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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10–Q

(Mark One)

Commission file number 0–30777

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.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

6,399,888 shares of Common Stock as of November 5, 2002

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PACIFIC MERCANTILE BANCORP
QUARTERLY REPORT ON FORM 10Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2002

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PART I. — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

The accompanying notes are an integral part of these consolidated financial statements.

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Part I.   Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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Part I.   Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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Part I.   Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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Part I. Item 1. (continued)

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

1.       Nature of Business and Significant Accounting Policies

                    Organization

          The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10–Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations, changes in cash flows and comprehensive income (loss) in conformity with generally accepted accounting principles. However, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of the management, are necessary for a fair presentation of the results for the interim periods presented. These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with prior periods, and should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2001 and the notes thereto included in the Company’s Annual Report on Form 10–K filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

          The Company’s results of operations for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the full year ending December 31, 2002.

          The consolidated financial statements include the accounts of Pacific Mercantile Bancorp and its wholly owned subsidiaries Pacific Mercantile Bank, PMB Securities Corporation, Pacific Mercantile Capital Trust I, PMB Capital Trust I, and  PMB Statutory Trust III (which together shall be referred to as the “Company”). Pacific Mercantile Bancorp is a bank holding company, which was incorporated on January 7, 2000 in the State of California. Pacific Mercantile Bank (the “Bank”) is a banking corporation 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 (the “DFI”) and is a member of the Federal Reserve Bank of San Francisco (“FRB”). In addition, the Bank’s customers’ deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by Federal Regulations.

          Pacific Mercantile Bancorp was organized to acquire all of the outstanding shares of the Bank and, on June 12, 2000, it consummated that acquisition by means of a merger as a result of which the Bank became a wholly–owned subsidiary of the Company and the Bank’s shareholders became the Company’s shareholders, owning the same number and percentage of the Company’s shares as they had owned in the Bank (the “Reorganization”). Prior to the Reorganization, the Company had only nominal assets and had not conducted any business.

          In June 2002, PMB Securities Corp., a wholly owned subsidiary of the Company, commenced operations. PMB Securities Corp. is a securities broker–dealer engaged in the retail securities brokerage business that is registered with the Securities and Exchange Commission and is a member firm of the National Association of Securities Dealers, Inc.

          In June 2002, Pacific Mercantile Capital Trust I, a Delaware trust, was organized in connection with the sale of $5,000,000 of trust preferred securities to an institutional investor in a private placement.

          In August 2002, PMB Capital Trust I, a Delaware trust, was organized in connection with the sale of $5,000,000 of trust preferred securities to an institutional investor in a private placement.

          In September 2002, PMB Statutory Trust III, a Connecticut trust, was organized in connection with the sale of $7,000,000 of trust preferred securities in an institutional private placement.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.–)

          Loans

          At September 30, 2002, the Company had $61,000 in nonaccrual and impaired loans and $3,700 in loans delinquent 90 days or more with principal that were still accruing interest. There were no restructured loans as of September 30, 2002.

          Income Per Share

          Basic income per share for each of the periods presented was computed by dividing the net income by the weighted average number of shares of common stock outstanding during each such period. The weighted average number of shares used in the basic income per share computations for the nine months ended September 30, 2002 and 2001, were 6,370,146 and 6,334,647 respectively. The weighted average number of shares used in the basic income per share computations for the three month periods ended September 30, 2002 and 2001 were 6,397,931 and 6,339,816 respectively. The weighted average number of shares used in the fully diluted income per share computations for the nine months ended September 30, 2002 and 2001 were 6,538,175 and 6,488,435, respectively. The weighted average number of shares used in the fully diluted income per share computations for the three month periods ended September 30, 2002 and 2001 were 6,525,026 and 6,525,145 respectively.

          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.

          Hedged Items

          Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting For Derivative Instruments and Hedging Activities”, as amended and interpreted (“SFAS No. 133”) was effective for the Company as of January 1, 2001. SFAS No. 133 requires all derivative instruments to be recognized on the balance sheet at fair value. Gains or losses resulting from changes in the values of derivatives are accounted for depending on the purpose of the derivative and whether it qualifies for hedge accounting. If certain conditions are met, hedge accounting may be applied and the derivative instrument may be specifically designated as a fair value, cash flow or foreign currency hedge. In the absence of meeting these conditions, the derivatives are designated as non–designated derivative instruments with gains or losses recorded to current earnings.

