<PAGE>
As filed with the Securities and Exchange Commission on May 9, 2000
Registration No. 333-33452
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
PACIFIC MERCANTILE BANCORP
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
California 6712 33-0898238
(State or
other
jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation
or
organization) Classification Code Number) Identification No.)
</TABLE>
450 Newport Center Drive, Suite 100
Newport Beach, California 92660
(949) 644-8040
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
RAYMOND E. DELLERBA
450 Newport Center Drive, Suite 100
Newport Beach, California 92660
(949) 644-8040
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
BEN A. FRYDMAN, ESQ. JOHN J. HALLE, ESQ.
Stradling Yocca Carlson & Rauth Stoel Rives LLP
660 Newport Center Drive, Suite 1600 900 S.W. Fifth Avenue, Suite 2600
Newport Beach, California 92660 Portland, Oregon 97204-1268
(949) 725-4000 (503) 224-3380
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Approximate date of commencement of the proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
--------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each
Class of Securities to be Proposed Maximum Aggregate Amount of
Registered Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, without par
value(2)......................... $51,750,000 $13,662
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Shares of Common Stock underlying
Underwriter's warrant(3)......... $4,500,000 1,188
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Total Registration Fee............ $14,850*
</TABLE>
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) under the Securities Act.
(2) Includes 450,000 shares issuable upon exercise of Underwriter's over-
allotment option.
(3) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the antidilution provisions of the warrant.
* $13,711.50 previously paid.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor does it +
+seek offers to buy these securities in any jurisdiction where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 9, 2000
3,000,000 Shares
[LOGO OF PACIFIC MERCANTILE BANCORP APPEARS HERE]
Pacific Mercantile Bancorp
Common Stock
We are offering 3,000,000 shares of our common stock with this prospectus. We
expect that the public offering price will be between $12.50 and $15.00 per
share. Prior to this offering, there has been no public market for our shares.
We have applied for quotation of our shares on the NASDAQ National Market under
the symbol "PMBC."
Prior to completion of this offering we will be issuing, as our initial
issuance of shares, a total of 3,720,162 shares of our common stock in exchange
for all of the outstanding shares of Pacific Mercantile Bank, a California
state chartered bank. As a result of that issuance and exchange of shares,
Pacific Mercantile Bank will become our sole subsidiary.
Pacific Mercantile Bank's shares are quoted on the NASDAQ OTC Bulletin Board
under the symbol "PQBH." However, trading in its shares has been limited and
sporadic. On May 8, 2000, the last reported sale price was $10.875 per share,
which reflects a two-for-one stock split of Pacific Mercantile Bank's shares
that became effective on April 14, 2000.
-----------
Investing in the shares involves a high degree of risk.
See "Risk Factors" beginning on page 8.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price....................... $ $
Underwriting discount............................... $ $
Proceeds before expenses............................ $ $
</TABLE>
We estimate the cash expenses will be approximately $812,500 and will include
a non-accountable expense allowance to the managing underwriter equal to 1% of
the gross offering proceeds. We have also agreed to issue a warrant to the
managing underwriter entitling it to purchase up to 300,000 of our shares at a
price equal to 120% of the initial public offering price of the shares sold in
this Offering. Other terms of the warrant are described under the heading
"Underwriting."
The underwriters may purchase up to an additional 450,000 shares from us at
the initial public offering price, less underwriting discount, within 45 days
from the date of this prospectus, to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is unlawful for any person to state
otherwise.
-----------
Paulson Investment Company, Inc.
The date of this Prospectus is , 2000.
<PAGE>
[Photographs/Graphics]
[On reverse of 1st page]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................... 4
The Offering.......................................................... 6
Summary Financial Data................................................ 7
Risk Factors.......................................................... 8
Forward Looking Statements............................................ 17
The Holding Company Reorganization.................................... 17
Use of Proceeds....................................................... 18
Trading History....................................................... 18
Dividend Policy....................................................... 18
Capitalization........................................................ 19
Dilution.............................................................. 20
Selected Financial Data............................................... 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 22
Business.............................................................. 31
Management............................................................ 49
Principal Shareholders................................................ 57
Description of Capital Stock.......................................... 58
Shares Eligible for Future Sale....................................... 59
Underwriting.......................................................... 60
Legal Matters......................................................... 63
Experts............................................................... 63
Where You Can Find More Information................................... 63
Index to Consolidated Financial Statements............................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. If any one provides you with different or
inconsistent information, you should not rely on it. Information contained on
our Web site does not constitute a part of this prospectus. The information in
this prospectus may only be accurate as of the date appearing on the cover page
of this prospectus, regardless of the time this prospectus is delivered or our
common stock is sold.
We are not, and the underwriters are not, making an offer to sell the shares
in any jurisdiction where the offer or sale is not permitted. No action is
being taken in any jurisdiction outside the United States to permit a public
offering of our common stock or the possession or distribution of this
prospectus in any such jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside of the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable in that jurisdiction.
Information regarding historical growth in the use of the Internet and online
banking services is derived from published reports. Information regarding the
demographics of Orange County is derived from data published by the U.S. Bureau
of the Census. Data regarding the banking industry was derived from the FDIC
Institution Directory.
Pacific Mercantile Bank(TM) and PMB Internet Bank(TM) are trademarks of
Pacific Mercantile Bancorp. All other brand names or trademarks appearing in
this prospectus are the property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information you should consider before
purchasing our shares. Therefore, you should read the prospectus in its
entirety, including the financial statements and related footnotes appearing
elsewhere in this prospectus. References to "we," "us," and "our" generally
refer to Pacific Mercantile Bancorp and our sole subsidiary, Pacific Mercantile
Bank, on a consolidated basis. We also will sometimes refer to Pacific
Mercantile Bancorp as "PM Bancorp" and Pacific Mercantile Bank as "PM Bank" to
distinguish them from each other.
PACIFIC MERCANTILE BANCORP
On the completion of this offering we will own Pacific Mercantile Bank, a
California state chartered commercial bank, which will be our sole subsidiary.
Pacific Mercantile Bank, which is based in Orange County, California, offers to
its customers, primarily small and medium size businesses and professional
firms:
. the best attributes of a community bank, which are personalized and
responsive service; and
. the added flexibility and convenience of conducting, reliably and
securely, an increasing number of banking and other financial
transactions, 24 hours per day, 7 days per week, at our Internet Web
site, www.pmbank.com.
Pacific Mercantile Bank commenced operations in March 1999 in response to a
consolidation within the banking industry, particularly in Southern California,
where the number of locally based banks has declined by nearly 50% since 1985,
and the recent rapid growth in electronic commerce that has made it possible
for banking to be conducted over the Internet. We believe that, due primarily
to that consolidation, small and medium size businesses and professional firms
are increasingly being overlooked and underserved by large regional and out-of-
state banks and that we have an opportunity to attract such customers from
those banks by offering higher levels of personal, more responsive service. At
the same time, we believe that the wide range of business and Internet banking
services that we can offer to this segment of the banking market gives us an
advantage in competing with other independent and community banks, many of
which do not currently offer such services and cannot cost-effectively develop
them.
We have grown rapidly during our first year of operations. As of March 31,
2000, our assets and our deposits had grown to $119,160,600 and $102,969,000,
respectively, and we had a total of 1,900 deposit customers, of which
approximately 950 were conducting at least some of their banking transactions
with us over the Internet. Business customers accounted for approximately 81%
of our deposits. Our rapid growth, however, contributed to net losses of
$2,750,000 for the year ended December 31, 1999, and $242,300 for the quarter
ended March 31, 2000.
Our Internet banking system enables our customers to conduct many of their
commercial banking and other financial transactions with us online, making it
more convenient and less expensive for them to bank with us. Those online
services and transactions, which have been designed to address the special
needs of small and medium size businesses and professional firms, include:
. opening bank accounts, viewing account activity and the front and back
sides of checks drawn on their accounts, and printing bank statements;
. processing credit card payments and originating and processing payments
electronically;
. paying bills and payroll, transferring funds between accounts at Pacific
Mercantile Bank; and
. downloading, on a secure basis, information regarding their banking
transactions from our Web site into their computerized accounting
systems, thereby making it easier for our business customers to record
and manage cash transactions.
4
<PAGE>
We believe that our Internet banking system, infrastructure and capabilities
position us to capitalize on the growth of the Internet and provide us with a
competitive advantage over a large proportion of the banks with which we
compete. According to the FDIC, as of June 1999, although approximately 30% of
the 3,000 federally insured banks and thrift institutions in the United States
had Web sites, only about 635 of those banks and thrift institutions offered
their customers the ability to conduct online banking transactions at their Web
sites.
An important element of our strategy is to focus our marketing efforts on
small and medium size businesses, professional firms and individuals, many of
which desire "relationship banking" and make their decisions when selecting a
bank primarily on the basis of the breadth, convenience, responsiveness and
timeliness of the services offered and, to a lesser extent, on the cost of
those services. We believe this strategy differentiates us from many Internet-
only banks that, due to a lack of a local presence or a lack of experience in
providing business banking services, focus primarily on attracting consumers
who are more rate and cost sensitive and who, therefore, are more willing to
change banks based primarily on rate and pricing considerations.
We believe our strategy, with its focus on business customers, requires a
local presence as well as an Internet presence to offer personalized services
to our customers. We currently operate two branch banking offices, located in
Newport Beach and San Clemente, California, where we provide a full range of
on-site commercial banking services to our customers, most of whom currently
are located in Orange County. According to government statistics, Orange County
is the seventh most affluent county in the United States among counties with
populations in excess of 1,000,000, but it has only one locally headquartered
bank per 306,772 people in the county, as compared to one locally headquartered
bank per 109,752 people in California as a whole and per 31,845 people in the
nation.
We plan to extend our market areas by establishing "express business banking
offices" designed primarily to serve the needs of the business customer. These
offices will be smaller in size and less costly to establish than traditional
branch banking offices because our computer and Internet banking systems will
make it possible to process banking transactions remotely. We also intend to
take advantage of opportunities that may arise to acquire other community banks
in selected communities, located both within and in states contiguous to
California, which have experienced a consolidation of banks and which have
demographics similar to those in Orange County, particularly in terms of the
number of small and medium size businesses located there.
Our principal executive offices are located at 450 Newport Center Drive,
Suite 100, Newport Beach, California 92660, telephone (949) 644-8040. Our Web
site is located at www.pmbank.com. Information contained on our Web site is not
a part of this prospectus.
Pacific Mercantile Bancorp was organized in January 2000 for the sole purpose
of becoming the parent holding company of Pacific Mercantile Bank. This will be
accomplished prior to the completion of this offering by means of a merger in
which we will issue, as our initial issuance of shares, a total of 3,720,162
shares of common stock to the shareholders of Pacific Mercantile Bank in
exchange for all of its shares, thereby making Pacific Mercantile Bank our sole
subsidiary. Prior to that merger, we will have only nominal assets and we will
not have conducted any business operations.
5
<PAGE>
THE OFFERING
All financial and other data in this prospectus gives retroactive effect to
our acquisition of Pacific Mercantile Bank as if it had occurred at the
inception of Pacific Mercantile Bank in May 1998 and to a two-for-one stock
split of its outstanding shares that became effective on April 14, 2000.
<TABLE>
<C> <S>
Shares Offered.......................... 3,000,000 shares of common stock
Offering Price.......................... $13.75 per share of common stock,
which is the mid-point of the price
range of $12.50 to $15.00 set forth
on the cover page of this prospectus
Common Stock Outstanding:
Before the Offering.................. 3,720,162 shares
After the Offering................... 6,720,162 shares
Use of Proceeds......................... To contribute capital to Pacific
Mercantile Bank to fund increases in
earning assets, to open additional
banking offices and for other general
corporate purposes, including
possible acquisitions of other banks.
Proposed NASDAQ National Market Symbol.. PMBC
</TABLE>
The 3,720,162 shares of common stock that will be outstanding prior to this
offering will be issued, as our initial share issuance, to the shareholders of
Pacific Mercantile Bank in exchange for their shares of its stock.
The 6,720,162 shares that will be outstanding after the offering will include
the shares offered by this prospectus, but will exclude:
. a total of 660,806 shares that will be subject to outstanding stock
options, with a weighted average exercise price of $5.17;
. a total of 345,800 shares that will have been set aside for future stock
options;
. any shares that may be sold in this offering as a result of the exercise
of the underwriters' overallotment option; and
. 300,000 shares that will be subject to a warrant that will be issued to
Paulson Investment Company, Inc. on completion of this offering and will
be exercisable beginning one year thereafter at a price equal to 120% of
the initial public offering price set forth on the cover page of this
prospectus.
6
<PAGE>
Summary Financial Data
The summary financial information presented below is derived from Pacific
Mercantile Bancorp's audited financial statements for the periods indicated.
The summary financial information should be read in conjunction with Pacific
Mercantile Bancorp's financial statements and other related information
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Inception Quarter Ended
Year Ended (May 29, 1998) March 31,
December 31, to December 31, ---------------------
1999(1) 1998(1) 2000 1999
------------ --------------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Total interest income.... $ 2,100,100 $ 2,600 $1,806,600 $ 66,300
Total interest expense... 880,000 -- 774,700 6,300
----------- --------- ---------- ---------
Net interest income...... 1,220,100 2,600 1,031,900 60,000
Provision for loan
losses.................. 750,000 -- 100,000 30,000
----------- --------- ---------- ---------
Net interest income after
provision for loan
losses.................. 470,100 2,600 931,900 30,000
Non-Interest income...... 131,600 -- 153,700 --
Non-Interest expense..... (3,351,300) (243,600) 1,327,100 397,300
----------- --------- ---------- ---------
Loss before income
taxes................... (2,749,600) (241,000) (241,500) (367,300)
Income tax expense....... (600) (1,200) (800) (800)
----------- --------- ---------- ---------
Net loss................. $(2,750,200) $(242,200) $ (242,300) $(368,100)
=========== ========= ========== =========
Basic and diluted loss
per share outstanding... $ (1.12) N/A $ (0.07) $ (0.51)
=========== ========= ========== =========
Basic and diluted
weighted average number
of shares outstanding... 2,466,114 N/A 3,720,162 720,106
=========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
At March 31, 2000
December 31, ---------------------------
1999 Actual As Adjusted(2)
------------ ------------ --------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents(3)......... $38,498,200 $ 38,706,300 $ 76,256,300
Total loans (net of allowance for
loan losses)(4)..................... 47,043,200 74,698,200 74,698,200
Total assets......................... 91,165,400 119,160,600 156,710,600
Total deposits....................... 74,500,200 102,969,000 102,969,000
Total shareholders' equity........... 16,018,400 15,772,700 53,322,700
</TABLE>
- --------
(1) For accounting purposes, the inception of Pacific Mercantile Bancorp is
deemed to have occurred in May 1998, when the organizers of Pacific
Mercantile Bank established an organizing committee to file necessary
applications for regulatory approvals and begin preparations for the
opening of Pacific Mercantile Bank. Pursuant to those regulatory approvals,
Pacific Mercantile Bank was incorporated in November 1998 and it received
its charter, completed its initial issuance and sale of shares and
commenced banking operations on March 1, 1999. As a result, prior to March
1, 1999, Pacific Mercantile Bancorp had not issued any shares nor generated
any revenues from operations.
(2) Reflects our receipt of the estimated net proceeds from the sale of
3,000,000 shares of our common stock offered by this prospectus at an
assumed public offering price of $13.75 and the receipt of the estimated
proceeds described in "Use of Proceeds."
(3) Cash and cash equivalents include cash and due from other banks and federal
funds sold and, on an as adjusted basis, the net proceeds of this offering.
(4) Includes loans held for sale of $2,700,000 at December 31, 1999 and
$11,724,600 at March 31, 2000.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the specific factors listed below, together with the
cautionary statement that follows this section and the other information
included in this prospectus, before purchasing shares in this offering. If the
possibilities described as risks below actually occur, our operating results
and financial condition would likely suffer, and the trading price of our
common stock could fall, causing you to lose some or all of your investment in
the shares we are offering.
The shares we offer are not savings accounts, deposits or other obligations
of a bank. The shares are not insured by the Federal Deposit Insurance
Corporation ("FDIC") or any other governmental agency.
We have a limited operating history, and our future performance is difficult to
predict.
We commenced our banking operations on March 1, 1999. As a result, we have a
limited operating history, which makes it difficult to predict our future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in early stages of
development, particularly companies in the new and rapidly evolving market for
electronic banking. To address these risks, we must, among other things, build
our customer base, respond to competitive developments, continue to attract,
retain and motivate qualified employees, and continue to upgrade our
technologies, products and services. We cannot assure you that we will succeed
in addressing these risks.
We have incurred losses to date and we expect to incur additional losses.
We have incurred a cumulative operating loss since our inception through
March 31, 2000 of $3,234,700, and we may incur operating losses for at least
the next six months. Our business model requires that we increase loans,
deposits and revenues substantially in order to achieve sustained profitable
operations. However, even if we substantially increase loans, deposits and
revenues, we cannot assure you that our operations will achieve or sustain
profitability. Further, even if we achieve profitability in our current
locations, we may find it difficult to achieve or maintain profitability in
other locations into which we may expand and the lack of profitability of such
other locations may cause our overall business to sustain losses.
Rapid growth could strain our resources and lead to operating problems or
inefficiencies.
Our business plan calls for continued rapid growth that will require
substantial changes in all of our operating systems, including physical
facilities and equipment, accounting and other computer systems, personnel,
regulatory compliance systems and management structures. We cannot assure you
that we will be able to adequately manage our growth, which will make
substantial demands on the time and attention of management and on our capital
resources. The failure to prepare appropriately and on a timely basis for
growth could cause us to experience inefficiencies or failures in our service
delivery systems, regulatory problems, an erosion in customer confidence,
unexpected expenses or other problems. Moreover, various facilities, services
or other resources that we may require to support growth may not be available
to us on a timely or cost-effective basis, or at all.
We face intense competition from more established and better known banks and
financial services companies.
Our strategy is to attract customers by offering them more convenient,
responsive and comprehensive banking services than are available at their
existing banks and financial service companies. However, many of those banks
and companies have financial, marketing and other resources and advantages that
we do not have. Many of them also are able to make larger loans, have greater
market presence and are able to offer products or services that we do not offer
directly. Those banks and companies could take actions that will have the
effect of making it more difficult for us to attract their customers or that
would reduce our profit margins, such as
8
<PAGE>
lowering the fees they charge customers for their products or services,
increasing their advertising in our service area or offering services that we
do not offer. Such actions could prevent us from successfully implementing our
strategy and make it more difficult for us to achieve and then to improve our
profitability.
Additionally, if we cannot provide a high level of personal service,
responsiveness and convenience to our customers, develop a strong market
presence, introduce new products and serve customers on a timely, secure and
convenient basis, our overall performance and financial results may suffer over
time. For all of these reasons, we cannot assure you that our efforts to
compete with other banks and financial services companies will be successful.
We expect the competition for online banking services to intensify.
Although, the market for electronic banking has only recently begun to
develop, it is growing rapidly as many banks and other financial services
businesses migrate their businesses onto the Internet. As a result, we expect
that competition will intensify in the future. Our ability to compete
successfully depends upon:
. customer service and satisfaction;
. our market presence;
. the capacity, reliability and security of our computer and network
infrastructure;
. ease of access to and navigation of the Internet;
. the timing of introductions of new products and services by our
competitors;
. the competitiveness of our pricing policies; and
. industry and general economic trends.
If we cannot provide a high level of personal service, responsiveness and
convenience to our customers, maintain a strong market presence, introduce new
products and serve customers on a timely, secure and convenient basis via the
Internet, our overall performance and financial results may suffer over time.
For all of these reasons, we cannot assure you that our efforts to compete with
other banks and financial services companies will be successful.
We cannot be sure that the nature or timing of the Internet banking services we
propose to offer will be appropriate in light of customer needs and
preferences.
We have invested substantial time and resources in the development and
implementation of Internet banking services on the assumption that the
provision of these services will afford us a competitive advantage over banks
that do not provide such services or that provide inferior services. Although
Internet banking is growing rapidly, customer behavior and preferences in this
area have not been definitively established. Many customers may choose not to
engage in Internet banking for a variety of reasons, including unfamiliarity
with the Internet and related equipment, security concerns or subjective
preferences. Although the technology to support electronic banking and funds
transfer has been widely available to bank customers for at least a decade,
many customers still elect to write checks and make deposits without using
these capabilities. We will compete for those customers who elect to use
Internet banking services with a large number of banks and other financial
services companies that have developed or purchased electronic banking and fund
transfer systems. If their systems are perceived by our existing or potential
customers as being more user-friendly or more secure, or as offering superior
features when compared to our Internet banking services, we may not succeed in
attracting and retaining online customers in sufficient numbers to make our
Internet banking services profitable or justify the costs of providing these
services.
9
<PAGE>
Our financial performance will suffer if we are unable to increase the volume
of the loans that we are able to make.
Interest earned on loans generally exceeds the interest that can be earned on
investments and other interest-earning assets of a bank. Our success, like that
of other banks, is therefore substantially dependent on our ability to increase
our loan business. We cannot assure you that we will succeed in doing so. Banks
are subject to lending limits that restrict the total amounts they can loan to
any one borrower, or a group of related borrowers, ranging from 15% to 25% of a
bank's shareholders' equity. As a result, we will be at a disadvantage when
competing with larger banks for the business of borrowers who are seeking loans
in excess of our lending limits because, in such cases, we will have to find
other banks to join with us in making such loans. Larger banks also may be able
to offer better lending terms than we can offer to prospective loan customers.
Our success in competing for loans depends on:
. the quality of service we provide to borrowers, especially the length of
time it takes for us to approve and process loans;
. the terms of the loans that we offer, such as interest rates, loan fees,
interest rate adjustment provisions, loan maturities and loan-to-value
ratio limitations;
. the size of the loans that we are able to offer; and
. general economic factors such as the interest rate environment.
We could incur losses on the loans we make.
The failure or inability of borrowers to repay their loans is an inherent
risk in the banking business. We take a number of measures designed to reduce
this risk, including the establishment of reserves against possible loan losses
and the requirement that borrowers provide collateral, such as real property,
equipment and other assets, which we can sell in the event they fail to pay
their loans. However, the ability of borrowers to repay their loans, the
adequacy of our reserves and our ability to sell collateral for amounts
sufficient to offset loan losses are affected by a number of factors outside of
our control, such as changes in economic conditions, increases in market rates
of interest and changes in the condition or value of the collateral securing
our loans. As a result, we could incur losses on the loans we make that will
hurt our operating results and weaken our financial condition. In addition, in
such an event bank regulatory agencies might impose restrictions on our
operations that could increase the cost of our operations, restrict our growth
and prevent us from achieving our business objectives.
A deterioration of economic conditions in Southern California in the future
could adversely affect our financial performance.
We currently focus our business in Southern California. In the early 1990's,
the Southern California economy experienced an economic recession that
increased the level of delinquencies and losses for many of the region's
financial institutions. Another economic slow-down or recession in Southern
California could have the following consequences, any of which could hurt our
operating results or cause us to incur losses:
. loan delinquencies may increase;
. problem assets and foreclosures may increase;
. claims and lawsuits may increase; and
. demand for our products and services may decline.
Collateral for loans made by us, especially real estate, may decline in
value, in turn reducing customers' borrowing power, reducing the value of
assets associated with problem loans and reducing collateral coverage of our
existing loans.
10
<PAGE>
Environmental laws could force us to pay for environmental problems.
The cost of cleaning up or paying damages and penalties associated with
environmental problems could increase our operating expenses. When a borrower
defaults on a loan secured by real property, we may purchase the property in
foreclosure or accept a deed to the property surrendered by the borrower. We
may also take over the management of commercial properties whose owners have
defaulted on loans. We also lease properties where our branches and other
facilities are located. While we have lending, foreclosure and facilities
guidelines intended to exclude properties with an unreasonable risk of
contamination, hazardous substances may exist on some of the properties that we
occupy or that we may acquire from any borrowers. We face the risk that
environmental laws could force us to clean up the properties at our expense. It
may cost much more to clean a property than the property is worth. We could
also be liable for pollution generated by a borrower's operations if we take a
role in managing those operations after a default. We may also find it
difficult or impossible to sell contaminated properties and, in such event,
would have to charge income to reduce the value at which those properties are
carried on our financial statements.
We are exposed to risks of earthquakes.
A major earthquake could cause us to incur material losses. Our operations
are concentrated in Southern California, which is an earthquake-prone region.
Unlike a bank with operations that are more geographically diversified, we are
vulnerable to greater losses if an earthquake or another natural catastrophe
occurs in Southern California. We have a disaster-recovery plan with offsite
data processing resources located in Austin, Texas and Phoenix, Arizona.
However, our properties and most of the real and personal property securing
loans in our portfolios are in Southern California. Many of our borrowers could
suffer uninsured property damage, experience interruption of their businesses
or lose their jobs after an earthquake. Those borrowers might not be able to
repay their loans, and the collateral for loans could decline significantly in
value.
Changes in interest rates, national monetary policies and economic conditions
could adversely affect our operating results.
Our ability to achieve and sustain profitability is substantially dependent
on our net interest income, which is the difference between the interest income
earned on our interest-earning assets and the interest we must pay on deposits
and other interest-bearing liabilities. Like most depository institutions, our
interest income is affected by a number of factors outside of our control,
including changes in market rates of interest, which are affected by national
monetary policies adopted by the Board of Governors of the Federal Reserve
System (commonly known as the Federal Reserve Board), changes in economic
conditions nationally and in our service area in particular and our ability to
increase interest rates on loans that we make in response to increases in the
rates of interest we must pay to attract and maintain deposits that we need to
be able to make loans and investments. While our cost of funds is variable over
relatively short periods, many of our loans have terms of several years and
bear either fixed rates of interest or are subject to limits on changes in the
variable interest rates they bear. Accordingly, our ability to react to changes
in interest rates to maintain our net interest income may be limited.
Additionally, increases in market rates of interest may make it more difficult
for prospective borrowers to qualify for loans that we offer, which could
result in a reduction in our loan volume and in our interest income. Increases
in market rates of interest also can adversely affect the value and the
marketability of a bank's interest-earning assets.
Our success depends in part on the continued growth of online commerce.
Market acceptance of Internet banking is substantially dependent upon the
adoption of the Internet for general commerce and financial services
transactions. The use of the Internet to conduct banking transactions,
particularly by businesses and consumers that have historically relied upon
traditional banking services, requires the acceptance of new ways of conducting
business and exchanging information. We cannot assure you
11
<PAGE>
that Internet banking will gain acceptance from such individuals and
businesses. Also, if we or another provider of Internet financial services were
to suffer damage from a physical break-in, security breach or other disruptive
problem caused by the Internet or by other users, such an event could lead our
Internet customers to terminate their use of our Internet banking services or
their relationships with us and could deter prospective customers from
establishing banking relationships with us, which would make it more difficult
for us to successfully implement our business strategy and achieve
profitability.
In addition, the Internet may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant growth in the number of users or
frequency of use, or requires an increase in its bandwidth requirements, we
cannot assure you that the infrastructure for the Internet will be able to
support the demands placed upon it. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet generally and us in
particular. The Internet also could lose its viability due to delays in the
development or the adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to the increased governmental
regulation.
For example, PC-based home banking systems have been marketed in the past by
other banking companies and have not enjoyed widespread consumer use or demand.
Accordingly, our assumption that there will be increased consumer acceptance of
Internet banking services may prove to be incorrect.
If use of the Internet does not continue to grow or grows more slowly than
expected, if the infrastructure for the Internet does not effectively support
growth that may occur, or if the Internet does not become a viable commercial
marketplace, our business, our operating results and financial condition could
be harmed, possibly to a significant extent.
Our success depends in part on our ability to provide comprehensive financial
services.
Our business strategy depends in part on our ability to offer secure,
convenient, cost-effective and comprehensive financial services on the
Internet. The growth and expansion of the banking services that we offer place
significant demands on our management and operational and financial resources.
Successful implementation of our Internet banking strategy will depend on our
ability to:
. increase significantly the number of our customers;
. offer new products and provide new financial services that meet changing
customer requirements;
. develop new strategic alliances with other Internet service providers in
order to market our services and to offer additional services to our
customers on the Internet;
. update our computer systems and network infrastructure to take advantage
of new technological developments which would facilitate and simplify the
use of the Internet to conduct banking and other financial transactions;
and
. hire and train additional qualified personnel who have experience
maintaining the information and processing systems that we use to provide
banking services over the Internet.
We cannot assure you that we will succeed in developing and bringing new
products and services to market in a timely manner or that we will be able to
accomplish these other tasks.
Our computer and network systems may be vulnerable to unforeseen problems and
security risks.
The computer systems and network infrastructure that we use to provide
automated and Internet banking services could be vulnerable to unforeseen
problems. Our operations are dependent upon our ability to protect
12
<PAGE>
our computer equipment against damage from fire, power loss, telecommunications
failure, earthquakes (which are more prevalent in California than in other
parts of the country) and similar catastrophic events. Any damage or failure
that causes an interruption in our banking services could harm our business,
operating results and financial condition.
In addition, our operations are dependent on our ability to protect our
computer systems and network infrastructure from damage that could occur from
physical break-ins, security breaches and other disruptive problems caused by
the Internet or other Internet users. Computer break-ins and security breaches
could jeopardize the security of information stored in and transmitted through
such computer systems and network infrastructure, which could cause us to incur
significant liability. Other disruptions due to problems on the Internet or
actions of Internet users could make it difficult for our customers to access
and retrieve information and conduct banking transactions at our Web site. In
either case, problems of this nature could lead existing customers to terminate
their banking relationships with us and could make it more difficult for us to
attract new Internet banking customers, which could undermine our business
strategy. Although we intend to continue to implement the latest security
technology and establish operational procedures to prevent such disruptions and
damage, there is no assurance that these security measures will be successful.
