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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

PACIFIC MERCANTILE BANCORP
(Exact name of Registrant as specified in its charter)

          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   o

          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. x

          Indicate by check mark whether the Registrant is an accelerated filer (as defined in Securities Exchange Act
Rule 12b-2). YES   o   No   x

          The aggregate market value of voting shares held by non-affiliates of Registrant as of June 28, 2002, which was determined on the basis of the closing price of Registrant’s shares on that date, was approximately $38,088,000.

          As of March 17, 2003, there were 6,399,888 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Except as otherwise stated therein, Part III of the Form 10-K is incorporated by reference from the Registrant’s Definitive Proxy Statement for its 2003 Annual Meeting, which is expected to be filed with the Commission on or before April 30, 2003.

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PACIFIC MERCANTILE BANCORP
ANNUAL REPORT ON FORM 10K
FOR THE YEAR ENDED DECEMBER 31, 2002

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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 future operations or future financial performance, or financial or other trend in our business, 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 can be identified by the fact that they do not relate strictly to historical or current facts.  Often, they include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Forward-looking statements are estimates subject to a number of risks and uncertainties that could cause our financial condition or 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 in the Section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations¾Forward 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.

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

PART I

ITEM 1.    BUSINESS.

Background

          Pacific Mercantile Bancorp (the “Company”) is a California corporation that owns all of the stock of Pacific Mercantile Bank, a California state chartered commercial bank (which, for convenience, will be referred to in this report as the “Bank” or “our Bank”). The capital stock of the Bank is our principal asset and substantially all of our business operations are conducted by the Bank which, as a result, accounts for substantially all of our revenues and income. As the owner of a commercial bank, Pacific Mercantile Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”) and, as such, our operations are regulated by the board of Governors of the Federal Reserve System (the “Federal Reserve Board”). See “Supervision and Regulation” below in this Report.

          The Bank is headquartered in Orange County, California, approximately 40 miles south of Los Angeles and conducts a commercial banking business in Orange, Los Angeles, and San Diego counties. The Bank is also a member of the Federal Reserve System and its deposits are insured, to the maximum extent permitted by law, by the Federal Deposit Insurance Corporation (commonly known as the “FDIC”). 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, a third banking office in Costa Mesa, California in June 2001, a fourth banking office in Beverly Hills, California in July 2001, a fifth banking office in La Jolla, California in June 2002 and a Loan Production Office (an “LPO”) in La Habra, California in June, 2002. At December 31, 2002, our total assets, net loans (including loans held for sale) and total deposits had grown to $574 million, $279 million and $423 million, respectively. Additionally, as of that date we were serving a total of approximately 6,800 deposit accounts, of which approximately 50% were business customers and customers of the bank who are located in 49 states and the District of Columbia have conducted banking transactions with the Bank via its Internet banking systems. It is our plan to expand our operations into other areas of Southern California, and we have obtained the necessary regulatory approvals to convert the LPO to a full service branch in La Habra, California, located in Orange County.

          The Company was organized 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 the shareholders of the Bank became the shareholders of Company, exchanging their shares of common stock of the Bank, on a one share-for-one share basis, for shares of Company’s common stock. Prior to that time, the Company had no material assets and had not conducted any business. In June 2000, immediately following the acquisition of the Bank, the Company completed an initial public offering of its common stock, registered under the Securities Act of 1933, in which we sold

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a total of 2,611,608 shares at a price of $8 per share. The net offering proceeds (after deducting underwriting commissions and offering expenses) totaled $18,527,200.

          As a matter of convenience, we will be using the term “Company” and the terms “we” and “us” to refer to Pacific Mercantile Bancorp, together with the Bank and the Company’s other subsidiaries. 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 may 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 moderate size businesses, professional firms and individuals by providing our customers with:

          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, 2002, our deposits totaled $423 million. 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, 2002:

(1)  Includes non-interest bearing demand checking accounts. Excludes $60,000 of non-interest demand deposits maintained at the Bank by PMB Securities Corp., a wholly owned subsidiary of the Company.