          Effective January 1, 2001, the Company adopted the provisions of SFAS 133 by recognizing all derivative instruments on the balance sheet at fair value. At January 1, 2001, the adoption of SFAS No. 133 did not have a material impact on the financial statements. All derivative instruments entered into by the Bank prior to February 19, 2002 were non–designated derivative instruments. On February 19, 2002, the Bank’s Board of Directors approved the “Mortgage Banking Risk Management Policy”. This policy specifically implements the Bank’s policy to designate interest rate lock commitments with investors as hedge instruments to hedge the mortgage loans upon funding. At September 30, 2002, approximately $52 million of loans held for sale were hedged.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.–)

2.       Commitments and Contingencies

          In order to meet the financing needs of its customers in the normal course of business, the Company is party to financial instruments with off–balance sheet risk, which consist of 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 September 30, 2002, we were committed to fund certain loans amounting to approximately $184 million including mortgages available for sale. We use the same credit policies in making commitments and conditional obligations as we do 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. We evaluate each customer’s credit worthiness on a case–by–case basis. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential real estate and income–producing commercial properties.

3.       Trust Preferred Securities

          In June 2002, the Company’s newly formed wholly owned subsidiary, Pacific Mercantile Capital Trust I, a Delaware trust, sold $5,000,000 of trust preferred securities to an institutional investor in a private placement. These securities mature in 30 years, are redeemable at the Company’s option beginning after 5 years, and require quarterly distributions, initially at a rate of 5.605%, which will reset quarterly at the three month LIBOR rate plus 3.75%. The trust preferred securities are subordinated to other borrowings that may be obtained by the Company in the future. The securities qualify as tier one capital for regulatory purposes.

          In August 2002, the Company’s newly formed wholly owned subsidiary, PMB Capital Trust I, a Delaware trust, sold $5,000,000 of trust preferred securities to an institutional investor in a private placement.  These securities mature in 30 years, are redeemable at the Company’s option beginning after 5 years, and require semi-annually distributions, initially at a rate of 5.388% which will reset semi-annually at the six month LIBOR rate plus 3.625%.  The trust preferred securities are subordinated to other borrowings that may be obtained by the Company in the future.  The securities qualify as tier one capital for regulatory purposes.

          In September 2002, the Company’s newly formed wholly owned subsidiary, PMB Statutory Trust III, a Connecticut trust, sold $7,000,000 of trust preferred securities in an institutional private placement.  These securities mature in 30 years, are redeemable at the Company’s option beginning after 5 years, and require quarterly distributions, initially at a rate of 5.22% which will reset quarterly at the three month LIBOR rate plus 3.40%.  The trust preferred securities are subordinated to other borrowings that may be obtained by the Company in the future.  $2,444,700 of the securities qualifies as tier one capital for regulatory purpose while the remaining $4,555,300 qualifies for Tier II capital.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

          Forward–Looking Information

          The following discussion 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.

          Background

        The following discussion should be read in conjunction with the Company’s quarterly unaudited consolidated financial statements, and the notes thereto, contained earlier in this Report.

          Substantially all of our operations are conducted by the Bank, which accounts for substantially all of our revenues and expenses. The principal determinant of a bank’s income is net interest income, which is the difference between the interest that a bank earns on loans, investments and other interest earning assets, and its interest expense, which consists primarily of the interest it must pay to attract and retain deposits and the interest that it pays on its other interest bearing liabilities. A bank’s interest income and interest expense are, in turn, affected by a number of factors, some of which are outside of its control, including the monetary policies of the Federal Reserve Board and national and local economic conditions, which affect interest rates and also the demand for loans and the ability of borrowers to meet their loan payment obligations.