Our operations could be disrupted by a change in service providers.
Our Internet banking operations are dependent on essential technical and
customer service support from a number of third party service providers,
including Fiserve and Q-Up Systems. Our Internet operations could be disrupted
if any of those service providers were to become unable to perform under, or
terminate, their contracts with us, because acceptable alternatives may take
time to implement, may be unavailable or may increase our costs.
We may find it difficult to increase the number of our customers.
It is sometimes difficult to convince prospective customers to transfer their
deposit accounts and business from their existing banks, even when they are
unhappy with the service they are receiving from those banks. Such transfers
generally involve unavoidable inconveniences and disruptions. Also, some
prospective customers may choose to remain at their existing banks to obtain
specialized services that we may not be able to offer or because their existing
banks have greater market presence or longer histories of operations that do
we. In addition, if competing banks or other financial services providers offer
Internet banking services comparable to those we offer, or other financial
services or products that we do not provide, it is possible that we could lose
some of our customers to those other banks or providers. Customers who
experience difficulties in accessing or conducting banking transactions at our
Web site may terminate their banking relationships with us, even if those
difficulties arise from operational features of the Internet over which we have
no control or are the result of the inexperience of the customer.
The loss of key personnel could hurt our financial performance.
Our success depends to a great extent on the continued availability of
Raymond E. Dellerba, President and Chief Executive Officer, John J. McCauley,
Chief Operating Officer and Chief Credit Officer, John P. Cronin, Chief
Technology Officer, and Daniel L. Erickson, Chief Financial Officer. In
addition to their skills and experience as bankers or their experience with the
procurement, operation and maintenance of computer systems used in providing
Internet banking services, these officers provide us with extensive community
ties upon which our competitive strategy is partially based. We do not maintain
key-man life insurance on these executives other than Mr. Dellerba. As a
result, the loss of the services of any of these officers could harm our
business strategy. In order to achieve the expansion we intend to pursue, we
will be required to attract and retain other key employees in a variety of
positions. Competition for such employees is intense and is particularly so in
our current markets and other markets we have targeted, which are experiencing
a high level of economic prosperity. We cannot assure you that we will be able
to retain our existing key employees or to attract or retain a sufficient
number of additional qualified employees to meet our business requirements.
13
<PAGE>
Government regulation may impair our operations or restrict our growth.
Banking Regulations. We are subject to extensive supervision and regulation
by federal and state regulatory agencies. The primary objective of those
agencies is to protect bank depositors and other customers and not our
shareholders, whose respective interests will often differ. The regulatory
agencies have the legal authority to impose restrictions which they believe are
needed to protect depositors and customers of banking institutions, even if
they will restrict the ability of the banking institution to expand its
business and introduce new financial products and services. Aspects of our
operations that are affected by bank regulatory agencies include:
. the capital we must maintain;
. the kinds of activities in which we can engage;
. the kinds and amounts of investments we can make;
. the locations of our offices;
. how much interest we can pay on demand deposits;
. insurance of our deposits and the premiums we must pay for this
insurance; and
. how much cash we must set aside as reserves for deposits.
As a new bank, we have only recently undergone our initial bank regulatory
examinations and we have not yet received the results of those examinations. As
a result, we have no prior experience on which to predict the outcome of those
examinations. Also, as a new bank that has experienced rapid growth, our
operations are subject to greater scrutiny by bank regulatory agencies than
banks with longer operating histories. As a result, there is a greater
likelihood that some of our practices will be criticized and that we could be
required to implement operational changes that could increase the costs of our
operations or could require us to limit our rate of growth.
Also, due to the complex and technical nature of many of the government
regulations to which banks and bank holding companies are subject, inadvertent
violations can and do occur. In such event, we will be required to correct, or
implement measures to prevent a recurrence of, such violations. If more serious
violations were to occur, the regulatory agencies may limit our activities or
growth, fine us or ultimately put us out of business. Bank regulation can
hinder our ability to compete with financial services companies that are not
regulated or are less regulated. In particular, federally chartered banks may
be exempt from certain restrictions that may be imposed on us by state laws or
banking authorities.
Other Regulatory Requirements. In conducting various aspects of our business,
we are also subject to various laws and regulations relating to commercial
transactions generally, such as the Uniform Commercial Code, and electronic
funds transfer rules embodied in Regulation E promulgated by the Federal
Reserve Board. Due to the expansion of Internet banking, it is possible that
any of these or other government agencies could revise existing regulations or
adopt new regulations governing or affecting our ability to conduct our
business over the Internet. It is also possible that Congress or individual
states could enact laws regulating Internet banking. Congress has held hearings
on whether to regulate providers of services and transactions over the
Internet. If enacted, such laws, rules and regulations could harm our business,
operating results and financial condition by restricting the services we can
provide or increasing the costs of providing banking services over the
Internet.
Banking regulations could discourage changes in our ownership.
Before anyone can acquire enough voting stock to exercise control over a bank
holding company like Pacific Mercantile Bancorp, bank regulatory agencies must
approve the acquisition. A shareholder must apply for regulatory approval to
own 10% or more of our common stock, unless the shareholder can show that he or
she will not actually exert control over us. In no case can a shareholder own
more than 25% of our common
14
<PAGE>
stock without applying for regulatory approval. These regulations could delay
and possibly discourage a potential acquiror who would have been willing to pay
a premium price to amass a large block of our common stock. That in turn could
decrease the value of our common stock and the price that you will receive if
you sell your shares in the future.
We may have the need for additional capital in the future, but that capital may
not be available when it is needed or may dilute our shareholders.
We anticipate that our existing capital resources and the net proceeds from
the sale of shares in this offering will satisfy our foreseeable capital
requirements. However, the funds generated by this offering could be
insufficient to fund our future operating requirements. In that event, we would
have to raise additional funds through public or private financings or, in the
alternative, curtail our growth and reduce our assets. Our ability to raise
additional capital in the future when we need it will depend on conditions in
the capital markets, which are outside of our control and on our financial
performance. We may not be able to complete such additional financings at all
or on favorable terms. Additional equity financings would result in the
dilution of your shares. Also, if adequate capital cannot be obtained, we will
be subject to increased regulatory supervision and the imposition of
restrictions on our growth and our business, which could result in increases in
operating expenses and reductions in revenues that would harm our operating
results.
We may be subject to liability risks that are not covered by insurance.
We are subject to a variety of liability risks that can arise from our
operations. We currently maintain a general commercial and umbrella liability
policy covering claims of up to $6,000,000. In addition, the FDIC insures
deposits to a maximum of $100,000 per depositor. If a successful claim were
brought against us in excess of any available insurance coverage, our business,
operating results and financial condition could be materially adversely
affected.
We may engage in business combinations that may dilute shareholders, divert
management attention, or cause integration difficulties.
Our management may elect to pursue our growth strategy by acquiring or
combining with other banks or related businesses. Such combinations may be
structured as stock or cash transactions or as a combination of the two.
Business combinations are extremely time consuming and expensive and, in the
case of bank acquisitions, subject to extensive regulatory control. We cannot
assure you that any business combinations will be consummated. In addition,
business combinations can cause substantial dilution in the investment of the
existing shareholders and can result in a significant drop in our stock price
if market perceptions of the combination are not favorable. Following a
business combination, it is necessary to integrate the two businesses, which is
always time consuming and often difficult. Many business combinations are a
result of intensely competitive bidding and our management may find itself
under severe pressure to increase our bid for a particular business. For
financing or legal reasons, we may be required to divest ourselves of certain
assets in order to consummate a business combination or to increase leverage by
borrowing. Any such events could have an adverse impact on our short term
operating results and, therefore, on our stock price. We cannot assure you that
any business combination we may attempt to consummate will have a positive
effect on our business or financial condition.
We do not intend to pay cash dividends.
We do not intend to pay cash dividends in the foreseeable future, as we
expect to apply any earnings to developing and expanding our business. Our
ability to pay dividends is also restricted by government regulations that
apply to us and to Pacific Mercantile Bank. See "Dividend Policy."
15
<PAGE>
Quoted prices for Pacific Mercantile Bank's common stock may not be a reliable
indicator of the value of our shares.
The Pacific Mercantile Bank's shares are quoted on the NASDAQ OTC Bulletin
Board and trade on an infrequent basis in the over-the-counter market. Prices
quoted on the NASDAQ OTC Bulletin Board do not necessarily reflect actual
market transactions. Moreover, the limited trading activity in those shares,
combined with the lack of market research on Pacific Mercantile Bank, means
that the prices quoted on the NASDAQ OTC Bulletin Board are not necessarily
based on, and do not necessarily correspond to, established criteria of value,
such as earnings, assets or prospects for our business, and are therefore not
necessarily indicative of the prices at which our shares will trade following
completion of this offering.
Our shares will be subject to stock price volatility.
The trading price of our common stock could be subject to significant
fluctuations in response to a variety of factors, many of which are not
directly related to our future performance and many of which are beyond our
ability to control. As a result, we cannot assure you that the market price of
our common stock will not decline below the price at which we sell shares in
this offering. Factors that may affect the trading price of our common stock
include quarterly variations in our actual or anticipated operating results,
changes in market or economic conditions generally or within the markets in
which we operate, changes in national monetary policies or in market rates of
interest, changes in banking regulations, competitive developments and changes
in investor perceptions of the attractiveness of certain industries or certain
types of investments. In recent years, significant price and volume
fluctuations have occurred in stock prices that often have been unrelated or
disproportionate to the operating performance of the affected companies.
We may be unable to sustain an active trading market for our common stock.
We have applied for the listing of our common stock on the NASDAQ National
Market. However, we cannot assure you that such listing will be obtained or,
whether or not such a listing is obtained, that an active trading market for
our common stock will develop or be sustained following completion of this
offering. The absence of an active trading market can make it more difficult
for shareholders to sell their shares, can add to stock price volatility and
depress the trading price of our shares. Active trading in our stock is likely
to depend on a number of factors, including the quality and quantity of
research coverage on our common stock, the number and quality of market makers
quoting our stock and our ability to develop and maintain an active and
effective shareholder relations program. We cannot assure you that the elements
required to sustain an active trading market in our common stock will be
present at any time after the offering.
A significant number of shares are eligible for sale, which could depress our
stock price.
The ability of existing shareholders to freely sell a significant number of
their shares could cause the trading price of our stock to decline. After this
offering, there will be 6,720,162 shares of our common stock outstanding, of
which approximately 55% will be held by existing shareholders and will become
eligible for resale in the public trading market beginning on the date of this
prospectus. Existing shareholders owning a total of 523,047 of our shares have
agreed not to sell those shares for a period of 180 days after the date of this
prospectus without the prior written consent of Paulson Investment Company,
Inc. Upon expiration of the 180-day lock-up period, those shares will become
available for sale in the public market (subject to certain volume restrictions
imposed by federal securities laws). On the first anniversary of this offering,
an additional 300,000 shares, which may be acquired on exercise of underwriters
warrants to be issued in connection with this offering, will become eligible
for sale. See "Shares Eligible for Future Sale" for additional information on
the number of shares that will be eligible for sale in the public market
following this offering.
16
<PAGE>
You will incur dilution.
If you purchase shares of our common stock in this offering, you will incur
immediate dilution in the pro forma per share net tangible book value of those
shares. We estimate this dilution to be approximately $5.82 per share, or
approximately 42%, assuming an offering price of $13.75 per share. If options
to purchase our common stock are exercised by the persons holding those
options, you would incur dilution of $6.06 per share or approximately 44%. See
"Dilution" for a description of how dilution has been calculated.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements. These statements can be identified by the use of forward-looking
terms such as "may," "will," "expect," "anticipate," "estimate," "continue" or
other similar words. These statements discuss future expectations, projections
of results of operations or of financial condition or state other "forward-
looking" information. When considering these forward-looking statements, you
should keep in mind the risk factors and other cautionary statements in this
prospectus. The risk factors noted under the heading "Risk Factors" and other
factors noted throughout this prospectus could cause our actual results to
differ materially from those contained in any forward-looking statement.
THE HOLDING COMPANY REORGANIZATION
We were incorporated on January 7, 2000 to acquire and thereby to become the
parent holding company for Pacific Mercantile Bank. Prior to completion of this
offering, we will acquire PM Bank by means of a merger as a result of which it
will become our wholly-owned subsidiary and its shareholders will become our
shareholders, receiving one share of our common stock for each PM Bank share
that they own (the "Holding Company Reorganization"). As a result, these
shareholders will own the same number and percentage of our shares as they had
owned in PM Bank. Prior to that merger, PM Bancorp will have only nominal
assets and will not have conducted any business.
All financial information included herein has been restated as if the Holding
Company Reorganization was effective for all periods presented. Additionally,
per share data, and the number of our common shares outstanding for all periods
presented, give retroactive effect to a two-for-one stock split of PM Bank's
outstanding shares that became effective on April 14, 2000.
PM Bank's Board of Directors decided to establish Pacific Mercantile Bancorp
as the parent holding company of PM Bank because they believe that a bank
holding company will have greater flexibility in financing its capital
requirements, acquiring other banks and financial service businesses and
increasing the variety of financial services that we can offer to customers.
However, PM Bank will continue its present business and operations under the
name "Pacific Mercantile Bank." There will be no changes in the management, the
assets or operations, or in the locations of the offices of PM Bank as a result
of the Holding Company Reorganization. Also, our consolidated capitalization,
assets, liabilities, income and financial statements immediately following the
Holding Company Reorganization will be substantially the same as those of PM
Bank immediately prior to the consummation of that reorganization.
The Holding Company Reorganization has been approved by PM Bank's
shareholders and by the Federal Reserve Board, the California Commissioner of
Financial Institutions and the FDIC. Under applicable law, PM Bank shareholders
do not have appraisal or dissenters' rights in connection with the Holding
Company Reorganization.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares in this offering will be
approximately $37,550,000 million, assuming an initial public offering price of
$13.75 per share, an underwriting discount of $2,887,500 and offering expenses
of $812,500. We intend to use these net proceeds as follows:
<TABLE>
<CAPTION>
Amount Percentage
----------- ----------
<S> <C> <C>
Capital contribution to PM Bank......................... $27,550,000 73.4%
General corporate purposes, including acquisitions of
other banks and funding of working capital
requirements............................................ 10,000,000 26.6%
----------- -----
$37,550,000 100.0%
=========== =====
</TABLE>
The capital contribution to PM Bank will increase its single borrower loan
limits which will enable it to offer larger loans to its customers. The
proceeds from that capital contribution will be used primarily to fund loans
and interest earning investments, to conduct additional marketing programs, to
enhance the functionality of our Internet and computerized banking systems, to
add new products and services and to fund the costs of establishing additional
branch offices. We also may use a portion of the proceeds to acquire other
banks to extend our service area when opportunities to do so present
themselves. However, at this time we are not in discussions or negotiations
with any prospective acquisition candidates.
The allocations of the net proceeds set forth in the table above represent
our current estimate of the amounts we will spend on each of the above
categories and are subject to change at our discretion based on actual results
of operations and capital requirements. The actual use of the net proceeds of
this offering may vary substantially from that set forth above.
Pending the uses of the net proceeds, we intend to invest those proceeds in
short term, interest bearing investment grade securities.
TRADING HISTORY
Pacific Mercantile Bancorp has recently been organized to become the parent
holding company for PM Bank, and there has been no trading our shares. We have
applied for quotation of our shares on the NASDAQ National Market under the
symbol "PMBC" effective on the commencement of this offering.
PM Bank's shares have been quoted on the NASDAQ OTC Bulletin Board since
January 14, 2000 under the symbol "PQBH." However, trading has been limited and
sporadic and prices quoted do not necessarily represent actual transactions.
Between that date and May 8, 2000, the sales prices of PM Bank's shares have
ranged from a low of $7.25 to a high of $13.9375 and the most recent sale
during that period took place on May 8, 2000 at a price of $10.875. All of
these prices have been adjusted to give retroactive effect to PM Bank's two-
for-one stock split that became effective on April 14, 2000.
DIVIDEND POLICY
We currently intend to retain any future earnings to increase our capital and
finance the growth and development of our business. We therefore do not
anticipate paying any cash dividends in the foreseeable future. For the
foreseeable future, PM Bank will be the only source of funds from which
dividends can be paid. Regulations of federal and state government agencies
that have supervisory authority over PM Bank place limits on the ability of PM
Bank to pay cash dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as if the Holding Company
Reorganization had occurred as of March 31, 2000 and on an as adjusted basis to
give effect to the sale of shares in this offering at an assumed offering price
of $13.75 per share and the receipt of the net proceeds from that sale.
<TABLE>
<CAPTION>
At March 31, 2000
------------------------
As
Actual Adjusted
----------- -----------
(unaudited)
<S> <C> <C>
Shareholders' equity:
Preferred shares, no par value; 2,000,000 shares
authorized; no shares issued or outstanding........ $ -- $ --
Common shares, no par value; 10,000,000 shares
authorized and 3,720,162 shares issued and
outstanding (actual); 10,000,000 shares authorized
and 6,720,162 shares issued and outstanding (as
adjusted).......................................... 19,019,200 56,569,200
Accumulated deficit................................. (3,234,700) (3,234,700)
Accumulated comprehensive loss...................... (11,800) (11,800)
----------- -----------
Total shareholders' equity......................... $15,772,700 $53,322,700
=========== ===========
</TABLE>
Common shares outstanding excludes 725,906 shares reserved for issuance
pursuant to our stock option plan. At March 31, 2000, options to purchase a
total of 380,106 of our shares at an exercise price of $4.00 per share, and
options covering 280,700 shares at an exercise price of $6.75 per share, were
outstanding under that plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000, which gives
retroactive effect to the Holding Company Reorganization and PM Bank's two-for-
one stock split, as if they had occurred on March 31, 2000, was approximately
$15,772,700, or $4.24 per share of common stock. Net tangible book value per
share represents the amount of our pro forma total tangible assets less total
liabilities, divided by the number of shares of our common stock that would
have been outstanding as of March 31, 2000 had the Holding Company
Reorganization and PM Bank's two-for-one stock split become effective on that
date.
The dilution in our pro forma net tangible book value per share represents
the difference between the per share amount paid for shares sold in this
offering, and the net tangible book value per share immediately after
completion of this offering. After giving effect to the sale of 3,000,000
shares of common stock in the offering at an assumed public offering price of
$13.75 per share, and deducting the anticipated underwriting discount and
estimated offering expenses payable by us, our pro forma net tangible book
value would have been $53,322,700, or $7.93 per share, at March 31, 2000. This
will represent an immediate increase in our net tangible book value of $3.69
per share to existing stockholders and an immediate dilution or reduction in
the net tangible book value of $5.82 per share to investors purchasing common
stock in this offering. These changes are illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per common share................. $13.75
Net tangible book value per share at March 31, 2000.......... $4.24
Increase per share attributable to new investors............. $3.69
-----
Net tangible book value per common share after this offering... $ 7.93
------
Dilution per common share to new investors..................... $ 5.82
======
</TABLE>
The following table compares the number of PM Bancorp shares that will be
owned by the existing shareholders of PM Bank who will become our shareholders
on completion of the Holding Company Reorganization, together with the
effective prices they paid for such shares, with the number of PM Bancorp
shares to be purchased and the prices that will be paid for such shares in this
offering, assuming that the offering price per share will be $13.75:
<TABLE>
<CAPTION>
Total
Shares Purchased(1)(2) Consideration(3) Average
------------------------ ------------------- Price Paid
Number Percent Amount Percent Per Share(3)
------------ ----------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 3,720,162 55.4% $19,361,900 31.9% $ 5.20
New investors........... 3,000,000 44.6% 41,250,000 68.1% $13.75
------------ --------- ----------- -----
Total................. 6,720,162 100.00% $60,611,900 100.0%
============ ========= =========== =====
</TABLE>
- --------
(1) The number of shares held by the existing shareholders gives retroactive
effect to the completion of the Holding Company Reorganization and PM
Bank's two-for-one stock split as if they had occurred as of March 31,
2000.
(2) The number of shares excludes shares that will be issuable on exercise of
currently outstanding stock options, as follows: 380,106 shares that are
exercisable at a price of $4.00 per share, and 280,700 shares that are
exercisable at $6.75 per share. To the extent that these options are
exercised, there will be further dilution to new investors.
(3) Does not reflect any deductions of any underwriting discounts or other
offering expenses.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the periods presented is derived
from our financial statements, including the accompanying notes, that have been
audited by Arthur Andersen LLP, independent public accountants, and that are
included elsewhere in this prospectus. The selected financial data gives
retroactive effect to the Holding Company Reorganization, which will become
effective prior to the completion of this offering. The selected financial data
should be read together with those audited financial statements and the section
of this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Inception Quarter Ended
Year Ended (May 29, 1998) March 31,
December 31, to December 31, ---------------------
1999 1998(1) 2000 1999
------------ --------------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Total interest income.... $ 2,100,100 $ 2,600 $1,806,600 $ 66,300
Total interest expense... 880,000 -- 774,700 6,300
----------- --------- ---------- ---------
Net interest income...... 1,220,100 2,600 1,031,900 60,000
Provision for loan
losses.................. 750,000 -- 100,000 30,000
----------- --------- ---------- ---------
Net interest income after
provision for loan
losses.................. 470,100 2,600 931,900 30,000
Non-Interest income...... 131,600 -- 153,700 --
Non-Interest expense..... (3,351,300) (243,600) 1,327,100 397,300
----------- --------- ---------- ---------
Loss before income
taxes................... (2,749,600) (241,000) (241,500) (367,300)
Income tax expense....... (600) (1,200) (800) (800)
----------- --------- ---------- ---------
Net loss ................ $(2,750,200) $(242,200) $ (242,300) $(368,100)
=========== ========= ========== =========
Net loss per share, basic
and diluted............. $ (1.12) N/A $ (0.07) $ (0.51)
=========== ========= ========== =========
Weighted average number
of shares outstanding
basic and diluted....... 2,466,114 N/A 3,720,162 720,106
=========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------- March 31,
1999 1998 2000
----------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents(2).............. $38,498,200 $ 177,300 $ 38,706,300
Total loans (net of allowance for loan
losses)(3)............................... 47,043,200 -- 74,698,200
Total assets.............................. 91,165,400 340,000 119,160,600
Total deposits............................ 74,500,200 -- 102,969,000
Total shareholders' equity (deficit)...... 16,018,400 (242,200) 15,772,700
</TABLE>
- --------
(1) For accounting purposes, the inception of PM Bancorp is deemed to have
occurred in May 1998, when the organizers of PM Bank established an
organizing committee to file necessary applications for regulatory
approvals and begin preparations for the opening of PM Bank. Pursuant to
those regulatory approvals, PM Bank was incorporated in November 1998 and
it received its charter and commenced banking operations on March 1, 1999.
As a result, no shares were outstanding and we generated no revenues from
operations prior to March 1, 1999.
(2) Cash and cash equivalents include cash and due from other banks and federal
funds sold.
(3) Includes loans held for sale of $2,700,000 at December 31, 1999 and
$11,724,600 at March 31, 2000.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
For accounting purposes, the inception of Pacific Mercantile Bancorp is
deemed to have occurred on May 29, 1998, the date when the organizers of PM
Bank established an organizing committee to file necessary applications for
regulatory approvals and begin preparations for the opening of PM Bank.
Pursuant to those regulatory approvals, PM Bank was incorporated in November
1998 and it received its charter, completed the initial issuance and sale of
its shares and commenced banking operations on March 1, 1999. As a result,
prior to March 1, 1999, PM Bank had no shares outstanding and generated no
revenues from operations. During the period from May 29, 1998 to February 28,
1999, our expenses consisted of the portion of our organizational expenses and
start up costs that, under generally accepted accounting principles, were
required to be expensed, rather than capitalized. Due to the absence of
operations during the period from inception to December 31, 1998, the following
discussion will focus primarily on our operating results in 1999 and in the
first quarter of 2000, and our financial condition as of December 31, 1999 and
March 31, 2000.
For the year ended December 31, 1999, we sustained a net loss of $2,750,200,
or $1.12 per share. Contributing to that loss was a provision, or charge to
income, of $750,000 to establish PM Bank's allowance for possible loan losses,
and non-interest expenses of $3,351,300, which includes $210,000 of non-
recurring organizational and start-up costs that were expensed during the two
months ended February 28, 1999. The provision for possible loan losses, coupled
with our non-interest expenses, more than offset our net interest income of
$1,220,100, earned during the ten months from commencement of our banking
operations to December 31, 1999.
Since 1999 was the first year of our operations, our results of operations
were more significantly affected by startup and other non-recurring costs than
we would expect will be the case in future periods. Moreover, we expect to
realize further growth in subsequent periods that will alter the nature of our
operations. Accordingly, our 1999 results are not necessarily indicative of our
results in future periods.
During the three months ended March 31, 2000, our interest income and net
interest income were $1,806,600 and $1,031,900, respectively. During the same
quarter of 1999, we did not commence operations until March 1, 1999 and,
therefore, a comparison of financial results between the first quarter of 2000
and the first quarter of 1999 does not provide meaningful information. However,
our net loss for the quarter ended March 31, 2000 declined to $242,300, or
$0.07 per share, from a net loss of $368,100, or $0.51 per share, for the
quarter ended March 31, 1999. Moreover, the net loss for the quarter ended
March 31, 2000 represents a significant improvement in operating results as
compared to the quarter ended December 31, 1999, when we incurred a net loss of
$1,191,500, or $0.33 per share.
Results of Operations
Year ended December 31, 1999 and Quarter ended March 31, 2000
Net Interest Income. Net interest income, the major source of our operating
income, represents the difference between interest earned from interest earning
assets and the interest paid on interest bearing liabilities. Net interest
income, when expressed as a percentage of total average interest earning
assets, is referred to as the net interest margin.
Net interest income for the year ended December 31, 1999 was $1,220,100 and
included $65,400 of interest earned on the proceeds of the sales of shares in
two public stock offerings completed by PM Bank in 1999 while those proceeds
were held in an escrow account pending completion of those offerings. Our net
interest margin for the year ended December 31, 1999 was 3.31% (excluding the
interest on those escrow accounts).
22
<PAGE>
At December 31, 1999, approximately 42% of our assets were invested in
federal funds and approximately 48% in gross loans. Typically, as a bank grows,
the mix of earning assets shifts out of lower earning federal funds into higher
earning loans, thereby increasing net interest margins. We expect loans to
increase in absolute dollars during the current fiscal year. However, due to
the increase in our assets that will result from the receipt of the proceeds of
this offering, we expect that loans will decline as a percentage of total
assets during the current fiscal year.
Net interest income for the three months ended March 31, 2000 was $1,031,900,
nearly as much as for the preceding 10 months of 1999. The increase was largely
attributable to increases in the volume of loans and other earning assets and,
to a lesser extent, a change in the mix of earning assets to a greater
proportion of loans on which were earn higher rates of interest. At March 31,
2000 our total earning assets were $113,754,800 as compared to $87,815,000 at
December 31, 1999, an increase of 30%. Loans as a percentage of interest
earning assets increased to 66.4% at March 31, 2000 as compared to 54.4% at
December 31, 2000.
Provision for Loan Losses. During the year ended December 31, 1999, we made a
provision for loan losses of $750,000 in order to create its allowance for loan
losses. At December 31, 1999, that allowance represented 1.6% of our gross
loans.
Due to the increase in outstanding loans during the quarter ended March 31,
2000, we made a provision for loan losses in that quarter of $100,000. At March
31, 2000 our allowance for loan losses represented 1.3% of gross loans
outstanding.
Noninterest Income. Noninterest income consists of service charges on deposit
accounts, mortgage banking income and other noninterest income. Most of our
non-interest income in the year ended December 31, 1999 and in the quarter
ended March 31, 2000 was attributable to loan origination and processing fees
and yield spread premium generated primarily by our mortgage banking division
which originates conforming and non-conforming, agency quality, residential
first and home equity mortgage loans.
Noninterest Expense. Total noninterest expense for the year ended December
31, 1999 was $3,351,300, of which salaries and employee benefits represented
$1,836,500. Other operating expense primarily consisted of stationary and
supplies, advertising and messenger services and check charges for customers.
For the 12 months ended December 31, 1999, noninterest expense, as a percentage
of average interest earning assets, was 9.61%.
For the quarter ended March 31, 2000, non-interest expense was $1,327,100, of
which salaries and employee benefits represented $731,000. For the three months
ended March 31, 2000, noninterest expense, as a percentage of average interest
earning assets, determined on an annualized basis, was 5.18%.