(2)  Includes money market accounts. Excludes $6,202,000 of money market deposits maintained at the Bank by the Company and $394,000 of money market deposits maintained at the Bank by PMB Securities Corp.

(3)  Time certificates of deposit in varying denominations under and over $100,000. Excludes a $250,000 certificate of deposit maintained at the Bank by the Company.

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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 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 mortgage loans.

          The following table sets forth the types and the amounts (in thousands of dollars) of our loans that were outstanding as of December 31, 2002:

          (1)  Excludes loans held for sale of $57,294,000 and net deferred loan costs of $13,000.

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 terms of up to 10 years; accounts receivable financing for terms of up to 12 months; and equipment and automobile loans and leases which generally amortize over a period of up to 7 years. The interest rates on these loans generally are adjustable and usually are indexed to The Wall Street Journal’s prime rate.  During the past year many of these loans were made subject to an interest rate floor in the 5.5% to 6.0% range.  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 well-defined primary and secondary sources of repayment. Generally, lines of credit are granted for no more than a 12-month period and are subject to periodic reviews.

          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 qualify for unsecured lending. Typically, these borrowers consist of companies that are growing rapidly, but cannot internally fund their growth without borrowings. These loans are generally collateralized by the borrower’s 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 borrowers have debt-to-worth ratios that generally do not exceed four-to-one and their operating cash flow 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.

          The majority of our real estate and construction loans are secured by deeds of trust on nonresidential real property, of which a majority were secured by first trust deeds at December 31, 2002. 80% of our residential and multi-family mortgage loans, which were purchased from an unrelated mortgage banking firm, are secured primarily by first trust deeds on multi-family dwellings.

          Commercial Real Estate Loans.  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 and multi-family dwellings. Payments on these loans depend to a large degree on results of operations and dependable cash flows of the borrowers, which are generated from a wide variety of businesses and industries. As a

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result, repayment of these loans can be affected adversely by changes in the economy in general or by the real estate market more specifically. Accordingly, the nature of this type of loan makes it more difficult to monitor and evaluate. Consequently, 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 terms of up to 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 30 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 meet secondary market investment criteria, which require that the loan-to-value ratios generally not exceed 90%, and that the borrower have a good payment history, a mortgage payment ratio of not more than 28% of income and total debt that does not exceed 40% of income.

          Construction Loans. Generally these loans are interim loans designed to meet the needs of specific construction projects and typically do not exceed 12 months. Terms and conditions are based on current market conditions, with interest rates that adjust based on market rates of interest.

          Consumer Loans. We offer a variety of loan and credit 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, that may not provide an adequate source of repayment of the outstanding loan balance in the event of a default by the consumer. 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:

          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 Clearing House Origination Services.

          The Federal Reserve operates an automated or “electronic” clearing house system (which is commonly referred to as “ACH”) which enables businesses, with the authorization of their customers, to obtain payments of their charges by electronically debiting or crediting 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:

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                    Reduction of administrative and operating costs;

                    Reduced remittance processing costs resulting from the absence of handling checks;

                    Accelerated availability of funds;

                    Increased certainty of payment delivery;

                    Elimination of time lost by employees who deposit checks; and

                    Ability to make tax payments electronically.

          Examples of businesses that use ACH services are 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 required and authorized by the Federal Reserve to originate ACH transactions.  While virtually all banks can receive ACH transactions 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 transactions 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.  Being a participant in the ACH network benefits Pacific Mercantile Bank by:

                    Reduction of costs through increased automated processing;

                    New opportunities for increased business through expanded services;

                    Ability to offer improved services to both customers and corporate account holders;

                    Alleviation of teller-line congestion during peak periods (e.g., pay days);

                    Enhanced public recognition through provisions of effective, efficient, and innovative payment services; and

                    Opportunity for increased fee income.

