet
operations are based in Newport Beach, California and at the offices of
Fiserv, in Van Nuys, California where our mainframe computer is based.
Only employees with proper identification may enter our primary server
area. Access to our server console requires further password
identification.
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. Service Continuity. To avoid interruptions in our Internet banking
services, we intend to install Internet servers at our other full
service banking offices, such as in our San Clemente office, which can
process Internet transactions not only from customers of that office,
but also customers of our other offices, in the event the servers at
those other offices become disabled. In the unlikely event that our
customers are prevented from accessing their accounts over the Internet,
they will retain access to their funds through a number of different
means, including making in-person withdrawals at any of our branch
banking offices or ATM's or by armored car; making deposits in person,
by mail or at our ATM's and getting information and assistance from our
employees by telephone. Additionally, Fiserv, which hosts our mainframe
computer, has the ability to transfer data electronically to a second
computer system located at a remote site, so that in the event of a
natural disaster that affects Southern California, we will continue to
be able to process banking transactions via our computer system without
any significant interruptions. Additionally, we are working with Q-Up
Systems, which provides Internet transaction processing software and
services to us, to establish a second location equipped with Internet
servers that can enable our customers to continue conducting Internet
banking transactions with us in the event that our Internet servers in
Southern California were to become disabled.
. Monitoring. All customer transactions on our Internet server in Newport
Beach produce one or more entries into transactional logs. We recognize
that it is critical to monitor these logs for unusual or fraudulent
activity. Our personnel review these logs regularly to identify any
abnormal or unusual activity and to take appropriate action. We believe
that, ultimately, vigilant monitoring is the best defense against fraud.
We believe the risk of fraud presented by providing Internet banking
services is not materially different from the risk of fraud inherent in any
banking relationship. We believe that potential security breaches can arise
from any of the following circumstances:
. misappropriation from the user of the user's account number or password;
. penetration of our server by an outside "hacker;"
. fraud committed by a new customer in completing his or her application
with us; and
. fraud committed by an employee of ours or one of our service providers.
Both traditional banks and Internet banks are vulnerable to these types of
fraud. By establishing the security measures described above, we believe we
have minimized 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.
Additionally, the adequacy of our security measures is reviewed periodically
by the Federal Reserve Board and the California Department of Financial
Institutions, which are the federal and state government agencies with
supervisory authority over the Bank. We also retain the services of third party
computer security firms to conduct tests of our Internet banking and computer
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.
Measures to Deal with the California Electricity Crisis. California has
recently encountered a tightening of electricity supplies from power generation
companies and, although there have been few instances of power outages to date,
it is expected that Southern California will experience so-called "rolling
blackouts" due to electric power shortages during the summer months when
electricity usage is at its peak. Moreover, the electric utilities that serve
California have advised their customers that there may be unable to give much
advance warning to their customers of the time and duration of these outages or
"blackouts". To enable us to continue serving our customers and to minimize the
potential disruptions that such blackouts would cause, we have developed
contingency plans to deal with any power outages. These contingency plans
include the use of
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alternative energy generating equipment to provide power to essential systems
and back up systems for effectuating banking transactions during the power
outages. However, we do not know and cannot predict the frequency or duration
of the power outages that may occur and, therefore, despite our contingency
plans, such outages could adversely affect our future financial performance.
Additionally, the electricity crisis will result in increases in the costs of
the electricity we use. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Forward Looking Information and
Uncertainties Regarding Future Financial Performance" in Part II of this
Report.
Competition
Competitive Conditions in the Traditional Banking Environment. The banking
business in California generally, and in our service area in particular, is
highly competitive with respect to both loans and deposits and is dominated by
a relatively small number of large multi-regional and large out-of-state banks
which have offices operating over wide geographic areas. We compete for
deposits and loans with such banks as well as other independent and community
banks that are based or have branch offices in our market areas, and with
savings and loan associations, credit unions, mortgage companies, money market
and other mutual funds, stock brokerage firms, insurance companies, and other
traditional and nontraditional financial institutions. 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 Wells Fargo Bank, Bank of America,
Union Bank, Sanwa Bank California, Washington Mutual Savings Bank, U. S.
Bancorp, Comerica Bank and California Federal Savings. With the exception of
Union Bank, all of these banks are now headquartered outside of California.
Independent banks or financial institutions with offices in our service area
include, among others, City National Bank, Imperial Bank, Manufacturers Bank,
Downey Savings and Eldorado Bank.
The large banks and some of the independent institutions 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 also have substantially more capital and higher
lending limits.
In order to compete with the financial institutions operating in our service
areas, we rely on our independent status to provide flexible and greater
personalized service to customers. We emphasize personal contacts with
potential customers by our executive officers, directors and employees; develop
local promotional activities; and seek to develop specialized or streamlined
services for customers. To the extent customers desire loans in excess of our
lending limit or services not offered by us, we attempt to assist customers 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 Internet Banking. The market for electronic
banking services is rapidly evolving. There are a number of banks that offer
services exclusively over the Internet, such as Net.B@nk and CompuBank, and
others that are affiliated with existing banks, such as Wingspan.com, that
market their services nationwide. There also are a large number of existing
banks that are beginning to offer Internet banking services; however, we
believe that few of these banks offer the comprehensiveness of Internet banking
services that we are able to offer. However, many of the larger of these banks
do have greater market presence and greater resources to market their Internet
banking services than we do. Additionally, new competitors and competitive
factors are likely to emerge, particularly in view of the rapid development of
Internet commerce. Additionally, there have been recently published reports
that the actual rate of growth in the use of the Internet banking services by
consumers and business is lower than had been previously predicted, and that
many customers continue to want to be able to access such services at
traditional local banking offices. In recognition of these conditions, from the
outset our strategy has been to offer our customers the benefits of both
traditional and internet banking services.
8
We also compete for customer funds with the numerous and growing number of
securities brokerage firms that offer online trading and investments, which
provide an alternative to deposit products we offer. The Bank has entered into
an agreement with UVEST Financial Services Group in order to offer online
discount securities brokerage services to its customers via our Web site.
Existing and future state and federal legislation could significantly affect
the cost of doing business, the range of permissible activities and competitive
balance among major and smaller banks and other financial institutions. We
cannot predict the impact such developments may have on commercial banking in
general or on our business in particular. For additional information regarding
these matters, see the discussion in below under the caption "Supervision and
Regulation."
Supervision and Regulation
General. Both federal and state laws extensively regulate bank holding
companies and banks. This regulation is intended primarily for the protection
of depositors and the FDIC's deposit insurance fund and not for the benefit of
our stockholders. Set forth below is a summary description of the material laws
and regulations which affect or bear on our operations. The description does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress and
certain of these proposals have been adopted, including legislation that
expands the insurance and other activities in which bank holding companies and
their subsidiaries may engage. We cannot predict whether any other of these
proposals, or any form of them, will be introduced in the current Congress and
become law. Consequently, we cannot presently determine what effect, if any,
those other proposals may have on us.
Pacific Mercantile Bancorp. Bancorp is a registered bank holding company
subject to regulation under the Bank Holding Company Act. Bancorp is required
to file with the Federal Reserve Board periodic reports pursuant to the Bank
Holding Company Act, and is subject to Federal Reserve Board examinations.
Among the powers conferred on the Federal Reserve Board is the power to
require any bank holding company to terminate an activity or terminate control
of or liquidate or divest subsidiaries or affiliates 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
the holding company's common stock or other equity securities.
Under the Bank Holding Company Act and related regulations adopted by the
Federal Reserve Board, a bank holding company and its non-banking subsidiaries
are prohibited from requiring tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Additionally, the Federal Reserve Board requires all bank holding companies to
maintain capital at or above certain prescribed levels. See "Capital Standards"
below. As a bank holding company, Bancorp must 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, of any bank or other bank holding company and for any merger of Bancorp
with any other bank holding company.
The Bank Holding Company Act also prohibits any bank holding company from
acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks or furnishing services to its
subsidiaries, except in statutorily permitted instances. However, we may,
subject to the prior approval of the Federal Reserve Board, engage in, or
acquire
9
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Additionally, under statutory
amendments adopted by Congress and enacted into law in 2000, subject to certain
prior notice requirements bank holding companies may establish or acquire
companies that engage in a number of financial service activities, including
insurance brokerage 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. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks 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.
Bancorp also is a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, Bancorp is subject to examination by,
and may be required to file reports with, the California Commissioner of
Financial Institutions.
Our shares of common stock are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended and,
therefore, we are subject to the information, proxy solicitation, insider
trading, and other requirements and restrictions of the Securities Exchange
Act.
Pacific Mercantile Bank. As a California state chartered bank, the Bank is
subject to primary supervision, periodic examination and regulation by the
California Commissioner of Financial Institutions. As a member of the Federal
Reserve Bank of San Francisco, the Bank also is subject to regulation by the
Federal Reserve Board, which is its primary federal banking regulator. Because
its deposits are insured by the FDIC, the Bank also is subject to regulations
promulgated by the FDIC. If, as a result of an examination of the Bank, the
Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, the Federal
Reserve Board has various remedies available. These remedies include the power
to enjoin "unsafe or unsound" practices, to require affirmative action to
correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the Bank, to assess civil monetary
penalties, to remove officers and directors and ultimately to terminate the
Bank's deposit insurance, which would result in a revocation of the Bank's
charter. The California Commissioner of Financial Institutions has many of the
same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain capital at or above
stated levels. See "Capital Standards" below.
Dividends and Other Transfers of Funds. In addition to cash generated from
our initial public offering in June 2000, dividends from the Bank constitutes
Bancorp's principal source of cash. 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 Bancorp. In
addition, the California Commissioner of Financial Institutions and the Federal
Reserve Board have the authority to prohibit the Bank from paying dividends, if
either of them deem payment of dividends by the Bank to be an unsafe or unsound
practice.
10
The Federal Reserve Board and the California Commissioner of Financial
Institutions also have authority to prohibit the Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the future financial
condition of the Bank and other factors, that the Federal Reserve Board or the
Commissioner could assert that the payment of dividends or other payments
might, under some circumstances, constitute an unsafe or unsound practice.
Additionally, the Federal Reserve Board 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 Bancorp may pay. An insured depository institution
is prohibited from paying management fees to any controlling persons or, with
limited exceptions, paying dividend if, after the transaction, the institution
would be undercapitalized. See "Prompt Corrective Action and Other Enforcement
Mechanisms" and "Capital Standards" for a discussion of these additional
restrictions on dividends.
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,
Bancorp or its other affiliates; the purchase of, or investments in, Bancorp
stock or other Bancorp securities; and the taking of such securities as
collateral for loans and the purchase of our assets or those of our other
affiliates. Such restrictions prevent Bancorp's affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts, and such secured loans and investments by the Bank to or in Bancorp or
any other Bancorp affiliates are limited, individually, to 10% of the Bank's
capital and surplus (as defined by federal regulations) and, in the aggregate,
to 20% of the Bank's capital and surplus. California law also imposes
restrictions with respect to transactions involving Bancorp and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law.
Capital Standards and Prompt Corrective Action.
Capital Standards. The Federal Reserve Board as well as other federal bank
regulatory agencies, have adopted uniform risk-based minimum capital guidelines
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization's operations for both transactions
reported on the balance sheet as assets, and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet
items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjusted percentages, which range from zero percent for assets with low
credit risk, such as U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as commercial loans.
The Federal Reserve Board, as well as other federal bank agencies, requires
a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a
minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to
the risked-based guidelines, federal banking regulators require banking
organizations to maintain a minimum amount of Tier 1 capital to total assets,
referred to as the leverage ratio. For a banking organization rated in the
highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets
must be 3%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios. As
is usually the case with newly established banking organizations, as a
condition of obtaining FDIC insurance for its deposits, the Bank agreed to
maintain, during a period of three years following the commencement of its
banking operations, which will end on February 28, 2002, a ratio of Tier 1
Capital to Average Assets of not less than 8%. Since the commencement of its
operations, the Bank has been able to maintain that ratio well above 8%.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal banking
agencies possess broad powers to take corrective and other supervisory action
to resolve the problems of insured depository
11
institutions, including; those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios:
. well capitalized;
. adequately capitalized;
. undercapitalized;
. significantly undercapitalized; and
. critically undercapitalized.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
The following table sets forth, as of December 31, 2000, the capital ratios
of Bancorp and the Bank 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 and to be deemed a "well capitalized
institution" under the prompt corrective action regulations described below:
For Capital Adequacy To be Classified as
At December 31, 2000 Actual Purposes Well Capitalized
-------------------- ------ ---------------------- -----------------------
Total Capital to Risk
Weighted Assets
Bancorp............... 27.5% (greater than or =)8.0% (greater than or =)10.0%
Bank.................. 22.3% (greater than or =)8.0% (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets
Bancorp............... 26.7% (greater than or =)4.0% (greater than or =) 6.0%
Bank.................. 21.4% (greater than or =)4.0% (greater than or =) 6.0%
Tier I Capital to
Average Assets
Bancorp............... 22.5% (greater than or =)4.0% (greater than or =) 5.0%
Bank.................. 18.1% (greater than or =)4.0% (greater than or =) 5.0%
As the table indicates, at December 31, 2000 Bancorp and the Bank exceeded
the capital ratios required for classification as adequately capitalized
institutions, under federally mandated capital standards and as "well
capitalized" institutions under the federally established prompt corrective
action regulations.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation, or any
condition imposed in writing by the agency or any written agreement with the
agency.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines designed to identify and address potential safety and soundness
concerns before capital becomes impaired. The guidelines set forth operational
and managerial standards relating to the following:
. internal controls, information systems and internal audit systems;
. loan documentation;
12
. credit underwriting;
. asset growth;
. earnings; and
. compensation, fees and benefits.