Quarterly Results of Financial Operations
The following table sets forth certain unaudited quarterly statements of
operations data for each of the five quarters in the period ended March 31,
2000. This information has been derived from our unaudited financial
statements, which, in our opinion, have been prepared on the same basis as our
audited financial statements, and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with our financial statements and related notes included elsewhere
in this prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1999 1999 1999 1999 2000
--------- -------- ------------- ------------ ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Total interest income... $64,700 $387,500 $651,600 $ 996,300 $1,806,600
Total interest expense.. 6,400 199,800 291,400 382,400 774,700
Net interest income..... 58,300 187,700 360,200 613,900 1,031,900
Provision for loan
losses................. 30,000 90,000 130,000 500,000 100,000
Non-Interest expense.... 398,200 584,000 974,600 1,394,500 1,327,100
Loss before income
taxes.................. 368,200 484,900 704,800 1,191,700 241,500
Net loss................ 368,200 485,700 704,800 1,191,500 242,300
</TABLE>
23
<PAGE>
Since we commenced operations on March 1, 1999, the first quarter includes
only one month of actual operations. The increase in the loss in the third
quarter as compared to the second quarter was due primarily to increases in
salaries and employee benefit expense associated with the opening of our San
Clemente banking office and the addition of a mortgage banking division. The
increase in the loss in the fourth quarter as compared to the prior two
quarters was due primarily to increases in salaries and employee benefit
expense and a $500,000 provision made to increase our allowance for loan
losses. During the fourth quarter our assets grew to $91,165,400 from
$58,463,100 at September 30, 1999 and our loans grew to $47,043,200 from
$16,911,500 at September 30, 1999. As a result, during the fourth quarter we
continued to add personnel needed to manage that growth and we increased our
allowance for possible loan losses to bring that allowance to 1.6% of loans
outstanding.
Financial Condition
Assets. Our assets totaled $91,165,400 at December 31, 1999 and $119,160,600
at March 31, 2000. The following table sets forth information regarding PM
Bank's average balance sheet, yields on interest earning assets, interest
expense on interest bearing liabilities, the interest rate spread and the
interest rate margin for the year ended December 31, 1999. The average yields
and rates represent the annualized rates. Average balances are calculated based
on average daily balances.
<TABLE>
<CAPTION>
Average Interest Average
Balance Earned/Paid Yield/Rate
----------- ----------- ----------
<S> <C> <C> <C>
Interest earning assets:
Short-term investments.................... $24,140,500 $1,283,800 5.32%
Securities available for sale............. 926,200 56,500 6.10%
Loans..................................... 9,801,400 759,800 7.75%
----------- ---------- ----
Total earning assets.................... 34,868,100 2,100,100 6.02%
---------- ----
Non-Interest earning assets................. 2,435,400
-----------
Total assets.............................. $37,303,500
===========
Interest bearing liabilities:
Interest bearing checking accounts........ $ 740,500 15,400 2.08%
Money market and savings accounts......... 10,155,000 448,500 4.42%
Certificates of deposit................... 8,618,600 416,100 4.83%
----------- ---------- ----
19,514,100 880,000 4.51%
---------- ----
Non-Interest bearing liabilities............ 9,485,600
-----------
Total liabilities......................... 28,999,700
Shareholders' equity........................ 8,303,800
-----------
Total liabilities and shareholders'
equity................................... $37,303,500
===========
Net interest earning........................ $1,220,100
==========
Interest rate spread........................ 1.51%
====
Net interest margin......................... 3.50%
====
</TABLE>
Loans Held for Sale. Loans intended for sale in the secondary market totaled
$2,700,000 at December 31, 1999 and $11,724,600 at March 31, 2000. This
increase was attributable primarily to the purchase of $9,370,800 of
residential mortgage loans from an unrelated mortgage banking company during
the quarter ended March 31, 2000. These loans are carried at the lower of cost
or estimated fair value in the aggregate. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income.
Loans. Loans outstanding at December 31, 1999 and March 31, 2000 were made to
customers in Southern California, the primary market areas being Orange and Los
Angeles Counties. The greatest concentration was in real estate loans and
commercial loans, which represent 61% and 24% of the portfolio, respectively,
at December 31 2000 and 67.7% and 27.4%, respectively, of the loan portfolio at
March 31, 2000.
24
<PAGE>
We purchased 13 real estate loans in November and December of 1999 from a
third party with a par value of $19,394,900 at a premium of $290,900. The loans
were recently originated, have terms of 10 to 30 years, are primarily variable
rate and are secured by multi-family real estate. Commercial loans are
primarily secured by real property and other business assets.
The loan portfolio consisted of the following at December 31, 1999:
<TABLE>
<S> <C>
Real estate loans............................................... $30,653,600
Commercial loans................................................ 10,471,600
Construction loans.............................................. 90,600
Consumer loans.................................................. 3,815,200
-----------
45,031,000
Allowance for loan losses..................................... (750,000)
Deferred loan origination costs, net.......................... 62,200
-----------
Loans, net.................................................. $44,343,200
===========
</TABLE>
The following table sets forth the maturity and repricing distribution of PM
Bank's loan portfolio (excluding consumer loans) at December 31, 1999:
<TABLE>
<CAPTION>
Over One
Year
One Year Through Over Five
or Less Five Years Years Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Real estate loans
Floating rate................ $ 771,400 $ 287,600 $27,405,100 $28,464,100
Fixed rate................... 51,700 1,520,500 617,300 2,189,500
Commercial loans
Floating rate................ 4,091,700 3,077,400 150,000 7,319,100
Fixed rate................... 1,149,800 1,701,400 301,300 3,152,500
Construction loans
Floating rate................ 90,600 -- -- 90,600
Fixed rate................... -- -- -- --
---------- ---------- ----------- -----------
$6,155,100 $6,586,900 $28,473,800 $41,215,800
========== ========== =========== ===========
</TABLE>
Allowance for Loan Losses. The risk that borrowers will fail or be unable to
repay their loans is an inherent part of the banking business. In order to
recognize on a timely basis, to the extent practicable, losses that can result
from such failures, banks establish reserves or an "allowance" for possible
loan losses by means of periodic charges to income known as "provisions for
loan losses" which, when made, are recorded as a current expense. Loans are
charged against the allowance for loan losses when management believes that
collection of the carrying amount of the loans has become unlikely. Periodic
additions are made to the allowance (i) to replenish and thereby maintain the
adequacy of the allowance following the incurrence of loan losses, and (ii) to
increase the allowance in response to increases in the volume of outstanding
loans and deteriorations in economic conditions or in the financial condition
of borrowers. PM Bank, like other banks, evaluates the adequacy of, and make
provisions in order to maintain or increase, its allowance for possible loan
losses on a quarterly basis. As a result provisions for possible loan losses
will represent a recurring expense in future periods.
The allowance for loan losses at December 31, 1999 was $750,000, which
represented 1.6% of outstanding loans at that date. At March 31, 2000 the
allowance had been increased to $850,000, which represented 1.3% of outstanding
loans as of that date. We carefully monitor changing economic conditions, the
loan portfolio by category, our borrowers' financial condition and the history
of the portfolio in determining the adequacy of the allowance for loan losses.
We are not currently aware of any information leading us to believe that there
will be material deterioration in our loan portfolio, and believe that the
allowance for loan losses at March 31, 2000 is
25
<PAGE>
adequate to provide for losses inherent in the portfolio. However, that
allowance was established on the basis of estimates developed primarily from
historical industry loan loss data, because we commenced operations in March
1999 and, therefore, lacked historical data relating to the performance of
loans in the loan portfolio. As a result, ultimate losses may vary from the
estimates used to establish the allowance. Additionally, as the volume of our
loans increase, additional provisions for loan losses will be required to
maintain the allowance for loan losses at levels we deem adequate. In addition,
if economic conditions were to deteriorate, it would become necessary to
increase the provision to an even greater extent.
We also evaluate loans for impairment, where principal and interest is not
expected to be collected in accordance with the contractual terms of the loan
agreement. We measure and reserve for impairment on a loan by loan basis using
either the present value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. As of December 31, 1999 PM Bank had no loans classified
as impaired. We exclude from our impairment calculations smaller, homogeneous
loans such as consumer installment loans and lines of credit. Also, loans that
experience insignificant payment delays or payment shortfalls are generally not
considered impaired.
A summary of the transactions in the allowance for loan losses for the year
ended December 31, 1999 is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1998..................................... $ --
Provision for loan losses...................................... 750,000
Recoveries..................................................... --
Amounts charged off............................................ --
--------
Balance, December 31, 1999..................................... $750,000
========
Ratio of the allowance for loan losses to loans outstanding at
December 31, 1999............................................. 1.6%
Ratio of the allowance for loan losses to nonaccrual loans at
December 31, 1999............................................. 0.0%
Ratio of net charge-offs to average loans...................... 0.0%
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses by loan category as of December 31, 1999:
<TABLE>
<S> <C>
Real estate loans............................................... $127,000
Commercial loans................................................ 43,400
Consumer loans.................................................. 60,000
Unallocated..................................................... 519,600
--------
Balance, December 31, 1999...................................... $750,000
========
</TABLE>
While management has allocated the allowance to various loan categories, the
allowance is general in nature and is available for the loan portfolio in its
entirety.
Nonperforming Assets. There were no nonaccrual loans, restructured loans or
loans which were considered impaired at December 31, 1999 or March 31, 2000.
Deposits. Total deposits were $74,500,200 at December 31, 1999 which included
$21,782,100 of certificates of deposit of $100,000 or more. At March 31, 2000
total deposits had increased to $102,969,000, which included $25,913,500 of
certificates of deposits of $100,000 or more.
26
<PAGE>
Set forth below is maturity schedule of domestic time certificates of
deposits of $100,000 or more outstanding at December 31, 1999:
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Three Months or Less.......................................... $20,484,000
Over Three through Six Months................................. 910,000
Over Six through Twelve Months................................ 200,000
Over Twelve Months............................................ 188,000
-----------
$21,782,000
===========
</TABLE>
Liquidity
Our liquidity needs are actively managed to insure sufficient funds are
available to meet the ongoing needs of our customers. We project the future
sources and uses of funds and maintain sufficient liquid funds for
unanticipated events. The primary sources of funds include payments on loans,
the sale or maturity of investments and the growth in deposits. The primary
uses of funds includes funding new loans, making advances on existing lines of
credit, purchasing investments, funding deposit withdrawals and paying
operating expenses. We maintain funds in overnight federal funds and other
short-term investments to provide for short term liquidity needs.
Cash flow from financing activities, primarily representing increases in
deposits and proceeds from the sale of common stock, totaled $93,049,400 for
the year ended December 31, 1999. Net cash used in operating activities,
primarily representing the net loss for the year, totaled $1,636,200. Net cash
used in investing activities, primarily representing increases in loans,
totaled $53,092,300.
At March 31, 2000, liquid assets, which included cash and due from banks,
federal funds sold, interest bearing deposits with financial institutions and
unpledged securities available for sale (excluding Federal Reserve Bank stock)
totaled $41,283,000, or 35% of total assets.
Although we do not have any material commitments to make capital
expenditures, we anticipate that we will experience a substantial increase in
our capital expenditures along with our working capital needs as a result of
our anticipated growth in operations, infrastructure and personnel. However, we
believe that our existing cash and cash equivalents, together with the proceeds
of this offering, will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
Investments and Investment Policy
Our investment policy, as established by the Board of Directors, is to
provide for our liquidity needs and to generate a favorable return on
investments without undue interest rate risk, credit risk or asset
concentrations.
We are authorized to invest in obligations issued or fully guaranteed by the
United States government, certain federal agency obligations, certain time
deposits, certain municipal securities and federal funds sold. It is our policy
that there will be no trading account. The weighted average maturity of
U.S. government obligations, federal agency securities and municipal
obligations cannot exceed five years. Time deposits must be placed with
federally insured financial institutions, cannot exceed $100,000 to any one
institution and must have a maximum maturity of twenty-four months.
Securities available for sale are those that we intend to hold for an
indefinite period of time but that may be sold in response to changes in
liquidity needs, changes in interest rates, changes in prepayment risks and
other similar factors. The securities are recorded at fair value, with
unrealized gains and losses excluded from earnings and reported as other
comprehensive income.
27
<PAGE>
The following is a summary of the major components of securities available
for sale and a comparison of carrying values, estimated fair values, gross
unrealized gains and losses and maturities at December 31, 1999:
<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Agency Securities:
Less than one year................. $ 750,000 $ -- $(2,100) $ 747,900
One to five years.................. 1,492,000 -- (6,300) 1,485,700
Federal Reserve Bank Stock......... 435,200 -- -- 435,200
---------- ----- ------- ----------
$2,677,200 $ -- $(8,400) $2,668,800
========== ===== ======= ==========
</TABLE>
The weighted average yield is 6.0% for securities maturing less than one
year, 6.3% for securities maturing in one to five years and 6.0% for Federal
Reserve Bank stock.
Asset/Liability Management
The objective of asset/liability management is to reduce our exposure to
interest rate fluctuations. We seek to achieve this objective by matching
interest-rate sensitive assets and liabilities, and maintaining the maturity
and repricing of these assets and liabilities at appropriate levels given the
interest rate environment. Generally, if rate sensitive assets exceed rate
sensitive liabilities, the net interest income will be positively impacted
during a rising rate environment and negatively impacted during a declining
rate environment. When rate sensitive liabilities exceed rate sensitive assets,
the net interest income will generally be positively impacted during a
declining rate environment and negatively impacted during a rising rate
environment. However, because interest rates for different asset and liability
products offered by depository institutions respond differently to changes in
the interest rate environment, the gap is only a general indicator of interest
rate sensitivity.
28
<PAGE>
The following table sets forth information concerning our rate sensitive
assets and rate sensitive liabilities as of December 31, 1999. Such assets and
liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms. Certain shortcomings are inherent in
the method of analysis presented in the following table. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees and at different times to
changes in market interest rates. Rates on some assets and liabilities change
in advance of changes in market rates of interest, while rates on other assets
or liabilities may lag behind changes in market rates of interest. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear in the table.
<TABLE>
<CAPTION>
Over Three Over One
Three Through Year Over Non-
Months Twelve Through Five Interest
or Less Months Five Years Years Bearing Total
----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing
deposits in other
financial
institutions........... $ 1,188,000 $ 198,000 $ -- $ -- $ -- $ 1,386,000
U.S. Govt. Agency
Securities............. -- 747,900 1,485,700 -- -- 2,233,600
Federal Reserve Bank
Stock.................. -- -- -- 435,200 -- 435,200
Federal Funds Sold...... 35,967,000 -- -- -- -- 35,967,000
Loans................... 29,773,200 8,130,000 7,611,000 1,529,000 -- 47,043,200
Non-interest earning
assets................. -- -- -- -- 4,100,400 4,100,400
----------- ----------- ----------- ----------- ------------ -----------
Total assets........... $66,928,200 $ 9,075,900 $ 9,096,700 $ 1,964,200 $ 4,100,400 $91,165,400
----------- ----------- ----------- ----------- ------------ -----------
Liabilities and
Shareholders' Equity:
Noninterest-bearing
deposits............... $ -- $ -- $ -- $ -- $ 16,607,800 $16,607,800
Interest-bearing
deposits............... 55,054,400 2,428,000 410,000 -- -- 57,892,400
Other liabilities....... -- -- -- -- 646,800 646,800
Shareholders' equity.... -- -- -- -- 16,018,400 16,018,400
----------- ----------- ----------- ----------- ------------ -----------
Total liabilities and
shareholders' equity... $55,054,400 $ 2,428,000 $ 410,000 $ -- $ 33,273,000 $91,165,400
----------- ----------- ----------- ----------- ------------ -----------
Interest rate
sensitivity gap........ $11,873,800 $ 6,647,900 $ 8,686,700 $ 1,964,200 $(29,172,600) $ --
=========== =========== =========== =========== ============ ===========
Cumulative interest rate
sensitivity gap........ $11,873,800 $18,521,700 $27,208,400 $29,172,600 $ --
=========== =========== =========== =========== ============
Cumulative % of rate
sensitive assets in
maturity period........ 73.41% 83.37% 93.35% 95.50% 100.00%
=========== =========== =========== =========== ============
Rate sensitive assets to
rate sensitive
liabilities............ 1.22 3.74 22.19 N/A N/A
=========== =========== =========== =========== ============
Cumulative ratio........ 1.23 1.32 1.47 1.50 N/A
=========== =========== =========== =========== ============
</TABLE>
At December 31,1999, our rate sensitive balance sheet was shown to be in a
positive gap position. This implies that our earnings would increase in the
short-term if interest rates rise and would decline in the short-term if
interest rates were to fall. However, as noted above, this may not necessarily
be the case depending on how quickly rate sensitive assets and liabilities
react to interest rate changes.
Market Risk
Market risk is the risk of loss to future earnings, to fair values of assets
or to future cash flows that may result from changes in the price or value of a
financial instrument. The value of a financial instrument may change as a
result of changes in interest rate and other market conditions. Market risk is
attributed to all market risk sensitive financial instruments, including loans,
investment securities, deposits and borrowings. We do not engage in trading
activities or participate in foreign currency transactions for our own account.
Accordingly, our exposure to market risk is primarily a function of our asset
and liability management activities and of changes in market rates of interest.
Changes in rates can cause or require increases in the rates we pay on deposits
that may take effect more rapidly or may be greater than the increases in the
interest rates we are able
29
<PAGE>
to charge on loans and the yields that we can realize on our investments. The
extent of that market risk depends on a number of variables including the
sensitivity to changes in market interest rates and the maturities of our
interest earning assets and our deposits. See "Asset/Liability Management."
Capital Resources
On March 1, 1999, PM Bank sold 2,090,628 shares of its common stock for
approximately $8,298,300 in an initial public offering, net of approximately
$64,200 in related expense. In November 1999, PM Bank completed a second
offering in which it sold a total of 1,629,534 shares for approximately
$10,720,900, net of approximately $278,500 in related expense.
PM Bank is required to comply with risk-based capital standards promulgated
by the bank regulatory authorities. Under federal regulations, it is currently
required to maintain a minimum ratio of total capital to risk-weighted assets
of eight percent, of which at least four percent must consist of Tier 1 capital
(consisting primarily of common stock and retained earnings, less intangibles).
In addition, federal regulations require banks generally to have a minimum
leverage capital ratio of at least four percent to be considered "adequately
capitalized." We believe that, as of March 31, 2000, PM Bank meets all capital
adequacy requirements to which it is subject.
The following table compares the actual capital ratios of PM Bank at December
31, 1999 to the capital ratios that PM Bank is required to meet under
applicable banking regulations.
<TABLE>
<CAPTION>
To be Well Capitalized Under
Prompt Corrective
Actual For Capital Adequacy Purposes Action Provisions
----------------- --------------------------------- ----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ---------------------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk
Weighted Assets....... $16,717,000 30.2% $4,422,500 (greater than or =)8.0% $5,528,200 (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets........ 16,026,800 29.0% 2,211,300 (greater than or =)4.0% 3,316,900 (greater than or =) 6.0%
Tier I Capital to
Average Assets......... 16,026,800 24.3% 2,632,400 (greater than or =)4.0% 3,290,500 (greater than or =) 5.0%
</TABLE>
We intend to retain any earnings to support our future growth and, therefore,
we do not intend to pay dividends for at least the foreseeable future. In
addition, PM Bank has agreed with the FDIC to maintain a Tier 1 Capital to
Average Assets ratio of at least eight percent until February 28, 2002.
Set forth below are certain ratios for the 12 months ended December 31, 1999
and the three months ended March 31, 2000.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------ ------------
<S> <C> <C>
Return on Average Assets........................... (7.37)% (0.23)%
Return on Average Equity........................... (33.12)% (1.52)%
Ratio of Equity to Average Assets.................. 22.26 % 14.93 %
</TABLE>
30
<PAGE>
BUSINESS
Overview
Prior to the completion of this offering we will own Pacific Mercantile Bank,
which will be our sole subsidiary. PM Bank is a California state chartered
commercial bank and is a member of the Federal Reserve System. The FDIC insures
its deposits. PM Bank, which commenced operations on March 1, 1999, seeks to
meet the banking requirements of small and medium size businesses and
professional firms, as well as individuals, by providing:
. a broad range of banking and financial service products, more typical of
larger banks, in order to gain a competitive advantage over independent
or community banks that do not provide the same range or breadth of
services that we are able to provide to our customers;
. a high level of personal service and responsiveness, more typical of
independent and community banks, giving us a competitive advantage over
large out-of-state and other large multi-regional banks that are unable
or, due to the expense involved, are unwilling, to provide that same
level of personal service to this segment of the banking market; and
. the added flexibility, convenience and efficiency of conducting banking
transactions with us over the Internet, which further differentiates us
from our competitors and will enable us to reduce the costs of providing
service to our customers.
We achieved rapid growth in our first year of operations. During 1999, we
opened two banking offices in Orange County, California, one in Newport Beach
in March and the other in San Clemente in August. In April 1999, we launched
our Internet Web site, at www.pmbank.com, where customers are able to conduct,
more conveniently and less expensively, many of their commercial banking and
other financial transactions with us, 24 hours a day, 7 days a week, using a
computer equipped with a current industry standard Web browser. As of March 31,
2000 our assets had grown to $119,160,600, deposits to $102,969,000, and we
were serving a total of 1,900 deposit customers, of which approximately 950
were conducting at least some of their banking transactions with us over the
Internet. Business customers accounted for approximately 81% of our deposits.
We also believe that, by offering a broad selection of banking and financial
services via the Internet, we are positioned to capitalize on the growing use
of the Internet to conduct financial and banking transactions. According to a
number of published reports, approximately 5 million households in the
United States are believed to have conducted online banking transactions in
1999 and that number is expected to grow to more than 10 million by 2001. At
the same time the FDIC reports that, although approximately 30% of the 3,000
federally insured banks and thrift institutions in the United States had Web
sites, only about 635 of those banks and thrift institutions offered their
customers the ability to conduct online banking transactions at their Web
sites.
We plan to expand our market area geographically by acquiring other
independent banks in Southern California and in major metropolitan areas of
other western states that have undergone banking consolidations similar to the
one that has occurred in California. We also plan to open "express business
banking offices" to establish a physical presence, offer traditional business
and consumer banking services, and market our Internet banking services in new
communities within and outside of Orange County. These offices, which will
range in size from 2,000, to 3,000 square feet (as compared to 4,000 to 7,000
square feet for a traditional branch banking office), are expected to cost
roughly one-half of the cost of establishing and operating a traditional branch
banking office. Because our computer and Internet systems make it possible to
conduct an increasing number of banking transactions from remote locations, we
believe that we can provide responsive and convenient business and consumer
banking services from these offices to customers within a 25 mile radius of
their locations.
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<PAGE>
Industry Background
The Banking Environment. According to data published by the FDIC, during the
period from 1970 to 1985, independent or community banks headquartered in
Southern California grew in number from 56 to 214, which included 46 banks that
were headquartered in Orange County. Independent and community banks offered an
alternative to larger multi-regional and multi-state banks, particularly for
small and medium size businesses and professional firms who desired to obtain,
and were willing to pay for, personalized and more responsive banking services.
By contrast, according to FDIC data, as of December 31, 1999, the number of
independent or community banks headquartered in Southern California had
declined to 139, of which only eight were headquartered in Orange County, due
principally to a consolidation that took place over roughly a five year period,
from 1994 to 1999, in which the large multi-regional and large out-of-state
banks acquired numerous independent and community banks in Southern California.
For a number of reasons, such as disruptions occasioned by the process of
integrating the acquired banks into their operations, their lack of familiarity
with the local communities in which the acquired banks had operated and a focus
on cutting expenses to justify the acquisition prices they had paid for the
acquired banks, these larger multi-regional and multi-state banks have been
unable or unwilling to continue the level of personal service that many of the
acquired banks had provided to their small and medium size business customers,
leaving many of them overlooked and underserved.
Additionally, during the past five years many larger California-based banks
have been acquired or have merged with large out-of-state banks and are, as a
result, now headquartered in other states. These include Bank of America, which
was acquired by Nations Bank, based in North Carolina; Wells Fargo Bank, which
merged with Norwest Bancorp, based in Minnesota; American Savings Bank and
Great Western Savings Bank, both of which were merged into Washington Mutual
Bank, based in the state of Washington; and Western Bancorp, which was acquired
by U.S. Bancorp, based in Minnesota. Similar consolidations have taken place in
Arizona, Nevada, Oregon and the state of Washington.
We believe one of the effects of this consolidation has been a deterioration
in the quality and responsiveness of the banking services that are provided to
small and medium size businesses, by both large out-of-state banks and the
independent and community banks that survived the consolidation. We believe
that these conditions have created an opportunity for us to capture a
meaningful share of this segment of the banking market from the large out-of-
state banks and also from local community banks by offering to customers a wide
range of innovative products and services and the added convenience of Internet
banking services designed to meet the special needs of small and medium size
businesses.
Location and Demographics of Our Service Area. We chose to locate our
headquarters and initial banking offices in Orange County, California for a
number of reasons. Orange County has a population of 2.8 million, with a
business community comprised of numerous small and medium size businesses and
service and professional firms that operate in a diverse number of industries.
According to the U.S. Bureau of Census, Orange County is the sixth largest in
population and the seventh most affluent county of the counties in the United
States with populations of more than 1,000,000 people. Additionally, the
demographics indicate that the Orange County community is underserved by the
independent segment of the banking industry. Based on data published by the
FDIC, there is only one locally headquartered bank in Orange County per 306,772
people. By comparison, there is one locally headquartered bank per 109,752
people in California as a whole and one locally headquartered bank per 31,845
people in the United States. Orange County is also centrally located within
Southern California, contiguous to three of the fastest growing counties, in
terms of population, in the region: Los Angeles County to the north, San Diego
County to the south and Riverside County to the east. In each of those counties
there are areas that have demographics similar to those in Orange County and,
because of their proximity, offer us attractive expansion opportunities. See
"Strategy."
The Internet Banking Opportunity. With the emergence of the Internet as a
globally accessible, fully interactive medium, many businesses, including many
small-to-medium size businesses that comprise our core
32
<PAGE>
market, are increasingly conducting business electronically, via the Internet.
Most businesses are equipped with, and their managements are familiar and
comfortable with using, computers to accomplish a growing number of tasks,
including completing commercial transactions via the Internet that can be
accomplished less expensively and more conveniently than in person or by
telephone or mail.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as an innovative means of providing financial services. As
finance-related Web sites continue to grow in popularity, many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the Internet.
The Internet also offers banks the opportunity to extend their customer base
beyond the practical geographical limitations of traditional branch banking
which require banks to open new offices in order to extend their service areas
and attract new customers. Customers are able to access a variety of banking
services and conduct numerous banking transactions, by connecting to a bank's
Web site via their personal computers at any time, day or night, without regard
to geographic distances or limitations. The Internet also offers banks a lower
cost alternative to provide banking services to customers who are comfortable
using the Internet for commercial and financial transactions.
Internet Demographics. We believe that the demographics of Internet users
will facilitate the growth of Internet banking. Internet users tend to be young
and mobile and thus more inclined to be comfortable with and receptive to the
convenience of online commercial transactions. Additionally, they tend to be
business managers or professionals with limited amounts of discretionary time
and therefore are attracted to the convenience of "one-stop shopping" for a
full range of financial services. As a result, we believe that, as these
individuals move into financial and other management positions with their
businesses or firms, they will insist on the convenience of being able to
conduct their business banking transactions over the Internet, resulting in
additional growth opportunities for banks equipped to provide such services. We
believe these demographics suggest a growing market for the convenience and
lower cost services that we are able to provide our business customers, as well
as consumers, via the Internet.
Strategy
Our strategy is:
. to offer personalized and responsive service combined with the added
convenience and flexibility of Internet banking services;
. to increase the variety of banking products and services that we offer
our customers in order to gain a competitive advantage over independent
and community banks; and
. to take advantage of our lower cost automated and Internet banking
systems to expand geographically into areas where the business and
banking demographics are similar to those of Orange County.
We intend to implement our strategy in the following ways.
Broad Selection of Products and Services. We offer a broad selection of
products and services primarily suited to the needs of our business customers
that are typically available only from larger multi-regional and out-of-state
banks.
Internet Banking Services. We offer customers the ability to access a number
of banking products and services through our Web site, www.pmbank.com, and to
conduct a number of banking transactions that in the past could only be
accomplished in person, over the telephone or by mail. Our Internet banking
services provide customers with the convenience of banking at any time, day or
night, seven days per week, using any personal computer that is equipped with a
current industry standard Web browser.
33
<PAGE>
Greater Convenience and Accessibility. We seek to provide our customers with
a higher level of convenience and access than can be obtained either from large
multi-regional and large out-of-state banks or from many other independent
banks, through a combination of full service branch banking offices, express
business banking offices that we intend to establish as part of our expansion
strategy, and Internet banking services that enable customers to choose the
ways in which, and the times at which, they will conduct banking transactions
with us. In addition, our Web site has been designed to be easy-to-use and to
expedite our customers' banking transactions.
High-Quality Service and Customer Satisfaction. We continually seek ways to
enhance customer satisfaction and provide a level of customer service generally
found only at independent and community banks. For example, we work with
business customers to design deposit and loan products that address their
specific requirements. We also offer special and discounted banking services to
their employees, including direct payroll deposit services, that will enable
their employees to transact banking transactions at reduced costs to them. We
also offer a number of services, such as electronic bill payment and ATM and
debit cards, without charging our customers for those services. We also
emphasize responsive, courteous customer service and utilize a fully-trained
dedicated staff who respond promptly to inquiries and requests for assistance
from existing and potential customers.
Increase Loan Originations and Volume While Maintaining Loan Quality. A bank
generally realizes higher yields on the loans it makes than from other interest
earning assets, such as investments. As a result, we intend to increase the
marketing of our loan products and, with the increase in capital that will
occur as a result of this offering, to make larger loans than we are currently
able to make. At the same time, to minimize loan losses, we will follow the
strategy of maintaining a conservative loan mix consisting of commercial and
other business loans and, to a lesser extent, home equity, construction and
consumer loans, with an emphasis on high credit quality.