          Internet Banking Services

          Customers can use our Internet Banking Web site to do any of the following:

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          Opening an Account.  The Bank customers can access the Bank’s Internet website, www.pmbank.com and Internet banking services through any Internet service provider by means of secure Web browsers such as Netscape’s Navigator or Microsoft’s Internet Explorer.  When customers access the menu of products and services at the Bank’s website, 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 the Bank.  A customer may also apply for a new account by calling the Bank’s toll-free telephone number at 1-877-450-BANK.

          Security.  The Bank’s ability to provide customers with secure financial services over the Internet is of paramount importance to the Internet business.  We believe the Bank’s Internet systems, services and software meet the highest standards of bank security.  The following are among the security measures that are in place:

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          The Bank believes the risk of fraud presented by providing Internet banking services is not materially different from the risk of fraud inherent in any banking relationship.  The Bank believes that potential security breaches can arise from any of the following circumstances:

          Both traditional banks and Internet banks are vulnerable to these types of fraud.  By establishing the security measures described above, we believe we can minimize, to the extent practicable, the Bank’s 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 the Bank’s 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.

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 those banks, with 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, United California Bank, 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; however, Union Bank is a majority owned subsidiary of Bank of Tokyo. Independent banks and other financial institutions with offices in our service areas include, among others, City National Bank, Manufacturers Bank, Downey Savings and California Bank and Trust.

          The large banks and some of the independent banks and financial 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 than our Bank.

          In order to compete with the banks and other 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 and participate in 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.

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          We also compete for customer funds with the numerous and a growing number of securities brokerage firms and mutual funds that provide investment products that are alternatives to our deposit products and also offer online trading and investments.  The Bank entered into an agreement with PMB Securities, a subsidiary of the Company, to offer online discount securities brokerage services to its customers via our Web site.

          Competitive Conditions in Internet Banking.  The market for Internet and electronic banking services is rapidly evolving.  There are a number of banks that offer services exclusively over the Internet, such as NetBank and E*TRADE Bank, and other banks, such as Bank of America and Wells Fargo Bank, that market their services nationwide over the Internet.  The Bank believes that few of these banks offer the comprehensiveness of Internet banking services that we are able to offer.  However, many of the larger banks do have greater market presence and greater financial resources to market their Internet banking services. Additionally, new competitors and competitive factors are likely to emerge, particularly in view of the rapid development of Internet commerce. On the other hand, there have been some recently published reports indicating that the actual rate of growth in the use of the Internet banking services by consumers and businesses is lower than had been previously predicted and that many customers still prefer to be able to access such services at traditional local banking offices.  We believe that these findings support the Bank’s strategic decision, made at the outset, to offer customers the benefits of both traditional and Internet banking services and the Bank believes that this strategy has been an important factor in the Bank’s growth during the past four years.

          Effects of Legislation and Government Regulation on Competition. Existing and future state and federal legislation, and government regulation of banking institutions, could significantly affect our costs 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

          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 shareholders. 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 laws and regulations summarized below.

          Pacific Mercantile Bancorp.

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

          As a bank holding company, the Company is generally allowed to engage, directly or indirectly, only in banking and other activities that the Federal Reserve Board deemed to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. However, the Federal Reserve Board has designated securities brokerage services and data processing services, among others, as activities closely related to banking that can be engaged in by bank holding companies through subsidiaries, subject to certain limitations established by the Federal Reserve Board.

          As a bank holding company, the 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 the Company with any other bank holding company. Additionally, the Company also is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class

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of voting securities, or of substantially all of the assets, of other entities engaged in banking related services.

          Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board’s policy that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. 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.

          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. A bank holding company and its non-banking subsidiaries also are prohibited from requiring tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services.

          Additionally, the Federal Reserve Board requires all bank holding companies to maintain capital at or above certain prescribed levels. See “Capital Standards and Prompt Corrective Action” below.

          The Company 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 DFI.

          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.