          Recent Operating Results

          During 2001 the Federal Reserve Board adopted and implemented a monetary policy that was designed to reduce market rates of interest in an effort to stimulate the U.S. economy, which was heading into recession. That policy has continued into 2002, as the hoped for economic recovery has been slow to develop. As a result of that policy, during the nine months ended September 30, 2001 the prime rate of interest charged by most banks declined from 9.50% to a low of 6.00%; and by January 1, 2002 the prime rate of interest had declined further, to 4.75% where it has remained throughout the nine months ended September 30, 2002. As a result, our net interest margin for the three and nine month periods ended September 30, 2002 was 3.74% and 3.61%, respectively, as compared to 4.70% and 4.69%, respectively, during the same three and nine month periods of 2001.

          Despite those declines in our net interest margin, we generated net interest income of $3,526,400 and $8,361,600, respectively, in the three and nine month periods ended September 30, 2002, which represented increases of $1,299,000 or 58% and $2,280,900 or 38%, respectively, over the net interest income generated in the same periods of 2001. Additionally, noninterest income, consisting largely of revenue from our mortgage loan operations, increased by $353,100, or 35%, in the quarter ended September 30, 2002 as compared to the same quarter of 2001 and by $1,216,400 or 54%, for the nine months ended September 30, 2002 as compared to the same period in 2001.

          Noninterest expense of $3,717,500 increased $1,005,200 for the quarter ended September 30, 2002 as compared to the same quarter in 2001. This increase in noninterest expense was primarily due to the opening of the Bank’s sixth full–service financial center in La Jolla, and a Loan Production Office in North Orange County in the second quarter of 2002. As a result, for the quarter ended September 30, 2002, the Company earned  $555,800, or $0.08 per fully diluted share, as compared to net income of $534,700, or $0.08 per fully diluted share, for the same quarter of 2001. Noninterest expense for the nine months ended September 30, 2002, increased $3,805,500 as compared to the same period in 2001. This increase was due to the aforementioned growth–related expenses along with the opening of two new financial centers in Costa Mesa, and Beverly Hills, California that occurred in the second and third quarters of 2001. For the nine months ended September 30, 2002, the Company earned $512,900, or $0.08 per fully diluted share, as compared to net income of $1,424,200, or $0.22 per fully diluted share, for the same period of 2001.

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Set forth below are key financial performance ratios for the periods indicated:

          RESULTS OF OPERATIONS

          Net Interest Income

          We generated net interest income of $3,526,400 and $8,361,600 respectively, in the three and nine months ended September 30, 2002 as compared to $2,227,400 and $6,080,700, respectively, for the corresponding periods of 2001. These increases in net interest income were largely attributable to increases in interest income of $2,073,600 and $3,212,800 respectively, in the three and nine months ended September 30, 2002, which more than offset increases in our interest expense of $774,600 and $931,900, respectively, in those same periods. The increases in interest income were primarily attributable to increases in the volume of our interest earning assets, which more than offset the effect of declining interest rates on loans and other interest earning assets due to declining market rates of interest that resulted from the Federal Reserve Board’s monetary policy and a general slowness in the economy. The increases in interest earning assets included increases in our average loans outstanding of approximately $72, 426,100 and $67,215,000, respectively, and increases in the average balances of government and agencies securities of $130,529,000 and $52,361,400, respectively in the quarter and nine months ended September 30, 2002, representing a shift from lower yielding federal funds sold.

          The increases in interest expense for the three and the nine months ended September 30, 2002 were due primarily to increases in the volume of interest bearing deposits and borrowings from the Federal Home Loan Bank, which more than offset the effect on interest expense of declining market rates of interest. Average interest bearing deposits outstanding during the three and nine month periods ended September 30, 2002 increased by approximately $107,621,100 and $75,051,100, respectively, as compared to the corresponding periods of 2001. In addition, other borrowings, consisting primarily of borrowings from the Federal Home Loan Bank, increased by $34,903,800 and $16,676,400, respectively, during the three and nine months ended September 30, 2002, as compared to the same periods in 2001.

          Our ratio of net interest income to average earning assets (“net interest margin”) for the three and nine month periods ended September 30, 2002 declined to 3.74% and 3.61%, respectively, from 4.70% and 4.69% in the same respective periods of 2001. These declines were primarily attributable to decreases in the average prime lending rate that occurred subsequent to September 30, 2001.