Achieve Cost Reductions by Increasing the Use of our Internet Banking
Services by Our Customers. Independent and community banks generally incur a
higher level of non-interest expense than larger banks due to the higher level
of personal service they provide to their customers. We intend to encourage and
assist our customers to make use of our Internet banking services, because
those services can be provided at a lower cost than services offered through a
traditional branch banking system. We believe that if we can realize such cost
savings, we will gain a competitive cost advantage over competing independent
and community banks that do not offer, or offer fewer, Internet banking
services than we offer.
Technological Advantage. As a new bank, we were able to acquire the most
technologically current information and transaction processing systems for our
banking operations and our Internet banking Web site. For example, we believe
we are one of the first banks to offer customers the ability to view the front
and back, and to print copies, of their paid checks at or from our Web site. We
believe that many established banks with which we compete continue to be
reluctant to replace older systems with newer ones, due to the cost of
acquiring the new systems, the problems of intergrating new systems with
existing ones and the added costs of having to write off their investments in
existing computer systems. We also have installed the latest available security
devices and measures to assure the secure transmission of confidential
information over public networks.
Outsource Certain Operational Functions to Internet Service Providers. To
enhance the flexibility and scalability of our Internet banking operations, we
outsource certain principal operational functions to leading Internet service
providers. In each of these relationships, we benefit from the service
provider's expertise and economies of scale while retaining the flexibility to
take advantage of changes in available technology without affecting customer
service. We can also respond more easily to growth because these third-party
service providers have the capacity to process a high volume of transactions.
Finally, these service providers offer us additional security, in that they
operate redundant systems that can be accessed to process our banking
transactions in the event that any of our primary systems is disabled by a
natural disaster or by a power or telecommunications failure.
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<PAGE>
Geographic Expansion. We believe that succeeding in our target segment of the
banking market requires establishing long term relationships with customers and
that having an accessible local office is and will continue to be important for
a significant number of our business banking customers. Therefore, we intend to
seek and exploit opportunities to expand our business geographically into other
metropolitan areas, within Southern California and possibly also in other
western states, where the demographics are similar to those in Orange County.
We intend to accomplish that expansion primarily in the following ways:
Express Business Banking Offices. We intend to establish "express
business banking offices" that will range in size from 2,000 to 3,000
square feet, as compared to the 4,000 to 7,000 square feet common to
traditional branch banking offices, that we believe can be constructed and
equipped for approximately one-half the cost of a traditional branch
banking office. At those offices, customers will be able to conduct a
number of banking transactions conveniently, whether in-person, over the
Internet or at ATMs installed at those offices. Our customers also will be
able to meet with account managers who will have ready access at any time
of day to the customer's banking records and data and will be able to print
loan documents prepared at our administrative offices via our secure local
area computer network and Internet bank servers.
Bank Acquisitions. We intend to seek opportunities to acquire, on a
selective basis, other independent or community banks that will enable us
to expand our market areas and introduce our Internet banking services to a
larger number of customers. We intend to use shares of our stock as the
primary currency for such acquisitions and we believe that our commitment
to personalized and responsive service, combined with our Internet
capabilities, will give us a competitive advantage over other banks
competing to acquire well managed local independent or community banks. In
addition, to preserve the competitive advantages of the community banks
that we may acquire, our strategy will be to preserve the local identities
of those banks and retain their local management personnel involved in
providing services to their customers, while taking advantage of
opportunities to achieve economies in the administration of those banks. We
are not currently engaged in any acquisition discussions.
We will need to obtain approvals from federal and state government banking
agencies to establish new banking offices or to acquire other banks in the
future. These will include approvals from government agencies in states outside
of California where we may propose to open new banking offices or acquire
existing banks.
Products and Services
We offer a broad range of traditional and Internet banking products and
services designed to meet the banking needs of small and medium size businesses
as well as those of individuals. We believe that our products and services are
more comparable to those that are available from large multi-regional and out-
of-state banks and include some services that are not typically provided by
other independent or community banks. The products and services we offer
include the following.
Deposit Products. We offer a number of different types of deposit accounts,
including non-interest demand and interest bearing checking accounts, money
market accounts, savings accounts and certificates of deposit. As of March 31,
2000, our deposits totaled $102,969,000, of which approximately 81% were
attributable to business customers. Those deposits included:
<TABLE>
<CAPTION>
Average Account Total of Account
Type of Deposit Account Balance Balances
----------------------- --------------- ----------------
<S> <C> <C>
Non-interest bearing checking accounts..... $ 24,400 $ 25,011,700
Interest bearing transaction accounts(1)... $ 53,900 $ 49,225,100
Certificates of Deposit(2)................. $122,700 $ 28,732,200
------------
Totals................................... $ 47,200 $102,969,000
============
</TABLE>
- --------
(1) Includes money market accounts.
(2) Time certificates of deposits in varying denominations under and over
$100,000.
35
<PAGE>
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 real estate construction loans
and consumer loans. We also have established a mortgage loan 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 sells 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 loans.
The following table sets forth the types and amount of our loans that were
outstanding as of March 31, 2000:
<TABLE>
<CAPTION>
At March 31,
Type of Loan 2000
------------ ------------
<S> <C>
Real estate loans............................................ $37,194,600(1)
Residential mortgage loans................................... 5,718,200
Commercial loans............................................. 17,141,900
Consumer loans............................................... 3,712,900
-----------
Total...................................................... $63,766,700(2)
===========
</TABLE>
- --------
(1) These loans include approximately $23,385,700 of real estate loans
purchased from an unrelated mortgage banking firm in the fourth quarter of
1999 and the first quarter of 2000.
(2) Excludes loans held for sale of $11,724,600 and deferred loan fees of
$56,900.
Commercial Loans. The commercial loans we offer include short-term
secured and unsecured loans, with maturities ranging from 12 to 24 months;
SBA guaranteed business loans with a term not to exceed ten years; accounts
receivable financing for terms not exceeding 12 months; and equipment and
automobile loans and leases which generally amortize over a period not to
exceed 7 years. The interest rates on these loans generally are adjustable
and usually are indexed to The Wall Street Journal's prime rate. In order
to mitigate the risk of borrower default, we generally require collateral
to support the credit or personal guarantees from the owners of the
borrowers, or both. In addition, all loans must have a well-defined primary
and secondary source of repayment. Generally, lines of credit are granted
for no more than a twelve month period and are subject to a more frequent
periodic review.
We also offer asset-based lending products which involve a higher degree
of risk in that the loan is designed for those borrowers who do not quality
for unsecured lending. Typically, these borrowers consist of companies that
are growing rapidly, are profitable but cannot internally fund their growth
without borrowing. In addition, the collateral is usually accounts
receivable. We control our risk by requiring loan-to-value ratios of not
more than 80% and by closely and regularly monitoring the amount and value
of the collateral in order to maintain that ratio.
Commercial loans, including accounts receivable financing, are generally
made to businesses that have been in operation for at least three years. In
addition, these companies have debt-to-worth ratios that generally do not
exceed four-to-one. Operating cash flow of these borrowers must be
sufficient to demonstrate the ability to pay obligations as they become
due. The borrowers must also have good payment histories as evidenced by
credit reports.
Real Estate Loans. Approximately 63% of our real estate loans
outstanding as of March 31, 2000 were purchased from a mortgage banking
firm. Most of these purchased loans are secured by multi-family dwellings.
The remainder of the real estate portfolio consists primarily of
nonresidential real estate loans, of which approximately 86% were secured
by first trust deeds.
Loans secured by nonresidential real estate generally involve a greater
risk than do mortgage loans secured by single and multi-family dwellings.
Nonresidential real estate loans often involve large loan
36
<PAGE>
balances to single borrowers or groups of related borrowers. Payments on
these loans depend to a large degree on results of operations and
dependable cash flows for the borrowers generated from a wide variety of
industries. In addition, repayment of these loans may be affected adversely
by changes in the economy in general or by the real estate market.
Accordingly, the nature of this type of loan makes it more difficult to
monitor and evaluate. Consequently, personal guarantees of principal
shareholders for privately owned corporations are typically required.
Customers wishing to obtain a commercial real estate loan must have good
payment records with a debt coverage ratio generally of at least 1.25 to 1.
In addition, we require adequate insurance on the property to protect the
collateral value. Generally, these types of loans are indexed to The Wall
Street Journal prime rate and are written for maximum terms of seven years
with loan-to-value ratios not to exceed 75%.
Residential Real Estate Loans. These loans generally are funded by our
mortgage banking division. In most cases, we funds these loans at the time
of origination and sell the loans to investors in the secondary market
within thirty days of funding. We earn loan origination and processing fees
and interest income. We also offer equity lines of credit secured by
residential real estate which are tied to an outside index (such as The
Wall Street Journal prime rate).
Generally, residential real estate loans must have loan-to-value ratios
that do not exceed secondary market requirements. A borrower must
demonstrate a good payment history as evidenced by credit reports. In
accordance with investor criteria, the mortgage payment ratio may not
exceed 28% of income and total debt of the borrower may not exceed 40% of
income.
Consumer Loans. We offer a wide variety of products to consumers
including personal installment loans, lines of credit and credit cards. We
design these products to meet the needs of our customers and some are made
at fixed rates of interest and others at adjustable rates. Consumer loans
often entail greater risk than residential mortgage loans, particularly in
the case of consumer loans which are unsecured or are secured by rapidly
depreciable assets, such as automobiles. Further, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source
of repayment of the outstanding loan balance. Consumer loan collections are
dependent on borrowers' ongoing financial stability. Furthermore,
bankruptcy and insolvency laws may limit the amount which can be recovered
on such loans. Consumer loans require a good payment record and, typically,
debt ratios of not more than 40%.
Business Services. We offer various financial services directed primarily at
our business banking customers, including:
. merchant bankcard services to process credit card payments made by their
customers;
. automated clearinghouse origination services that enable any businesses
that charge that for their services or products on a monthly or other
periodic basis to obtain payment from their customers through an
automatic, pre-authorized debit from their customers bank accounts
anywhere in the United States;
. electronic check origination and processing that allows businesses,
including Internet retailers, to accept payment from their customers in
the form of an electronic check that we are able to debit electronically
from any bank in the United States; and
. financial management tools, including multiple account control, account
analysis, transaction security and verification, wire transfers,
universal bill payment, payroll and lockbox services.
Convenience Banking Services. We offer a number of services and products that
make it more convenient to conduct banking transactions with us, such as our
Internet banking system, ATM's, phone banking, night drop services and armored
car services to order and receive cash without having to travel to our banking
offices.
37
<PAGE>
Automated Clearinghouse Origination Services. The Federal Reserve operates an
automated or "electronic" clearing house system (which is commonly referred to
as "ACH") which enables businesses, with the authorization of their customers,
to obtain payments of their charges by electronically debiting the banking
accounts of their customers, wherever they may be located in the United States.
ACH services enable businesses that sell products or services to customers to
reduce their costs and improve their cash flow by:
. eliminating the need to issue monthly invoices; and
. substituting electronic checks, that can be processed and paid to them
almost instantaneously, in place of paper checks from their customers
that must be prepared and mailed and then processed through the Federal
Reserve's traditional clearing house system, thereby significantly
shortening the time to receive payments from their customers.
Businesses that use ACH services include insurance companies (to collect
insurance premiums), lenders (to collect monthly mortgage or automobile
payments) and health or 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 and that is
authorized by the Federal Reserve to originate ACH charges or "credits." While
virtually all banks can receive ACH debits made against the accounts of their
customers, there are a limited number of banks, particularly among independent
and community banks, that have requested to become authorized by the Federal
Reserve, and have the computer systems necessary, to originate ACH debits for
their business customers. PM Bank has qualified with the Federal Reserve to do
so and originates ACH transactions for a number of its customers.
We have also been retained to provide similar ACH services to clients of
eFunds Corporation, which provides a number of automated collection services
primarily to businesses that sell their products to consumers in person, by
mail or over the Internet. Among the methods of collection that eFunds employs
is an "electronic debit" process by which a consumer that buys products from
any eFunds client may authorize the charges on a per transaction basis to be
paid by means of an electronic debit or "electronic check" that can be
transmitted electronically to and charged against the consumer's bank account
at any U.S. based bank via a privately established automated clearing house
system. Like the Federal Reserve's automated clearing house system, these
automated payment services enable businesses to improve their cash flow and
reduce expenses by reducing their dependence on paper checks and credit cards
for payment and enabling them to receive payments from their customers
generally within about two- to-three business days following the transactions
which generate the electronic debits.
We act as an originating depository financial institution for a number of
eFunds' clients, electronically debiting the bank accounts of customers of
those clients, receiving the resulting payments from those customers and
transfering those payments to banks designated by those eFunds clients who
utilize this service. Neither eFunds' clients nor the consumers need to have
accounts with us to avail themselves of this service and we generate interest
earnings on the funds received as a result of the debits pending their
electronic transmission to eFunds' clients. We believe that, currently, there
are only about 30 banks in the United States that have qualified to participate
as originating depository financial institutions in this program, most of which
are much larger multi-regional and out-of-state banks. We can offer this
service to its own business customers and, as a result, we believe that our
capabilities enable us to offer a relatively unique service not provided by the
independent and community banks with which we compete.
Internet Banking Services
Banking transactions that customers can conduct and banking products and
services that customers can access at our Web site include:
(1) establishing business and consumer checking and savings accounts and
purchasing and renewing certificates of deposit;
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(2) transferring funds between accounts;
(3) printing bank statements and viewing the front and back of their paid
checks;
(4) submitting loan applications;
(5) transferring funds from credit lines to, and making loan payments
from, their deposit accounts;
(6) paying bills, payroll and taxes electronically;
(7) ordering cash through our Web site and having the funds delivered to
them by armored car;
(8) utilizing business cash management services, including currency
converters for international transactions and electronic wire
transfers;
(9) merchant banking services, including credit card processing, automated
clearing house originations and electronic check processing; and
(10) a number of consumer and personal banking services, including
financial planning for home buying and financing, retirement planning
and discount brokerage services offered through a strategic alliance
with UVest Financial Services Group, Inc., an online discount
securities brokerage firm.
Opening an Account. Our customers can access our Web site and our Internet
banking services through any Internet service provider by means of an
acceptable secure Web browser such as Netscape's Navigator (Version 4.0 or
higher) or Microsoft's Internet Explorer (Version 4.0 or higher). When
customers access our menu of products and services at our Web site, they can
open a new account, review the history and status of an existing account, and
engage in any of several different types of banking transactions.
To apply for a new account, a customer completes an online account
application, prints out that application and mails it to us. A customer also
may apply for a new account by calling our toll-free telephone number, 1-877-
450-BANK.
Security. Our ability to provide our customers with secure financial services
over the Internet is of paramount importance. We believe our Internet systems,
services and software meet the highest standards of bank security. The
following are among the security measures that are in place:
. Encrypted Transactions. All banking transactions and Internet
communications are encrypted so that sensitive information is not
available on the Internet in a form that can be read or easily
deciphered. Encryption of Internet communications is accomplished through
the use of the Netscape SSL (Secure Sockets Layer) technology. SSL is the
standard for encryption on the Internet and is currently used by
Netscape's Navigator (Version 4.0 or higher) and Microsoft's Internet
Explorer (Version 4.0 or higher). Messages between our bank mainframe
computer system, where all transactions are processed and data is
maintained, and our Internet server, and between our Internet server and
the customer's Web browser, are encrypted using DES encryption. DES is a
symmetric key algorithm and is highly secure because it is not
susceptible to standard ciphertext attacks.
. Secure Logon. To eliminate the possibility that a third party may
download PM Bank's or any customer's password file, user identification
and passwords are stored behind a secure firewall on the Web server.
Additionally, passwords are variable length strings of five to eight
alpha-numeric characters, which makes the chance that a password can be
randomly guessed less than one in one trillion.
. Firewalls. All of our Internet banking services are routed from our
Internet server through a firewall. The firewall is a combined software
and hardware product that precisely defines, controls and limits the
access to "internal" computers from "outside" computers across a network.
Use of this firewall means that only authenticated PM Bank customers or
administrators may send or receive transactions through it, and the
firewall itself is immune to penetration from the Internet. In other
words, the firewall is a mechanism used to protect our computers from
unauthorized access through the Internet by customers or by third
parties.
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. Physical Security. All servers and network computers reside in secure
facilities. Currently, computer operations supporting our Internet
operations are based in Newport Beach, California and at the offices of
Fiserv, in Van Nuys, California where our mainframe computer is based.
Only employees with proper identification may enter our primary server
area. Access to our server console requires further password
identification.
. Service Continuity. To avoid interruptions in our Internet banking
services, we intend to install Internet servers at our other full service
banking offices, such as in our San Clemente office, which can process
Internet transactions not only from customers of that office, but also
customers of our other offices, in the event the servers at those other
offices become disabled. In the unlikely event that our customers are
prevented from accessing their accounts over the Internet, they will
retain access to their funds through a number of different means,
including making in-person withdrawals at any of our branch banking
offices or ATM's or by armored car; making deposits in person, by mail or
at our ATM's and getting information and assistance from our employees by
telephone. Additionally, Fiserv, which hosts our mainframe computer, has
the ability to transfer data electronically to a second computer system
located at a remote site, so that in the event of a natural disaster that
affects Southern California, we will continue to be able to process
banking transactions via our computer system without any significant
interruptions. Additionally, we are working with Q-Up Systems, which
provides Internet transaction processing software and services to us, to
establish a second location equipped with Internet servers that can
enable our customers to continue conducting Internet banking transactions
with us in the event that our Internet servers in Southern California
were to become disabled.
. Monitoring. All customer transactions on our Internet server in Newport
Beach produce one or more entries into transactional logs. We recognize
that it is critical to monitor these logs for unusual or fraudulent
activity. Our personnel review these logs regularly, and any abnormal or
unusual activity will be noted and appropriate action will be taken. We
believe that, ultimately, vigilant monitoring is the best defense against
fraud.
We believe the risk of fraud presented by providing Internet banking services
is not materially different from the risk of fraud inherent in any banking
relationship. We believe that potential security breaches can arise from any of
the following circumstances:
. misappropriation from the user of the user's account number or password;
. penetration of our server by an outside "hacker;"
. fraud committed by a new customer in completing his or her application
with us; and
. fraud committed by an employee of ours or one of our service providers.
Both traditional banks and Internet banks are vulnerable to these types of
fraud. By establishing the security measures described above, we believe we
have minimized our vulnerability to the first three types of fraud. To
counteract fraud by employees and service providers, we have established
internal procedures and policies designed to ensure that, as in any bank,
proper control and supervision is exercised over employees and service
providers.
Additionally, the adequacy of our security measures are 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 PM 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.
Express Business Banking Offices
Following completion of this offering, we intend to apply for government
approvals to open two express business banking offices within the next 12
months. Each express business banking office will be configured,
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equipped and staffed to meet the banking needs of small and medium size
businesses, professional firms and individuals that are located within a 25
mile radius. These offices will range in size from 2,000 to 3,000 square feet,
which is approximately half the size of a traditional branch banking office,
and as a result are expected to require only about half the investment that is
typically required to establish and operate a traditional branch banking
office. These express business banking offices will be:
. equipped with ATM machines and a business conference room, with video
conferencing capability, that will be located in the entry area of the
office and can be accessed at any time of day or night, seven days per
week, by business and individual customers using ATM or other
identification cards, but which for security reasons are separated from
and, except during normal business hours, will not be accessible to, the
area of the office where in-person banking transactions are conducted;
. configured with a concierge and a new accounts desk and up to three
teller windows equipped with secure automated cash machines that will
eliminate the need for a traditional bank vault;
. equipped with computer terminals where customers can conduct their
banking transactions with us via the Internet; and
. configured with three to four offices for use by account managers and
loan officers, who can retrieve customer account data and loan
documentation prepared at our administrative offices via computer linked
to our local area network or Internet system.
We believe that express business banking offices will enable us to penetrate
new market areas and give us the presence we need to help attract business
customers in those areas. Additionally, the lower costs of establishing and
operating such offices, as compared to a traditional branch banking office,
should decrease the time within which such offices can become profitable.
Our Database, Transaction Processing and Internet Service Providers
We have established service relationships with leading providers of network
infrastructures, computerized transaction processing systems and Web based
financial products and services. Those providers include:
Fiserv. Fiserv hosts and maintains our mainframe computer on which all our
financial and accounting data is stored and all banking transactions are
processed. Fiserv provides similar services to numerous other banks and
depository institutions and has the computing capacity to be able to meet our
computer processing needs as we grow. To protect against interruptions in
service that could occur in the event of a natural disaster or a power or
telecommunications outage affecting Southern California, Fiserv has arranged
for processing of our transactions and the maintenance of accounting records to
continue at another mainframe computer located outside of California.
Q-Up Systems. Q-Up Systems provides us with the software needed to enable our
customers to process banking transactions with us over the Internet. As
Internet banking transactions are processed the data regarding those
transactions is transmitted, electronically and securely, to our mainframe
computer hosted by Fiserv, thereby automatically updating account information
for those deposit or loan accounts for which transactions have been processed.
We are currently working with Q-Up Systems to establish a remote site, outside
of California, to locate a redundant Internet banking system that can become
operational in the event that our Internet banking system in Southern
California were to become disabled.
UVEST Financial Services Group, Inc. PM Bank has an agreement with UVEST
Financial Services Group, Inc., an online discount securities brokerage firm.
Under that agreement, our customers can access UVest's Web site from our Web
site in order to purchase and sell securities. Information regarding those
transactions are maintained on our computer system and are accessible to
customers via our Web site. We also receive a fee from UVEST on securities
transactions that it processes for our customers.
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Marketing
In marketing our services, we emphasize:
. our identity as an independent and community-based bank, managed by bank
officers and employees who live in, and therefore have personal ties to,
the communities where our offices are located;
. our commitment to providing competent, personalized and responsive
banking services to our customers; and
. the breadth of the banking services we are able to provide to our
customers, with particular focus on the convenience and flexibility of
our Internet banking services.
We believe that the first two of these attributes differentiate us from
larger multi-regional and out-of-state banks and that the third attribute
differentiates us from many independent and community banks.
We market our services primarily by means of localized promotional
activities, personalized service, and personal contacts with potential
customers by our executive officers, directors, employees and shareholders, as
well as by direct mail and media advertising directed primarily at local
businesses in our market areas.
Increased Marketing of Internet Services. We have registered our Web site
with many of the most popular Internet search engines, such as Yahoo! and Alta
Vista, to facilitate access to our Internet Web site. However, because we are
focused on attracting small and medium size local business customers, we do not
presently intend to use banner advertising or to enter into joint marketing
arrangements with other Internet e-commerce companies to market our Internet
banking services. Instead, at least initially, we intend to market those
services primarily in those markets where we have established a physical
presence and to selected businesses outside of those markets who want to use
our services and are willing to maintain a volume of deposits and to regularly
conduct a number of banking transactions with us that will justify the cost of
providing services to them.
We intend to increase our marketing to build greater awareness of our
Internet banking services, initially in Southern California, in order to
attract new customers and expand our service areas. Initially, those marketing
programs will primarily take the form of print and direct mail campaigns to
businesses in our target market.
Once we have expanded our markets geographically into additional communities,
either through establishing additional full service regional banking offices or
local express business banking offices, we will consider establishing joint
marketing relationships with selected Internet e-commerce companies that offer
non-financial business-related services to the business communities that we
serve.
Competition
Competitive Conditions in the Traditional Banking Environment. The banking
business in California generally, and in our service area in particular, is
highly competitive with respect to both loans and deposits and is dominated by
a relatively small number of large multi-regional and large out-of-state banks
which have offices operating over wide geographic areas. We compete for
deposits and loans with such banks as well as with savings and loan
associations, credit unions, mortgage companies, money market and other mutual
funds, stock brokerage firms, insurance companies, and other traditional and
nontraditional financial institutions. We also compete for customers' funds
with governmental and private entities issuing debt or equity securities or
other forms of investments which may offer different and potentially higher
yields than those available through bank deposits.
Major financial institutions that operate throughout California and that have
offices in our service areas include Wells Fargo Bank, Bank of America, Union
Bank, Sanwa Bank California, Washington Mutual Savings Bank, Comerica Bank and
California Federal Savings. With the exception of Union Bank, all of these
banks are
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now headquartered outside of California. Independent banks or financial
institutions with offices in our service area include, among others, City
National Bank, Imperial Bank, Manufacturers Bank, Downey Savings and Eldorado
Bank.
The large banks and some of the independent institutions have the financial
capability to conduct extensive advertising campaigns and to shift their
resources to regions or activities of greater potential profitability. Many of
them also offer diversified financial services which we do not presently offer
directly. The larger banks also have substantially more capital and higher
lending limits.
In order to compete with the financial institutions operating in our service
areas, we rely on our independent status to provide flexible and greater
personalized service to customers. We emphasize personal contacts with
potential customers by our executive officers, directors and employees; develop
local promotional activities; and seek to develop specialized or streamlined
services for customers. To the extent customers desire loans in excess of our
lending limit or services not offered by us, we attempt to assist customers in
obtaining such loans or other services through participations with other banks
or assistance from our correspondent banks or third party vendors.
Competitive Conditions in Internet Banking. The market for electronic banking
services is rapidly evolving. There are a number of banks that offer services
exclusively over the Internet, such as Net.B@nk and First Internet Bank, and
others who are affiliated with existing banks, such as Wingspan.com, that
market their services nationwide. There are also a large number of existing
banks that are beginning to offer Internet banking services; however, we
believe that few of these banks offer the comprehensiveness of Internet banking
services that we are able to offer. However, many of the larger of these banks
do have greater market presence and greater resources to market their Internet
banking services than we do. Additionally, new competitors and competitive
factors are likely to emerge, particularly in view of the rapid development of
Internet commerce.
We also compete for customer funds with the numerous and growing number of
securities brokerage firms that offer online trading and investments, which
provide an alternative to deposit products we offer. PM Bank has entered into
an agreement with UVEST Financial Services Group in order to offer, through
UVEST, online discount securities brokerage services to its customers via our
Web site. See "Our Database, Transaction Processing and Internet Service
Providers--UVEST Financial Services Group, Inc."
Existing and future state and federal legislation could significantly affect
the cost of doing business, 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.
Supervision and Regulation
General. Both federal and state law extensively regulate bank holding
companies. This regulation is intended primarily for the protection of
depositors and the FDIC's deposit insurance fund and not for the benefit of our
shareholders. Set forth below is a summary description of the material laws and
regulations which will relate to our operations. The description does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
In recent years, significant legislative proposals and reforms affecting the
financial services industry have been discussed and evaluated by Congress and
certain of these proposals have been adopted, including legislation to expand
the insurance activities of banks. We cannot predict whether any other of these
proposals, or any form of them, will be introduced in the next Congress and
become law. Consequently, we cannot presently determine what effect, if any,
those other proposals may have on us.
Pacific Mercantile Bancorp. Upon the completion of the Holding Company
Reorganization, we will be a registered bank holding company subject to
regulation under the Bank Holding Company Act. We will be
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required to file with the Federal Reserve Board periodic reports and such
additional information as the Federal Reserve Board may require pursuant to the
Bank Holding Company Act, and will be subject to Federal Reserve Board
examinations.
The Federal Reserve Board may require us to terminate an activity or
terminate control of or liquidate or divest subsidiaries or affiliates if the
Federal Reserve Board determines that the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of our 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. The Federal Reserve Board may also require us to file written
notice and obtain approval prior to purchasing or redeeming our equity
securities.
Under the Bank Holding Company Act and related regulations adopted by the
Federal Reserve Board, a bank holding company and its nonbanking subsidiaries
are prohibited from requiring tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Further, the Federal Reserve Board will require us to maintain capital at or
above stated levels. See "Capital Standards" below.
We 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 bank holding
company. The Federal Reserve Board must also give advance approval for our
merger or consolidation with another bank holding company.
We will be prohibited by the Bank Holding Company Act from acquiring direct
or indirect ownership or control of more than 5% of the outstanding voting
shares of any company that is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks or furnishing services to its subsidiaries,
except in statutorily prescribed instances. However, we may, subject to the
prior approval of the Federal Reserve Board, engage in, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
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.
We will also be a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such, we will be subject to examination by,
and may be required to file reports with, the California Commissioner of
Financial Institutions.
We have applied to have our securities registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended. As
such, we will be subject to the information, proxy solicitation, insider
trading, and other requirements and restrictions of the Securities Exchange
Act.
Pacific Mercantile Bank. As a California chartered bank, PM Bank is subject
to primary supervision, periodic examination and regulation by the California
Commissioner of Financial Institutions. As a member of the Federal Reserve Bank
of San Francisco, PM Bank also is subject to regulation by the Federal Reserve
Board, which is its primary federal banking regulator. Because its deposits are
insured by the FDIC, PM Bank is also subject to regulations promulgated by the
FDIC. If, as a result of an examination of PM Bank, the
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Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of PM Bank's operations are unsatisfactory or that PM Bank or its
management is violating or has violated any law or regulation, the Federal
Reserve Board has various remedies available. These remedies include the power
to enjoin "unsafe or unsound" practices, to require affirmative action to
correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of PM Bank, to assess civil monetary penalties,
to remove officers and directors and ultimately to terminate PM Bank's deposit
insurance, which would result in a revocation of PM Bank's charter. The
California Commissioner of Financial Institutions has many of the same remedial
powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of PM Bank. State and
federal statutes and regulations relate to many aspects of PM Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, PM Bank is required to maintain capital at or above
stated levels.