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

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          We do not believe that the Financial Services Modernization Act will have a material effect on our operations, at least in the near-term. However, to the extent that it enables banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. Additionally, the Act may have the result of increasing the level of competition that we face from larger institutions and other types of companies offering financial products, many of which may have substantially greater financial resources than we have.

          A bank holding company that elects to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. According to current Federal Reserve Board regulations, activities that are financial in nature include: securities underwriting; dealing and market making; sponsoring mutual funds and investment companies and engaging in insurance underwriting and brokerage; and engaging in merchant banking activities.

          A bank holding company that is not also a financial holding company may not engage in such activities. Instead, it is limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

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

          Privacy Provisions of the Financial Services Modernization Act. Pursuant to under the Financial Services Modernization Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. Pursuant to the rules, financial institutions must provide:

          These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We do not expect these privacy provisions to have a material impact on our financial condition or results of our operations.

The Sarbanes-Oxley Act of 2002.

          On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 into law. This Act addresses accounting oversight and corporate governance matters of companies whose securities are registered under the Exchange Act (“public companies”) and, therefore, applies to the Company. Among other things, the Sarbanes-Oxley Act:

          We have implemented disclosure controls and procedures and taken other actions to meet the expanded disclosure requirements and certification requirements of the Sarbanes-Oxley Act. Additionally, we have determined that the members of our audit committee meet the independence standards imposed by that Act. A number of the requirements under that Act will become effective during fiscal 2003 and, to the extent we do not already meet any of those new requirements, we will be taking the actions required to do so.

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          Pacific Mercantile Bank.

          General. As a California state chartered bank, the Bank is subject to primary supervision, periodic examination and regulation by the CDFI. 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. Also, 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 were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations had become unsatisfactory or that the Bank or its management was in violation of any law or regulation, the Federal Reserve Board can take a number of different remedial actions as it deems appropriate under the circumstances. These actions 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 the Bank’s capital, to restrict the Bank’s growth, to assess civil monetary penalties against the Bank’s officers or directors, 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 and require it to cease its banking operations. Additionally, under California law the DFI has many of the same remedial powers.

          Federal and state banking laws, and the implementing regulations that are promulgated by Federal and State regulatory agencies, cover most aspects of a bank’s operations, including the reserves a bank must maintain against deposits and for possible loan losses and other contingencies; the ownership and acquisition of deposit accounts; the interest rates that a bank may pay on deposits, loans and investments; the types of investments that a bank may make; the borrowings that a bank may incur; a bank’s growth levels and the number and location of banking offices that a bank may establish; merger and acquisition activities of a bank; the amount of dividends that a bank may pay; and the capital requirements that a bank must satisfy. See the more detailed discussion regarding capital requirements that are applicable to us and the Bank that is set forth below under the caption “Capital Standards and Prompt Corrective Action”.

          Dividends and Other Transfers of Funds. In addition to cash generated from our initial public offering in June 2000, and from the sale by the Company in 2002 of trust preferred securities (in the Section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources” in Item 7 of this Report), it is expected that, in the future, dividends from the Bank will constitute one of principal source of cash available to the Company. The Company 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 the Company. In addition, the Federal Reserve Board and the DFI have the authority to prohibit the Bank from paying dividends, if either of them deems payment of dividends by the Bank to be 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 the Company may pay. See “Capital Standards and Prompt Corrective Action” below. An insured depository institution, like the Bank, also is prohibited from paying management fees to any controlling persons or, with limited exceptions, paying dividends if, after the transaction, the institution would be undercapitalized.

          The Bank is subject to restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or any of its other subsidiaries; the purchase of, or investments in, Company stock or other Company securities; and the taking of such securities as collateral for loans; and the purchase of assets from the Company or any of its other subsidiaries. Such restrictions prevent the Company and any of its subsidiaries 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 the Company or any of its subsidiaries are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations) and, in the aggregate, to 20% of the Bank’s capital and surplus. California law also imposes restrictions with respect to transactions involving the Company and other controlling persons of the Bank. Additional restrictions on transactions with affiliates of the Company may be imposed on the Bank under the prompt corrective action provisions of federal law. See “Capital Standards and Prompt Corrective Action,” below.