In addition, the federal banking agencies also have adopted safety and
soundness guidelines with respect to asset quality and earnings standards.
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 insured depository institution is expected to:
. conduct periodic asset quality reviews to identify problem assets;
. estimate the inherent losses in problem assets and establish reserves
that are sufficient to absorb estimated losses;
. compare problem asset totals to capital;
. take appropriate corrective action to resolve problem assets;
. consider the size and potential risks of material asset concentrations;
and
. provide periodic asset quality reports with adequate information for
management and the board of directors to assess the level of asset risk.
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.
FDIC Deposit Insurance. The FDIC's Bank Insurance Fund insures the Bank's
deposit accounts up to the maximum amount permitted by law. The FDIC may
terminate insurance of deposits upon finding that an insured institution has
engaged in unsafe or unsound practices, is in too unsafe or unsound a condition
to continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary federal
regulatory agency. California does not permit commercial banks to operate
without FDIC insurance. As a result, termination of FDIC insurance of a
California bank will result in its closure.
The Federal Deposit Insurance Corporation charges an annual assessment for
the insurance of deposits, which as of December 31, 2000, ranged from [0 to 27]
basis points per $100 of insured deposits, based on the risk a particular
institution poses to its deposit insurance fund. The risk classification is
based on an institution's capital group and supervisory subgroup assignment.
Pursuant to the Economic Growth and Paperwork Reduction Act, banks pay, in
addition to their normal deposit insurance premium as a member of the Bank
Insurance Fund, an amount equal to approximately 1.3 basis points per $100 of
insured deposits toward the retirement of the Financing Corporation bonds
issued in the 1980s to assist in the recovery of the savings and loan industry.
Interstate Banking and Branching. The Bank Holding Company Act permits bank
holding companies from any state to acquire banks and bank holding companies
located in any other state, subject to conditions including nationwide- and
state-imposed concentration limits. The Bank also has the ability, subject to
certain restrictions, to acquire branches outside California either by
acquisition from or a merger with another bank. The establishment by a state
bank of new bank branches (often referred to as "de novo" branches) in other
states is also possible in states with laws that expressly permit it.
Interstate branches are subject to laws of the states in which they are
located. Consolidations of and competition among banks has increased as banks
have begun to branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to fair lending requirements and reporting obligations involving home
mortgage lending operations and Community
13
Reinvestment Act activities. The Community Reinvestment Act generally requires
the federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low- and
moderate-income neighborhoods. A bank may be subject to substantial penalties
and corrective measures for a violation of fair lending laws. The federal
banking agencies may take compliance with those laws and Community Reinvestment
Act obligations into account when regulating and supervising other activities.
A bank's compliance with its Community Reinvestment Act obligations is based
on a performance-based evaluation system which bases Community Reinvestment Act
ratings on an institution's lending service and investment performance. When a
bank holding company applies for approval to acquire a bank or other bank
holding company, the Federal Reserve Board will review the assessment of each
subsidiary bank of the applicant bank holding company, and those records may be
the basis for denying the application.
Comprehensive Bank Reform Legislation. On November 12, 1999, President
Clinton signed into law the Gramm-Leach-Bliley Act (the "Gramm Act"). The Gramm
Act is expected to have a major impact on cross-industry mergers, customer
privacy and lending to lower-income communities. The Gramm Act repeals the
Glass Steagal Act of 1937, which separated commercial and investment banking,
and eliminates the Bank Holding Company Act's prohibition on insurance
underwriting activities. The Gramm Act allows both holding company subsidiaries
and national bank operating subsidiaries to offer a wide range of new financial
services, including insurance or securities sales. However, real estate
development and insurance underwriting would be restricted to affiliates and
cannot be performed by bank operating subsidiaries. State laws will govern
insurance sales, but states cannot discriminate against national banks by
preventing national banks from conducting insurance activities that non-banks
may conduct. The Gramm Act bars a bank holding company from merging with
insurance or securities firms, or embarking on new powers, if any of its banks
earned less than a "satisfactory" Community Reinvestment Act rating in its most
recent examination. The Gramm Act also provides that customers will have the
right to prevent banks from sharing information with third parties. The Gramm
Act is expected to further increase competition in providing financial
services.
Employees
As of December 31, 2000, we employed 55 persons on a full-time equivalent
basis. None of our employees is covered by a collective bargaining agreement.
We believe our employee relations are good.
ITEM 2. PROPERTIES.
The Bank subleases approximately 9,500 square feet of ground floor office
space, and leases approximately 4,300 square feet of upper floor office space,
both from unaffiliated third parties, in Newport Beach, California, which is
the current location of our headquarters and main banking office. Both leases
expire on June 30, 2001. However, we have obtained a new 5-year lease from the
master landlord for the ground floor office space which will continue to house
our Newport Beach banking office. The Bank also subleases from an unaffiliated
third party approximately 4,200 square feet of office space in San Clemente,
California, which is the location of our southern Orange County banking office.
The San Clemente sublease expires January 31, 2006.
The Bank has signed new leases, each for a term of 8 years, for
approximately 3,000 square feet of ground floor office space, and for
approximately 21,000 square feet of upper floor office space in the same
building, which is located in Costa Mesa, California, across the street from
the South Coast Plaza Shopping Mall. The ground floor space will house our new
Costa Mesa branch banking office. We will be using the upper floor space for
our headquarters offices which will be relocated from Newport Beach. We
currently expect to open the banking office and to relocate our headquarters
office to this new location in the second quarter of 2001.
The Bank has also signed a new lease for approximately 4,600 square feet of
ground floor office space for a business banking office to be located in
Beverly Hills, California, on Wilshire Boulevard near the intersection of
McCarty street. The lease expires on April 30, 2006. We currently expect to
open this new branch banking office, our first Los Angeles County location, in
the second quarter of 2001.
14
We believe that these facilities are adequate to meet our needs for space
during the next two to three years. However, we will continue to seek
additional office space in Southern California at locations that we believe
will be advantageous for new banking offices when opportunities to do so arise.
For additional information concerning properties, see Notes 5 and 12 of the
Notes to the Consolidated Financial Statements included in Part II of this
Report.
ITEM 3. LEGAL PROCEEDINGS.
The Bank is subject to legal actions that arise in the ordinary course of
the banking business. At December 31, 2000, we had no pending legal proceedings
that would be material to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The principal executive officers of the Bancorp and Bank are:
Name Position with Bancorp and the Bank Age
---- ---------------------------------- ---
Raymond E. Dellerba President, Chief Executive Officer 53
John J. McCauley Executive Vice President and Chief Operating Officer 53
Daniel L. Erickson Executive Vice President and Chief Financial Officer 56
John P. Cronin Executive Vice President and Chief Technology Officer 51
There is no family relationship among any of the above-named officers.
Mr. Dellerba has served as President, Chief Executive Officer and a Director
of the Company and of the Bank since the respective dates of their inception.
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 Eldorado Bancorp. Mr. Dellerba has more than 30
years of experience as a banking executive, primarily in Southern California
and in Arizona.
John J. McCauley has served as Executive Vice President, Chief Operating
Officer and a Director of the Company and of the Bank since the respective
dates of their inception. From September 1991 to July 1997, Mr. McCauley served
as Executive Vice President of Administration for Eldorado Bank.
Daniel L. Erickson, who is a certified public accountant, has been an
Executive Vice President and the Chief Financial Officer of the Company and the
Bank since the respective dates of their inception in 2000 and 1999,
respectively. Prior to that, Mr. Erickson was Senior Vice President and Chief
Financial Officer of Republic Bank from 1997 through 1998, and Senior Vice
President and Chief Financial Officer of Marathon National Bank from 1993 to
1997.
John P. Cronin has served as the Chief Technology Officer for the Company
and the Bank since the respective dates of their inception in 2000 and 1999,
respectively. From 1996 to 1997, he was Executive Vice President-Retail Banking
of CenFed Bank and President of CenFed Investments. From 1995 to 1996, he was
Senior Vice President-Retail Banking of Eldorado Bank.
15
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Trading Market for the Company's Shares.
Concurrently with the commencement of our initial public offering in June
2000, our shares were listed and have since been traded on the NASDAQ National
Market System under the trading symbol "PMBC."
The following table presents the high and low sales prices for the Company's
common stock, as reported by NASDAQ during each quarter since June 13, 2000. On
March 15, 2001, the high and low sales prices of the our common stock, on the
NASDAQ National Market System was $6.50 and $6.1875, respectively, and we had
approximately 360 shareholders of record as of that date.
High Low
------ ------
Period from June 13, 2000 to June 30, 2000....................... $8.250 $7.625
Quarter Ended September 30, 2000................................. $8.250 $6.125
Quarter Ended December 31, 2000.................................. $6.750 $4.500
Dividend Policy. It is the policy of the Board of Directors to retain
earnings to support future growth and, therefore, there are no current plans to
pay cash dividends.
Restrictions on the Payment of Dividends. The principal source of funds
available to the Company (in addition to the net proceeds retained by the
Bancorp from its initial public stock offering), at least until such time, if
any, as it may acquire or develop other businesses, will be cash dividends from
the Bank. 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 will be available to us
to pay cash dividends. California law places a statutory restriction on the
amounts of cash dividends a bank may pay to its shareholders. Under that law,
cash dividends by a California state chartered bank may not exceed, in any
calendar year, the lesser of (i) net income of the bank for the year and
retained net income from the preceding two years (after deducting all dividends
paid during the period), or (ii) the bank's retained earnings. However, because
the payment of cash dividends has the effect of reducing capital, capital
requirements imposed on federally insured banks often operate, as a practical
matter, to preclude the payment of cash dividends in amounts 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.
In addition, Section 23(a) of the Federal Reserve Act restricts any bank
subsidiary of a bank holding company, such as the Bancorp, from extending
credit to the its bank holding company unless the loans are secured by
specified obligations and are limited in amount to an aggregate of no more than
10% of the bank subsidiary's capital and retained earnings.
A more detailed discussion of those capital requirements and other
restrictions is contained in the Section of Part I of this Report entitled
"BUSINESS--Supervision and Regulation."
16
ITEM 6 SELECTED FINANCIAL DATA.
The following selected financial data for the periods presented is derived
from our consolidated financial statements, including the accompanying notes,
that have been audited by Grant Thornton LLP as of and for the 12 months ended
December 31, 2000 and by Arthur Andersen LLP, independent public accountants,
for the prior periods presented. Those financial statements are included as
Item 8 of this Report. The selected financial data should be read together with
those audited financial statements and the section of this Report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Period from
Inception
(May 29,
Year Ended December 31, 1998 to
------------------------ December 31,
2000 1999 1998
------------ ----------- ------------
Condensed Consolidated Statements of
Operations:
Total interest income.................. $ 9,600,400 $ 2,100,100 $ 2,600
Total interest expense................. 3,487,200 880,000 --
------------ ----------- ---------
Net interest income.................... 6,113,200 1,220,100 2,600
Provision for loan losses.............. 400,000 750,000 --
------------ ----------- ---------
Net interest income after provision for
loan losses........................... 5,713,200 470,100 2,600
Noninterest income..................... 960,100 90,700 --
Noninterest expense.................... 6,546,600 3,311,000 244,800
------------ ----------- ---------
Net income (loss)...................... $ 126,700 $(2,750,200) $(242,200)
============ =========== =========
Net income (loss) per share, basic and
diluted(2)............................ $ 0.02 $ (1.12) N/A
============ ===========
At December 31,
--------------------------------------
2000 1999 1998
------------ ----------- ------------
Selected Balance Sheet Data:
Cash and cash equivalents(3)........... $ 47,588,300 $38,498,200 $ 177,300
Total loans (net of allowance for loan
losses)(4)............................ 98,345,200 47,043,200 --
Total assets........................... 162,616,900 91,165,400 340,000
Total deposits......................... 124,286,500 74,500,200 --
Total stockholders' equity (deficit)... 34,688,600 16,018,400 (242,200)
Year Ended December 31,
-------------------------
2000 1999
----------- ------------
Selected Financial Ratios
Return on Average Assets............................ 0.10% (7.37)%
Return on Average Equity............................ 0.49% (33.12)%
Ratio of Average Equity to Average Assets........... 19.45% 22.26%
- --------
(1) For accounting purposes, the inception of the Company is deemed to have
occurred in May 1998, when the organizers of the Bank established an
organizing committee to file necessary applications for regulatory
approvals and begin preparations for the opening of the Bank. Pursuant to
those regulatory approvals, the Bank was incorporated in November 1998,
received its charter, completed its initial sale of shares and commenced
banking operations on March 1, 1999. As a result, no shares were
outstanding and no revenues were generated from operations prior to March
1, 1999.
(2) Share and per share data have been retroactively adjusted for a 2-for-1
stock split effectuated in April 2000 and a 1.25-for-1 stock split
effectuated in May 1999, as if both stock splits had occurred on March 1,
1999.
(3) Cash and cash equivalents include cash and due from other banks and federal
funds sold.
(4) Includes loans held for sale of $11,084,400 and $2,700,000 at December 31,
2000 and 1999, respectively.
17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Background. The following discussion presents information about the
consolidated results of operations, financial condition, liquidity and capital
resources of the Company. Substantially all of the Company's operations are
conducted by the Bank and the Bank accounts for substantially all of the
Company's revenues. This information should be read in conjunction with the
Company's audited Consolidated Financial Statements thereto included in Item 8
of this Report.