Dividends and Other Transfers of Funds. Dividends from PM Bank will
constitute our principal source of cash. PM Bancorp is a legal entity separate
and distinct from PM Bank. PM Bank will be subject to various statutory and
regulatory restrictions on its ability to pay cash dividends to PM Bancorp. In
addition, the California Commissioner of Financial Institutions and the Federal
Reserve Board have the authority to prohibit PM Bank from paying dividends,
depending upon PM Bank's financial condition, if the payment is deemed to
constitute an unsafe or unsound practice.
The Federal Reserve Board and the California Commissioner of Financial
Institutions also have authority to prohibit PM Bank from engaging in
activities that, in their opinion, constitute unsafe or unsound practices in
conducting its business. It is possible, depending upon the future financial
condition of PM Bank and other factors, that the Federal Reserve Board or the
Commissioner could assert that the payment of dividends or other payments
might, under some circumstances, constitute an unsafe or unsound practice.
Further, 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 PM Bank or PM Bancorp may pay. An insured depository
institution is prohibited from paying management fees to any controlling
persons or, with limited exceptions, making capital distributions if, after the
transaction, the institution would be undercapitalized. See "Prompt Corrective
Action and Other Enforcement Mechanisms" and "Capital Standards" for a
discussion of these additional restrictions on capital distributions.
PM 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,
PM Bancorp or our other affiliates, the purchase of, or investments in, our
stock or other securities, the taking of such securities as collateral for
loans and the purchase of our assets or those of our other affiliates. Such
restrictions prevent our affiliates from borrowing from PM Bank unless the
loans are secured by marketable obligations of designated amounts. Further,
such secured loans and investments by PM Bank to or in PM Bancorp or any other
affiliate are limited, individually, to 10% of PM Bank's capital and surplus
(as defined by federal regulations), and such secured loans and investments are
limited, in the aggregate, to 20% of PM Bank's capital and surplus. California
law also imposes restrictions with respect to transactions involving PM Bancorp
and other controlling persons of PM Bank. Additional restrictions on
transactions with affiliates may be imposed on PM Bank under the prompt
corrective action provisions of federal law.
Capital Standards. The Federal Reserve Board has adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets, and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines,
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nominal dollar amounts of assets and credit equivalent amounts of off balance
sheet items are multiplied by one of several risk adjustment percentages, which
range from zero percent for assets with low credit risk, such as U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
commercial loans.
The Federal Reserve Board, as well as other federal bank agencies, requires a
minimum ratio of qualifying total capital to risk-adjusted assets of eight
percent and a minimum ratio of Tier 1 capital to risk-adjusted assets of four
percent. In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets
must be three percent. 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. PM
Bank has agreed with the FDIC to maintain a Tier 1 Capital to Average Assets
ratio of at least eight percent until February 28, 2002.
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:
. well capitalized;
. adequately capitalized;
. undercapitalized;
. significantly undercapitalized; and
. critically undercapitalized.
At December 31, 1999, PM Bank exceeded the required ratios for classification
as "well capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation, or any
condition imposed in writing by the agency or any written agreement with the
agency.
Safety and Soundness Standards. The federal banking agencies have adopted
guidelines designed to assist the federal banking agencies in identifying and
addressing potential safety and soundness concerns before capital becomes
impaired. The guidelines set forth operational and managerial standards
relating to the following:
. internal controls, information systems and internal audit systems,
. loan documentation,
. credit underwriting,
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. asset growth,
. earnings, and
. compensation, fees and benefits.
In addition, the federal banking agencies also have adopted safety and
soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a
system to identify problem assets and prevent those assets from deteriorating.
Under these standards, an insured depository institution is expected to:
. conduct periodic asset quality reviews to identify problem assets;
. estimate the inherent losses in problem assets and establish reserves
that are sufficient to absorb estimated losses;
. compare problem asset totals to capital;
. take appropriate corrective action to resolve problem assets;
. consider the size and potential risks of material asset concentrations;
and
. provide periodic asset quality reports with adequate information for
management and the board of directors to assess the level of asset risk.
These guidelines also establish standards for evaluating and monitoring
earnings and for ensuring that earnings are sufficient for the maintenance of
adequate capital and reserves.
FDIC Deposit Insurance. The FDIC's Bank Insurance Fund insures PM Bank's
deposit accounts up to the maximum amount permitted by law. The FDIC may
terminate insurance of deposits upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
California does not permit commercial banks to operate without FDIC insurance.
As a result, termination of FDIC insurance of a California bank will result in
its closure.
The Federal Deposit Insurance Corporation charges an annual assessment for
the insurance of deposits, which as of December 31, 1998, ranged from 0 to 27
basis points per $100 of insured deposits, based on the risk a particular
institution poses to its deposit insurance fund. The risk classification is
based on an institution's capital group and supervisory subgroup assignment.
Pursuant to the Economic Growth and Paperwork Reduction Act, at January 1,
1997, banks began paying, in addition to their normal deposit insurance premium
as a member of the Bank Insurance Fund, an amount equal to approximately 1.3
basis points per $100 of insured deposits toward the retirement of the
Financing Corporation bonds issued in the 1980s to assist in the recovery of
the savings and loan industry. Members of the Savings Association Insurance
Fund, by contrast, pay, in addition to their normal deposit insurance premium,
approximately 6.4 basis points. Under the Paperwork Reduction Act, the FDIC is
not permitted to establish Savings Association Insurance Fund assessment rates
that are lower than comparable Bank Insurance Fund assessment rates. Beginning
no later than January 1, 2000, the rate paid to retire the Financing
Corporation Bonds will be equal for members of the Bank Insurance Fund and the
Savings Association Insurance Fund. The Paperwork Reduction Act also provided
for the merging of the Bank Insurance Fund and the Savings Association
Insurance Fund by January 1, 1999 provided there were no financial institutions
still chartered as savings associations at that time. However, as of January 1,
1999, there were still financial institutions chartered as savings
associations. Should the insurance funds be merged before January 1, 2000, the
rate paid by all members of this new fund to retire the Financing Corporation
Bonds would be equal.
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
47
<PAGE>
including nationwide- and state-imposed concentration limits. PM Bank also has
the ability, subject to certain restrictions, to acquire by acquisition or
merger branches outside California. The establishment of new interstate
branches is also possible in those 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. PM 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.
Comprehensive Bank Reform Litigation. On November 12, 1999, President Clinton
signed into law the Gramm-Leach-Bliley Act (the "Gramm Act"). The Gramm Act is
expected to have a major impact on cross-industry mergers, customer privacy and
lending to lower-income communities. The Gramm Act repeals the Glass Steagal
Act of 1937, which separated commercial and investment banking, and eliminates
the Bank Holding Company Act's prohibition on insurance underwriting
activities. The Gramm Act allows both holding company subsidiaries and national
bank operating subsidiaries to offer a wide range of new financial services,
including insurance or securities sales. However, real estate development and
insurance underwriting would be restricted to affiliates and cannot be
performed by bank operating subsidiaries. State laws will govern insurance
sales, but states cannot discriminate against national banks by preventing
national banks from conducting insurance activities that nonbanks may conduct.
The Gramm Act bars a bank holding company from merging with insurance or
securities firms, or embarking on new powers, if any of its banks earned less
than a "satisfactory" Community Reinvestment Act rating in its most recent
examination. The Gramm Act also provides that customers will have the right to
prevent banks from sharing information with third parties. The Gramm Act is
expected to further increase competition in providing financial services.
Properties
PM Bank subleases approximately 9,500 square feet of ground floor office
space, and leases approximately 4,300 square feet of upper floor office space,
both from unaffiliated third parties, at 450 Newport Center Drive, Newport
Beach, California, which is the location of our headquarters and main banking
office. The ground floor sublease expires on June 30, 2001. The upper floor
lease expires December 31, 2000. PM Bank also subleases from an unaffiliated
third party approximately 4,190 square feet of office space at 501 N. El Camino
Real, San Clemente, which is the location of our southern Orange County banking
office. The San Clemente sublease expires January 31, 2006.
Employees
As of March 31, 2000, we employed 46 persons on a full-time equivalent basis.
None of our employees is covered by a collective bargaining agreement. We
believe our employee relations are excellent.
Legal Proceedings
Neither PM Bancorp nor PM Bank is a party to any material legal proceedings.
48
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table lists our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Raymond E. Dellerba.. 52 President, Chief Executive Officer and Director
John J. McCauley..... 52 Executive Vice President, Chief Operating Officer,
Chief Credit Officer and Director
Daniel L. Erickson... 55 Executive Vice President and Chief Financial Officer
John P. Cronin....... 50 Executive Vice President and Chief Technology
Officer
George H. Wells...... 65 Chairman and Director
Richard M. Torre..... 54 Vice Chairman and Director
Ronald W. Chrislip... 48 Director
Julia M. DiGiovanni.. 81 Director
Warren T. Finley..... 68 Director
John Thomas, M.D..... 50 Director
Robert E. Williams... 57 Director
</TABLE>
Background and Business Experience of Directors and Executive Officers
The following is a brief description of the principal occupation and recent
business experience of each of our executive officers and directors:
Raymond E. Dellerba is the President and Chief Executive Officer, and also
serves as a member of the Boards of Directors, of PM Bancorp and PM Bank. Mr.
Dellerba has worked in the bank industry for more than 25 years. He served as
the President and Chief Operating Officer and as a director of Eldorado Bank,
and as Executive Vice President and a director of Eldorado Bancorp, based in
Tustin, California, from February 1993 to June 1997 and as President and Chief
Executive Officer of Belvedere Bancorp from July 1997 to December 1997. Mr.
Dellerba has a Bachelor of Science degree in management, and a Masters of
Business Administration with emphasis in organizational management and finance
from Pepperdine University. Additionally, he has completed post graduate work
at the University of Pennsylvania, Wharton School of Business Administration,
with certificates issued in "Integrating Finance and Marketing" and in "Mergers
and Acquisitions." Mr. Dellerba is presently teaching an evening class in
"Strategic Management and Business Policies" at California State University,
Fullerton.
John J. McCauley is an Executive Vice President and a director of PM Bancorp
and PM Bank. He also serves as Executive Vice President, Chief Operating
Officer and the Chief Lending Officer, of PM Bank. Mr. McCauley has more than
25 years of experience in the banking industry, most recently serving as
Executive Vice President of Administration for Eldorado Bank, Tustin,
California, from September 1991 to July 1997. Mr. McCauley holds a Masters of
Business Administration in Banking and Finance from Golden Gate University, San
Francisco, California.
Daniel L. Erickson, who is a certified public accountant, is an Executive
Vice President and also is the Chief Financial Officer and Cashier of PM
Bancorp and PM Bank. Prior to joining PM Bank in 1998, Mr. Erickson held a
number of key management positions with other banks in Southern California,
including Senior Vice President and Chief Financial Officer of Republic Bank
from 1997 through October 1998, Senior Vice President and Chief Financial
Officer of Marathon National Bank from 1993 to 1997 and Vice President and
Chief Financial Officer of Commercial Center Bank from 1987 to 1993. Mr.
Erickson graduated from the University of South Dakota with a Bachelor of
Science degree in Accounting and also has earned a graduate certificate from
the Stonier Graduate School of Banking at Rutgers University.
49
<PAGE>
John P. Cronin is the Chief Technology Officer for both PM Bancorp and PM
Bank. He joined PM Bank in 1998. From 1996 to 1997, he was Executive Vice
President-Retail Banking of CenFed Bank and President of CenFed Investments and
from 1995 to 1996 he was Senior Vice President-Retail Banking of Eldorado Bank.
He received a Bachelors Degree in Political Science from the University of
California at Los Angeles.
George H. Wells is the Chairman and a member of the Boards of Directors of PM
Bancorp and PM Bank. Mr. Wells is a private investor. Mr. Wells was a founding
director of Eldorado Bank in 1972 and served as its Chairman and as Chairman of
its parent holding company, Eldorado Bancorp, from 1979 to 1997, when Eldorado
Bank was sold. Prior to becoming a private investor, Mr. Wells held various
executive positions with Technology Marketing Incorporated, including Chairman,
President, Treasurer and Chief Financial Officer, which at the time was a
publicly owned computer development services and software company. Mr. Wells
holds a Bachelor of Science degree in Electrical Engineering from Pennsylvania
State University.
Richard M. Torre is the Vice Chairman and a member of the Boards of Directors
of both PM Bancorp and PM Bank. He is also Chairman of the Acquisition and
Branching Committee of PM Bank. Mr. Torre is Chairman and CEO and a director of
Global Capital Markets, Inc., an investment banking and financial intermediary
company that he established in 1994. From 1992 to 1996, Mr. Torre also served
as Chairman and board member of Business Council Credit Union, a $100 million
credit union. Mr. Torre holds a Bachelor of Science degree from Fordham
University.
Ronald W. Chrislip is a director of both PM Bancorp and PM Bank. Mr. Chrislip
has been an attorney in private practice in the City of Santa Ana, California
since 1976. Mr. Chrislip also has a law office in San Clemente, California. Mr.
Chrislip received his undergraduate degree from the University of California at
Irvine and his law degree from Western State University College of Law.
Julia M. DiGiovanni is a director of both PM Bancorp and PM Bank. Mrs.
DiGiovanni is, and for more than the past five years has been, a private
investor. She also served as a director of Eldorado Bank, a California state-
chartered bank based in central Orange County, California, and its parent
corporation, Eldorado Bancorp, from October 1995 until 1997, when Eldorado Bank
was acquired by Commerce Security Bancorp. Mrs. DiGiovanni also served as a
member of the board of directors of Mariners Bank, a state chartered bank based
in San Clemente, California, from 1991 until 1995, when that bank was acquired
by Eldorado Bank.
Warren T. Finley is a director of both PM Bancorp and PM Bank. Mr. Finley
also is the Chairman of the Management and Incentive Committee of PM Bank. Mr.
Finley is an attorney who is, and for more than 35 years has been, engaged in
the private practice of law in Orange County, California. Mr. Finley also
served as a director of Eldorado Bank and its parent holding company, Eldorado
Bancorp, from 1972 to 1997, when that bank was acquired by Commerce Security
Bancorp. Mr. Finley earned an undergraduate degree and a masters of business
administration from Stanford University and his law degree from the University
of Southern California.
John Thomas, M.D. is a director of both PM Bancorp and PM Bank. Dr. Thomas is
a licensed physician who is, and for more than the past 15 years, has been
engaged in the private practice of medicine, specializing in the practice of
radiation oncology. He also serves as, and for more than the past 7 years has
been, the Medical Director of the San Clemente Tumor Medical Center. He is a
Diplomate of the American Board of Radiology and a Clinical Assistant Professor
at the University of Southern California School of Medicine and is a member of
the Standards Committee for the American College of Radiation Oncology. Dr.
Thomas graduated from the Institute of Medicine and Pharmacy in Cluj, Rumania.
Robert E. Williams is a director of both PM Bancorp and PM Bank and also
serves as the Chairman of the Audit Committee of the Board of Directors of PM
Bancorp. Mr. Williams is, and for more than 20 years has been, a certified
public accountant, with Robert E. Williams Accountancy Corporation, a firm that
he established in 1978. Mr. Williams holds a Bachelor of Arts degree in
accounting from California State College at Fullerton.
50
<PAGE>
Committees of the Board of Directors
The Board of Directors of PM Bank has established the following committees to
review and supervise various aspects of PM Bank's operations. Following the
completion of the Holding Company Reorganization, the Board of Directors of PM
Bancorp will continue these committees at the parent holding company level.
. The Audit Committee, which is made up entirely of outside directors,
provides oversight of PM Bancorp's audit and compliance programs and
coordinates audit matters with PM Bank's independent auditors. Robert E.
Williams is the chairman of the Audit Committee.
. The Management and Incentive Committee has the authority to approve the
salaries and grants of bonuses and options to our management, and
oversees the development and implementation of compensation and benefit
programs that are designed to enable PM Bancorp and PM Bank to retain
existing, and attract new, management personnel and thereby remain
competitive with other financial institutions in its market areas. Mr.
Finley serves as chairman of this committee.
The Board of Directors of PM Bank has established the following committees to
review and supervise various aspects of PM Bank's operations. Following the
completion of the Holding Company Reorganization, these committees will
continue at the bank level.
. The Executive Committee develops and oversees the implementation of a
number of our policies and procedures, including policies and procedures
relating to our growth, the adequacy of PM Bank's facilities, procedures
designed to maintain compliance with regulatory requirements and capital
adequacy and capital enhancement policies. The members of the Executive
Committee also serve as the members of PM Bank's Asset/Liability
Committee and, in that capacity, develop and oversee the implementation
of PM Bank's asset/liability policies which are designed to insure that
PM Bank has, at all times, adequate funds to meet the cash requirements
of its business and to preserve its net interest margins.
. The Loan Committee is responsible for establishing loan policies and for
reviewing loans proposed to be made by PM Bank. This committee also
reviews, on a regular basis, PM Bank's existing loan portfolio to
identify potential risks, monitor the management of those risks by its
lending officers and assist its Board in determining the amount of the
allowance that it needs to maintain against the possibility of loan
losses. Mr. McCauley is the chairman of the Loan Committee.
. The Acquisition and Branching Committee is responsible for reviewing
possible acquisition and branching opportunities and making
recommendations with respect to such opportunities to the full Board of
Directors. Mr. Torre serves as chairman of this committee.
51
<PAGE>
Remuneration of Executive Officers and Directors
The following table sets forth information concerning the annual cash
compensation paid to each of the executive officers of PM Bank for services in
all capacities rendered to it in 1999. No compensation was paid to any officers
by PM Bancorp in 1999.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------- Awards Securities
Name and Principal Position Salary Bonus Underlying Options(#)
- --------------------------- ---------- --------- ---------------------
<S> <C> <C> <C>
Raymond E, Dellerba, President
and CEO......................... $ 120,000 $ 15,000 125,530
John J. McCauley, Executive Vice
President, Chief Operating
Officer and Chief Credit
Officer......................... $ 100,000(1) 7,500 36,586
Daniel L. Erickson, Executive
Vice President and Chief
Financial Officer............... $ 92,500 3,000 10,000
John P. Cronin, Executive Vice
President and Chief Technology
Officer......................... $ 90,000(2) 3,500 13,066
</TABLE>
- --------
(1) Mr. McCauley's annual salary was increased to $110,000 when the Bank first
achieved income from operations in April 2000.
(2) Mr. Cronin's annual salary was increased to $100,000 when the Bank first
achieved income from operations in April 2000.
PM Bank paid to Messrs. Dellerba and McCauley consulting fees in the amount
of $10,000 and $5,000, respectively, for services rendered by them prior to
November 1, 1998 in connection with the organization of PM Bank, and cash
compensation to Messrs. Dellerba, McCauley, Erickson and Cronin in the amounts
of $20,000, $16,667, $10,278 and $14,167, respectively, for services rendered
by them during the period from November 1, 1998 to December 31, 1998.
In addition to the compensation set forth above and the provisions of Mr.
Dellerba's employment contract set forth below, each executive officer receives
health and life insurance benefits and other incidental job-related benefits.
In addition, Mr. Dellerba's heirs are entitled to receive one-half of the
benefit payable upon his death under the key-man life insurance policy we
maintain on Mr. Dellerba. Also, automobiles are provided to Mr. Dellerba and
Mr. McCauley for use on company business. We have also granted stock options to
the officers named above, as further described below under the heading "Stock
Option Plan."
PM Bank has employment or severance agreements with the following executive
officers:
Raymond E. Dellerba. PM Bank entered into a multi-year employment contract
with Mr. Dellerba under which he is employed as PM Bank's President and Chief
Executive Officer. The initial term of the employment contract ends on April
23, 2002, and renews automatically for additional successive one year periods
through the year 2013 unless earlier terminated by either party.
Salary. Under the employment contract, Mr. Dellerba received a salary of
$120,000 in 1999. In subsequent years, beginning in 2000, he will receive
an annual base salary of not less than the median salary for chief
executive officers of banks headquartered in the in the Western United
States that are of comparable size to PM Bank.
Bonus Compensation. Under his employment contract, Mr. Dellerba received
a bonus of $15,000 for 1999. For each year thereafter, Mr. Dellerba will be
entitled to receive a bonus in an amount which will be determined by
agreement between PM Bank and Mr. Dellerba on the basis of PM Bank's pre-
tax profits for the year, after consultation with an independent
compensation consultant; however, each year's bonus will be at least equal
to 35% of Mr. Dellerba's base salary, or 3.5% of PM Bank's pre-tax profits,
for that year, whichever is greater.
Participation in Management Equity Plans. Mr. Dellerba's employment
contract provides that he is entitled to participate in PM Bank's equity
compensation plans such that he will receive at least one-sixth of all
options issued to all employees or other participants in such plans. In
addition, following the calendar year in which PM Bank achieves a ratio of
net earnings to average total assets (exclusive of
52
<PAGE>
any goodwill) of at least one percent (1%), Mr. Dellerba will receive fully
vested options to purchase, at an exercise price equal to the then fair
market value of our shares, a number of our shares equal to 0.5% of the sum
of the number of our shares then outstanding and the number of shares
subject to then outstanding stock options. Under the employment contract,
the stock options that Mr. Dellerba currently owns, which entitle him to
purchase a total of 125,530 of our shares, will become fully exercisable on
completion of this offering. See "Stock Option Grants in 1999" and
"Aggregate Option Exercises in 1999 and Year-End Option Values" below.
Transaction-Based Compensation. Mr. Dellerba's employment contract
provides that if there occurs a change of control of PM Bank, by means of a
private sale of shares, a sale of all or substantially all of its assets or
a merger, either during the term of his employment or within 24 months of a
termination of his employment by PM Bank, other than for cause or due to
his death, disability or voluntary resignation, Mr. Dellerba will be
entitled to receive one percent (1%) of the gross proceeds of that change
of control transaction. If PM Bancorp or PM Bank or any other of our
subsidiaries completes a public offering of its shares, then Mr. Dellerba
would receive a bonus equal to 1% of the increase in shareholders' equity
during the year in which that offering is consummated (net of any increase
attributable to any net profits earned). Payment of any such transaction-
based compensation will be payable to Mr. Dellerba, at his election, either
in cash or in shares of our stock.
Retirement Benefits. Subject to vesting requirements described below,
upon Mr. Dellerba's reaching the age of 65, he shall become eligible to
receive monthly payments as follows: (i) $6,250 per month for the first
five years after reaching age 65; (ii) $8,333 per month for the next
succeeding five years, and (iii) $10,417 per month for the next succeeding
five years (the "Retirement Payments"). Mr. Dellerba's right to receive
these Retirement Payments vests monthly during the term of his employment
at a rate equal to 1.5 of the monthly Retirement Payments for each month of
service under his employment contract, subject to accelerated partial
vesting if Mr. Dellerba is terminated without cause (as defined) or if he
terminates his employment for good reason (as defined). In the event Mr.
Dellerba dies, whether before or after age 65, the then vested monthly
Retirement Payments will paid to Mr. Dellerba's heirs. Mr. Dellerba, or his
heirs, may elect to receive, in lieu of monthly installments, a lump sum
amount equal to the present value of his vested Retirement Payments.
Severance Benefits. In the event Mr. Dellerba's employment is terminated
without cause or he elects to terminate his employment as a result of
changes we unilaterally make to the terms or conditions of his employment
that adversely affect him, Mr. Dellerba will be entitled to receive a lump
sum cash payment equal to his base salary and target bonus for the
remainder of the term of his employment contract or for the succeeding
twenty-four (24) months, whichever is longer. He also will be entitled to a
continuation of his health insurance and other benefits for a period of two
(2) years. Additionally, on any such termination, all unvested options and
other unvested equity compensation to which he would otherwise be entitled
will become vested.
Other Benefits. Mr. Dellerba also receives the use of a company-paid
automobile, two club memberships, health and life insurance benefits and
the standard employee health, welfare and other benefit plans.
Adjustments to Compensation. If we hire another executive at a
compensation level that exceeds that then payable to Mr. Dellerba, Mr.
Dellerba's compensation and benefits will be adjusted upward to be at least
equal to that of the other executive.
Messrs. McCauley, Erickson and Cronin. We plan to cause PM Bank to enter into
severance agreements with Mr. McCauley, our Chief Operating Officer, Mr.
Erickson, our Chief Financial Officer and Mr. Cronin, our Chief Technology
Officer. Under those agreements, if any of them is terminated without cause, or
there occurs a change of control (as defined) of PM Bank that leads to an
adverse change in the executive officer's position with us, or in the executive
officer's salary or benefits, then the affected officer would be entitled to
receive the following severance compensation: Mr. McCauley--six months in the
case of a termination without cause or twelve months in the case of a change of
control; Mr. Cronin--six months in the case of a termination without cause (as
defined) or twelve months in the case of a change of control; and Mr.
Erickson--six months in the case of either a termination without cause or a
change of control.
53
<PAGE>
Stock Option Grants in 1999
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value
---------------------------------------------------------- at Assumed Annual
Number of Rates of
Securities Percent of Stock Price
Underlying Total Options Appreciation for
Options Granted to Option Term(4)
Granted Employees in Exercise Price -----------------
Name (#)(2) Fiscal Year (Per Share)(2)(3) Expiration Date 5% 10%
---- ---------- ------------- ----------------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Raymond E. Dellerba(1).. 125,530 33.0% $4.00 March 1, 2009 $315,781 $800,250
John J. McCauley(1)..... 36,586 9.6% 4.00 March 1, 2009 92,030 233,222
Daniel Erickson(1)...... 10,000 2.6% 4.00 March 1, 2009 25,156 63,750
John P. Cronin(1)....... 13,066 3.4% 4.00 March 1, 2009 32,864 83,283
</TABLE>
- --------
(1) Mr. Dellerba's options become exercisable in 60 consecutive monthly
installments, but will become fully exercisable on completion of this
offering. All other options described in the table above become exercisable
in five consecutive annual installments.
(2) Adjusted for PM Bank's two-for-one stock split which became effective on
April 14, 2000.
(3) The exercise price of our options are equal to the fair market value of the
underlying shares of stock on the date of grant.
(4) Potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term of the options. These
numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future stock
price growth. Potential realizable values are computed by multiplying the
number of shares of common stock subject to a given option by the exercise
price, as determined by our Board of Directors, assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option and
subtracting from that result the aggregate option and exercise price.
In January 2000, Messrs. Dellerba, McCauley, Erickson and Cronin were granted
options to purchase 90,000, 10,000, 2,000, and 10,000 additional shares of
common stock, respectively, at an exercise price of $6.75 per share
(retroactively adjusted for PM Bank's two-for-one stock split on April 14,
2000). On that same date non-employee directors were granted options to
purchase an aggregate of 96,000 additional shares, also at an exercise price of
$6.75 per share.
Aggregate Option Exercises in 1999 and Year-End Option Values
The following table sets forth the number and value of shares of common stock
underlying the unexercised options held by our executive officers. No options
were exercised during 1999.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 1999(1)(2) December 31, 1999(1)(2)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Raymond E. Dellerba........ 25,106 100,424 $69,042 $276,166
John J. McCauley........... -- 36,586 -- 100,612
Daniel Erickson............ -- 10,000 -- 27,500
John P. Cronin............. -- 13,066 -- 35,932
</TABLE>
- --------
(1) The value of unexercised options has been calculated on the basis of the
fair market value of PM Bank's common stock on December 31, 1999, less the
applicable exercise price per share, multiplied by the number of shares
underlying such options. All amounts give retroactive effect to PM Bank's
two-for-one stock split.
(2) Mr. Dellerba's options become exercisable in 60 approximately equal
installments, but shall become fully exercisable on completion of this
offering. The options held by Messrs. McCauley, Erickson and Cronin become
exercisable in five equal annual installments commencing March 2, 2000.
54
<PAGE>
Compensation of Directors
Non-employee directors receive fees of $500 for each board meeting, and $100
for each committee meeting, that they attend, up to a maximum of $600 per
month. The chairman of the Board of Directors also receives an additional
stipend of $100 per month for the additional responsibilities he has as
chairman.
Stock Option Plan
Effective March 2, 1999, PM Bank's Board of Directors adopted a stock option
plan which provides for the grant of options to our directors, officers and
other key employees, entitling them to purchase shares of common stock of PM
Bank. As of December 31, 1999, options to purchase a total of 380,106 shares of
PM Bank's common stock had been granted and options to purchase an additional
345,800 shares were available for future grant.
Prior to the consummation of this offering, as a result of the Holding
Company Reorganization the Option Plan will be assumed by PM Bancorp and
thereafter the then outstanding options to purchase PM Bank common stock will
be converted into options to purchase a like number of shares of common stock
of PM Bancorp, at the same exercise price per share. Options that may be
granted thereafter shall represent the right to purchase shares of common stock
of PM Bancorp.
The Option Plan provides for the granting of "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and nonstatutory options to directors, officers and
employees of PM Bancorp and PM Bank, except that incentive stock options may
not be granted to non-employee directors. The purpose of the Option Plan is to
provide participants with an opportunity to acquire an equity interest in PM
Bancorp that will give them incentive to continue to provide services to us.
The Option Plan is administered by the Management and Incentive Committee of
the Board of Directors, which has sole discretion and authority, consistent
with the provisions of the Option Plan, to determine which eligible
participants will receive options, the time when options will be granted, the
terms of options granted and the number of shares which will be subject to
options granted under the Option Plan.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 1999, the Management and Incentive
Committee of the Board of Directors established the levels of compensation for
our executive officers. Mr. Dellerba, who is the President and Chief Executive
Officer of PM Bancorp and PM Bank, is a member of that Committee and
participated in its deliberations regarding executive compensation for our
other officers. Mr. Dellerba did not, however, participate in the deliberations
of that Committee with respect to his compensation.