          Capital Standards and Prompt Corrective Action

          Capital Standards. The Federal Reserve Board and other federal bank regulatory agencies have adopted uniform risk-based minimum capital guidelines intended to require banking organizations to maintain capital at levels that reflect the degree of risk associated with the banking organization’s operations for both assets reported on the balance sheet assets, 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,

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such as U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans.

          These guidelines require banking organizations to maintain a ratio of qualifying total capital to risk-adjusted assets of at least 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4% (Tier 1 capital consists principally of common stock and non-redeemable preferred stock and retained earnings.) In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a ratio of Tier 1 capital to total average assets of 4%, which is 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 average assets must be 5%. 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.

          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 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:

          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 greater operating restrictions and regulatory increased supervision. 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, 2002, the capital ratios of the Company (on a consolidated basis) 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:

          As the table indicates, at December 31, 2002 the Company (on a consolidated basis) 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.

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          Safety and Soundness Standards. In addition to measures taken under the prompt corrective action provisions, banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices or for violating any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. The federal banking agencies have adopted guidelines designed to identify and address potential safety and soundness concerns that could, if not corrected, lead to a deterioration in the quality of bank’s assets or liquidity or capital problems.

          Those guidelines set forth operational and managerial standards relating to such matters as:

          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:

          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 operates a Bank Insurance Fund (“BIF”) which insures the deposits, up to federally prescribed limits, of those banks that are subject to regulation by a federal banking regulatory agency and have elected to participate in that Fund (“BIF Members”). The Bank is a BIF Member and, as a result, its deposit accounts are insured up to the maximum amount permitted by law. The FDIC charges all BIF Members an annual assessment for the insurance of their deposits. The amount of a bank’s annual assessment is based on its relative risk of default as measured by (i) the institution’s federal regulatory capital risk category, which can range from well capitalized to less than adequately capitalized, and (ii) its supervisory subgroup category, which is based on the federal regulatory assessment of the financial condition of the institution and the probability that FDIC or other corrective action will be required. The assessment rate currently ranges from 0 to 27 cents per $100 of domestic insured deposits. The FDIC has the authority to increase or decrease the rate of the assessment on a semi-annual basis. An increase in the assessment rate would increase the Bank’s costs of doing business.

          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 and, as a result, termination of a California bank’s FDIC insurance would result in its closure.

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          All FDIC - insured depository institutions also are required to pay an annual assessment for the payment of interest on bonds (known as “FICO Bonds”) that were issued by the Financing Corporation, a federally chartered corporation, to assist in the recovery of the savings and loan industry following the failure of numerous savings and loan institutions in the 1980s. Effective for the fourth quarter of 2002, the FDIC established the FICO assessment rate at approximately $0.017 per $100 of assessable deposits of the insured banks. The FICO assessment rates are adjusted quarterly by the FDIC to reflect changes in the assessment bases of the FDIC’s insurance funds and, unlike the BIF assessments, do not vary on the basis of a bank’s capital or supervisory risk categories.

          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 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.

          USA Patriot Act of 2001

          On October 26, 2001, President Bush signed the USA Patriot Act of 2001. Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including:

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On July 23, 2002, the U.S. Treasury Department proposed regulations requiring institutions to incorporate a customer identification program into their written money laundering plans that would implement reasonable procedures for:

          •   verifying the identity of any person seeking to open an account, to the extent reasonable and practicable;

          •   maintaining records of the information used to verify the person's identity; and

          •   determining whether the person appears on any list of known or suspected terrorists or terrorist organizations.

Future Legislation and Regulatory Initiatives.

          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. It is likely that additional legislation will be considered by Congress that, if enacted, could have a significant impact on the operations of banks and bank holding companies, including the Company and the Bank.