Although Bancorp was not incorporated until January 7, 2000 and did not
conduct any business operations until June 12, 2000, when it acquired 100%
ownership of the Bank, for accounting purposes the inception of Bancorp is
deemed to have occurred on May 29, 1998, the date when the organizers of the
Bank established an organizing committee to file necessary applications for
regulatory approvals and begin preparations for the opening of the Bank.
Pursuant to those regulatory approvals, the Bank was incorporated in November
1998 and it received its charter, completed the initial issuance and sale of
its shares and commenced banking operations on March 1, 1999. As a result,
prior to March 1, 1999, the Bank had no shares outstanding and had generated no
revenues from operations.
During 1999, we had only ten months of operations, from March 1, 1999 to
December 31, 1999, when our operating results were adversely affected by non-
recurring organizational and start-up expenses. As a result, readers of this
Report are cautioned that comparisons of the year ended December 31, 2000 to
the corresponding period of 1999 are of limited usefulness.
Forward-Looking Information. This discussion also contains information
regarding operating trends and expectations regarding our future performance
(which is referred to as "forward-looking information"). That information is
subject to the uncertainties and risks described below in the Section of this
Report entitled "Forward Looking Information and Uncertainties Regarding Future
Financial Performance" and readers of this Report are urged to read that
Section in its entirety.
Overview of Recent Operating Results. We generated net income of $126,700 in
the year ended December 31, 2000 as compared to a net loss of $2,750,200 for
the year ended December 31, 1999. This improvement was due largely to increases
in interest income and non-interest income that were primarily attributable to
the increases we achieved in the volume of our loans and other interest-earning
assets and the expansion of our mortgage banking operations. However, since the
Company commenced operations in March of 1999, operating results for the year
ended December 31, 1999 included only ten months of business operations, as
compared to a full year of business operations in 2000. On a per share basis,
we generated income of $0.02 for the year ended December 31, 2000; whereas we
sustained a net loss of $1.12 for the year ended December 31, 1999. Those per
share figures are based on weighted-average shares outstanding of 5,098,796 in
2000, as compared to 2,466,114 during 1999, an increase that was due to the
completion of a public offering in June 2000 in which we sold a total of
2,611,608 shares of common stock.
Set forth below are certain key financial performance ratios for the periods
indicated:
Year Ended
December 31,
--------------
2000 1999
----- -------
Return on average assets (1)................................ 0.10% (7.37)%
Return on average shareholders' equity (1).................. 0.49% (33.12)%
Net interest margin......................................... 4.90% 3.50%
Income (loss) per share..................................... $0.02 $ (1.12)
- --------
(1) These ratios have been annualized for 1999, because 1999 included only ten
months of operations.
18
Results of Operations
Net Interest Income. Net interest income, the major source of our operating
income, represents the difference between interest earned on interest earning
assets, principally loans and investment securities, and the interest paid on
interest bearing liabilities, principally deposits. Net interest income, when
expressed as a percentage of total average interest earning assets, is referred
to as "net interest margin."
The following tables sets forth information regarding the Company's average
balance sheet, yields on interest earning assets, interest expense on interest
bearing liabilities, the interest rate spread and the interest rate margin for
the year ended December 31, 2000 and 1999. Average balances are calculated
based on average daily balances.
Average Interest Average
Balance Earned/Paid Yield/Rate
------------ ----------- ----------
December 31, 2000:
Interest earning assets:
Short term investments.................. $ 37,476,000 $2,273,100 6.07%
Securities available for sale........... 4,857,000 308,400 6.35%
Loans................................... 82,319,200 7,018,900 8.53%
------------ ----------
Total earning assets.................. 124,652,200 9,600,400 7.70%
Noninterest earning assets................ 8,167,600
------------
TOTAL ASSETS.......................... $132,819,800
============
Interest bearing liabilities:
Interest bearing checking accounts...... $ 3,397,500 84,800 2.50%
Money market and savings accounts....... 43,311,200 2,028,900 4.68%
Certificates of deposit................. 23,726,600 1,338,400 5.64%
Other borrowings........................ 807,000 35,100 4.35%
------------ ----------
71,242,300 3,487,200 4.89%
----------
Noninterest bearing liabilities........... 35,746,200
------------
TOTAL LIABILITIES....................... 106,988,500
Stockholders' equity...................... 25,831,300
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................... $132,819,800
============
Net interest income....................... $6,113,200
==========
Interest rate spread...................... 2.81%
====
Net interest margin....................... 4.90%
====
19
Average Interest Average
Balance Earned/Paid Yield/Rate
------------ ----------- ----------
December 31, 1999:
Interest earning assets:
Short-term investments.................. $ 24,140,500 $ 1,283,800 5.32%
Securities available for sale........... 926,200 56,500 6.10%
Loans................................... 9,801,400 759,800 7.75%
------------ -----------
Total earning assets.................. 34,868,100 2,100,100 6.02%
Noninterest earning assets................ 2,435,400
------------
TOTAL ASSETS.......................... $ 37,303,500
------------
Interest bearing liabilities:
Interest bearing checking accounts...... $ 740,500 15,400 2.08%
Money market and savings accounts....... 10,155,000 448,500 4.42%
Certificates of deposit................. 8,618,600 416,100 4.83%
------------ -----------
19,514,100 880,000 4.51%
-----------
Noninterest bearing liabilities........... 9,485,600
------------
TOTAL LIABILITIES..................... 28,999,700
Stockholders' equity...................... 8,303,800
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................... $ 37,303,500
============
Net interest income....................... $ 1,220,100
===========
Interest rate spread...................... 1.51%
====
Net interest margin....................... 3.50%
====
The following table sets forth changes in interest income, including loan
fees, and interest paid in each of the years ended December 31, 2000 and 1999
and the extent to which those changes were attributable to changes in the
volume and rates of interest earning assets and in the volume and rates of
interest bearing liabilities. Changes in interest earned and interest paid due
to both rate and volume have been allocated to the change due to volume and the
change due to rate in proportion to the relationship of the absolute dollar
amounts of the changes in each.
2000 Compared to 1999
Increase (decrease) due to:
------------------------------
Volume Rate Total
---------- -------- ----------
Interest income
Short term investments........................ $ 788,600 $200,700 $ 989,300
Securities available for sale................. 249,500 2,400 251,900
Loans......................................... 6,175,700 83,400 6,259,100
---------- -------- ----------
Total earning assets........................ 7,213,800 286,500 7,500,300
Interest expense:
Interest bearing checking accounts............ 65,700 3,700 69,400
Money market and savings accounts............. 1,551,600 28,800 1,580,400
Certificates of deposit....................... 841,500 80,800 922,300
Other borrowings.............................. 35,100 -- 35,100
---------- -------- ----------
Total interest bearing liabilities.......... 2,493,900 113,300 2,607,200
---------- -------- ----------
NET INTEREST INCOME......................... $4,719,900 $173,200 $4,893,100
========== ======== ==========
20
We generated net interest income of $6,113,200 for the year ended December
31, 2000 as compared to net interest income of $1,220,100 in 1999. These
increases in net interest income were largely attributable to increases in
interest income of $7,500,300 for the year ended December 31, 2000 as compared
to 1999, which more than offset the increase in our interest expense in the
same period of $2,607,200. The increase in interest income was largely
attributable to increase of $72,517,800 in our average loans outstanding for
the year, which generated $6,259,100 of additional interest income for us for
the year ended December 31, 2000 as compared to 1999. The increase in interest
expense was primarily attributable to increase of $50,921,200 in our average
interest bearing deposits during the year ended December 31, 2000, compared to
1999. Our net interest margin for the year ended December 31, 2000 improved to
4.90% as compared to 3.50% for 1999. This improvement was largely attributable
to the change in the mix of earning assets to a greater proportion of loans on
which we earn higher rates of interest than on other interest earning assets.
Provision for Loan Losses. Like virtually all banks and other financial
institutions, we follow the practice of maintaining a reserve or allowance (the
"Allowance") for possible losses on loans and leases that occur from time to
time as an incidental part of the banking business. When it is determined that
the payment in full of a loan has become unlikely, the carrying value of the
loan is reduced to its realizable value. This reduction, which is referred to
as a loan "charge-off" is charged against the Allowance. The amount of the
Allowance is increased periodically to replenish the Allowance after it has
been reduced due to loan charge-offs and to reflect changes in (i) the volume
of outstanding loans, and (ii) the risk of potential losses due to a
deterioration in the condition of borrowers or in the value of property
securing non-performing loans or changes in economic conditions. See "Financial
Condition-Allowance for Loan Losses" below in this Section of this Report.
Increases in the Allowance are made through a charge against income referred to
as the "provision for loan losses."
During the year ended December 31, 2000, we made provisions for loan losses
of $400,000 as compared to $750,000 for 1999, as a direct response to the
growth in the volume of our outstanding loans. Loan charge-offs totaled only
$4,500 for the year ended December 31, 2000. There were no charge-offs in 1999.
At December 31, 2000, that Allowance represented 1.3% of our gross loans. The
Allowance is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically by management and the
Board of Directors of the Bank and, as adjustments become necessary, additional
provisions may be made in the periods in which they become known. In addition,
the Federal Reserve Bank of San Francisco and the Department of Financial
Institutions, as an integral part of their examination processes, periodically
review the Bank's allowance for loan losses. The agencies may require the Bank
to make additional provisions, over and above those made by management, based
on their judgments formulated on the basis of information obtained during their
periodic examinations of the Bank.
Noninterest Income. Noninterest income consists of service charges on
deposit accounts, mortgage banking income and other noninterest income.
Noninterest income for the year ended December 31, 2000 consisted primarily of
loan origination and processing fees and yield spread premium generated by the
mortgage banking division which originates conforming and non-conforming,
agency quality, residential first and home equity mortgage loans. The mortgage
division commenced operations in August 1999 and, therefore, a comparison of
noninterest income for the year ended December 31, 2000 to noninterest income
for the same period of 1999 is not meaningful.
Noninterest Expense. Total noninterest expense for the year ended December
31, 2000 was $6,546,600 as compared to $3,311,000 for 1999. Salaries and
employee benefits are the largest components of noninterest expense and the
increases in noninterest expense for 2000 were attributable primarily to the
addition of experienced banking personnel required to meet the needs of our
growing customer base. Other operating expense primarily consisted of business
development expense, telephone expense, correspondent bank charges, and check
charges for customers.
Management's ability to control noninterest expense in relation to the level
of net revenue (net interest income plus noninterest income) can be measured in
terms of other operating expenses as a percentage of net
21
revenue. This is known as the efficiency ratio and indicates the percentage of
revenue that is used to cover expenses. In 2000, noninterest expense as a
percentage of net revenue was 92.6% compared to 252.6% for 1999. This decrease
indicated that a proportionately smaller amount of net revenue was being
allocated to noninterest expenses. Noninterest expense as a percentage of
average assets for the years ended December 31, 2000 and 1999 was 4.93% and
8.98%, respectively.
We anticipate increases in noninterest expense in the first half of 2001, as
compared to the prior year, due to the opening of two new banking offices and
the relocation of our headquarters offices to a larger office facility during
that period.
Financial Condition
Assets. Assets totaled $162,616,900 at December 31, 2000 as compared to
$91,165,400 at December 31, 1999. The increase is largely attributable to
increases in the volume of loans and investment securities that we were able to
fund as a result of increases in deposits during 2000.
Securities Available for Sale. The Bank's investment policy, as established
by the Board of Directors, is to provide for the liquidity needs of the Bank
and to generate a favorable return on investments without undue interest rate
risk, credit risk or asset concentrations. At December 31, 2000, the Company
reported total investment securities of $12,987,900. This represents an
increase of $10,319,100 over total investment securities of $2,668,800 at
December 31, 1999. See Note 3 of the Notes to the Consolidated Financial
Statements, included as Item 8 of this Report, for information concerning the
composition and the maturity distribution of the investment securities
portfolio at December 31, 2000 and 1999.
The Bank is authorized to invest in obligations issued or fully guaranteed
by the United States Government, certain federal agency obligations, certain
time deposits, certain municipal securities and federal funds sold. It is our
policy that there will be no trading account. The weighted-average maturity of
U.S. government obligations, federal agency securities and municipal
obligations cannot exceed 5 years. Time deposits must be placed with federally
insured financial institutions, cannot exceed $100,000 in any one institution
and may not have a maturity exceeding 24 months.
Securities available for sale are those that management intends to hold for
an indefinite period of time and that may be sold in response to changes in
liquidity needs, changes in interest rates, changes in prepayment risks and
other similar factors. Securities available for sale are reported at current
market value for financial reporting purposes. The market value, less the
amortized cost of investment securities, net of income taxes, is adjusted
directly to stockholders' equity. At December 31, 2000, securities available
for sale had a fair market value of $12,987,900 with an amortized cost of
$12,981,000 and, as a result, the net unrealized holding gain was $6,900.
Loans Held for Sale. Loans intended for sale in the secondary market totaled
$11,084,400 at December 31, 2000 and $2,700,000 at December 31, 1999. This
increase was attributable primarily to a $6,811,200 increase in loans
originated by our mortgage banking division. The remainder of the increase was
due to the purchase of real estate loans from an unrelated party. These loans
are carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
Loans. Loans outstanding at December 31, 2000 and 1999 were made to
customers in Southern California, the primary market areas being Orange and Los
Angeles Counties. The greatest concentration was in real estate loans and
commercial loans, which represent 53% and 38%, respectively, of the loan
portfolio at December 31, 2000, as compared to 68% and 23%, respectively, at
December 31, 1999.