          As described below in the subsection entitled “Asset/Liability Management,” our balance sheet was shown to be in a negative gap position at September 30, 2002. This implies that our earnings would decrease in the short–term if interest rates were to rise and would increase in the short–term if interest rates were to fall.

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          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, recorded as an expense in the statement of income, referred to as the “provision for loan losses.” Recoveries of loans previously charged–off are added back to and, therefore, have the effect of increasing, the Allowance.

          During the quarter ended September 30, 2002, we made a provision for loan losses of $250,000 as compared to $100,000 for the quarter ended September 30, 2001, in response to the growth in the volume of our outstanding loans. Charge offs of loans during the quarter ended September 30, 2002 were $10,500. For the nine months ended September 30, 2002 loan charge offs were $15,100. At September 30, 2002, the Allowance for Loan Losses represented 1.11% of our gross loans excluding loans held for sale. See “Financial Condition – Allowance for Loan Losses” below.

          Although we employ economic models that are based on bank regulatory guidelines and industry standards to evaluate and determine the sufficiency of the Allowance and, thereby, the amount of the provisions required to be made for potential loan losses, those determinations involve judgments or forecasts about future economic conditions and other events that are subject to a number of uncertainties, some of which are outside of our ability to control. See the discussion below under the caption “Forward Looking Information and Uncertainties Regarding Future Performance.” In the event of unexpected subsequent events or changes in circumstances, it could become necessary in the future to incur additional charges in order to increase the Allowance, which would have the effect of reducing our income or even causing us to incur losses.

          Noninterest Income

          Noninterest income consists primarily of mortgage banking income (which includes loan origination and processing fees and yield spread premiums) and net gains on sales of loans held for sale, which are generated by our mortgage loan division. That division originates conforming and non–conforming, agency quality, residential first and home equity mortgage loans. As indicated in the table below, noninterest income increased by $353,100, or 35%, and by $1,216,400, or 54%, respectively in the three and nine months ended September 30, 2002, as compared to the same respective periods of 2001. Those increases were primarily attributable to substantial increases in mortgage loan originations as a result of significant increases in the volume of mortgage loan refinancings prompted by declining market rates of interest.

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          Noninterest Expense

          Total noninterest expense for the three and nine month periods ended September 30, 2002, were $3,717,500 and $10,523,800, respectively, as compared to $2,712,300 and $6,718,300 for the corresponding periods of 2001. As indicated in the table below, salaries and employee benefits constitute the largest components of noninterest expense. The increase in noninterest expense in the third quarter of 2002 was primarily attributable to increased staffing, occupancy and equipment costs incurred in connection with the opening by the Bank of a new financial center in La Jolla, California and a new loan production office, and the commencement of operations of a new securities brokerage subsidiary of the Company. The increase in noninterest expense for the nine months ended September 30, 2002 as compared to the same period for 2001, was primarily attributable to the growth mentioned above, as well as the opening of two new financial centers in Costa Mesa and Beverly Hills, California and the establishment of Company headquarters offices in Costa Mesa, which took place in the second and third quarters of 2001. Other professional expenses increased as a result of the legal costs incurred in connection with credit card refund claims in our merchant processing area.

          The following table sets forth the principal components of noninterest expense and the amount thereof, incurred in the three and nine month periods ended September 30, 2002 and 2001.

          Due largely to the growth–related expenses described above, noninterest expense as a percentage of the sum of net interest income and noninterest income (the “efficiency ratio”) impoved to 75.9% for the quarter ended September 30, 2002 compared to 83.5% for the corresponding period of 2001 and increased to 88.9% for the nine months ended September 30, 2002 from 80.5% for the same nine month period in 2001.

ASSET/LIABILITY MANAGEMENT

          The objective of asset/liability management is to reduce our exposure to interest rate fluctuations, which can affect our net interest margins and, therefore, our net interest income and net earnings. 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.

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          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. Additionally, loan and securities available for sale prepayments, and early withdrawals of certificates of deposit, could cause the interest sensitivities to vary from those which appear in the table.  

          The table below sets forth information concerning our rate sensitive assets and rate sensitive liabilities as of September 30, 2002. 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.