Limitations on Directors' Liability and Indemnification
The Articles of Incorporation of PM Bancorp and the Articles of Incorporation
of PM Bank provide that, pursuant to California law, their directors shall not
be liable for monetary damages for breach of their fiduciary duty in their
capacities as directors of PM Bancorp or PM Bank. This provision in our
Articles of Incorporation does not eliminate the directors' fiduciary duty, and
in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under California law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to PM Bancorp or PM Bank for acts or omissions
not in good faith or involving intentional misconduct, for knowing violations
of law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under California law. The provision also does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
The respective Articles of Incorporation of PM Bancorp and PM Bank further
provide that PM Bancorp and PM Bank will indemnify their respective directors
and officers, and may indemnify their respective
55
<PAGE>
employees and other agents, to the fullest extent permitted by law. In
addition, in January 2000, the shareholders of PM Bank approved Indemnification
Agreements that PM Bank entered into with its officers and directors and also
authorized PM Bancorp to enter into similar agreements with its officers and
directors. These agreements require PM Bank and will require PM Bancorp, among
other things, to indemnify their respective directors and officers against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from actions not taken in
good faith or in a manner the indemnitee believed to be opposed to our best
interests, or in the case of a shareholder derivative action, opposed to the
best interests of PM Bancorp and its shareholders), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, against an undertaking by the indemnified party to repay such
advances if it is ultimately determined that he or she is not entitled to
indemnification, and to obtain directors' insurance if available on reasonable
terms. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling our company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable. We believe that PM Bancorp's Articles of Incorporation and the
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
We also have obtained directors and officers liability insurance for our
directors and officers.
CERTAIN TRANSACTIONS
Our executive officers and directors, and the entities with which they are
associated, have engaged in banking transactions with PM Bank in the ordinary
course of PM Bank's business. It is the policy of the Board of Directors that
loans and commitments to loan included in such transactions will be made in
accordance with applicable laws and on substantially the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with persons of similar creditworthiness that are not
affiliated with us or PM Bank and only if such loans do not present any undue
risk of collectability.
It is possible that, on the basis of sound business practices and subject to
the approval of the Board of Directors, we may select companies owned, operated
or controlled by directors to provide certain products and services to us. Any
such purchases shall be made on reasonable competitive terms and prices and in
accordance with applicable laws and regulations.
The directors advanced an aggregate of $470,000, without interest, to PM Bank
during the period from inception (May 29,1998) to December 1998 to fund
organizational and pre-opening expenses. Such amounts were repaid to the
organizing directors by PM Bank on March 1, 1999 from the proceeds of its
initial capital offering.
56
<PAGE>
PRINCIPAL SHAREHOLDERS
Set forth below is information regarding the number of shares of the
Bancorp's common stock that would have been beneficially owned as of March 31,
2000 by (i) any persons known by us to own beneficially five percent or more of
PM Bancorp's outstanding shares, and (ii) each of our executive officers and
directors, after giving retroactive effect to the Holding Company
Reorganization as if it had occurred prior to March 31, 2000.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
----------------------
Names and Addresses of Beneficial Shares Beneficially Before this After this
Owners(1) Owned(2) Offering Offering
- --------------------------------- ------------------- ----------- ----------
<S> <C> <C> <C>
Carroll David Cone Jr.............. 200,000 5.4% 3.0%
Raymond E. Dellerba................ 95,790(2)(3) 2.5 1.4
George H. Wells.................... 76,862(2)(4) 2.1 1.1
Ronald W. Chrislip................. 68,682(2)(5) 1.8 1.0
Julia M. DiGiovanni................ 66,682(2)(6) 1.8 1.0
John Thomas, M.D................... 68,682(2) 1.8 1.0
Richard M. Torre................... 68,682(2) 1.8 1.0
Robert E. Williams................. 68,682(2) 1.8 1.0
Warren T. Finley................... 19,482(2)(7) * *
John J. McCauley................... 33,316(2) * *
John P. Cronin..................... 20,614(2) * *
Daniel L. Erickson................. 10,250(2) * *
All officers and directors as a
group (11 persons)................ 597,718 16.0% 8.8%
</TABLE>
- --------
* Less than 1%.
(1) Each Director's and Executive Officer's address is the address of PM
Bancorp, 450 Newport Center Drive, Suite 100, Newport Beach, California
92660. Mr. Cone's address is P.O. Box 2433, McCall, Idaho, 83638.
(2) Includes the following number of shares that are currently exercisable or
will become exercisable by April 29, 2000: Mr. Dellerba--29,290 shares; Mr.
McCauley--7,316 shares; Mr. Cronin--2,614 shares; Mr. Erickson--2,000
shares; Mr. Wells--8,362 shares; and Mrs. DiGiovanni and Messrs. Chrislip,
Thomas, Torre, Williams and Finley--4,182 shares each. Does not include
options to purchase an aggregate of 280,700 shares of common stock granted
to the officers and directors in January 2000. See "Management--Stock
Option Plan."
(3) Does not include, and Mr. Dellerba disclaims beneficial ownership of, a
total of 5,000 shares held in joint tenancy by Mr. Dellerba's mother and
each of Mr. Dellerba's minor children.
(4) Does not include, and Mr. Wells disclaims beneficial ownership of, 12,500
shares owned by Mr. Wells' spouse.
(5) Does not include, and Mr. Chrislip disclaims beneficial ownership of 5,300
shares which are owned by certain family members (not residing with him).
(6) Does not include, and Mrs. DiGiovanni disclaims beneficial ownership of
3,000 shares which are owned by certain family members (not residing with
her).
(7) Does not include, and Mr. Finley disclaims beneficial ownership of, 62,198
shares, which are owned by family members of Mr. Finley (not residing with
him).
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
PM Bancorp's authorized capital stock currently consists of 2,000,000 shares
of preferred stock, without par value, and 10,000,000 shares of common stock,
without par value. Prior to the completion of this offering a total of
3,720,162 shares of common stock of PM Bancorp will be issued and outstanding
and an additional 725,906 shares of common stock will be reserved for issuance
on exercise of stock options. Up to 3,450,000 shares of common stock will be
sold and issued in this offering and warrants to purchase 300,000 shares will
be issued to the underwriters, leaving 1,803,932 shares of common stock and
2,000,000 shares of preferred stock available for future issuance. No shares of
preferred stock have been issued, and we have no present plans to sell or issue
shares of preferred stock. Set forth below is a description of the preferred
stock and the common stock.
Preferred Stock
Our Board of Directors has the authority, without further action by the
shareholders, to issue up to 2,000,000 shares of preferred stock in one or more
series, and to fix the rights, preferences and privileges thereof, including
voting rights, terms of redemption, redemption prices, liquidation preference
and number of shares constituting any series or the designation of such series.
The purpose of the provisions of PM Bancorp's Articles of Incorporation
authorizing the issuance of preferred stock is to provide us with the
flexibility to take advantage of opportunities to raise additional capital
through the issuance of shares that address competitive conditions in the
securities markets. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that we may issue in the future. Although it presently has no
plans to do so, the Board of Directors, without stockholder approval, may issue
preferred stock with voting or conversion rights which could adversely affect
the voting power of the holders of our common stock. This provision may be
deemed to have a potential anti-takeover effect, because the issuance of such
preferred stock may delay or prevent a change of control of PM Bancorp.
Furthermore, shares of preferred stock, if any are issued, may have other
rights, including economic rights, senior to our common stock, and, as a
result, the issuance thereof could depress the market prices of the common
stock. After the Holding Company Reorganization, PM Bank will continue to have
2,000,000 authorized shares of preferred stock, with identical rights and
preferences to those described above.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders, provided that shareholders may
cumulate votes in the election of our directors (that is, to give any
candidate, or any number of candidates, standing for election a number of votes
equal to the number of directors to be elected multiplied by the number of
votes to which the shareholder's shares are entitled). The candidates who
receive the highest number of votes will be elected as directors.
Subject to the preference in dividend rights of any series of preferred stock
which we may issue in the future, the holders of common stock are entitled to
receive such cash dividends, if any, as may be declared by our board of
directors out of legally available funds, which consist of our retained
earnings or current earnings. However, our ability to pay dividends also will
depend on the extent to which our capital exceeds minimum capital requirements
under applicable laws and regulations, and upon the rate of growth of PM Bank,
which may require earnings to be retained to support such growth. Upon
liquidation, dissolution or winding up, after payment of all debts and
liabilities, including funds of depositors, and after payment of the
liquidation preferences of any shares of preferred stock then outstanding, the
holders of the common stock will be entitled to all assets that are legally
available for distribution.
Other than the rights described above, the holders of common stock have no
preemptive subscription, redemption, sinking fund or conversion rights and are
not subject to further calls or assessments. The rights and preferences of
holders of common stock will be subject to the rights of any series of
preferred stock which we may issue in the future.
Transfer Agent and Registrar
The transfer agent and registrar for the shares of our common stock is U. S.
Stock Transfer Corporation, Glendale, California.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, PM Bancorp's common stock was not listed on any stock
exchange or automated or other inter-dealer trading or quotation system. PM
Bank's common stock has traded only on an infrequent basis on the NASDAQ OTC
Bulletin Board. Future sales of substantial amounts of our common stock in the
public market, following this offering, could adversely affect prevailing
market prices and adversely affect our ability to raise additional capital at a
time and price favorable to us.
Upon completion of this offering, we will have 6,720,162 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option. Of these shares, the 3,000,000 shares sold in the offering will be
freely tradable without restriction or further registration under the
Securities Act, unless they are purchased by our "affiliates" as that term is
used under the Securities Act. Of the 3,720,162 shares that will be held by the
existing shareholders of PM Bank, a total of 3,197,115 will become freely
tradable without restriction on the date of this prospectus. The remaining
523,047 shares, which will be owned by officers or directors of PM Bancorp,
also will become tradable 90 days after the date of this offering, but sales of
such shares will be subject to certain volume limitations and manner of sale
restrictions contained in Rule 145 under the Securities Act of 1933, which is
summarized below.
As a condition of the offering, all officers and directors will agree with
the underwriters that they will not sell any of our common stock owned by them
for a period of 180 days after the effective date of this offering without the
prior written consent of Paulson Investment Company, Inc. A total of 523,047
shares of common stock will be subject to this 180-day lock-up. Upon the
expiration of the 180-day lock-up (or earlier upon the consent of Paulson),
those shares will become eligible for sale subject to the volume and other
restrictions of Rule 144.
In general, under Rule 145, any person (or persons whose shares are
aggregated) who, at the time the Holding Company Reorganization was approved,
was an affiliate of PM Bank or who is an affiliate PM Bancorp will be entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of one percent of the then outstanding shares of our common stock
(approximately 67,200 shares immediately after this offering) or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 145 are also subject to certain requirements as to the manner of
sale, notice and availability of current public information about us.
On completion of this offering, we will issue a stock purchase warrant (the
"Underwriter's Warrant"), that will entitle Paulson Investment Company, Inc.,
the representative of the underwriters for this offering ("Paulson"), to
purchase a number of our shares of common stock (the "Warrant Shares") equal to
10% of the shares sold in this offering (exclusive of shares that may be sold
pursuant to the underwriters' overallotment option). The per share purchase
price of the Warrant Shares will be equal to 120% of the per share initial
public offering price set forth on the cover page of this prospectus. The
Underwriter's Warrant will be exercisable for a period of four years commencing
one year after the date of this prospectus.
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock reserved for issuance under our stock
option plan, thus permitting the resale by non-affiliates of shares issued
under the plan in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing,
which is expected to occur on or shortly after the closing of this offering. At
the time this offering is completed, options to purchase 380,106 shares of
common stock will be outstanding under our stock option plan. Shares issuable
upon the exercise of options held by persons subject to the lock-up agreements
described above will be subject to the lock-up provisions thereof.
59
<PAGE>
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms and
conditions contained in an underwriting agreement with us, to purchase
3,000,000 shares from us at the price set forth on the cover page of this
prospectus, in accordance with the following table:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Paulson Investment Company, Inc....................................
---------
Total............................................................ 3,000,000
=========
</TABLE>
Nature of Underwriting Commitment. The underwriting agreement provides that
the underwriters are committed to purchase all the shares offered by this
prospectus if any shares are purchased. This commitment does not apply to
450,000 shares subject to the over-allotment option granted by us to the
underwriters to purchase additional shares in this offering.
Conduct of the Offering. We have been advised by Paulson Investment Company,
Inc., that the underwriters propose to offer the shares of common stock to be
sold in this offering directly to the public at the initial public offering
price set forth on the cover page of this prospectus, and to certain securities
dealers at that price less a concession of not more than $ per share. The
underwriters may allow, and those dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the shares of common
stock are released for sale to the public, the offering price and other selling
terms may be changed from time to time by the underwriters. No change in those
terms will change the amount of proceeds to be received by us as set forth on
the cover page of this prospectus.
The underwriters have informed us that they do not expect to confirm sales of
shares offered by this prospectus on a discretionary basis.
Overallotment Option. We have granted the underwriters an option, expiring 45
days after the date of this prospectus, to purchase up to 450,000 additional
shares from us on the same terms as set forth in this prospectus with respect
to the 3,000,000 shares offered hereby. The underwriters may exercise this
option, in whole or in part, only to cover over-allotments, if any, in the sale
of the shares offered by this prospectus.
Offering Discounts and Expenses. The following table shows the per share and
total underwriting discounts to be paid by us to the underwriters. These
amounts are shown assuming no exercise and full exercise, respectively, of the
underwriters' over-allotment option described above:
<TABLE>
<CAPTION>
Total without Total with
Per Over-Allotment Over-Allotment
Share Option Option
----- -------------- --------------
<S> <C> <C> <C>
Per share underwriting discounts....... $ $ $
Total underwriting discount to be paid
by us................................. $ $ $
</TABLE>
The expenses of this offering, not including the underwriting discounts, are
estimated to be approximately $812,500 and will be paid by us. Expenses of this
offering, exclusive of the underwriting discounts, include the 1%
nonaccountable expense allowance payable to Paulson Investment Company, Inc.,
the SEC filing fee, the NASD filing fee, NASDAQ listing fees, printing
expenses, legal and accounting fees, transfer agent and registrar fees and
other miscellaneous fees and expenses.
We have agreed that if this offering is successfully completed we will pay to
Paulson Investment Company, Inc., a non-accountable expense allowance equal to
one percent of the initial public offering price of the sale of the shares in
this offering (including sales on exercise of the underwriters' over-allotment
option).
60
<PAGE>
Underwriter's Warrant. On completion of this offering, we will issue the
Underwriter's Warrant to Paulson Investment Company, Inc., entitling it to
purchase from us up to ten percent of the number of shares sold in this
offering, exclusive of the shares available pursuant to the over-allotment
option. The per share purchase price of these shares will be equal to 120% of
the initial public offering price per share. The warrant is exercisable during
the four-year period beginning one year from the date of issuance. The warrant,
and the shares underlying the warrant, are not transferable for one year
following the effective date of the registration, except to an individual who
is an officer or partner of an underwriter, by will or by the laws of descent
and distribution, and are not redeemable.
The holder of the Underwriter's Warrant will have, in that capacity, no
voting, dividend or other shareholder rights. Any profit realized by the
underwriters on the sale of the shares issuable upon exercise of the
Underwriter's Warrant may be deemed to be additional underwriting compensation.
The securities underlying the Underwriter's Warrant are being registered
pursuant to the registration statement of which this prospectus is a part.
During the term of the Underwriter's Warrant, the holder thereof is given the
opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional equity capital while the
Underwriter's Warrant is outstanding. At any time at which the Underwriter's
Warrant is likely to be exercised, we may be able to obtain additional equity
capital on more favorable terms.
Indemnification. We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect thereof.
Lock-up Agreements. We, our executive officers, and directors have agreed not
to sell or transfer any shares of our common stock for six months after the
date of this prospectus without first obtaining the written consent of Paulson
Investment Company, Inc. Specifically, we and these other individuals have
agreed not to, directly or indirectly:
. sell or offer to sell any shares of our common stock;
. grant any option to sell any shares of our common stock;
. engage in any short sale of our common stock;
. pledge or otherwise transfer or dispose of any shares of our common
stock; or
. publicly announce an intention to do any of the foregoing.
These lock-up agreements apply to shares of our common stock and also to any
options or warrants to acquire shares of our common stock, or securities
exchangeable or exercisable for or convertible into shares of our common stock.
These lock-up agreements apply to all such securities that are currently owned
or later acquired either of record or beneficially by the persons executing the
agreements. However, Paulson Investment Company, Inc. may, in its sole
discretion and without notice, release some or all of the securities subject to
these agreements at any time during the one year period. Currently, there are
no agreements by Paulson Investment Company, Inc. to release any of the
securities from the lock-up agreements during such six month period.
Our executive officers and directors have agreed that, for a period of one
year from the date of this prospectus, they will notify Paulson Investment
Company, Inc. before they sell our common stock under Rule 144 or Rule 145.
Prior to this offering, there has not been an active public market for PM
Bancorp's common stock. Consequently, the initial public offering price of the
common stock will be determined by arms' length negotiation between us and the
underwriters. Among the factors to be considered in pricing the common stock
are our results of operations, current financial condition and future
prospects, the experience of management, the amounts of ownership to be
retained by the current stockholders, the general condition of the economy, the
banking industry and the securities markets, the demand for similar securities
of companies considered comparable to us and other factors that we and the
underwriters deem relevant.
61
<PAGE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect thereof.
Online Activities. A prospectus in electronic format may be made available on
the Internet sites or through other online services maintained by one or more
of the underwriters of this offering, member of the selling group or by persons
with whom they may contract for such services. In those cases, prospective
investors may view offering terms online and, depending upon the particular
underwriter, prospective investors may be allowed to place orders online. The
underwriters may agree with us to allocate a specific number of shares for sale
to online brokerage account holders. Any such allocation for online
distributions will be made by the representatives on the same basis as other
allocations.
Stabilization and Other Transactions. The rules of the SEC generally prohibit
the underwriters from trading in our common stock on the open market during
this offering. However, the underwriters are allowed to engage in some open
market transactions and other activities during this offering that may cause
the market price of our common stock to be above or below that which would
otherwise prevail in the open market. These activities may include
stabilization, short sales and over-allotments, syndicate covering transactions
and penalty bids.
. Stabilizing transactions consist of bids or purchases made by the lead
representative for the purpose of preventing or slowing a decline in the
market price of our common stock while this offering is in progress.
. Short sales and over-allotments occur when the representatives, on behalf
of the underwriting syndicate, sell more of our shares than they purchase
from us in this offering. In order to cover the resulting short position,
the representatives may exercise the over-allotment option described
above and/or they may engage in syndicate covering transactions. There is
no contractual limit on the size of the syndicate covering transaction.
The underwriters will deliver a prospectus in connection with these short
sales. Purchasers of shares sold short by the underwriters are entitled
to the same remedies under the federal securities laws as any other
purchaser of shares covered by the registration statement.
. Syndicate covering transactions are bids for or purchases of our common
stock on the open market by the representatives on behalf of the
underwriters in order to reduce a short position incurred by the
representatives on behalf of the underwriters.
. A penalty bid is an arrangement permitting the representatives to reclaim
the selling concession that would otherwise accrue to an underwriter if
the common stock originally sold by that underwriter was later
repurchased by the representatives and therefore was not effectively sold
to the public by such underwriter.
If the underwriters commence these activities, they may discontinue them at any
time without notice. The underwriters may carry out these transactions on the
NASDAQ National Market, in the over-the-counter market or otherwise.
Passive Market Making. Prior to the pricing of this offering, and until the
commencement of any stabilizing bid, underwriters and dealers who are qualified
market makers on the NASDAQ OTC Bulletin Board may engage in passive market
making transactions. Passive market making is allowed during the period when
the SEC's rules would otherwise prohibit market activity by the underwriters
and dealers who are participating in this offering. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for our common stock; but if all
independent bids are lowered below the passive market maker's bid, the passive
market maker must also lower its bid once it exceeds specified purchase limits.
Net purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in our
common stock during a specified period and must be discontinued when such limit
is reached. Underwriters and dealers are not required to engage in passive
market making and may end passive market making activities at any time.
62
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares that we offer will be passed upon
for us by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport
Beach, California. Certain legal matters in connection with this offering will
be passed upon for the underwriters by Stoel Rives LLP, Portland, Oregon.
Members of Stradling Yocca Carlson & Rauth own a total of 12,500 shares of
Bancorp common stock.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission with respect to the shares offered by this prospectus. This
prospectus does not contain all of the information included in the registration
statement and the accompanying exhibits and schedules. For further information
with respect to us and the shares, you should refer to the registration
statement and the accompanying exhibits and schedules. Statements in this
prospectus regarding the contents of contracts or other documents are not
necessarily complete. In each instance you should refer to the copy of the
contract or other document filed as an exhibit to the registration statement.
You may inspect a copy of the registration statement and the accompanying
exhibits and schedules without charge at the public reference facilities
maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and you may obtain copies of all
or any part of the registration statement from these offices upon the payment
of the fees prescribed by the Securities and Exchange Commission. You may
obtain information on the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent certified public accountants.
63
<PAGE>
PACIFIC MERCANTILE BANCORP
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Statements of Financial Condition............................ F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)...... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
After the reorganization transaction discussed in Note 1 to Pacific Mercantile
Bancorp's consolidated financial statements is effected, we expect to be in a
position to render the following audit report.
/s/ Arthur Andersen LLP
January 28, 2000
Irvine, California
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Pacific Mercantile Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Pacific Mercantile Bancorp (the Company) and subsidiary as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1999 and the period from inception (May 29, 1998) to December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Mercantile Bancorp and
subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999 and for
the period from inception (May 29, 1998) to December 31, 1998 in conformity
with accounting principles generally accepted in the United States.
F-2
<PAGE>
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1999 1998 2000
----------- --------- ------------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Cash and Due from Banks.................. $ 2,531,200 $ 177,300 $ 4,301,300
Federal Funds Sold....................... 35,967,000 -- 34,405,000
----------- --------- ------------
Cash and cash equivalents.............. 38,498,200 177,300 38,706,300
----------- --------- ------------
Interest Bearing Deposits with Financial
Institutions............................ 1,386,000 -- 1,089,000
Securities Available for Sale, at fair
value................................... 2,668,800 -- 2,712,600
Loans held for Sale, at lower of cost or
market.................................. 2,700,000 -- 11,724,600
Loans, net............................... 44,343,200 -- 62,973,600
Accrued Interest Receivable.............. 221,100 -- 435,400
Premises and Equipment, net.............. 1,178,300 142,500 1,282,500
Other Assets............................. 169,800 20,200 236,600
----------- --------- ------------
Total assets......................... $91,165,400 $ 340,000 $119,160,600
=========== ========= ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
------------------------------------
<S> <C> <C> <C>
Deposits:
Noninterest bearing.................... $16,607,800 $ -- $ 25,012,400
Interest bearing....................... 57,892,400 -- 77,956,600
----------- --------- ------------
Total deposits....................... 74,500,200 -- 102,969,000
Advances from Founders................... -- 470,000 --
Accrued Interest Payable................. 51,600 -- 58,700
Other Liabilities........................ 595,200 112,200 360,200
----------- --------- ------------
Total liabilities.................... 75,147,000 582,200 103,387,900
----------- --------- ------------
Commitments and Contingencies (Note 12)
Stockholders' Equity (Deficit):
Preferred stock, no par value,
2,000,000 shares authorized, none
issued................................ -- -- --
Common stock, no par value, 10,000,000
shares authorized, 3,720,162 shares
issued and outstanding................ 19,019,200 -- 19,019,200
Accumulated deficit.................... (2,992,400) (242,200) (3,234,700)
Unrealized loss on securities available
for sale, net of tax.................. (8,400) -- (11,800)
----------- --------- ------------
Total stockholders' equity
(deficit)........................... 16,018,400 (242,200) 15,772,700
----------- --------- ------------
Total liabilities and stockholders'
equity (deficit).................... $91,165,400 $ 340,000 $119,160,600
=========== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception Three Months Ended
Year Ended (May 29, 1998) March 31,
December 31, to December 31, ---------------------
1999 1998 2000 1999
------------ --------------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees.... $ 759,800 $ -- $1,200,600 $ 3,700
Federal funds sold....... 1,173,300 -- 543,200 34,200
Securities available for
sale.................... 56,500 -- 34,500 1,300
Interest bearing deposits
with financial
institutions............ 45,100 -- 21,800 --
Other.................... 65,400 2,600 6,500 27,100
----------- --------- ---------- ---------
Total interest income.. 2,100,100 2,600 1,806,600 66,300
----------- --------- ---------- ---------
Interest Expense:
Deposits................. 878,900 -- 774,700 5,300
Other borrowings......... 1,100 -- -- 1,000
----------- --------- ---------- ---------
Total interest
expense............... 880,000 -- 774,700 6,300
----------- --------- ---------- ---------
Net Interest Income........ 1,220,100 2,600 1,031,900 60,000
Provision for Loan Losses.. 750,000 -- 100,000 30,000
----------- --------- ---------- ---------
Net Interest Income after
Provision for Loan
Losses.................... 470,100 2,600 931,900 30,000
----------- --------- ---------- ---------
Noninterest Income:
Service charges and
fees.................... 14,900 -- 15,800 500
Mortgage banking......... 99,200 -- 102,800 --
Other.................... 17,500 -- 35,100 (500)
----------- --------- ---------- ---------
Total noninterest
income................ 131,600 -- 153,700 --
----------- --------- ---------- ---------
Noninterest expense:
Salaries and employee
benefits................ 1,836,500 108,800 731,000 226,700
Occupancy expense........ 271,100 21,000 125,400 56,100
Equipment expense........ 195,200 1,000 101,800 9,300
Professional fees........ 377,300 74,100 147,900 38,200
Other operating expense.. 671,200 38,700 221,000 67,000
----------- --------- ---------- ---------
Total noninterest
expense............... 3,351,300 243,600 1,327,100 397,300
----------- --------- ---------- ---------
Loss before Income Taxes... (2,749,600) (241,000) (241,500) (367,300)
Income Tax Expense......... 600 1,200 800 800
----------- --------- ---------- ---------
Net Loss................... $(2,750,200) $(242,200) $ (242,300) $(368,100)
=========== ========= ========== =========
Net Loss per Share......... $ (1.12) $ N/A $ (0.07) $ (0.51)
=========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from Inception (May 29, 1998) to December 31, 1998, the Year
Ended December 31, 1999,
and the Period Ended March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Unrealized
Preferred Stock Common Stock Loss on
---------------- --------------------- Securities
Number of Number of Accumulated Available
Shares Amount Shares Amount Deficit for Sale Total
--------- ------ --------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at inception
(May 29, 1998)......... -- $ -- -- $ -- $ -- $ -- $ --
Net loss............... -- -- -- -- (242,200) -- (242,200)
--- ----- --------- ----------- ----------- -------- -----------
Balance, December 31,
1998................... -- -- -- -- (242,200) -- (242,200)
Issuance of 3,720,162
shares of common stock,
net of offering
expenses............... -- -- 3,720,162 19,019,200 -- -- 19,019,200
Comprehensive loss:
Net loss............... -- -- -- -- (2,750,200) -- (2,750,200)
Change in unrealized
loss on securities
available for sale,
net of tax............ -- -- -- -- -- (8,400) (8,400)
-----------
Total comprehensive
loss................... (2,758,600)
--- ----- --------- ----------- ----------- -------- -----------
Balance, December 31,
1999................... -- $ -- 3,720,162 $19,019,200 $(2,992,400) $ (8,400) $16,018,400
Comprehensive loss:
Net loss (unaudited)... -- -- -- -- (242,300) -- (242,300)
Change in unrealized
loss on securities
available for sale,
net of tax
(unaudited)........... -- -- -- -- -- (3,400) (3,400)
-----------
Total comprehensive loss
(unaudited)............ (245,700)
--- ----- --------- ----------- ----------- -------- -----------
Balance, March 31, 2000
(unaudited)............ -- $ -- 3,201,627 $19,019,200 $(3,234,700) $(11,800) $15,772,700
=== ===== ========= =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PACIFIC MERCANTILE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception Three Months Ended
Year Ended (May 29, 1998) March 31,
December 31, to December 31, -------------------------
1999 1998 2000 1999
------------ --------------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net loss.............. $(2,750,200) $(242,200) $(242,300) $(368,100)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 202,100 -- 91,500 11,800
Provision for loan
losses............. 750,000 -- 100,000 30,000
Accretion of
discount on
securities......... (2,000) -- (1,500) --
Net change in
accrued interest
receivable......... (221,100) -- (214,300) (5,600)
Net change in other
assets............. (149,600) (20,200) (66,800) (4,300)
Net change in
accrued interest
payable............ 51,600 -- 7,100 2,800
Net change in other
liabilities........ 483,000 112,200 (235,000) 6,600
----------- --------- ------------ -----------
Net cash used in
operating
activities......... (1,636,200) (150,200) (561,300) (326,800)
----------- --------- ------------ -----------
Cash Flows From
Investing Activities:
Net increase in
interest bearing
deposits with
financial
institutions......... (1,386,000) -- 297,000 (396,000)
Purchase of securities
available for sale... (2,675,200) -- (45,700) (250,900)
Net increase in loans
held for sale........ (2,700,000) -- (9,024,600) --
Net increase in
loans................ (45,093,200) -- (18,730,400) (1,045,500)
Increase in premises
and equipment........ (1,237,900) (142,500) (195,700) (344,800)
----------- --------- ------------ -----------
Net cash used in
investing
activities......... (53,092,300) (142,500) (27,699,400) (2,037,200)
----------- --------- ------------ -----------
Cash Flows From
Financing Activities:
Net increase in
deposits............. 74,500,200 -- 28,468,800 13,331,400
Proceeds from sale of
common stock, net of
offering expenses.... 19,019,200 -- -- 8,298,300
(Repayment of)
advances from
founders............. (470,000) 470,000 -- (470,000)
----------- --------- ------------ -----------
Net cash provided by
financing
operations......... 93,049,400 470,000 28,468,800 21,159,700
----------- --------- ------------ -----------
Net increase in cash
and cash
equivalents........ 38,320,900 177,300 208,100 18,795,700
Cash and Cash
Equivalents,
beginning of period.. 177,300 -- 38,498,200 177,300
----------- --------- ------------ -----------
Cash and Cash
Equivalents, end of
period............... $38,498,200 $ 177,300 $ 38,706,300 $18,973,000
=========== ========= ============ ===========
Supplementary Cash Flow
Information:
Cash paid for interest
on deposits and other
borrowings........... $ 828,400 $ -- $ 676,600 $ --
=========== ========= ============ ===========
Cash paid for income
taxes................ $ 600 $ 1,200 $ 800 $ --
=========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. Nature of Business and Significant Accounting Policies
Organization
The consolidated financial statements include the accounts of Pacific
Mercantile Bancorp ("Bancorp") and Pacific Mercantile Bank (the "Bank").