22
The following table sets forth the composition, by loan category, of the
loan portfolio at December 31, 2000 and 1999:
December December
31, 2000 Percent 31, 1999 Percent
----------- ------- ----------- -------
Real estate loans.................. $46,882,000 53.1% $30,653,600 68.1%
Commercial loans................... 33,732,400 38.2% 10,471,600 23.2%
Construction loans................. 3,238,900 3.7% 90,600 0.2%
Consumer loans..................... 4,393,700 5.0% 3,815,200 8.5%
----------- ----- ----------- -----
Gross loans.................... 88,247,000 100.0% 45,031,000 100.0%
===== =====
Deferred fee income.............. 159,300 62,200
Allowance for loan losses........ (1,145,500) (750,000)
----------- -----------
Loans, net..................... $87,260,800 $44,343,200
=========== ===========
Commercial loans are loans to businesses to finance capital purchases or
improvements, or to provide cash flow for operations. Real estate loans are
loans secured by trust deeds on real property, including property under
construction, commercial property and single family and multifamily residences.
Consumer loans include installment loans to consumers as well as home equity
loans and other loans secured by junior liens on real property.
The following table sets forth the maturity distribution of the Company's
loan portfolio (excluding consumer loans) at December 31, 2000:
Over
One Year
One Year Through Over Five
Or Less Five Years Years Total
----------- ----------- ----------- -----------
Real estate loans
Floating rate.............. $ 4,637,200 $ 2,390,000 $35,799,800 $42,827,000
Fixed rate................. 750,000 1,852,100 1,452,900 4,055,000
Commercial loans
Floating rate.............. 20,473,100 8,987,300 76,800 29,537,200
Fixed rate................. 1,374,600 1,966,200 854,400 4,195,200
Construction loans
Floating rate.............. 1,927,200 -- -- 1,927,200
Fixed rate................. 1,311,700 -- -- 1,311,700
----------- ----------- ----------- -----------
Total.................... $30,473,800 $15,195,600 $38,183,900 $83,853,300
=========== =========== =========== ===========
Allowance for Loan Losses. The risk that borrowers will fail or be unable to
repay their loans is an inherent part of the banking business. In order to
recognize on a timely basis, to the extent practicable, losses that can result
from such failures, banks establish an allowance for loan losses by means of
periodic charges to income known as "provisions for loan losses." Loans are
charged against the allowance for loan losses when management believes that
collection of the carrying amount of the loan, either in whole or in part, has
become unlikely. Periodic additions are made to the allowance (i) to replenish
and thereby maintain the adequacy of the allowance following the occurrence of
loan losses, and (ii) to increase the allowance in response to increases in the
volume of outstanding loans and deterioration in economic conditions or in the
financial condition of borrowers. The Bank evaluates the adequacy of and makes
provisions to the allowance in order to maintain or increase the allowance for
loan losses on a quarterly basis. As a result, provisions for loan losses will
normally represent a recurring expense.
The allowance for loan losses at December 31, 2000 was $1,145,500, which
represented 1.3% of outstanding loans as of that date. By comparison, at
December 31, 1999 the allowance was $750,000, which
23
represented 1.7% of outstanding loans at that date. The Bank carefully
monitors changing economic conditions, the loan portfolio by category,
borrowers' financial condition and the history of the portfolio in determining
the adequacy of the allowance for loan losses. We are not currently aware of
any information indicating that there will be material deterioration in our
loan portfolio, and we believe that the allowance for loan losses at December
31, 2000 is adequate to provide for losses inherent in the portfolio. However,
the allowance was established on the basis of estimates developed primarily
from historical industry loan loss data because the Bank commenced operations
in March 1999 and lacks historical data relating to the performance of loans
in its loan portfolio. As a result, ultimate losses may vary from the
estimates used to establish the allowance. Additionally, as the volume of
loans increases, additional provisions for loan losses will be required to
maintain the allowance at levels deemed adequate. In addition, if economic
conditions were to deteriorate, it would become necessary to increase the
provision to an even greater extent.
Changes in the allowance for loan losses for the year ended December 31,
2000 and 1999 were as follows:
2000 1999
----------- -----------
Total gross loans outstanding at end of year
(1)............................................. $88,406,300 $45,093,200
=========== ===========
Average total loans outstanding for the period
(1)............................................. $71,735,700 $ 8,888,500
=========== ===========
Allowance for loan losses at beginning of year... $ 750,000 $ --
Loans charged off--installment loan.............. (4,500) --
Recoveries....................................... -- --
Provision for loan losses charges to operating
expense......................................... 400,000 750,000
----------- -----------
Allowance for loan losses at end of year......... $ 1,145,500 $ 750,000
=========== ===========
Net charge-offs as a percentage of average total
loans........................................... 0.01% -- %
Net charge-offs as a percentage of total loans
outstanding at
end of year..................................... 0.01% -- %
Allowance for loan losses as a percentage of
average total loans............................. 1.60% 8.44%
Allowance for loan losses as a percentage of
total outstanding loans at end of year.......... 1.30% 1.67%
Net loans charged-off to allowance for loan
losses.......................................... 0.39% -- %
Net loans charged-off to provision for loan
losses.......................................... 1.13% -- %
- --------
(1) Includes deferred loan costs and excludes loans held for sale.
We also evaluate loans for impairment, where principal and interest is not
expected to be collected in accordance with the contractual terms of the loan
agreement. We measure and reserve for impairment on a loan by loan basis using
either the present value of expected future cash flows discounted at the
loan's effective interest rate, or the fair value of the collateral if the
loan is collateral dependent. As of December 31, 2000, we had no loans
classified as impaired. We exclude from our impairment calculations smaller,
homogeneous loans such as consumer installment loans and lines of credit.
Also, loans that experience insignificant payment delays or payment shortfalls
are generally not considered impaired.
In addition, at December 31, 2000, there were no nonaccrual loans,
restructured loans or loans with principal balances more than 90 days past
due.
24
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocations presented should not be interpreted as an indication that loans
charged to the allowance for loan losses will occur in these amounts or
proportions, or that the portion of the allowance allocated to each loan
category represents the total amount available for future losses that may occur
within these categories. There is a large unallocated portion of the allowance
for credit losses and the total allowance is applicable to the entire loan
portfolio.
December 31,
---------------------------------------------
2000 1999
----------------------- ---------------------
Allowance % of Allowance % of
for Loan Category of for Loan Category of
Losses Total Loans Losses Total Loans
----------- ----------- --------- -----------
Real estate...................... $ 324,100 56.8% $127,000 68.3%
Commercial and industrial........ 337,500 38.2% 43,400 23.2%
Consumer......................... 132,100 5.0% 60,000 8.5%
Unallocated...................... 351,800 N/A 519,600 N/A
----------- --------
$ 1,145,500 $750,000
----------- --------
Specific allocations are identified by loan category and allocated according
to charge-off data pertaining to the banking industry. All loans are graded and
incorporated in the process of assessing the adequacy of the allowance. The
allowance is maintained at a level considered sufficient to absorb estimated
losses in the loan portfolio, and the allowance not allocated to specific loan
categories is considered unallocated and evaluated based on management's
assessment of the portfolio's risk profile.
Deposits. At December 31, 2000 deposits totaled $124,286,500, which included
$17,212,900 of certificates of deposits of $100,000 or more. By comparison,
deposits at December 31, 1999, totaled $74,500,200, which included $21,782,100
of certificates of deposit of $100,000 or more.
Noninterest bearing demand deposits totaled $48,553,100 at December 31,
2000. This represented an increase of $31,945,300 over total noninterest
bearing demand deposits of $16,607,800 at December 31, 1999. Noninterest
bearing deposits represented 39.1% of total deposits as of December 31, 2000
and 22.3% of total deposits as of December 31, 1999.
Set forth below is maturity schedule of domestic time certificates of
deposits outstanding at December 31, 2000:
Certificates of Deposit Certificates of Deposit of
Maturities Under $100,000 $100,000 or more
---------- ----------------------- --------------------------
Three months or less....... $1,396,500 $13,128,300
Over three and though six
months.................... 1,239,700 2,045,600
Over six through twelve
months.................... 1,327,400 1,739,000
Over twelve months......... 95,100 300,000
---------- -----------
$4,058,700 $17,212,900
========== ===========
Liquidity
The Company's liquidity needs are actively managed to insure sufficient
funds are available to meet the ongoing needs of the Bank's customers. The
Company projects the future sources and uses of funds and maintains sufficient
liquid funds for unanticipated events. The primary sources of funds include
payments on loans, the sale or maturity of investments and growth in deposits.
The primary uses of funds includes funding new loans, making advances on
existing lines of credit, purchasing investments, funding deposit withdrawals
and paying operating expenses. The Bank maintains funds in overnight federal
funds and other short-term investments to provide for short-term liquidity
needs.
25
Cash flow from financing activities, primarily representing increases in
deposits and proceeds from the sale of common stock, totaled $70,994,300 for
the year ended December 31, 2000. Net cash used in operating activities,
primarily representing the net increase in loans held for sale and the net
change in accrued interest receivable and other assets, totaled $7,937,800. Net
cash used in investing activities, primarily representing increases in loans
and the purchases of investment securities available for sale, totaled
$53,966,400 for the year ended December 31, 2000.
At December 31, 2000, liquid assets, which included cash and due from banks,
federal funds sold, interest earning deposits with financial institutions and
unpledged securities available for sale (excluding Federal Reserve Bank stock)
totaled $55,509,400 or 34% of total assets.
Since the Bank's primary uses of funds are loans and the primary sources of
the funds used to make loans are deposits, the relationship between gross loans
and total deposits provides a useful measure of the Bank's liquidity.
Typically, the closer the ratio of loans to deposits is to 100%, the more
reliant the Bank is on its loan portfolio to provide for short term liquidity
needs. Since repayment of loans tends to be less predictable than the maturity
of investments and other liquid resources, the higher the loan to deposit ratio
the less liquid are the Bank's assets. On the other hand, since the Bank
realizes greater yields and higher interest income on loans than it does on
investments, a lower loan to deposit ratio can adversely affect interest income
and the earnings of the Bank. As a result, management's goal is to achieve a
loan to deposit ratio that appropriately balances the requirements of liquidity
and the need to generate a fair return on assets. At December 31, 2000, the
Company's loan to deposit ratio was 80.0%, compared to 64.2% at December 31,
1999.
Bancorp is a company separate and apart from the Bank that must provide for
its own liquidity. Substantially all of Bancorp's revenues are obtained from
interest income on investments since there are statutory and regulatory
provisions that limit the ability of the Bank to pay dividends to Bancorp (see
Note 11 to Consolidated Financial Statements). At December 31, 2000, Bancorp
has $6,796,900 of short-term investments and minimal expenses (see Note 16 to
Consolidated Financial Statements). Those investments were funded by a portion
of the proceeds of our public offering in June 2000. The remaining net proceeds
of that offering were contributed to the Bank to increase its capital to
support its growth. As of December 31, 2000, we did not have any material
commitments for capital expenditures.
Asset/Liability Management
The objective of asset/liability management is to reduce our exposure to
interest rate fluctuations. We seek to achieve this objective by matching
interest-rate sensitive assets and liabilities, and maintaining the maturity
and repricing of these assets and liabilities at appropriate levels given the
interest rate environment. Generally, if rate sensitive assets exceed rate
sensitive liabilities, the net interest income will be positively impacted
during a rising rate environment and negatively impacted during a declining
rate environment. When rate sensitive liabilities exceed rate sensitive assets,
the net interest income will generally be positively impacted during a
declining rate environment and negatively impacted during a rising rate
environment. However, because interest rates for different asset and liability
products offered by depository institutions respond differently to changes in
the interest rate environment, the gap is only a general indicator of interest
rate sensitivity.
26
The following table sets forth information concerning our rate sensitive
assets and rate sensitive liabilities as of December 31, 2000. The assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Certain shortcomings are inherent in
the method of analysis presented in the following table. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees and at different times to
changes in market interest rates. Rates on some assets and liabilities change
in advance of changes in market rates of interest, while rates on other assets
or liabilities may lag behind changes in market rates of interest. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear in the table.
Over Three Over One
Three Through Year Over Non-
Months Twelve Through Five Interest
or Less Months Five Years Years Bearing Total
------------ ----------- ----------- ----------- ------------ ------------
ASSETS
------
Interest-bearing
deposits in other
financial
institutions........... $ 792,000 $ 396,000 $ -- $ -- $ -- $ 1,188,000
Securities available for
sale................... 8,683,600 3,482,600 -- 821,700 -- 12,987,900
Federal Funds Sold...... 38,565,000 -- -- -- -- 38,565,000
Loans, gross............ 76,608,400 10,644,400 9,205,500 3,032,400 -- 99,490,700
Non-interest earning
assets................. -- -- -- -- 10,385,300 10,385,300
------------ ----------- ----------- ----------- ------------ ------------
Total assets........... 124,649,000 14,523,000 9,205,500 3,854,100 10,385,300 162,616,900
------------ ----------- ----------- ----------- ------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
---------------------
Noninterest-bearing
deposits............... -- -- -- -- 48,553,100 48,553,100
Interest-bearing
deposits............... 68,986,500 6,351,800 395,100 -- -- 75,733,400
Repurchase agreements... 2,679,800 -- -- -- -- 2,679,800
Other liabilities....... -- -- -- -- 962,000 962,000
Stockholders' equity.... -- -- -- -- 34,688,600 34,688,600
------------ ----------- ----------- ----------- ------------ ------------
Total liabilities and
Stockholders equity.... 71,666,300 6,351,800 395,100 -- 84,203,700 162,616,900
------------ ----------- ----------- ----------- ------------ ------------
Interest rate
sensitivity gap........ $ 52,982,700 $ 8,171,200 $ 8,810,400 $ 3,854,100 $(73,818,400) $ --
============ =========== =========== =========== ============ ============
Cumulative interest rate
Sensitivity gap........ $ 52,982,700 $61,153,900 $69,964,300 $73,818,400 $ -- $ --
============ =========== =========== =========== ============ ============
Cumulative % of rate
sensitive assets in
maturity period........ 76.65% 85.58% 91.24% 93.61% 100.00%
============ =========== =========== =========== ============
Rate sensitive assets to
rate sensitive
liabilities 1.74% 2.29% 23.30% N/A N/A
============ =========== =========== =========== ============
Cumulative ratio 1.74% 1.78% 1.89% 1.94% N/A
============ =========== =========== =========== ============
At December 31, 2000, our rate sensitive balance sheet was shown to be in a
positive gap position. This implies that our earnings would increase in the
short-term if interest rates rise and would decline in the short-term if
interest rates were to fall. However, as noted above, this may not necessarily
be the case depending on how quickly rate sensitive assets and liabilities
react to interest rate changes.