Employees

          As of December 31, 2002, we employed 121 persons on a full-time equivalent basis. None of our employees are covered by a collective bargaining agreement. We believe our employee relations are good.

ITEM 2.    PROPERTIES.

          The Bank operates five banking offices, three of which are located in Orange County, California, one located in Los

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Angeles County, California, and other banking office located in San Diego County, California, along with a Loan Production Office (an "LPO") located in Orange County, California. All of those banking offices and LPO, together with the Bank’s headquarters offices, are leased under full service gross leases. The following table sets forth certain information regarding those offices.

          We believe that these facilities are adequate to meet our current needs for space. However, we will continue to seek additional office space for the location of new banking offices in Southern California 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.

          We are subject to legal actions that arise in the ordinary course of our business. At December 31, 2002, 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.

ITEM 4A.   EXECUTIVE OFFICERS OF THE REGISTRANT.

          The principal executive officers of the Bancorp and Bank are:

          There is no family relationship between 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.

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

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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 of the quarters in the fiscal years ended December 31 2002 and 2001, respectively.  On March 17, 2003, the high and low sales prices of the common stock on the NASDAQ National Market System were $7.57 and $7.54, respectively, and we had approximately 284 shareholders of record as of that date.

Dividends.

          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 Bancorp (in excess of the portion of the net proceeds of the Bancorp’s initial public offering that it retained) will be cash dividends from the Bank, at least until such time, if any, as the Bancorp may acquire or develop other businesses. 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. 

          Additionally, 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.

          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 limits the amount of such loans to an aggregate of no more than 10% of the bank subsidiary’s capital and retained earnings. The Bancorp does not have any present intention to obtain any borrowings from the Bank.

          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.”

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ITEM 6     SELECTED FINANCIAL DATA

          The selected operating statement data set forth below for the fiscal years ended December 31, 2002, 2001 and 2000, and the selected balance sheet data as of December 31, 2002 and 2001, are derived from  consolidated financial statements of the Company audited by Grant Thornton LLP, independent certified public accountants.  Those consolidated financial statements, together with the notes thereto, are included in Item 8 of this Report and these selected financial data should be read in conjunction with those consolidated financial statements and also with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Report.  The selected operating data for the year ended December 31, 1999 and the selected balance sheet data as of December 31, 1999 are derived from consolidated financial statements audited by Arthur Andersen LLP, which are not included in the Report. 

     (1)     Cash and cash equivalents include cash and due from other banks and federal funds sold.

     (2)     Includes loans held for sale of $57,294,000, $63,697,000, $11,084,000 and $2,700,000 at December 31, 2002, 2001,  2000 and 1999, respectively.

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          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 and should be read in conjunction with the Company’s audited Consolidated Financial Statements included in Item 8 of this Report.

           Substantially all of the Company’s operations are conducted by the Bank and the Bank accounts for substantially all of the Company’s revenues and operating costs.   The Bank was incorporated in 1998 and began operations in 1999.  The Company was incorporated in January 2000 for the purpose to become a holding company for and acquiring all of the outstanding shares of the Bank, which occurred in June 2000.  Prior to the acquisition of the Bank, the Company conducted no business operations and, as a result, for accounting purposes the Company’s inception and commencement of operations the inception of the Bank in 1998 and the commencement of its operations in 1999, respectively.

          During each of the fiscal years ended December 31, 2002 and 2001, respectively, we achieved substantial growth in total assets and in the volume of interest earning assets, in each case over the preceding fiscal year.  Total assets grew by 115% and 64% in 2002 and 2001, respectively.  Contributing to that growth was the opening of our fifth full service banking office, in La Jolla, California, and our first loan production office, in La Habra, California, in 2002 and our third and fourth full service banking offices, in Costa Mesa and Beverly Hills, California, in 2001.  This rapid growth limits somewhat the comparability of our operating results in 2002 and 2001, as compared to each of the respective preceding years.

          Forward Looking Information. This discussion also contains information regarding operating trends and our beliefs and expectations regarding our future financial performance and future financial condition (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.