Bancorp is a bank holding company which was incorporated on January 7, 2000 in
the State of California. Pacific Mercantile Bank is a banking company which was
formed on May 29, 1998, incorporated November 18, 1998 in the State of
California and commenced operations on March 1, 1999. The Bank is chartered by
the California Department of Financial Institutions (DFI) and is a member of
the Federal Reserve Bank of San Francisco ("FRB"). In addition, its customers'
deposit accounts are insured by the Federal Deposit Insurance Corporation
("FDIC").
Prior to completion of its public offering (see Note 17), Bancorp will
acquire Pacific Mercantile Bank by means of a merger as a result of which
Pacific Mercantile Bank will become a wholly-owned subsidiary of Bancorp and
Pacific Mercantile Bank's shareholders will become Bancorp shareholders, owning
the same number and percentage of Bancorp shares as they had owned in Pacific
Mercantile Bank (the "Reorganization"). Prior to the Reorganization, Bancorp
will have only nominal assets and will not have conducted any business. All
financial information included herein has been restated as if the holding
company reorganization was effective for all periods presented. Additionally,
the number of common shares outstanding gives retroactive effect to a two-for-
one stock split of the Bank's outstanding shares, and the authorized number of
common shares gives retroactive effect to an increase therein that is
proportionate to the increase in the number of outstanding shares as a result
of that stock split, that will become effective prior to the completion of the
Reorganization.
The Bank provides a full range of banking services to small and medium size
businesses, professionals and the general public throughout Orange County and
is subject to competition from other financial institutions. The operating
results of the Bank may be significantly affected by changes in market interest
rates and by fluctuations in real estate values in the Bank's primary service
area. The Bank is regulated by the DFI, FRB and FDIC and undergoes periodic
examinations by those regulatory authorities.
Interim Financial Statements
These accompanying consolidated statements of financial condition of Pacific
Mercantile Bancorp and subsidiary as of March 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 2000 and 1999 have been prepared in accordance
with generally accepted accounting principles on a basis consistent with the
accounting policies reflected in the audited consolidated financial statements.
They do not, however, include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments including normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the interim periods presented are not necessarily indicative of the
results that may be expected for any other interim period or for the year as a
whole.
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.
F-7
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Cash and Cash Equivalents
For purposes of the statements of cash flow, cash and cash equivalents
consist of cash on hand and due from banks and federal funds sold. Generally,
federal funds are sold for a one-day period. Cash and cash equivalents amount
to $38,498,200 and $177,300 as of December 31, 1999 and 1998, respectively.
Interest Bearing Deposits with Financial Institutions
Interest bearing deposits with financial institutions mature within one year
and are carried at cost.
Securities Available for Sale
Securities available for sale are those that management intends to hold for
an indefinite period of time and that may be sold in response to changes in
liquidity needs, changes in interest rates, changes in prepayment risks and
other similar factors. The securities are recorded at fair value, with
unrealized gains and losses excluded from earnings and reported as other
comprehensive income.
Purchased premiums and discounts are recognized as interest income using the
interest method over the term of the securities. Declines in the fair value of
available for sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the
specific identification method.
Loans Held for Sale
Loans intended for sale in the secondary market are carried at the lower of
cost or estimated fair value in the aggregate. Net unrealized losses, if any,
are recognized through a valuation allowance by charges to income.
Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are stated at principal amounts
outstanding, net of unearned income. Interest is accrued daily as earned,
except where reasonable doubt exists as to collectibility, in which case
accrual of interest is discontinued and the loan is placed on nonaccrual
status. Loans are generally classified as impaired and placed on nonaccrual
status when, in management's opinion, such principal or interest will not be
collectible in accordance with the contractual terms of the loan agreement.
Loans with principal or interest that is 90 days or more past due are then
placed on nonaccrual status. Management may elect to continue the accrual of
interest when the estimated net realizable value of the collateral is
sufficient to recover both principal and accrued interest balances and such
balances are in the process of collection.
Generally, interest payments received on nonaccrual loans are applied to
principal. Once all principal has been received, additional interest payments
are recognized as interest income on a cash basis. The allowance for loan
losses is established through a provision for loan losses. Loans are charged
against the allowance for loan losses when management believes that the
collection of the carrying amount is unlikely. Because the Bank commenced
operations in early 1999, management has no prior loss experience with its loan
portfolio. Consequently, during the initial stages of operation, the allowance
is being maintained at a level of 1.6% of outstanding loan balances. This
allowance is based upon historical industry loan losses and management's
evaluation of the Bank's loan portfolio quality. As management develops more
history with the Bank's loan portfolio, it will maintain an allowance for loan
losses based on evaluations of the collectibility of loans taking into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, review of specific problem loans, prior
loan loss experience and current economic conditions that may affect the
borrowers' ability to pay.
F-8
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
The allowance is based on estimates, and ultimate losses may vary from the
current estimates. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known. Management believes that the allowance for loan losses
is adequate as of December 31, 1999. In addition, the FDIC and the DFI, as an
integral part of their examination processes, periodically review the Bank's
allowance for loan losses. The agencies may require the Bank to recognize
additions to the allowance based on their judgments on information available at
the time of their examinations.
The Bank also evaluates loans for impairment, where principal and interest is
not expected to be collected in accordance with the contractual terms of the
loan agreement. The Bank measures and reserves for impairment on a loan by loan
basis using either the present value of expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent. As of December 31, 1999 the Bank has no loans
classified as impaired. The Bank excludes from its impairment calculations
smaller, homogeneous loans such as consumer installment loans and lines of
credit. Also, loans that experience insignificant payment delays or payment
shortfalls are generally not considered impaired.
Loan Origination Fees and Costs
All origination fees and related direct costs are deferred and amortized to
interest income as an adjustment to yield over the respective lives of the
loans using the effective interest method. As of December 31, 1999,
approximately $62,200 of deferred loan costs were included in the related loan
totals in the accompanying statements of financial condition.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization which is charged to expense on a straight-line basis over the
estimated useful lives of the assets or, in the case of leasehold improvements,
over the term of the leases, whichever is shorter. Maintenance and repairs are
charged directly to expense as incurred. Improvements to premises and equipment
that extend the useful lives of the assets are capitalized.
When assets are disposed of, the applicable costs and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in current operations. Rates of depreciation and amortization
are based on the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and
equipment.... Three to ten years
Leasehold
improvements.. Lesser of the lease term or estimated useful life
</TABLE>
Income Taxes
Deferred income taxes and liabilities are determined using the asset and
liability method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws.
Loss Per Share
Basic loss per share was computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during the period. The
weighted average number of shares used in the loss per share computation for
the year ended December 31, 1999 was 2,466,114. No shares were outstanding for
the period
F-9
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
from inception (May 29, 1998) to December 31, 1998. The weighted average number
of shares used in the loss per share computation for the three month periods
ended March 31, 2000 and 1999 was 3,720,162 and 720,106, 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. The Bank had no components
of comprehensive income in the period ended December 31, 1998.
Segment Disclosures
Based on the internal reporting of financial information, management
currently believes that it operates with only one operating segment and has not
included any segment disclosures herein.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was subsequently amended by SFAS No.
137 to defer the effective date of the pronouncement from fiscal years
beginning June 15, 1999 to fiscal years beginning June 30, 2000. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the purpose
of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows.
Management believes that the adoption of SFAS No. 133 will not have a material
impact on the Bank's results of operations or financial condition.
2. Interest Bearing Deposits with Banks
The Bank had interest bearing deposits with financial institutions of
$1,386,000 at December 31, 1999. The Bank had no interest bearing deposits at
December 31, 1998. The weighted average percentage yield of these deposits at
December 31, 1999 was 5.70%.
Interest bearing deposits with financial institutions at December 31, 1999
are scheduled to mature within one year.
3. Securities Available For Sale
The following is a summary of the major components of securities available
for sale and a comparison of carrying values, estimated fair values, gross
unrealized gains and losses and maturities at December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S Agency Securities:
Less than one year........... $ 750,000 $ -- $(2,100) $ 747,900
One to five years............ 1,492,000 -- (6,300) 1,485,700
Federal Reserve Bank Stock..... 435,200 -- -- 435,200
---------- ----- ------- ----------
$2,677,200 $ -- $(8,400) $2,668,800
========== ===== ======= ==========
</TABLE>
F-10
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
At December 31, 1999, U.S. Agency securities with a carrying value of
$746,000 were pledged to secure a discount line at the Federal Reserve Bank.
4. Loans and Allowance for Loan Losses
The loan portfolio consisted of the following at December 31, 1999:
<TABLE>
<S> <C>
Real estate loans............................................... $30,653,600
Commercial loans................................................ 10,471,600
Construction loans.............................................. 90,600
Consumer loans.................................................. 3,815,200
-----------
45,031,000
Allowance for loan losses..................................... (750,000)
Deferred loan origination costs, net.......................... 62,200
-----------
Loans, net.................................................. $44,343,200
===========
</TABLE>
A summary of the Bank's transactions in the allowance for loan losses for the
year ended December 31, 1999 is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1998......................................... $ --
Provision for loan losses.......................................... 750,000
Recoveries......................................................... --
Amounts charged off................................................ --
--------
Balance, December 31, 1999......................................... $750,000
========
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses by loan category as of December 31, 1999:
<TABLE>
<S> <C>
Real Estate loans.................................................. $127,000
Commercial loans................................................... 43,400
Consumer loans..................................................... 60,000
Unallocated........................................................ 519,600
--------
Balance, December 31, 1999......................................... $750,000
========
</TABLE>
The Bank had no nonaccrual loans at December 31, 1999. The Bank had no loans
with principal more than 90 days past due and not on nonaccrual status at
December 31, 1999. At December 31, 1999, the Bank had no restructured loans and
no loans were considered impaired.
The Bank purchased 13 loans in November and December of 1999 from a non-
related entity with a par value of $19,394,900 at a premium of $290,900. The
premium is being amortized over five years which is the estimated life of the
loans. The loans are recently originated with terms of 10 to 30 years,
primarily variable rate, and secured by multi-family real estate.
F-11
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
5. Premises and Equipment
The major classes of premises and equipment at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Furniture and equipment............................ $1,190,600 $131,100
Leasehold improvements............................. 189,800 11,400
---------- --------
1,380,400 142,500
Accumulated depreciation and amortization.......... (202,100) --
---------- --------
$1,178,300 $142,500
========== ========
</TABLE>
The amount of depreciation and amortization included in operating expense was
$202,100 for the year ended December 31, 1999. There was no depreciation for
the period from inception (May 29, 1998) through December 31, 1998.
6. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 1999 was $21,782,100.
At December 31, 1999, the scheduled maturities of time deposits of $100,000
or more are as follows:
<TABLE>
<S> <C>
2000......................................................... $21,594,600
2001......................................................... 187,500
-----------
$21,782,100
===========
</TABLE>
7. Related Parties
The executive officers and directors of the Bank, and the companies with
which they are associated, have banking transactions with the Bank in the
ordinary course of business. In the opinion of management, all loans and
commitments to loan included in such transactions have been made in accordance
with applicable laws and on substantially the same terms, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with persons of similar creditworthiness that are not affiliated
with the Bank, and only if such loans do not present any undue risk of
collectibility.
The following is a summary of loan transactions with executive officers and
directors of the Bank for the year ended December 31, 1999:
<TABLE>
<S> <C>
Balance, December 31, 1998......................................... $ --
New loans granted.................................................. 304,700
Principal repayments............................................... (85,700)
--------
Balance, December 31, 1999......................................... $219,000
========
</TABLE>
8. Advances From Founders
The organizing directors advanced an aggregate of $470,000, without interest,
to the Bank during the period from inception (May 29,1998) to December 1998 to
fund organizational and pre-opening expenses. Such amounts were repaid to the
organizing directors by the Bank on March 1, 1999 from the proceeds of its
initial capital offering.
F-12
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
9. Income Taxes
Tax expense from inception (May 29, 1998) to December 31, 1998 represents
$400 of current federal tax provision and $800 of current state tax provision.
Tax expense for the year ended December 31, 1999 represents $600 of current
state tax provision.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan
losses................. $ 255,000 $ --
Deferred organizational
and start-up expenses.. (16,500) 82,800
Net operating loss
carryforward........... 530,200 --
State taxes............. 210,200 26,700
Other accrued expenses.. 155,800 --
----------- ---------
Total deferred taxes...... 1,134,700 109,500
Valuation allowance....... (1,134,700) (109,500)
----------- ---------
Net deferred taxes........ $ -- $ --
=========== =========
</TABLE>
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Period from
Inception
Year Ended (May 29, 1998)
December 31, to December 31,
------------ ---------------
1999 1998
------------ ---------------
<S> <C> <C>
Federal statutory tax rate...................... (34.0)% (34.0)%
Increase (decrease) resulting from:
State taxes................................... (7.6) (10.6)
Other accrued expenses........................ 0.4 --
Valuation allowance........................... 41.3 45.1
----- -----
Effective rate.................................. 0.1 % 0.5 %
===== =====
</TABLE>
The Bank has established a valuation allowance of approximately $1,135,000
and $110,000 at December 31, 1999 and 1998, respectively. The valuation
allowance has been established due to the Bank's limited operating history and
management's inability to determine whether or not the deferred tax asset will
be realizable in the future.
The Bank has a net operating loss carryforward of approximately $1,559,500
for federal income tax purposes which expires through 2019. In addition, the
Bank has a net operating loss carryforward of approximately $1,558,900 for
state franchise tax purposes which expires through 2006.
10. Shareholders' Equity
On March 1, 1999, the Bank sold 2,090,628 of its common stock that raised
approximately $8,298,300 through an initial public offering, net of
approximately $64,200 in related expense. Concurrent with the completion of the
offering, the Bank received final approval from the DFI to commence operations
and from the FDIC on its application for the insurance of its customers'
deposit accounts. The Bank commenced operations on March 1, 1999.
F-13
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
On April 20, 1999, the Bank's Board of Directors authorized a 1.25 for 1.00
stock split, which was approved by the California Department of Financial
Institutions (DFI) on May 21, 1999. Additionally, Pacific Mercantile Bank will
effect a two-for-one stock split that will become effective prior to the
completion of the offering (see Note 17).
Share and per share data in this Note 10 have been adjusted for all stock
splits that are described herein.
In November 1999, the Bank completed a second offering in which it sold
1,629,532 shares of its common stock that raised approximately $10,720,900, net
of approximately $278,500 in related expense.
Under California law, the directors of the Bank may declare distributions to
shareholders subject to the restriction that the amount available for the
payment of cash dividends shall be the lesser of retained earnings of the Bank
or the Bank's net income for its last three fiscal years (less the amount of
any distributions to shareholders made during such period). If the above test
is not met, distributions to shareholders may be made only with the prior
approval of the Commissioner of the California Department of Financial
Institutions ("Commissioner") and in an amount not exceeding the greatest of a
bank's retained earnings, a bank's net income for its last fiscal year or a
bank's net income for its current fiscal year. If the Commissioner finds that
the shareholders' equity of a bank is not adequate, or that the making by a
bank of a distribution to shareholders would be unsafe or unsound for the bank,
the Commissioner can order a bank not to make any distribution to shareholders.
The ability of the Bank to pay dividends is further restricted under the
Federal Deposit Insurance Corporation Improvement Act of 1991 which prohibits a
bank from paying dividends if, after making such payment, the bank would fail
to meet any of its minimum capital requirements. Under the Financial
Institutions Supervisory Act and Federal Financial Institutions Reform,
Recovery and Enforcement Act of 1989, federal banking regulators also have
authority to prohibit financial institutions from engaging in business
practices which are considered to be unsafe or unsound. It is possible,
depending upon the financial condition of the Bank and other factors, that
regulators could assert that the payment of dividends in some circumstances
might constitute unsafe or unsound practices. Therefore, the Bank's federal
regulatory agency might prohibit the payment of dividends even though such
payments would otherwise be technically permissible.
11. Components of Other Operating Expense
For the year ended December 31, 1999, and for the period from inception (May
29, 1998) through December 31, 1998, items in other operating expense include
the following:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Customer expense.............................................. $ 94,681 $ --
Postage and delivery.......................................... 33,990 1,200
Professional and community.................................... 25,795 2,700
Telecommunications............................................ 36,142 5,400
Stationery and supplies....................................... 114,530 8,100
Advertising and promotion..................................... 181,599 2,800
Travel and entertainment...................................... 41,400 4,700
Insurance expense............................................. 29,610 2,100
Loan related expenses......................................... 25,184 --
Regulatory and outside expense................................ 67,416 11,500
Miscellaneous expense......................................... 20,853 --
-------- -------
$671,200 $38,700
======== =======
</TABLE>
F-14
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
12. Commitments and Contingencies
The Bank leases certain facilities and equipment under various non-cancelable
operating leases. Rent expense for the year ended December 31, 1999 and for the
period from inception (May 29, 1998) through December 31, 1998 was $171,300 and
$20,800, respectively.
Future minimum non-cancelable lease commitments are as follows:
<TABLE>
<S> <C>
2000.......................................................... $ 405,000
2001.......................................................... 223,300
2002.......................................................... 105,300
2003.......................................................... 94,500
2004.......................................................... 92,700
Thereafter.................................................... 104,600
----------
Total....................................................... $1,025,400
==========
</TABLE>
In order to meet the financing needs of its customers in the normal course of
business, the Bank is party to financial instruments with off-balance sheet
risk. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated financial statements. At December 31, 1999, the Bank was
committed to fund certain loans amounting to approximately $12,668,000.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Commitments generally
have fixed expiration dates; however, since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment,
residential real estate and income-producing commercial properties.
The Bank is subject to legal actions normally associated with financial
institutions. At December 31, 1999, the Bank had no pending contingencies that
would be material to the financial condition or results of operations of the
Bank.
The Bank is required to purchase stock in the Federal Reserve Bank in an
amount equal to 6% of its capital, one-half of which must be paid currently
with the balance due upon request.
13. Stock Option Plan
On March 2, 1999, the Bank's Board of Directors adopted a stock option plan
(the "Option Plan"). The Option Plan provides for the granting of options to
directors, officers and other key employees, entitling them to purchase shares
of common stock of the Bank at a price per share equal to 100% of the fair
market value of the Bank's shares on the date the option is granted. The Option
Plan further provides that if the Bank sells or issues any additional shares of
common stock (other than pursuant to the exercise of options under the Option
Plan), the number of shares issuable pursuant to the Option Plan will be
automatically increased by a number equal to 20% of the additional shares that
are sold or issued. The Option Plan provides that the total number of shares
for which options may be granted under the Option Plan shall be 725,906 shares.
F-15
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
On March 2, 1999, the Bank granted options to purchase a total of 363,334
shares of common stock of the Bank, at a price of $4 per share to directors,
officers and other key employees of the Bank. Options outstanding under the
Option Plan have been granted at prices equal to or above the market value of
the stock on the date of grant, vest over a five year period, and expire 10
years after the grant date.
The status of the Bank's Option Plan as of December 31, 1999 is summarized
below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding, December 31, 1998............................ -- --
Granted................................................. 382,106 $4.00
Exercised............................................... -- --
Cancelled............................................... (2,000) $4.00
-------
Outstanding, December 31, 1999............................ 380,106 $4.00
=======
</TABLE>
The Bank continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation
cost for stock options is recognized for stock option awards granted at or
above fair market value. Had compensation expense for the Bank's Option Plan
been determined based upon the fair value at the grant date for awards under
the plan in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Bank's net loss and loss per share would have been reduced
to the pro forma amounts indicated below.
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(2,750,200)
Pro forma................................................. (2,820,200)
Loss per share:
As reported............................................... $ (1.12)
Pro forma................................................. (1.15)
</TABLE>
The weighted average fair value of each option granted during the year ended
December 31, 1999, estimated on the date of grant using the Black-Scholes
option-pricing model ranged from $0.92 to $1.00. The fair value of the grants
were estimated using the following assumptions: no dividend yield, no expected
volatility, risk-free interest rates ranging from 5.27% to 5.81%, and an
expected life of 5 years.
14. Regulatory Matters and Capital/Operating Plans
The Bancorp and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can lead to certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Bancorp's operating results or financial
condition. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action that apply to all bank holding companies and FDIC
insured banks in the United States, Bancorp (on a consolidated basis) and the
Bank must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Bancorp's and the Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
F-16
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp (on a consolidated basis) and the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999, that the Bank met all capital adequacy
requirements to which it is subject.
As of December 31, 1999, based on the regulations, the Bank is categorized as
well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
following table. There are no conditions or events that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios as of December 31, 1999 are also
presented in the following table:
<TABLE>
<CAPTION>
To be Well Capitalized
Under Prompt Corrective Action
Actual For Capital Adequacy Purposes Provisions
----------------- --------------------------------- ----------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ---------------------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk
Weighted Assets....... $16,717,000 30.2% $4,422,500 (greater than or =)8.0% $5,528,200 (greater than or =)10.0%
Tier I Capital to Risk
Weighted Assets....... 16,026,800 29.0% 2,211,300 (greater than or =)4.0% 3,316,900 (greater than or =) 6.0%
Tier I Capital to
Average Assets........ 16,026,800 24.3% 2,632,400 (greater than or =)4.0% 3,290,500 (greater than or =) 5.0%
</TABLE>
In addition, the Bank has agreed to maintain a Tier I Capital to Average
Asset ratio of at least eight percent until March 1, 2002.
15. Fair Value of Financial Instruments
Fair value estimates are made at a discreet point in time based on relevant
market information and information about the financial instruments. Because no
active market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments,
prepayment assumptions, future expected loss experience and other such factors.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
In addition, the fair value estimates are based on existing on and off-
balance sheet financial instruments without attempting to estimate the value of
existing and anticipated future customer relationships and the value of assets
and liabilities that are not considered financial instruments. Significant
assets and liabilities that are not considered financial assets or liabilities
include other real estate owned and premises and equipment.
The following methods and assumptions were used to estimate the fair value of
financial instruments.
Cash and Cash Equivalents
The fair value of cash and cash equivalents approximates its carrying value.
F-17
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
Interest Bearing Deposits with Financial Institutions
The fair value of interest bearing deposits maturing within ninety days
approximate their carrying values.
Securities Available for Sale
For investment securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans Held for Sale
The fair value of loans held for sale is based on commitments on hand from
investors or prevailing market prices.
Loans
The fair value for loans with variable interest rates is the carrying amount.
The fair value of fixed rate loans is derived by calculating the discounted
value of future cash flows expected to be received by the various homogeneous
categories of loans. All loans have been adjusted to reflect changes in credit
risk.
Deposits
The fair value of demand deposits, savings deposits, and money market
deposits is defined as the amounts payable on demand at year-end. The fair
value of fixed maturity certificates of deposit is estimated based on the
discounted value of the future cash flows expected to be paid on the deposits.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the parties involved. For
fixed rate loan commitments, fair value also considers the difference between
current levels of interest rates and committed rates. The fair value of these
unrecorded financial instruments is estimated to approximate the notional
amounts at December 31, 1999.
The estimated fair values and related carrying amounts of the Bank's
financial instruments are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
----------- -----------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents........................ $38,498,200 $38,498,200
Interest bearing deposits with financial
institutions.................................... 1,386,000 1,386,000
Securities available for sale.................... 2,668,800 2,668,800
Loans held for sale.............................. 3,844,800 3,884,800
Loans, net....................................... 43,198,400 41,977,700
Financial Liabilities:
Noninterest bearing deposits..................... 16,607,800 16,607,800
Interest bearing deposits........................ 57,892,400 57,660,300
</TABLE>
In all cases, the estimated fair values of the Bank's financial instruments
are equal to their respective book values at December 31, 1998.
F-18
<PAGE>
PACIFIC MERCANTILE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998
16. Parent Company Information
Bancorp has only nominal assets and will not have conducted any business
through January 28, 2000.
17. Subsequent Event (unaudited)
Bancorp intends to offer for sale, during the second quarter ending June 30,
2000, 3,000,000 shares of its common stock in a public offering to be
registered under the Securities Act of 1933. Bancorp expects that the proceeds
of this public offering, net of underwriting discounts and commissions and
other expenses, will total approximately $38 million. In conjunction with the
offering, Bancorp expects to issue to Paulson Investment Company, Inc., the
representative of the underwriters, warrants to purchase 300,000 shares of
Bancorp common stock at an exercise price per share equal to 120% of the common
stock public offering price per share.
F-19
<PAGE>
[PHOTOGRAPHS/GRAPHICS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000, all dealers effecting transactions in our securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3,000,000 Shares
[LOGO OF PACIFIC MERCANTILE BANCORP APPEARS HERE]
Pacific Mercantile Bancorp
Common Stock
----------------
PROSPECTUS
----------------
Paulson Investment
Company, Inc.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered hereunder. All of the
amounts shown are estimates except for the SEC registration fee, the NASD
filing fee and the NASDAQ National Market application fee.
<TABLE>
<CAPTION>
To be Paid by
the Registrant
--------------
<S> <C>
SEC registration fee....................................... $14,850
NASD filing fee............................................ 5,675
NASDAQ National Market application fee..................... 69,375
Printing and engraving expenses............................ *
Legal fees and expenses.................................... *
Accounting fees and expenses............................... *
Transfer agent and registrar fees.......................... *
Miscellaneous.............................................. *
-------
Total.................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
(a) As permitted by the California General Corporation Law ("CGCL"), the
Registrant's Articles of Incorporation eliminate the liability of its directors
for monetary damages to the fullest extent permissible under the CGCL and in
excess of that otherwise permitted under the CGCL. The Registrant's Bylaws
provide for a similar indemnity to directors and officers of the Registrant to
the fullest extent authorized by the CGCL.
(b) Pursuant to the authority contained in the Registrant's Bylaws, the
Registrant maintains liability insurance covering all of the Registrant's
officers and directors.
Item 15. Recent Sales of Unregistered Securities
Pacific Mercantile Bancorp (the "Bancorp") will issue a total of 3,720,162
shares of its common stock to the former shareholders of Pacific Mercantile
Bank (the "Bank") pursuant to the terms of an Plan of Reorganization and Merger
Agreement entered into as of February 29, 2000, following approval of that
Agreement and the transactions contemplated thereby by the Bank's shareholders
in January 2000. Pursuant to that Agreement (i) the Bank will be merged with a
new-formed wholly owned subsidiary of the Bancorp, (ii) the Bank will be the
surviving corporation in that merger and, as a result thereof, will become a
wholly owned subsidiary of the Bancorp, and (iii) each of the 3,720,162 shares
of common stock of the Bank that will be outstanding at the time of that merger
will be automatically converted into one share of common stock of the Bancorp.
The Bancorp has relied on the exemption from registration under the Securities
Act of 1933 provided by Section 3(a)(12) for this transaction, which exempts
equity securities issued in connection with the acquisition by a holding
company of a bank under Section 3(a) of the Bank Holding Company Act of 1956.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement+
1.2 Form of Underwriter's Warrant+
2.1 Plan of Reorganization and Merger Agreement, dated as of February
29, 2000, between Pacific Mercantile Bank and PMSub+
3.1 Articles of Incorporation of Pacific Mercantile Bancorp+
3.2 Bylaws of Pacific Mercantile Bancorp+
4.1 Specimen form of stock certificate for Common Stock+
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation
10.1 1999 Incentive Stock Option and Nonqualified Option Plan (the
"1999 Plan")+
10.2 Form of Stock Option Agreement pertaining to the 1999 Plan+
10.3 Employment Agreement, dated April 23, 1999, between Raymond E.
Dellerba and Pacific Mercantile Bank
10.4 Form of Severance Agreement to be entered into between Pacific
Mercantile Bank and John J. McCauley, John P. Cronin and Daniel
L. Erickson, respectively
10.5 Office Space Lease, dated December 8, 1999, between the Irvine
Company and Pacific Mercantile Bank+
10.6 Sublease dated as of August 3, 1999, between Wells Fargo Bank,
N.A. and Pacific Mercantile Bank+
10.7 Sublease, dated as of September 16, 1998, between Washington
Mutual Bank, FA, and Pacific Mercantile Bank+
10.8 Standard Internet Banking System License Agreement, dated as of
January 29, 1999, between Q-UP Systems and Pacific Mercantile
Bank+
10.9 ODFI--Originator Agreement for Automated Clearing House Entries,
dated as of February 16, 1999, between eFunds Corporation and
Pacific Mercantile Bank*+
10.10 Agreement, dated September 15, 1998 between Fiserv Solutions,
Inc., and Pacific Mercantile Bank*
10.11 UVEST Brokerage Services Agreement, dated April 1, 1999 between
UVEST Financial Services Group, Inc. and Pacific Mercantile Bank*
11.1 Statement regarding computation of pro forma net income per share+
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in Exhibit 5.1 hereto)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (contained on the signature page of this
Registration Statement)+
27.1 Financial Data Schedule+
</TABLE>
- --------
* Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Securities Act of
1933.