Capital Resources
The Company and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. See
"Business--Supervision and Failure to meet minimum capital requirements can
lead to certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's operating results or financial condition. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action that apply
to all bank holding companies and FDIC insured banks in the United States, the
Company (on a consolidated basis) and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-
27
balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company (on a consolidated basis) and the Bank to maintain minimum
amounts and ratios of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes that, as of December 31, 2000,
the Company (on a consolidated basis) and the Bank met all capital adequacy
requirements to which they are subject.
On March 1, 1999, the Bank sold 2,090,620 shares of its common stock for
approximately $8,298,300 in its initial public offering, net of approximately
$64,200 in related expense. In November 1999, the Bank completed a second
common stock offering in which it sold a total of 1,629,542 shares for
approximately $10,720,900, net of approximately $278,500 in related expenses.
In June 2000, the Bancorp sold a total of 2,611,608 shares in its initial
public offering from which it realized proceeds of approximately $18,527,200,
net of approximately $2,365,700 in underwriting commissions and discounts and
other related expenses. In addition, Bancorp issued warrants to the underwriter
to purchase 250,000 shares of common stock at an exercise price of $9.60 per
share.
We effectuated a 1.25-for-1 stock split of our outstanding shares in May
1999 and a 2-for-1 stock split in April 2000. Share and per share data have
been adjusted to give retroactive effect to both stock splits as if they had
occurred on March 1, 1999.
As of December 31, 2000, based on applicable capital regulations, Bancorp
and the Bank are categorized as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, Bancorp
and the Bank must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the following table, which contains a
comparison of Bancorp and Bank's capital and capital ratios at December 31,
2000 to the regulatory requirements applicable to them.
Capital and Capital Ratios To be Classified as Well
Required under Applicable Capitalized under Prompt Corrective
Actual Government Regulations Action Provisions
----------------- -------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ---------------------- ----------- -----------------------
Total Capital to Risk
Weighted Assets
Bancorp............... $35,827,200 27.5% $10,407,500 (greater than or =)8.0% $13,009,300 (greater than or =)10.0%
Bank.................. 29,031,800 22.3% 10,407,100 (greater than or =)8.0% 13,008,900 (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets
Bancorp............... 34,681,700 26.7% 5,203,700 (greater than or =)4.0% 7,805,600 (greater than or =) 6.0%
Bank.................. 27,886,300 21.4% 5,203,500 (greater than or =)4.0% 7,805,300 (greater than or =) 6.0%
Tier I Capital to
Average Assets
Bancorp............... 34,681,700 22.5% 6,170,000 (greater than or =)4.0% 7,712,600 (greater than or =) 5.0%
Bank.................. 27,886,300 18.1% 6,170,000 (greater than or =)4.0% 7,712,600 (greater than or =) 5.0%
The Company intends to retain earnings to support future growth and,
therefore, does not intend to pay dividends for at least the foreseeable
future. In addition, the Bank has agreed with the FDIC to maintain a Tier 1
Capital to Average Assets ratio of at least eight percent until February 28,
2002.
28
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE FINANCIAL
PERFORMANCE
This Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains certain forward-looking
statements. Forward-looking statements are estimates of, or expectations or
beliefs regarding our future financial performance that are based on current
information and that are subject to a number of risks and uncertainties that
could cause our actual operating results in the future to differ significantly
from those expected at the current time. Those risks and uncertainties include,
although they are not limited to, the following:
Increased Competition. Increased competition from other banks and financial
service businesses, mutual funds and securities brokerage and investment
banking firms that offer competitive loan and investment products could require
us to reduce interest rates and loan fees to attract new loans or to increase
interest rates that we offer on time deposits, either or both of which could,
in turn, reduce interest income and net interest margins.
Possible Adverse Changes in Local Economic Conditions. Adverse changes in
local economic conditions could (i) reduce loan demand which could, in turn,
reduce interest income and net interest margins; (ii) adversely affect the
financial capability of borrowers to meet their loan obligations which, in
turn, could result in increases in loan losses and require increases in
provisions made for possible loan losses, thereby adversely affecting operating
results; and (iii) lead to reductions in real property values that, due to our
reliance on real property to secure many of our loans, could make it more
difficult for us to prevent losses from being incurred on non-performing loans
through the sale of such real properties.
Possible Adverse Changes in National Economic Conditions and FRB Monetary
Policies. Changes in national economic conditions, such as increases in
inflation or declines in economic output often prompt changes in Federal
Reserve Board monetary policies that could increase the cost of funds to us and
reduce net interest margins, particularly if we are unable, due to competitive
pressures or the rate insensitivity of earning assets, to effectuate
commensurate increases in the rates we are able to charge on existing or new
loans. In the past few months there has been a slowing in economic growth
nationally, the duration and severity of which are difficult to predict at this
time. These conditions could adversely affect the financial capability of
borrowers to meet their loan obligations which, in turn, could result in
increases in loan losses and require increases in provisions made for possible
loan losses, thereby adversely affecting operating results.
Changes in Regulatory Policies. Changes in federal and state bank regulatory
policies, such as increases in capital requirements or in loan loss reserve or
asset/liability ratio requirements, could adversely affect earnings by reducing
yields on earning assets or increasing operating costs.
Effects of Growth. It is our intention to take advantage of opportunities to
increase our business, either through acquisitions of other banks or the
establishment of new banking offices. In particular, we plan to open two new
banking offices in the first half of 2001. The opening of those two offices are
expected to cause us to incur additional operating costs that may adversely
affect our operating results, at least on an interim basis, until the new
banking offices are able to achieve profitability. Also, if we do open any
additional new offices or acquire any other banks, we are likely to incur
additional operating costs until those offices achieve profitability or the
acquired banks are integrated into our operations.
Electricity Crisis in California. California is currently experiencing a
tightening in the supply of electricity to the state and there are predictions
that there will be rolling power outages or "blackouts" during the summer
months when electricity usage is typically at its peak. Power outages could
disrupt our operations, increase our operating costs and reduce the
productivity of staff and operations. Among other things, power outages could
cause a slowdown and delays in processing banking transactions, which are
heavily dependent on the continued functioning of electronic and automated
systems; and abrupt and unscheduled power outages could result in the shut down
of information systems that could cause financial data to be lost. In addition,
29
power outages could prevent customers from being able to access their accounts
and effectuate banking transactions over the internet. We have developed
contingency plans to deal with such power outages that include the use of
alternative energy generating equipment to provide power to essential systems
and back up systems for effectuating banking transactions during the power
outages. However, we do not know and cannot predict the frequency or duration
of the power outages that may occur and, therefore, despite our contingency
plans, such outages could adversely affect our future financial performance. In
addition, the electricity crisis is expected to cause an increase in the cost
of electricity we use in our operations and, consequently, will cause our
noninterest expense to increase as compared to prior periods.
Other risks that could affect our future financial performance are described
in the Section entitled "Risk Factors" in the Prospectus dated June 14, 2000,
included in our S-1 Registration Statement filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and readers
are urged to review those risks as well.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Report. We also disclaim any obligation to
update forward looking statements contained in this Report.
30
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Certified Public Accountants...................... 32
Consolidated Statements of Financial Condition as of December 31, 2000
and 1999 ............................................................... 34
Consolidated Statements of Operations for the Years Ended December 31,
2000 and 1999 and the Period from Inception (May 29, 1998) to December
31, 1998................................................................ 35
Consolidated Statements of Stockholders' Equity for the Period from
Inception (May 29, 1998) to December 31, 1998 and for the Years Ended
December 31, 1999 and 2000.............................................. 36
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000 and 1999 and the Period from Inception (May 29, 1998) to December
31, 1998................................................................ 37
Notes to Consolidated Financial Statements............................... 38
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Pacific Mercantile Bancorp and Subsidiary:
We have audited the accompanying consolidated statement of financial
condition of Pacific Mercantile Bancorp and Subsidiary as of December 31, 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Mercantile Bancorp and Subsidiary as of December 31, 2000 and the consolidated
results of operations, stockholders' equity and cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Irvine, California
February 9, 2001
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Pacific Mercantile Bancorp:
We have audited the accompanying consolidated statement of financial
condition of Pacific Mercantile Bancorp and subsidiary (the Company) as of
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1999 and the period from inception (May 29, 1998) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Mercantile Bancorp
and subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the year ended December 31, 1999 and for the period from
inception (May 29, 1998) to December 31, 1998 in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Irvine, California
January 28, 2000 (except with respect to the reorganization discussed in Note 1
as to which the date is June 12, 2000)
33
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------------
2000 1999
------------ -----------
ASSETS
------
Cash and due from banks............................. $ 9,023,300 $ 2,531,200
Federal funds sold.................................. 38,565,000 35,967,000
------------ -----------
Cash and cash equivalents......................... 47,588,300 38,498,200
Interest bearing deposits with financial
institutions....................................... 1,188,000 1,386,000
Securities available for sale, at fair value........ 12,987,900 2,668,800
Loans held for sale, at lower of cost or market..... 11,084,400 2,700,000
Loans (net of allowances of $1,145,500 and $750,000,
respectively)...................................... 87,260,800 44,343,200
Accrued interest receivable......................... 782,400 221,100
Premises and equipment, net......................... 1,336,300 1,178,300
Other assets........................................ 388,800 169,800
------------ -----------
Total assets.................................... $162,616,900 $91,165,400
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing............................... $ 48,553,100 $16,607,800
Interest bearing.................................. 75,733,400 57,892,400
------------ -----------
Total deposits.................................. 124,286,500 74,500,200
Securities sold under agreements to repurchase...... 2,679,800 --
Accrued interest payable............................ 94,300 51,600
Other liabilities................................... 867,700 595,200
------------ -----------
Total liabilities............................... 127,928,300 75,147,000
Commitments and contingencies....................... -- --
Stockholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, none issued.......................... -- --
Common stock, no par value, 10,000,000 shares
authorized, 6,332,020 and 3,720,162 shares issued
and outstanding at December 31, 2000 and 1999,
respectively..................................... 37,547,400 19,019,200
Accumulated deficit............................... (2,865,700) (2,992,400)
Accumulated other comprehensive income (loss)..... 6,900 (8,400)
------------ -----------
Total stockholders' equity...................... 34,688,600 16,018,400
------------ -----------
Total liabilities and stockholders' equity...... $162,616,900 $91,165,400
============ ===========
The accompanying notes are an integral part of these financial statements.
34
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
Inception
(May 29, 1998)
Year Ended December 31, to December 31,
------------------------ ---------------
2000 1999 1998
----------- ------------ ---------------
Interest Income:
Loans, including fees.............. $ 7,018,900 $ 759,800 $ --
Federal funds sold................. 2,196,100 1,173,300 --
Securities available for sale...... 308,400 56,500 --
Interest bearing deposits with
financial institutions............ 77,000 45,100 --
Other.............................. -- 65,400 2,600
----------- ------------ ----------
Total interest income............ 9,600,400 2,100,100 2,600
----------- ------------ ----------
Interest Expense:
Deposits........................... 3,452,100 878,900 --
Borrowings......................... 35,100 1,100 --
----------- ------------ ----------
Total interest expense........... 3,487,200 880,000 --
----------- ------------ ----------
Net Interest Income.................. 6,113,200 1,220,100 2,600
Provision for Loan Losses............ 400,000 750,000 --
----------- ------------ ----------
Net Interest Income after Provision
for Loan Losses..................... 5,713,200 470,100 2,600
----------- ------------ ----------
Noninterest Income:
Service charges and fees........... 158,900 14,900 --
Net gains on sales of loans held
for sale.......................... 277,000 -- --
Mortgage banking................... 397,700 58,300 --
Other.............................. 126,500 17,500 --
----------- ------------ ----------
Total noninterest income......... 960,100 90,700 --
----------- ------------ ----------
Noninterest Expense:
Salaries and employee benefits..... 3,638,300 1,795,600 108,800
Occupancy ......................... 489,100 218,900 21,000
Depreciation....................... 419,000 202,100 --
Equipment.......................... 99,900 45,300 1,000
Data processing.................... 254,000 125,200 --
Professional fees.................. 273,400 192,900 66,400
Stationery and supplies............ 154,100 114,500 8,100
Courier............................ 130,700 31,600 --
Advertising........................ 108,400 101,700 --
Other operating ................... 979,700 483,200 39,500
----------- ------------ ----------
Total noninterest expense........ 6,546,600 3,311,000 244,800
----------- ------------ ----------
Net Income (Loss).................... $ 126,700 $ (2,750,200) $ (242,200)
=========== ============ ==========
Basic and Fully Diluted Income (Loss)
per Share........................... $ .02 $ (1.12) $ N/A
=========== ============ ==========
The accompanying notes are an integral part of these financial statements.