Critical Accounting Policies

          Bancorp has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting polices. Management believes accounting for allowance for loan losses and hedging instruments to be critical accounting policies in the presentation of the financial condition and results of operations requiring management to make approximate measurements of the financial effects based on transactions and events that have already occurred.

     Allowance for Loan Losses

          The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio.  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.   Please refer to footnote 1 – Allowance for Loan Losses and footnote 4  - Loans and Allowance for Loan Losses for additional information.

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          Derivative Financial Instruments

          The Bank adopted the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting For Derivative Instruments and Hedging Activities”, as amended  and interpreted as of January 1, 2001. The Bank uses derivative instruments to reduce its exposure to adverse fluctuations in interest rates in accordance with its risk management policy. Generally speaking, if interest rates increase, the value of the Bank’s loan commitments to borrowers and mortgage loans held for sale are adversely impacted. The Bank attempts to economically hedge 100% of the risk of the overall change in the fair value of loan commitments to borrowers and mortgage loans held for sale by entering into rate lock commitments with investors in mortgage loans at the date of loan commitments to the individual borrowers. These rate lock commitments are entered into at the same terms extended to borrowers to be delivered to the investors at a future date.  Please refer to Footnote 1 – Hedged Items  and Footnote 14 – Hedged Instruments for additional information.

          Loan commitments to borrowers and rate lock commitments with investors in mortgage loans are non-designated derivative instruments and are included in mortgage loans held for sale on the accompanying Consolidated Statements of Financial Condition. Gains and losses resulting from these derivative instruments are included in gains on sales of loans in the accompanying Consolidated Statements of Operations.

Overview of Operating Results in Fiscal 2002

          Net Interest Income. Net interest income, which is a principal determinant of a banking organization’s operating results, is the amount by which interest earned on loans, securities and other interest earning assets exceeds the interest paid on interest bearing liabilities, principally deposits.  In 2002 net interest income increased by nearly $3.8 million, or approximately 45%, to $12.4 million in fiscal 2002 from $8.6 million in fiscal 2001. As discussed more fully below, that improvement was primarily attributable to a 49% increase in the average volume of our outstanding loans to $216 million in fiscal 2002 from $144 million in fiscal 2001.

          Noninterest Income and Expense. Non-interest income, which consists primarily of loan origination and processing fees and yield spread premium generated on mortgage loans originated or purchased by our mortgage banking division, grew by $2.7 million, or 78%, to $6.1 million in fiscal 2002 from approximately $3.4 million in fiscal 2001 due largely to residential mortgage refinancing activity that continued to be strong in 2002 as a result of declining mortgage interest rates.

          Our non-interest expense grew by $5.0 million, or 49%, to $15.2 million in fiscal 2002 from $10.2 million in fiscal 2001. Most of the increase was attributable to the growth of the Bank’s operations, including the opening of a new La Jollas banking office and a Loan Production Office (“LPO”) and the first full year of operations of the two new banking offices that we opened, and the relocation and expansion of our headquarters offices that took place in 2001.

          Net Income. We generated net income of $1,516,000 in fiscal 2002, as compared to  $1,834,000 in fiscal 2001, which includes $534,000 tax benefit for the year, as compared to an income tax provision of $1,044,000 and net income of $127,000 in fiscal 2000. Basic and diluted income were $0.24 and $0.23 per share for fiscal 2002, respectively, as compared to basic and diluted income of $0.29 and $.28 per share in fiscal 2001, respectively and $.02 per share in fiscal 2000.  These per share figures are based on weighted-average shares outstanding of 6,378,000 during 2002, 6,337,000 during 2001 and 5,099,000 during 2000. The increase in shares outstanding in 2001 as compared to 2000 was due to the completion of a public offering in June 2000 in which we sold a total of 2,612,000 shares of common stock.

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

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          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 our 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 years ended December 31, 2002, 2001, and 2000. Average balances are calculated based on average daily balances.

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