35
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (May 29, 1998) to December 31, 1998
and for the Years Ended December 31, 1999 and 2000
Preferred Stock Common Stock Accumulated
---------------- --------------------- Other
Number of Number of Accumulated Comprehensive
Shares Amount Shares Amount Deficit Income (Loss) Total
--------- ------ --------- ----------- ----------- ------------- -----------
Balance, at inception
(May 29, 1988)......... -- $ -- -- $ -- $ -- $ -- $ --
Net loss................ -- -- -- -- (242,200) -- (242,200)
--- ----- --------- ----------- ----------- ------- -----------
Balance, December 31,
1998................... -- -- -- -- (242,200) -- (242,200)
Issuance of 3,720,162
shares of common stock,
net of offering
expenses............... -- -- 3,720,162 19,019,200 -- -- 19,019,200
Comprehensive loss:
Net loss............... -- -- -- -- (2,750,200) -- (2,750,200)
Change in unrealized
gain (loss) on
securities available
for sale, net
of tax................ -- -- -- -- -- (8,400) (8,400)
-----------
Total comprehensive
loss................ (2,758,600)
--- ----- --------- ----------- ----------- ------- ===========
Balance, December 31,
1999................... -- -- 3,720,162 19,019,200 (2,992,400) (8,400) 16,018,400
Exercise of 250 stock
options................ -- -- 250 1,000 -- -- 1,000
Issuance of 2,611,608
shares of common stock,
net of offering
expenses............... -- -- 2,611,608 18,527,200 -- -- 18,527,200
Comprehensive income:
Net income............. -- -- -- -- 126,700 -- 126,700
Change in unrealized
gain (loss) on
securities available
for sale, net
of tax................ -- -- -- -- -- 15,300 15,300
-----------
Total comprehensive
income.............. 142,000
--- ----- --------- ----------- ----------- ------- ===========
Balance, December 31,
2000 -- $ -- 6,332,020 $37,547,400 $(2,865,700) $ 6,900 $34,688,600
=== ===== ========= =========== =========== ======= ===========
The accompanying notes are an integral part of these financial statements.
36
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 and 1999 and the
Period from Inception (May 29, 1998) to December 31, 1998
2000 1999 1998
------------ ------------ ---------
Cash Flows From Operating Activities:
Net income (loss)...................... $ 126,700 $ (2,750,200) $(242,200)
Adjustments to reconcile net income
(loss) to net cash used in
Operating activities:
Depreciation and amortization......... 419,000 202,100 --
Provision for loan losses............. 400,000 750,000 --
Net amortization (accretion) of
premium (discount) on securities..... (36,200) (2,000) --
Net gains on sales of loans held for
sale................................. (277,000) -- --
Proceeds from sales of loans held for
sale................................. 87,225,800 6,603,400 --
Originations and purchases of loans
held for sale........................ (95,333,200) (9,303,400) --
Net loss on sale of equipment......... 2,200 -- --
Net change in accrued interest
receivable........................... (561,300) (221,100) --
Net change in other assets............ (219,000) (149,600) (20,200)
Net change in accrued interest
payable.............................. 42,700 51,600 --
Net change in other liabilities....... 272,500 483,000 112,200
------------ ------------ ---------
Net cash used in operating
activities......................... (7,937,800) (4,336,200) (150,200)
------------ ------------ ---------
Cash Flows From Investing Activities:
Net decrease (increase) in interest
bearing deposits with financial
institutions......................... 198,000 (1,386,000) --
Maturities of securities available for
sale................................. 750,000 -- --
Purchase of securities available for
sale................................. (11,017,600) (2,675,200) --
Net increase in loans................. (43,317,600) (45,093,200) --
Proceeds from sale of equipment....... 10,300 -- --
Purchases of premises and equipment... (589,500) (1,237,900) (142,500)
------------ ------------ ---------
Net cash used in investing
activities......................... (53,966,400) (50,392,300) (142,500)
------------ ------------ ---------
Cash Flows From Financing Activities:
Net increase in deposits.............. 49,786,300 74,500,200 --
Net increase in securities sold under
agreements to repurchase............. 2,679,800 -- --
Proceeds from sale of common stock,
net of offering expenses............. 18,527,200 19,019,200 --
Proceeds from exercise of stock
options.............................. 1,000 -- --
(Repayment of ) advances from
founders............................. -- (470,000) 470,000
------------ ------------ ---------
Net cash provided by financing
operations......................... 70,994,300 93,049,400 470,000
------------ ------------ ---------
Net increase in cash and cash
equivalents........................ 9,090,100 38,320,900 177,300
Cash and Cash Equivalents, beginning of
period................................. 38,498,200 177,300 --
------------ ------------ ---------
Cash and Cash Equivalents, end of
period................................. $ 47,588,300 $ 38,498,200 $ 177,300
============ ============ =========
Supplementary Cash Flow Information:
Cash paid for interest on deposits and
other borrowings..................... $ 3,444,500 $ 828,400 $ --
============ ============ =========
The accompanying notes are an integral part of these financial statements.
37
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Organization
The consolidated financial statements include the accounts of Pacific
Mercantile Bancorp ("Bancorp") and Pacific Mercantile Bank (the "Bank").
Bancorp is a bank holding company which was incorporated on January 7, 2000 in
the State of California. Pacific Mercantile Bank is a banking company which was
formed on May 29, 1998, incorporated November 18, 1998 in the State of
California and commenced operations on March 1, 1999. The Bank is chartered by
the California Department of Financial Institutions (DFI) and is a member of
the Federal Reserve Bank of San Francisco ("FRB"). In addition, its customers'
deposit accounts are insured by the Federal Deposit Insurance Corporation
("FDIC') up to the maximum amount allowed by Federal Regulations.
On June 12, 2000 Bancorp acquired the Bank by means of a merger which
resulted in the Bank becoming a wholly-owned subsidiary of Bancorp and the
Bank's shareholders became Bancorp shareholders, owning the same number and
percentage of Bancorp shares as they had owned in the Bank (the
"Reorganization"). Prior to the Reorganization, Bancorp had only nominal assets
and had not conducted any business. All financial information included herein
has been restated as if the holding company reorganization was effective for
all periods presented. Additionally, the number of common shares outstanding
gives retroactive effect to a two-for-one stock split of the Bank's outstanding
shares that became effective on April 14, 2000, and a 1.25 for 1.00 stock split
that became effective May 21, 1999.
The Bank provides a full range of banking services to small and medium size
businesses, professionals and the general public throughout Orange County and
is subject to competition from other financial institutions. The operating
results of the Bank may be significantly affected by changes in market interest
rates and by fluctuations in real estate values in the Bank's primary service
area. The Bank is regulated by the DFI, FRB and FDIC and undergoes periodic
examinations by those regulatory authorities.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets, liabilities, and
contingencies at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Bancorp and
its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flow, cash and cash equivalents
consist of cash on hand and due from banks and federal funds sold. Generally,
federal funds are sold for a one-day period.
Interest Bearing Deposits with Financial Institutions
Interest bearing deposits with financial institutions mature within one year
and are carried at cost.
38
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Securities Available for Sale
Securities available for sale are those that management intends to hold for
an indefinite period of time and that may be sold in response to changes in
liquidity needs, changes in interest rates, changes in prepayment risks and
other similar factors. The securities are recorded at fair value, with
unrealized gains and losses excluded from earnings and reported as other
comprehensive income or loss, respectively.
Purchased premiums and discounts are recognized as interest income using the
interest method over the term of the securities. Declines in the fair value of
securities available for sale below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the
specific identification method.
Loans Held for Sale
Loans intended for sale in the secondary market are carried at the lower of
cost or estimated fair value in the aggregate. Net unrealized losses, if any,
are recognized through a valuation allowance by charges to income.
Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are stated at principal amounts
outstanding, net of unearned income. Interest is accrued daily as earned,
except where reasonable doubt exists as to collectibility, in which case
accrual of interest is discontinued and the loan is placed on nonaccrual
status. Loans are generally classified as impaired and placed on nonaccrual
status when, in management's opinion, such principal or interest will not be
collectible in accordance with the contractual terms of the loan agreement.
Loans with principal or interest that is 90 days or more past due are placed on
nonaccrual status. Management may elect to continue the accrual of interest
when the estimated net realizable value of the collateral is sufficient to
recover both principal and accrued interest balances and such balances are in
the process of collection. Generally, interest payments received on nonaccrual
loans are applied to principal. Once all principal has been received,
additional interest payments are recognized as interest income on a cash basis.
The allowance for loan losses is established through a provision for loan
losses. Loans are charged against the allowance for loan losses when management
believes that the collection of the carrying amount is unlikely. Because the
Bank commenced operations in early 1999, management has no prior loss
experience with its loan portfolio. Consequently, during the initial stages of
operation, the allowance is being maintained at a level of 1.3% of outstanding
loan balances. This allowance is intended to reflect losses based upon
historical industry loan losses and management's evaluation of the Bank's loan
portfolio quality. As management develops more history with the Bank's loan
portfolio, it will maintain an allowance for loan losses based on evaluations
of the collectibility of loans taking into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
review of specific problem loans, prior loan loss experience and current
economic conditions that may affect the borrowers' ability to pay.
The allowance is based on estimates, and ultimate losses may vary from the
current estimates. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known. Management believes that the allowance for loan losses
is adequate as of December 31, 2000 and 1999. In addition, the FRB and the DFI,
as an integral part of their examination processes, periodically review the
Bank's allowance for loan losses. The agencies may require the Bank to
recognize additions to the allowance based on their judgments given the
information available at the time of their examinations.
39
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bank also evaluates loans for impairment, where principal and interest
is not expected to be collected in accordance with the contractual terms of the
loan agreement. The Bank measures and reserves for impairment on a loan by loan
basis using either the present value of expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent. As of December 31, 2000 and 1999, the Bank
has no loans classified as impaired. The Bank excludes from its impairment
calculations smaller, homogeneous loans such as consumer installment loans and
lines of credit. Also, loans that experience insignificant payment delays or
payment shortfalls are generally not considered impaired.
Loan Origination Fees and Costs
All origination fees and related direct costs are deferred and amortized to
interest income as an adjustment to yield over the respective lives of the
loans using the effective interest method. As of December 31, 2000 and 1999,
approximately $159,300 and $62,200, respectively, of net deferred loan costs
were included in the related loan totals in the accompanying statements of
financial condition.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which is charged to expense on a straight-line basis over the
estimated useful lives of the assets or, in the case of leasehold improvements,
over the term of the leases, whichever is shorter. Maintenance and repairs are
charged directly to expense as incurred. Improvements to premises and equipment
that extend the useful lives of the assets are capitalized.
When assets are disposed of, the applicable costs and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in current operations. Rates of depreciation and amortization
are based on the following estimated useful lives:
Furniture and
equipment Three to ten years
Leasehold
improvements Lesser of the lease term or estimated useful life
Income Taxes
Deferred income taxes and liabilities are determined using the asset and
liability method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of Bancorp. The
weighted average number of shares used in the income or loss per share
computation for the years ended December 31, 2000 and 1999 was 5,098,796 and
2,466,114, respectively. No shares were outstanding for the period from
inception (May 29, 1998) to December 31, 1998. Common stock equivalents are
excluded from the income (loss) per share calculation for fiscal 1999 because
the effect would be antidilutive.
40
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plan
Bancorp accounts for stock-based employee compensation as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the
disclosure provisions of Statements of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation (SFAS 123)." SFAS No. 123 requires
pro-forma disclosures of net income (loss) and net income (loss) per share as
if the fair value based method of accounting for stock based awards had been
applied. Under the fair value based method, compensation cost is recorded based
on the value of the award at the grant date and is recognized over the service
period.
Comprehensive Income
Components of comprehensive income include non-ownership related revenues,
expenses, gains, and losses that under generally accepted accounting principles
are included in equity but excluded from net income. The Bank had no components
of comprehensive income in the period ended December 31, 1998.
Segment Disclosures
Based on the internal reporting of financial information, management
currently believes that it operates with only one operating segment and has not
included any segment disclosures herein.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was subsequently amended by SFAS No.
137 to defer the effective date of the pronouncement from fiscal years
beginning June 15, 1999 to fiscal years beginning June 30, 2000. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the purpose
of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows.
Management believes that the adoption of SFAS No. 133 will not have a material
impact on the Bank's financial condition or results of operations.
Reclassifications
Certain reclassifications have been made to prior years' balances to conform
to the December 31, 2000 presentation.
2. Interest Bearing Deposits with Financial Institutions
The Bank had interest bearing deposits with financial institutions of
$1,188,000 and $1,386,000 at December 31, 2000 and 1999, respectively. The
weighted average percentage yield of these deposits at December 31, 2000 and
1999, was 6.57 % and 5.70%, respectively.
Interest bearing deposits with financial institutions at December 31, 2000
are scheduled to mature within one year.
41
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3.Securities Available For Sale
The following is a summary of the major components of securities available
for sale and a comparison of amortized cost, estimated fair market values,
gross unrealized gains and losses and maturities at December 31, 2000 and 1999:
December 31, 2000
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury Securities...... $ 2,204,300 $ -- $ -- $ 2,204,300
U.S. Agency Securities:
Less than one year........... 9,955,000 6,900 -- 9,961,900
Federal Reserve Bank Stock.... 821,700 -- -- 821,700
----------- ------ ------- -----------
$12,981,000 $6,900 $ -- $12,987,900
=========== ====== ======= ===========
December 31, 1999
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Agency Securities:
Less than one year........... $ 750,000 $ -- $(2,100) $ 747,900
One to five years............ 1,492,000 -- (6,300) 1,485,700
Federal Reserve Bank Stock.... 435,200 -- -- 435,200
----------- ------ ------- -----------
$ 2,677,200 $ -- $(8,400) $ 2,668,800
=========== ====== ======= ===========
At December 31, 2000, U.S. Government securities and U.S. Agency securities
with a fair market value of $2,204,300 and $3,228,800, respectively, were
pledged to secure a discount line at the Federal Reserve Bank and securities
sold with agreements to repurchase.
4.Loans and Allowance for Loan Losses
The loan portfolio consisted of the following at December 31:
2000 1999
----------- -----------
Real estate loans.................................. $46,156,100 $27,833,100
Residential mortgage loans......................... 3,964,800 2,911,100
Commercial loans................................... 33,732,400 10,471,600
Consumer loans..................................... 4,393,700 3,815,200
----------- -----------
88,247,000 45,031,000
Allowance for loan losses........................ (1,145,500) (750,000)
Deferred loan origination costs, net............. 159,300 62,200
----------- -----------
Loans, net..................................... $87,260,800 $44,343,200
=========== ===========
42
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Bank's transactions in the allowance for loan losses for
the year ended December 31 is as follows:
2000 1999
---------- --------
Beginning balance...................................... $ 750,000 $ --
Provision for loan losses.............................. 400,000 750,000
Recoveries............................................. -- --
Amounts charged off.................................... (4,500) --
---------- --------
Ending balance......................................... $1,145,500 $750,000
========== ========
At December 31, 2000 and 1999, the Bank had no nonaccrual loans, no
restructured loans, no loans with principal balances more than 90 days past
due, and no loans that were considered impaired.
5.Premises and Equipment
The major classes of premises and equipment at December 31 are as follows:
2000 1999
---------- ----------
Furniture and equipment.............................. $1,768,300 $1,190,600
Leasehold improvements............................... 181,100 189,800
---------- ----------
1,949,400 1,380,400
Accumulated depreciation and amortization............ (613,100) (202,100)
---------- ----------
$1,336,300 $1,178,300
========== ==========
The amount of depreciation and amortization included in operating expense
was $419,000 and $202,100 for the years ended December 31, 2000 and 1999,
respectively. There was no depreciation for the period from inception (May 29,
1998) through December 31, 1998.
6.Deposits
The aggregate amount of time deposits in denominations of $100,000 or more
at December 31, 2000 and 1999 was $17,212,900 and $21,782,100, respectively.
At December 31, 2000, the scheduled maturities of time deposits of $100,000
or more are as follows:
2001.......................................................... $16,912,900
2002.......................................................... 300,000
-----------
$17,212,900
===========
7.Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase, which are classified as
secured borrowings, mature within one day from the transaction date. Securities
sold under agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. The Bank monitors the fair value
of the underlying securities on a daily basis.
43
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8.Related Parties
The executive officers and directors of the Bank, and the companies with
which they are associated, have banking transactions with the Bank in the
ordinary course of business. All loans and commitments to loan included in such
transactions have been made in accordance with applicable laws and on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with persons of similar
creditworthiness that are not affiliated with the Bank, and only if such loans
do not present any undue risk of collectibility.
The following is a summary of loan transactions with executive officers and
directors of the Bank for the year ended December 31:
2000 1999
--------- --------
Beginning balance....................................... $ 219,000 $ --
New loans granted..................................... 293,400 304,700
Principal repayments.................................. (245,200) (85,700)
--------- --------
Ending balance.......................................... $ 267,200 $219,000
========= ========
9.Income Taxes
The components of the net deferred tax asset are as follows:
December,
-----------------------------------
2000 1999 1998
----------- ----------- ---------
Deferred tax assets:
Allowance for loan losses........... $ 515,700 $ 255,000 $ --
Deferred organizational and start-up
expenses........................... 65,600 (16,500) 82,800
Net operating loss carryforward..... 664,900 530,200 --
Other accrued expenses.............. 141,100 155,800 --
Depreciation and amortization....... (17,500) -- --
Deferred loan origination costs..... (105,100) -- --
Deferred state taxes................ (103,600) 210,200 26,700
----------- ----------- ---------
Total deferred taxes.................. 1,161,100 1,134,700 109,500
Valuation allowance................... (1,161,100) (1,134,700) (109,500)
----------- ----------- ---------
Net deferred taxes.................... $ -- $ -- $ --
=========== =========== =========
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
Year Ended Period from
December 31, Inception
--------------- (May 29, 1998) to
2000 1999 December 31, 1998
------ ------ -----------------
Federal income tax based on statutory
rate.................................. (34.00)% (34.00)% (34.00)%
State franchise tax net of federal
income tax benefit.................... (7.15) (7.60) (10.60)
Other accrued expenses................. -- .30 --
Valuation allowance.................... 41.15 41.30 44.60
------ ------ ------
Total income tax expense............... 0.00 % 0.00 % 0.00 %
====== ====== ======
44
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bank has established a valuation allowance of $1,161,100, $1,134,700 and
$109,500 at December 31, 2000, 1999 and 1998, respectively. The valuation
allowance has been established due to the Bank's limited operating history and
management's inability to determine whether or not the deferred tax asset will
be realizable in the future.
The Bank has a net operating loss carryforward of approximately $1,596,000
for federal income tax purposes which expires through 2020. In addition, the
Bank has a net operating loss carryforward of approximately $1,514,000 for
state franchise tax purposes which expires through 2006. During 2000, the Bank
had an "ownership change" as defined under Internal Revenue Code Section 382.
Under Section 382, which has also been adopted under California law, if during
any three-year period there is more than a 50% change in ownership of the Bank,
then the future use of any pre-change net operating losses or built-in losses
of the Bank would be subject to an annual percentage limitation based on the
value of the Bank at the ownership change date. The current annual limitation
under Section 382 is approximately $1,700,000.
10.Net Income (Loss) Per Share
The following data shows a reconciliation of the numerators and the
denominators used in computing income (loss) per share and the weighted average
number of shares of potential dilutive common stock.
Year Ended December
31,
---------------------
2000 1999
--------- -----------
Net income (loss) available to common stockholders
used in basic income (loss) per share.............. $ 126,700 $(2,750,200)
========= ===========
Basic income (loss) per share....................... $ 0.02 $ (1.12)
========= ===========
Weighted average number of common shares used in
basic income (loss) per share...................... 5,098,796 2,466,114
Effect of dilutive securities:
Options........................................... 99,646 --
--------- -----------
Weighted number of common shares and potential
dilutive common shares used in diluted income
(loss) per share................................... 5,198,442 2,466,114
--------- -----------
Diluted income (loss) per share..................... $ 0.02 $ (1.12)
========= ===========
Stock options of 380,106 were not included in computing diluted income
(loss) per share for the year ended December 31, 1999 because their effects
were antidilutive. No shares were outstanding for the period from inception
(May 29, 1988) to December 31, 1998.
11.Stockholders' Equity
On March 1, 1999, the Bank sold 2,090,620 shares of its common stock that
raised approximately $8,298,300 through an initial public offering, net of
approximately $64,200 in related expense. Concurrent with the completion of the
offering, the Bank received final approval from the California Department of
Financial Institutions ("DFI") to commence operations and from the FDIC on its
application for the insurance of its customers' deposit accounts. The Bank
commenced operations on March 1, 1999.
In November 1999, the Bank completed a second offering in which it sold
1,629,542 shares of its common stock that raised approximately $10,720,900, net
of approximately $278,500 in related expense. In addition, in conjunction with
the June 12, 2000 merger and reorganization described in Note 1 between Bancorp
and the
45
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bank, Bancorp sold 2,611,608 shares of its common stock in a public offering
registered under the Securities Act of 1933. Proceeds of this public offering,
net of underwriting discounts, commissions and other expenses of $2,365,700,
totaled $18,527,200. In addition, Bancorp issued warrants to the underwriter to
purchase 250,000 shares of common stock at an exercise price of $9.60 per
share.
On April 20, 1999, the Bank's Board of Directors authorized a 1.25 for 1.00
stock split which became effective on May 21, 1999. Additionally, the Bank's
Board of Directors authorized a two-for-one stock split which became effective
on April 14, 2000. Share and per share data have been adjusted herein to give
effect to both stock splits.
Under California law, the directors of the Bank may declare distributions to
stockholders subject to the restriction that the amount available for the
payment of cash dividends shall be the lesser of retained earnings of the Bank
or the Bank's net income for its last three fiscal years (less the amount of
any distributions to stockholders made during such period). If the above test
is not met, distributions to stockholders may be made only with the prior
approval of the Commissioner of the California Department of Financial
Institutions ("Commissioner") and in an amount not exceeding the greatest of
the Bank's retained earnings, the Bank's net income for its last fiscal year or
the Bank's net income for its current fiscal year. If the Commissioner finds
that the stockholders' equity of the Bank is not adequate, or that the making
by the Bank of a distribution to stockholders would be unsafe or unsound for
the Bank, the Commissioner can order the Bank not to make any distribution to
stockholders.
The ability of the Bank to pay dividends is further restricted under the
Federal Deposit Insurance Corporation Improvement Act of 1991 which prohibits a
bank from paying dividends if, after making such payment, the bank would fail
to meet any of its minimum capital requirements. Under the Financial
Institutions Supervisory Act and Federal Financial Institutions Reform,
Recovery and Enforcement Act of 1989, federal banking regulators also have
authority to prohibit financial institutions from engaging in business
practices which are considered to be unsafe or unsound. It is possible,
depending upon the financial condition of the Bank and other factors, that
regulators could assert that the payment of dividends in some circumstances
might constitute unsafe or unsound practices. Therefore, the Bank's federal
regulatory agency might prohibit the payment of dividends even though such
payments would otherwise be technically permissible.
12. Commitments and Contingencies
The Bank leases certain facilities and equipment under various non-
cancelable operating leases. Rent expense for the years ended December 31, 2000
and 1999 and for the period from inception (May 29, 1998) through December 31,
1998 was $432,400, $171,300 and $20,800, respectively.
Future minimum non-cancelable lease commitments are as follows:
2001............................................................. $223,300
2002............................................................. 105,300
2003............................................................. 94,500
2004............................................................. 92,700
2005............................................................. 96,500
Thereafter....................................................... 8,100
--------
Total.......................................................... $620,400
========
46
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In order to meet the financing needs of its customers in the normal course
of business, the Bank is party to financial instruments with off-balance sheet
risk. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated financial statements. At December 31, 2000, the Bank was
committed to fund certain loans amounting to approximately $41,761,000. The
contractual amounts of credit-related financial instruments such as commitments
to extend credit, credit-card arrangements, and letters of credit represent the
amounts of potential accounting loss should the contract be fully drawn upon,
the customer default, and the value of any existing collateral become
worthless.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Commitments generally
have fixed expiration dates; however, since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment,
residential real estate and income-producing commercial properties.
Bancorp and the Bank are subject to legal actions normally associated with
financial institutions. At December 31, 2000, neither Bancorp nor the Bank had
any pending contingencies that would be material to the financial condition or
results of operations of either Bancorp or the Bank.
The Bank is required to purchase stock in the Federal Reserve Bank in an
amount equal to 6% of its capital, one-half of which must be paid currently
with the balance due upon request.
13.Stock Option Plan
Effective March 2, 1999, the Board of Directors adopted a stock option plan
(the "Plan"). The Plan provides for the granting of options to directors,
officers and other key employees, entitling them to purchase shares of common
stock of Bancorp at a price per share equal to or above the fair market value
of Bancorp's shares on the date the option is granted. Options vest over five
year periods and expire 10 years after the grant date. The Plan further
provides that if Bancorp sells or issues any additional shares of common stock
(other than pursuant to the exercise of options under the Plan), the number of
shares issuable pursuant to the Plan will be automatically increased by a
number equal to 20% of the additional shares that are sold or issued. As such,
Bancorp's current year stock issuance of 2,611,608 shares increased the number
of shares issuable under the Option Plan by 522,322. The Plan provides that the
total number of shares for which options may be granted under the Option Plan
shall be 1,248,230 shares.
47
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information concerning currently outstanding
and exercisable stock options:
2000 1999
----------------------- -----------------------
Number Weighted Number Weighted
of Average of Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
Outstanding at beginning
of year.................. 380,106 $4.00 -- --
Granted................. 608,400 $7.07 382,106 $4.00
Exercised............... (250) $4.00 -- --
Cancelled............... (3,650) $5.89 (2,000) $4.00
------- ----- ------- -----
Outstanding at end of
year..................... 984,606 $5.90 380,106 $4.00
======= ===== ======= =====
Weighted
Average
Number of Remaining Weighted
Shares Contractual Average
Range of Exercise Prices Outstanding Life in Years Exercise Price
------------------------ ----------- ------------- --------------
$4.00............................. 377,106 8.3 $4.00
$6.00 - $12.13.................... 607,500 9.3 $7.07
-------
984,606
=======
Shares exercisable at December 31, 2000 were 330,632 at an option price of
between $4.00 and $12.13 per share.
Bancorp continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation
cost for stock options is recognized for stock option awards granted at or
above fair market value. Had compensation expense for Bancorp's Plan been
determined based upon the fair value at the grant date for awards under the
Plan in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," Bancorp's net income (loss) and income (loss) per share would
have been reduced (increased) to the pro forma amounts indicated below:
2000 1999
-------- -----------
Net Income (Loss):
As reported......................................... $126,700 $(2,750,200)
Pro forma........................................... 6,700 (2,820,200)
Basic and Fully Diluted Income (Loss) Per Share:
As reported......................................... $ 0.02 $ (1.12)
Pro forma........................................... 0.00 (1.15)
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions for the years
ending December 31, 2000 and 1999, respectively: no dividend yield, expected
volatility of 50 and 0 percent, risk-free interest rates ranging from 5.90% to
6.63% and 5.27% to 5.81%, and an expected option life of 5 years.
14.Employee Benefit Plans
The Bank has a 401(k) plan that covers substantially all full-time
employees. It permits voluntary contributions by employees, a portion of which
are matched by the Bank. The Bank's expenses relating to its contributions to
the 401(k) plan for the years ended December 31, 2000 and 1999, and for the
period from inception (May 29, 1998) through December 31, 1998, were $114,200,
$25,300, and none, respectively.
48
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15.Regulatory Matters and Capital/Operating Plans
Bancorp and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Bancorp's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Bancorp
and the Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp and Bank to maintain minimum amounts and ratios (set forth in
the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 2000, that Bancorp and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2000, based on the regulations, Bancorp and the Bank are
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," Bancorp and the
Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the following tables. There are no conditions
or events that management believes have changed Bancorp or the Bank's category.
The actual capital amounts and ratios of Bancorp and the Bank at December
31, 2000 are presented in the following table:
To be Well Capitalized
Under Prompt Corrective Action
Actual For Capital Adequacy Purposes Provisions
----------------- ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ---------------------- ----------- -----------------------
Total Capital to Risk
Weighted Assets:
Bancorp............... $35,827,200 27.5% $10,407,500 (greater than or =)8.0% $13,009,300 (greater than or =)10.0%
Bank.................. 29,031,800 22.3% 10,407,100 (greater than or =)8.0% 13,008,900 (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets:
Bancorp............... 34,681,700 26.7% 5,203,700 (greater than or =)4.0% 7,805,600 (greater than or =) 6.0%
Bank.................. 27,886,300 21.4% 5,203,500 (greater than or =)4.0% 7,805,300 (greater than or =) 6.0%
Tier I Capital to
Average Assets:
Bancorp............... 34,681,700 22.5% 6,170,000 (greater than or =)4.0% 7,712,600 (greater than or =) 5.0%
Bank.................. 27,886,300 18.1% 6,170,000 (greater than or =)4.0% 7,712,600 (greater than or =) 5.0%
49
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The actual capital amounts and ratios of the Bank at December 31, 1999 are
presented in the following table:
To be Well Capitalized
Under Prompt Corrective Action
Actual For Capital Adequacy Purposes Provisions
----------------- --------------------------------- ----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ---------------------- ---------- -----------------------
Total Capital to Risk
Weighted Assets: $16,717,000 30.2% $4,422,500 (greater than or =)8.0% $5,528,200 (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets: 16,026,800 29.0% 2,211,300 (greater than or =)4.0% 3,316,900 (greater than or =) 6.0%
Tier I Capital to
Average Assets: 16,026,800 24.3% 2,632,400 (greater than or =)4.0% 3,290,500 (greater than or =) 5.0%
16. Parent Company Only Information
The following Condensed Financial Statements of Bancorp are presented as if
the merger and reorganization described in Note 1 was effective on January 1,
2000.
Condensed Statement of Financial Condition
December 31, 2000
----------------------
(Dollars in thousands)
Assets
Interest bearing deposits with financial
institutions..................................... $ 6,797
Investment in Pacific Mercantile Bank............. 27,893
-------
Total Assets.................................... $34,690
=======
Liabilities and Stockholders' Equity
Liabilities......................................... $ 1
Stockholders' Equity................................ 34,689
-------
Total Liabilities and Stockholders' Equity...... $34,690
=======
Condensed Statement of Operations
Year Ended
December 31, 2000
----------------------
(Dollars in thousands)
Interest income..................................... $134
Other expenses...................................... (11)
Equity in undistributed earnings of Pacific
Mercantile Bank.................................... 4
----
Net income.......................................... $127
====
50
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Condensed Statement of Cash Flows
Year Ended
December 31, 2000
----------------------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income............................................. $ 127
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in other assets.................. --
Undistributed earnings of subsidiary................. 4
Other, net........................................... (7)
Increase (decrease) in other liabilities............. 1
-------
Net cash provided by operating activities.......... 125
-------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock............... 18,527
Capital contribution to Pacific Mercantile Bank...... (11,855)
-------
Net cash provided by financing activities.......... 6,672
-------
Net (decrease) increase in cash........................ 6,797
Cash and Cash Equivalents, beginning of period......... --
-------
Cash and Cash Equivalents, end of period............... $ 6,797
=======
17. Fair Value of Financial Instruments
Fair value estimates are made at a discreet point in time based on relevant
market information and information about the financial instruments. Because no
active market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments,
prepayment assumptions, future expected loss experience and other such
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing on and off-
balance sheet financial instruments without attempting to estimate the value
of existing and anticipated future customer relationships and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include other real estate owned and premises and equipment.
The following methods and assumptions were used to estimate the fair value
of financial instruments.
Cash and Cash Equivalents
The fair value of cash and cash equivalents approximates its carrying
value.
Interest Bearing Deposits with Financial Institutions
The fair value of interest bearing deposits maturing within ninety days
approximate their carrying values.
Securities Available for Sale
For investment securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
51
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans Held for Sale
The fair value of loans held for sale is based on commitments on hand from
investors or prevailing market prices.
Loans
The fair value for loans with variable interest rates is the carrying
amount. The fair value of fixed rate loans is derived by calculating the
discounted value of future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect
changes in credit risk.
Securities Sold Under Agreements to Repurchase
The fair value of securities sold under agreements to repurchase is the
carrying amount and mature on a daily basis.
Deposits
The fair value of demand deposits, savings deposits, and money market
deposits is defined as the amounts payable on demand at year-end. The fair
value of fixed maturity certificates of deposit is estimated based on the
discounted value of the future cash flows expected to be paid on the deposits.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the parties involved. For
fixed rate loan commitments, fair value also considers the difference between
current levels of interest rates and committed rates. The fair value of these
unrecorded financial instruments is estimated to approximate the notional
amounts at December 31, 2000 and 1999.
The estimated fair values and related carrying amounts of the Bank's
financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
Financial Assets:
Cash and cash
equivalents.............. $47,588,300 $47,588,300 $38,498,200 $38,498,200
Interest bearing deposits
with financial
institutions............. 1,188,000 1,188,000 1,386,000 1,386,000
Securities available for
sale..................... 12,987,900 12,987,900 2,668,800 2,668,800
Loans held for sale....... 11,084,400 11,084,400 2,700,000 2,700,000
Loans, net................ 87,260,800 84,465,100 44,343,200 43,162,500
Financial Liabilities:
Noninterest bearing
deposits................. 48,553,100 48,553,100 16,607,800 16,607,800
Interest bearing
deposits................. 75,733,400 75,729,700 57,892,400 57,660,300
Securities sold under
agreements to
repurchase............... 2,679,800 2,679,800 -- --
In all cases, the estimated fair values of the Bank's financial instruments
are equal to their respective book values at December 31, 1998.
52
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Subsequent Events
Subsequent to December 31, 2000, the Bank signed three lease agreements for
approximately 36,100 square feet of office space for the new corporate
headquarters, the Newport Beach branch, a new Costa Mesa branch and a new
Beverly Hills branch. The lease agreements are for a period of five to eight
years.
Future minimum non-cancelable lease commitments for the above leases are as
follows:
2001.............................................................. $ 760,600
2002.............................................................. 1,284,000
2003.............................................................. 1,333,500
2004.............................................................. 1,384,300
2005.............................................................. 1,437,700
Thereafter........................................................ 2,926,000
----------
Total............................................................. $9,126,100
==========
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
As reported in a Current Report on Form 8-K dated October 23, 2000, the
Company dismissed Arthur Anderson LLP as its independent public accountants and
selected Grant Thornton LLP as its new independent public accountants. The
Current Report also stated, and it was confirmed in a letter from Arthur
Andersen LLP, that there had never been (i) any disagreements between the
Company and Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures or
(ii) any "reportable events" (as defined in Paragraph (a)(v) of Item 304 of
Regulation S-K as promulgated by the Securities and Exchange Commission).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Registrant's executive officers which
is included in Part I of this Report, the information called for by Item 10 is
incorporated herein by reference from the Company's definitive proxy statement
which is scheduled to be filed with the Commission on or before April 30, 2001
for the Company's 2001 annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from
the Company's definitive proxy statement which is scheduled to be filed with
the Commission on or before April 30, 2001 for the Company's 2001 annual
meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference from
the Company's definitive proxy statement which is scheduled to be filed with
the Commission on or before April 30, 2001 for the Company's 2001 annual
meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference from
the Company's definitive proxy statement which is scheduled to be filed with
the Commission on or before April 30, 2001 for the Company's 2001 annual
meeting of stockholders.
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(1) Financial Statements:
See Index to Consolidated Financial Statements in Item 8 on Page 31
of this Report.
(2) Financial Statement Schedules:
All schedules are omitted as the information is not required, is not
material or is otherwise furnished.
(3) Exhibits:
See Index to Exhibits on Page E-1 of this Form 10-K.
(4) Reports on Form 8-K:
As described in Item 9 of this Report, during the fourth quarter of
2000, the Company filed a Current Report on Form 8-K dated October
17, 2000, and an Amendment to that Form 8-K, to report the dismissal
of Arthur Andersen LLP as the Company's independent accountants and
the selection of Grant Thornton LLP as its new independent
accountants.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March 2001.
PACIFIC MERCANTILE BANCORP
/s/ Raymond E. Dellerba
By: _________________________________
Raymond E. Dellerba
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Raymond E.
Dellerba, John J. McCauley and Daniel L. Erickson, and each of them
individually, as his or her attorney-in-fact, to sign in his or her behalf and
in each capacity stated below, and to file, all amendments and/or supplements
to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following officers and directors of the
Registrant in the capacities indicated on March 30, 2001.
Signature Title
--------- -----
/s/ Raymond E. Dellerba President, Chief Executive Officer and Director
_________________________________ (Principal Executive Officer)
Raymond E. Dellerba
/s/ Daniel L. Erickson Executive Vice President and Chief Financial Officer
_________________________________ (Principal Financial and Accounting Officer)
Daniel L. Erickson
/s/ John J. McCauley Executive Vice President, Chief Operating Officer
_________________________________ and Director
John J. McCauley
/s/ George Wells Chairman of the Board and Director
_________________________________
George Wells
/s/ Richard M. Torre Vice Chairman of the Board and Director
_________________________________
Richard M. Torre
/s/ Ronald W. Chrislip Director
_________________________________
Ronald W. Chrislip
/s/ Julia M. DiGiovanni Director
_________________________________
Julia M. DiGiovanni
/s/ Warren T. Finley Director
_________________________________
Warren T. Finley
/s/ John Thomas, M.D. Director
_________________________________
John Thomas, M.D.
Director
_________________________________
Robert E. Williams
56
EXHIBIT INDEX
Exhibit
No.
-------
2.1 Plan of Reorganization and Merger Agreement, dated as of February 29,
2000, between Pacific Mercantile Bank and Pacific Mercantile Bancorp+
3.1 Articles of Incorporation of Pacific Mercantile Bancorp+
3.2 Bylaws of Pacific Mercantile Bancorp+
4.1 Specimen form of stock certificate for Common Stock+
10.1 1999 Incentive Stock Option and Nonqualified Option Plan (the "1999
Plan")+
10.2 Form of Stock Option Agreement pertaining to the 1999 Plan+
10.3 Employment Agreement, dated April 23, 1999 between Raymond E. Dellerba
and Pacific Mercantile Bank+
10.4 Form of Severance Agreement to be entered into between Pacific
Mercantile Bank and John J. McCauley, John P. Cronin and Daniel L.
Erickson, respectively+
10.5 Office Space Lease, dated December 8, 1999, between the Irvine Company
and Pacific Mercantile Bank+
10.6 Sublease, dated as of August 3, 1999, between Wells Fargo Bank, N.A.
and Pacific Mercantile Bank+
10.7 Sublease, dated as of September 16, 1998, between Washington Mutual
Bank, FA, and Pacific Mercantile Bank+
10.8 Standard Internet Banking System Licensing Agreement, dated as of
January 29, 1999, between Q-UP Systems and Pacific Mercantile Bank+
10.9 ODFI--Originator Agreement for Automated Clearing House Entries, dated
as of February 16, 1999, between eFunds Corporation and Pacific
Mercantile Bank*+
10.10 Agreement, dated September 15, 1998, between Fiserv Solutions, Inc.
and Pacific Mercantile Bank+
10.11 UVEST Brokerage Services Agreement, dated April 1, 1999 between UVEST
Financial Services Group, Inc. and Pacific Mercantile Bank*+
10.12 Underwriter's Warrant Agreement with Paulson Investment Company**
10.13 Commercial Office Building Lease dated February 26, 2001 between Metro
Point 13580, Lot Three, a California limited partnership, and Pacific
Mercantile Bank
21 Subsidiary of the Company
24.1 Power of Attorney (contained on the signature page of Annual Report)+
- --------
+ Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1 filed with the Commission on June 14,
2000.
**Incorporated by reference to the Exhibit 1.2 to the above referenced S-1
Registration Statement.
E-1