+ Previously filed.
(b) Financial Statement Schedules
All other schedules are omitted because they are not required under the
related instructions, are inapplicable, or the information is included in the
financial statements or the notes thereto.
II-2
<PAGE>
Item 17. Undertakings
The Registrant hereby undertakes to provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newport
Beach, State of California, on the 9th day of May, 2000.
PACIFIC MERCANTILE BANCORP
/s/ Raymond E. Dellerba
By: _________________________________
Raymond E. Dellerba
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Raymond E. Dellerba President, Chief Executive May 9, 2000
____________________________________ Officer and Director
Raymond E. Dellerba (Principal Executive
Officer)
/s/ Daniel L. Erickson Executive Vice President and May 9, 2000
____________________________________ Chief Financial Officer
Daniel L. Erickson (Principal Financial and
Accounting Officer)
/s/ John J. McCauley* Executive Vice President, May 9, 2000
____________________________________ Chief Operating Officer,
John J. McCauley Chief Credit Officer and
Director
/s/ George Wells* Chairman of the Board and May 9, 2000
____________________________________ Director
George Wells
/s/ Richard M. Torre* Vice Chairman of the Board May 9, 2000
____________________________________ and Director
Richard M. Torre
/s/ Ronald W. Chrislip* Director May 9, 2000
____________________________________
Ronald W. Chrislip
/s/ Julia M. DiGiovanni* Director May 9, 2000
____________________________________
Julia M. DiGiovanni
/s/ Warren T. Finley* Director May 9, 2000
____________________________________
Warren T. Finley
/s/ John Thomas, M.D*. Director May 9, 2000
____________________________________
John Thomas, M.D.
/s/ Robert E. Williams* Director May 9, 2000
____________________________________
Robert E. Williams
</TABLE>
/s/ Raymond E. Dellerba
*By: _____________________
Raymond E. Dellerba
Attorney-in-Fact
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement+
1.2 Form of Underwriter's Warrant+
2.1 Plan of Reorganization and Merger Agreement, dated
as of February 29, 2000, between Pacific
Mercantile Bank and PMSub+
3.1 Articles of Incorporation of Pacific Mercantile
Bancorp+
3.2 Bylaws of Pacific Mercantile Bancorp+
4.1 Specimen form of stock certificate for Common
Stock+
5.1 Opinion of Stradling Yocca Carlson & Rauth, a
Professional Corporation
10.1 1999 Incentive Stock Option and Nonqualified
Option Plan (the "1999 Plan")+
10.2 Form of Stock Option Agreement pertaining to the
1999 Plan+
10.3 Employment Agreement, dated April 23, 1999 between
Raymond E. Dellerba and Pacific Mercantile Bank
10.4 Form of Severance Agreement to be entered into
between Pacific Mercantile Bank and
John J. McCauley, John P. Cronin and Daniel L.
Erickson, respectively
10.5 Office Space Lease, dated December 8, 1999,
between the Irvine Company and Pacific Mercantile
Bank+
10.6 Sublease, dated as of August 3, 1999, between
Wells Fargo Bank, N.A. and Pacific Mercantile
Bank+
10.7 Sublease, dated as of September 16, 1998, between
Washington Mutual Bank, FA, and Pacific
Mercantile Bank+
10.8 Standard Internet Banking System Licensing
Agreement, dated as of January 29, 1999, between
Q-UP Systems and Pacific Mercantile Bank+
10.9 ODFI-Originator Agreement for Automated Clearing
House Entries, dated as of February 16, 1999,
between eFunds Corporation and Pacific Mercantile
Bank*+
10.10 Agreement, dated September 15, 1998, between
Fiserv Solutions, Inc. and Pacific Mercantile
Bank*
10.11 UVEST Brokerage Services Agreement, dated April 1,
1999 between UVEST Financial Services Group, Inc.
and Pacific Mercantile Bank*
11.1 Statement regarding computation of pro forma net
income per share+
23.1 Consent of Stradling Yocca Carlson & Rauth, a
Professional Corporation (included in Exhibit 5.1
hereto)
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (contained on the signature page
of this Registration Statement)+
27.1 Financial Data Schedule+
</TABLE>
- --------
* Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Securities Act of
1933.
+ Previously filed.
E-1
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF STRADLING YOCCA CARLSON & RAUTH]
A PROFESSIONAL CORPORATION SAN FRANCISCO OFFICE
ATTORNEYS AT LAW 44 MONTGOMERY STREET,
660 NEWPORT CENTER DRIVE, SUITE 1600 SUITE 2950
NEWPORT BEACH, CA 92660 SAN FRANCISCO, CALIFORNIA
TELEPHONE (949) 725-4000 94104
FACSIMILE (949) 725-4100 TELEPHONE (415) 283-2240
FACSIMILE (415) 283-2255
May 9, 2000
Pacific Mercantile Bancorp
450 Newport Center Drive, Suite 100
Newport Beach, California 92660
Re: Registration Statement on Form S-1; Registration No.333-33452
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Dear Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1, Registration No.
333-33452, filed by you with the Securities and Exchange Commission (the
"Commission") on March 28, 2000 (as amended by Amendment No. 1 thereto, and as
may be further amended or supplemented, the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of: (i) 3,450,000 shares of your Common Stock that are to be
purchased by the underwriters named in the Registration Statement (the
"Underwriters") for sale by them to the public (the "Shares"), which include up
to 450,000 shares of common stock issuable pursuant to an over-allotment option;
and (ii) 300,000 shares of your Common Stock that may be purchased on exercise
of warrants that are to be sold to Paulson Investment Company, Inc., as
representative of the Underwriters (the "Warrant Shares").
As your counsel in connection with the registration of the Shares under the
Act, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
Based on the foregoing, and assuming completion of proceedings taken in
order to permit the sale and issuance of the Shares and the Warrant Shares to be
carried out in accordance with the securities laws of various states, where
required, it is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, and the Warrant Shares, when issued and
sold in the manner described in the Registration and pursuant to the terms of
the Warrant Agreement in the form filed as an Exhibit to the Registration, will
be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement, including the Prospectus constituting a part thereof and
any amendment thereto.
Respectfully submitted,
/s/ STRADLING YOCCA CARLSON & RAUTH
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
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This Employment Agreement (this "Agreement") is made as of April 23, 1999,
between Raymond E. Dellerba ("Executive") and Pacific Mercantile Bank, its
parent, subsidiaries and related entities. (collectively, the "Company").
RECITALS
The Company desires to establish its right to the services of Executive in
the capacities described below, on the terms and conditions hereinafter set
forth, and Executive is willing to accept such employment on such terms and
conditions.
AGREEMENT
The parties agree as follows:
1. DUTIES
(a) The Company does hereby hire, engage, and employ Executive as the
President and Chief Executive Officer of the Company, and Executive does hereby
accept and agree to such hiring, engagement, and employment. During the Period
of Employment (as defined in Section 2), Executive shall serve the Company in
such position in conformity with the provisions of this Agreement, directives of
the Boards of Directors of the Company (the "Boards"), and the corporate
policies of the Company as they presently exist, and as such policies may be
amended, modified, changed, or adopted during the Period of Employment.
Executive shall have duties and authority consistent with Executive's position
as President and Chief Executive Officer. Subject to policy direction from the
Boards, Executive shall have full authority over all operational, financial,
administrative, and planning matters for the Company. Executive shall serve as a
member of the Boards and as a member of all committees of the Boards, except the
Audit Committee and the Compensation Committee, (if any). Executive shall
participate in all meetings of the Boards and other committees, and as an ex
officio member of the Audit Committee and the Compensation Committee, (if any).
(b) Throughout the Period of Employment, Executive shall devote his time,
energy, and skill to the performance of his duties for the Company, vacations
and other leave authorized under this Agreement excepted. The foregoing
notwithstanding, Executive shall be permitted to (i) engage in charitable and
community affairs, (ii) act as a director of any corporations or organizations
outside the Company, not to exceed five (5) in number, and receive compensation
therefor, and (iii) to make investments of any character in any business or
businesses and to manage such investments (but not be involved in the day-to-day
operations of any such business); provided, in each case, and in the aggregate,
that such activities do not materially interfere with the performance of
Executive's duties hereunder.
(c) During the Period of Employment, Executive shall be allowed to retain
and maintain top level administrative support for his activities and shall be
provided by the Company with all
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equipment appropriate to outfit office, home, and automobile as are reasonably
necessary or appropriate for the performance of Executive's duties hereunder and
consistent with his position as the President and Chief Executive Officer of the
Company, including, as applicable, fax machine, computer, printer, scanner,
cellular telephones, laptop computer, and similar equipment, and Executive shall
be entitled to reimbursement for all reasonable expenses incurred in connection
therewith.
(d) Executive hereby represents to the Company that the execution and
delivery of this Agreement by Executive and the Company and the performance by
Executive of Executive's duties hereunder shall not constitute a breach of, or
otherwise contravene, the terms of any employment or other agreement or policy
to which Executive is a party or otherwise bound.
2. PERIOD OF EMPLOYMENT
The "Period of Employment" shall, unless sooner terminated as provided
herein, be a three (3) year period commencing on April 23, 1999 (the "Effective
Date") and ending with the close of business on April 22, 2002. Notwithstanding
the preceding sentence, commencing with April 23, 2002 and on each April 23rd
thereafter (each an "Extension Date"), the Period of Employment shall be
automatically extended for an additional one-year period, unless the Company or
Executive provides the other party hereto sixty (60) days' prior written notice
before the next scheduled Extension Date that the Period of Employment shall not
be so extended (the "Non-Extension Notice"). The term "Period of Employment"
shall include any extension that becomes applicable pursuant to the preceding
sentence. Notwithstanding anything to the contrary herein, the Period of
Employment shall not continue beyond January 1, 2013. In the event Executive is
employed under this Agreement on January 1, 2013, this Agreement will terminate,
and for the purposes of this Agreement be treated as a termination under Section
7(a) below.
3. COMPENSATION
(a) BASE SALARY. During the remainder of the 1999 calendar year,
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Executive's base salary shall be at a rate of $120,000 annually, paid in
accordance with regular payroll practices, but not less than monthly; provided,
however, that in the event of a termination without Cause by Company in the
first three (3) year period of this Agreement, all salary dating back to June
1998 and any severance amount shall be paid or calculated based on the median
peer salary of the western region as disclosed in SNL Executive Compensation
Review for the years 1998, 1999 and 2000, as applicable and only if such amount
is greater than Executive's actual salary for that year. Commencing January 1,
2000 and thereafter, Executive's base salary shall be at least equal to the
median peer salary of the western region as disclosed in SNL Executive
Compensation Review for the applicable year.
(b) BONUS. For the 1999 calendar year, Executive shall receive an
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incentive bonus ranging from thirty-five percent (35%) to one hundred fifty
percent (150%) of his base salary with a target bonus of seventy-five percent
(75%), based on achievement of mutually agreed upon objectives, fifty percent
(50%) of which shall be personal and the remaining fifty percent (50%) of which
shall be tied to a budget and/or other measures of Company's success within the
areas of responsibility of Executive. In subsequent years, the bonus formula and
target bonus
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shall be determined in good faith by Executive, Company, and a recognized
compensation consultant and shall relate on a percentage basis to Company's pre-
tax profits. In all events, Executive shall be paid a bonus for each calendar
year at least equal to the greater of (i) thirty-five percent (35%) of
Executive's base annual salary for that calendar year or (ii) three and one-half
percent (3.5%) of the Company's pre-tax profits for that calendar year.
(c) EQUITY COMPENSATION.
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(i) During the Period of Employment, Executive shall be entitled to
participate in any equity-based plan or arrangement, including, but not limited
to, stock options, stock appreciation rights, phantom stock rights, restricted
stock, equity-based cash or performance share awards, or other equity-based
incentive compensation plans or arrangements maintained by the Company for
executives or employees of the Company generally, on the same basis as other
executives or employees of the Company. Executive's rate of participation in
such plans or arrangements shall be 1:6 (Executive to all other
employees/executives as a group). To illustrate application of this ratio, if
60,000 options are granted to other employees/executives, Executive shall be
entitled to 10,000 options on substantially the same terms as the other grants.
(ii) In addition to any benefits provided under (i), the Company
granted as of March 2, 1999, to Executive options to purchase fifty thousand,
one hundred seventy-five (50,175) shares of Company Common Stock. Such options
were granted at a per share exercise price equal to $10.00 per share of Company
Common Stock and shall vest in sixty substantially equal monthly installments
commencing on April 2, 1999.
(iii) In addition to any benefits provided under (i) or (ii), the
Company shall grant, as of the first day of the calendar year following the
calendar year in which the Company first achieves a one percent (1%) or more
Return on Assets, to Executive a stock option to purchase a number of shares of
Company Common Stock equal to one-half of one percent (1/2 of 1%) of the Company
Common Stock then issued and outstanding (without dilution for employee stock
option grants then outstanding). Such option shall be granted at a per share
exercise price equal to the fair market value of a share of Company Common Stock
on the date of grant and shall be immediately and fully vested. "Return on
Assets" means the ratio of net earnings to total average assets excluding
goodwill.
(iv) All options granted to the Executive pursuant to (ii) or (iii)
above: (A) shall, to the maximum extent possible, be incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended; and (B) shall become fully vested and exercisable upon an underwritten
public offering of the Company's Common Stock, the termination of the Executive
without Cause, the termination by the Executive for Good Reason, or the
occurrence of a Change in Control.
For purposes of this Agreement, "Change in Control" shall mean the occurrence of
any one of the following:
(A) approval by the shareholders of the Company of the dissolution or
liquidation of the Company;
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(B) approval by the shareholders of the Company of a merger, consolidation,
or other reorganization, with or into, or the sale of all or
substantially all of the Company's business and/or assets as an
entirety to, one or more entities that are not Subsidiaries (a
"Business Combination"), unless (A) as a result of the Business
Combination at least 60% of the outstanding securities voting generally
in the election of directors of the surviving or resulting entity or a
parent thereof (the "Successor Entity") immediately after the
reorganization are, or will be, owned, directly or indirectly, in
substantially the same proportions, by shareholders of the Company
immediately before the Business Combination; and (B) no "person" (as
such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (excluding the
Successor Entity or an Excluded Person) beneficially owns, directly or
indirectly more than 20% of the outstanding shares of the combined
voting power of the outstanding voting securities of the Successor
Entity, after giving effect to the Business Combination, except to the
extent that such ownership existed prior to the Business Combination;
and (C) at least 60% of the members of the board of directors of the
entity resulting from the Business Combination were members of the
Board of Directors of the Company (the "Board") at the time of the
execution of the initial agreement, or of the action of the Board,
providing for the Business Combination.
The stockholders before and after the Business Combination shall be
determined on the basis of the following assumptions (x) there is no
change in the record ownership of the Company's securities from the
record date for such approval until the consummation of the Business
Combination; and (y) record owners of securities of the Corporation
hold no securities of the other parties to such reorganization.
(C) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) other than an Excluded Person becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more than 20% of
the combined voting power of the Company's then outstanding securities
entitled to then vote generally in the election of directors of the
Corporation.
(D) during any period not longer than two consecutive years, individuals
who at the beginning of such period constituted the Board cease to
constitute at least a majority thereof, unless the election, or the
nomination for election by the Company's shareholders, of each new
Board member was approved by a vote of at least three-fourths of the
Board members then still in office who were Board members at the
beginning of such period (including for these purposes, new members
whose election or nomination was so approved), but excluding, for this
purpose, any such individual whose initial assumption of office occurs
as a result of an actual or threatened election contest with respect to
the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other
than the Board.
"Excluded Person" means (1) any person described in and satisfying the
conditions of Rule 13d-1(b)(1) under the Exchange Act, (2) any person who
is the beneficial owner
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(as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the
outstanding shares of the Company's on the Effective Date, (3) the Company,
or (4) an employee benefit plan (or related trust) sponsored or maintained
by the Company.
"Subsidiary" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
(v) In the event of any (i) private sale of more than fifty percent
(50%) of the outstanding shares of Company Common Stock, (ii) sale of
substantially all of the assets of the Company, or (iii) merger, during the term
of this Agreement or within twenty-four (24) months after a termination of the
Executive without Cause or a termination by the Executive for Good Reason,
Executive will receive in Executive's sole discretion either a cash lump sum
payment or stock equal to one percent (1%) of the gross amount paid in such
transaction. Executive shall be eligible to receive only one such payment during
the twenty-four (24) months after termination of his employment.
(vi) In the event of any public offering of shares of company common
stock by the company or any of its parents or subsidiaries, that is registered
under the Securities Act of 1933 (other than in connection with a registration
for shares being issued pursuant to Rule 145 or for any employee benefit plan or
program) that is consummated during the term of this agreement or within twenty-
four (24) months after a termination of the executive without cause or a
termination by the executive for good reason, executive will receive in
executive's sole discretion either a cash lump sum payment or stock equal to one
percent (1%) of the increase in shareholders' equity of the issuer of such
shares in such public offering during the year in which such offering was
consummated, less any increase therein resulting from the net earnings of that
issuer in such year. Executive shall be eligible to receive only one such
payment during the twenty-four (24) months after termination of his employment.
(d) REVIEWS. The Boards shall review annually Executive's salary to
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determine in the Boards' discretion whether the package should be increased from
the amounts or levels provided or required by this Agreement.
(e) CONTRACT REIMBURSEMENT. The Company shall reimburse Executive on a
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fully grossed-up, after-tax basis or directly pay for all reasonable consulting
and legal fees and costs attributed to the development, reviews and
modifications of this Agreement and associated consulting and legal services.
Such fees and costs shall not exceed five thousand dollars ($5,000). This
subsection shall not be deemed to limit any of Executive's rights under Section
22 ("Attorneys' Fees").
4. BENEFITS
(a) HEALTH AND WELFARE. During the Period of Employment, Executive shall
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be entitled to participate, on the same terms and at the same level as other
executives, in all health and welfare benefit plans and programs and all
retirement, deferred compensation and similar plans and programs generally
available to other executives or employees of the Company as in effect from time
to time, subject to any legally required restrictions specified in such plans
and programs. Without limiting the generality of the foregoing, Company shall
provide life insurance for Executive in an amount equal to 2 1/2 times
Executive's base salary in effect on the date of this Agreement and as in effect
on the first business day of each calendar year thereafter, and long term and
short term disability insurance covering eighty percent (80%) of Executive's
base salary in effect on the date of this Agreement and as in effect on the
first business day of each calendar year thereafter, which insurance shall
expressly provide that it is portable by Executive.
(b) VACATION AND OTHER LEAVE. During the Period of Employment, Executive
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shall receive four (4) weeks paid vacation per year for each of the first three
(3) years of service; five (5) weeks of paid vacation per year after three (3)
years of service; and six (6) weeks of paid vacation per year after five (5)
years of service; provided, however, that such vacation shall be
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scheduled and taken in accordance with the Company's standard vacation policies
applicable to Company executives. Executive shall also be entitled to all other
holiday and leave pay generally available to other executives of the Company.
(c) TRAVEL AND EXPENSE REIMBURSEMENTS. During the Period of Employment,
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Company will provide Executive with a Company credit card and/or promptly
reimburse Executive for all reasonable expenses incurred in connection with
performance of his duties as President and Chief Executive Officer, including,
but not limited to, hotels, meals, airline tickets, transportation, automobile
rentals, and related charges on the basis of business class. Company shall
advance or reimburse Executive for all educational expenses related to career
development, including tuition, books, travel, meals and lodging expenses as
reasonably determined by Executive. Company shall advance or reimburse Executive
for all reasonable expenses associated with participation in Sheshunoff's CEO
Affiliation Group and other professional, business, trade and managerial
organizations related to Executive's employment.
(d) AUTOMOBILE. During the Period of Employment, Executive shall be
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entitled to receive the use of an automobile of Executive's choosing, which
shall be owned or leased by the Company and have a purchase price not to exceed
$65,000, and reimbursement for reasonable expenses associated with the operation
and maintenance of such automobile. The Company will reimburse Executive upon
presentation of vouchers and documentation for any such operational and
maintenance expenses which are consistent with the usual accounting procedures
of the Company.
(e) CLUB MEMBERSHIPS. During the Period of Employment, Executive shall
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receive from the Company reimbursement for dues, initial and other expenses at
the Pacific Club or Balboa Bay Club, and a country club of Executive's choosing.
All such memberships shall be subject to approval by only the Chairman of the
Board of the Company and shall be owned by the Company, provided, however, that
if at the time of the termination of Executive's employment the value of any
such membership is greater than its purchase price, the Company shall pay to
Executive a lump sum cash payment equal to the difference in value.
(f) MOST FAVORED EXECUTIVE. During the Period of Employment, Executive
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shall at all times be entitled to compensation and benefits provided to the most
favored executive of Company.
(g) RELOCATION. In the event Executive consents to a relocation requiring
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a move of residence, Company shall advance or reimburse Executive, on a grossed-
up basis at Executive's marginal tax rate, for all moving, house-hunting,
temporary housing, and real estate transaction costs for both sale and purchase
on a fully grossed up, after-tax basis.
(h) SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN.
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(i) Subject to the vesting requirements set forth in section 4(h)(ii)
below, Executive shall be entitled, upon reaching age sixty-five (65), to
receive from the Company monthly payments over a fifteen (15) year period
("Retirement Payments") on the following terms: (a) for each of the first five
(5) years following Executive's sixty-fifth (65th) birthday, Executive shall
receive monthly payments equal to seventy-five thousand dollars ($75,000) per
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year, the first such payment payable on Executive's sixty-fifth (65th) birthday;
(b) for each of years six (6) through ten (10) following Executive's sixty-fifth
(65th) birthday, Executive shall receive monthly payments equal to one hundred
thousand dollars ($100,000) per year; and (c) for each of years eleven (11)
through fifteen (15) following Executive's sixty-fifth (65th) birthday,
Executive shall receive monthly payments equal to one hundred twenty-five
thousand dollars ($125,000) per year.
(ii) The Retirement Payments set forth in section 4(h)(i) above shall
vest in the following manner: For each full month of Executive's employment
during the Period of Employment, Executive shall vest in one and one-half (1.5)
monthly Retirement Payments. If Executive's employment with the Company is
terminated under any circumstance in which Executive is entitled to the benefits
set forth in Section 6(b) of this Agreement, Executive shall, in addition to any
Retirement Payments previously vested, vest in the lesser of (i) the remaining
months of unvested Retirement Payments at the time of termination or (ii) an
additional twenty-four (24) months of Retirement Payments. If Executive's
employment is terminated in any other circumstance, Executive shall only be
entitled to those Retirement Payments that have become vested prior to the
termination of Executive's employment with the Company.
(iii) If Executive dies prior to the payment of any or all vested
Retirement Payments, such vested but unpaid Retirement Payments shall be paid to
Executive's heirs on the terms set forth in sections 4(h)(i) and (ii) above;
provided, however, that vested but unpaid Retirement Payments shall be paid to
Executive's heirs pursuant to the following payment schedule:
(1) If Executive dies prior to his sixty-fifth (65th)
birthday, payment of the first Retirement Payment shall be
paid within thirty (30) days of the date of Executive's
death and all subsequent Retirement Payments shall be paid
monthly thereafter.
(2) If Executive dies after his sixty-fifth (65th) birthday,
but prior to the payment of all vested Retirement
Payments, the Company shall pay Executive's heirs each of
the remaining Retirement Payments in conformance with the
payment schedule set forth in section 4(h)(i) above.
(iv) At or after the time the Company has commenced payment of the
Retirement Payments, Executive or, if applicable, his heirs shall have the
option of receiving any vested but unpaid Retirement Payments in a lump sum
discounted to present value at a discount rate specified by the Company at the
time of the discount. In order to be entitled to receive such lump sum payment,
Executive or his heirs must provide written notice to the Company of such
election.
(i) OTHER BENEFITS. In addition to benefits specifically provided
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herein, during the Period of Employment, Executive shall be entitled to
participate, on the same terms and at the same level as other executives, in all
bonus, compensation, fringe benefit plans and perquisites provided by Company to
its executives.
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5. DEATH OR DISABILITY
(a) DEFINITION OF PERMANENTLY DISABLED AND PERMANENT DISABILITY. For
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purposes of this Agreement, the terms "Permanently Disabled" and "Permanent
Disability" shall mean Executive's inability, because of physical or mental
illness or injury, to perform the essential function of his customary duties
pursuant to this Agreement, with or without reasonable accommodation, and the
continuation of such disabled condition for a period of one hundred twenty (120)
continuous days, or for not less than two hundred ten (210) days during any
continuous twenty-four (24) month period. Whether Executive is Permanently
Disabled shall be certified to the Company by a Qualified Physician (as
hereinafter defined). The determination of the individual Qualified Physician
shall be binding and conclusive for all purposes. As used herein, the term
"Qualified Physician" shall mean any medical doctor designated by Executive who
is licensed to practice medicine in the State of California. Executive and the
Company may in any instance, and in lieu of a determination by a Qualified
Physician, agree between themselves that Executive is Permanently Disabled.
(b) VESTING ON DEATH OR DISABILITY. Upon any termination of the Period of
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Employment and Executive's employment hereunder by reason of Executive's death
or Permanent Disability, as defined in Section 5(a) any remaining unvested stock
or options shall thereupon automatically be deemed vested, notwithstanding any
other provision of this Agreement.
(c) TERMINATION DUE TO DEATH OR DISABILITY. If Executive dies or becomes
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Permanently Disabled during the Period of Employment, the Period of Employment
and Executive's employment shall automatically cease and terminate as of the
date of Executive's death or the date of Permanent Disability (which date shall
be determined by the Qualified Physician or by agreement, under Section 5(a)
above, and referred to as the "Disability Date"), as the case may be. In the
event of the termination of the Period of Employment and Executive's employment
hereunder due to Executive's death or Permanent Disability, Executive or his
estate shall be entitled to receive:
(i) a lump sum cash payment, payable within ten (10) business days
after termination of Executive's employment, equal to the sum of (x) any accrued
but unpaid Base Salary as of the date of Executive's termination of employment
hereunder and (y) any earned but unpaid annual incentive compensation in respect
of the most recently completed fiscal year preceding Executive's termination of
employment hereunder (the "Earned/Unpaid Annual Bonus"); and
(ii) a pro-rated portion of the target annual incentive compensation,
if any, that Executive would have been entitled to receive pursuant to Section
3(b) in respect of the fiscal year in which termination of Executive's
employment occurs, based upon the percentage of such fiscal year that shall have
elapsed through the date of Executive's termination of employment, payable when
such annual incentive would otherwise have been payable had Executive's
employment not terminated; and
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(iii) such employee benefits described in Sections 4(a) through 4(i)
inclusive ("Executive Benefits"), if any, as to which Executive may be entitled
under the employee benefit plans and arrangements of the Company.
In the event Executive's employment is terminated on account of Executive's
Permanent Disability, he shall, so long as his Permanent Disability continues,
remain eligible for all benefits provided under any long-term disability
programs of the Company in effect at the time of such termination, subject to
the terms and conditions of any such programs, as the same may be changed,
modified, or terminated for or with respect to all senior management personnel
of the Company.
6. TERMINATION BY THE COMPANY
(a) TERMINATION FOR CAUSE. The Company may, by providing written notice
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to Executive, terminate the Period of Employment and Executive's employment
hereunder for Cause at any time. The term "Cause" for purpose of this Agreement
shall mean:
(i) Executive's conviction of or entrance of a plea of guilty or
nolo contendere to a felony; or
(ii) fraudulent conduct by Executive in connection with the business
affairs of the Company, which causes material injury to Company;
or
(iii) theft, embezzlement, or other criminal misappropriation of funds
by Executive from the Company; or
(iv) Executive's bad faith refusal to perform the duties of President
and Chief Executive Officer.
If Executive's employment is terminated for Cause, the termination shall
take effect on the effective date (pursuant to Section 24 ("Notices")) of
written notice of such termination to Executive.
In the event of the termination of the Period of Employment and Executive's
employment hereunder due to a termination by the Company for Cause, then
Executive shall be entitled to receive: (i) a lump sum cash payment, payable on
the date of termination equal to the sum of (x) accrued but unpaid Base Salary
as of the date of termination of Executive's employment hereunder and (y) any
Earned/Unpaid Annual Bonus in respect of the most recently completed fiscal year
preceding termination of Executive's employment hereunder; and (ii) such
Executive Benefits, if any, as to which Executive may be entitled under the
employee benefit plans and arrangements of the Company.
If the Company attempts to terminate Executive's employment pursuant to
this Section 6(a) and it is ultimately determined that the Company lacked Cause,
the provisions of Section 6(b) ("Termination by the Company-Termination Without
Cause") shall apply and, in addition to any other remedies that Executive may
have, Executive shall be entitled to receive the payments called for by Section
6(b) ("Termination by the Company-Termination Without Cause") with interest on
any past due payments at the rate of ten percent (10%) per year from the date on
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which the applicable payment would have been made pursuant to Section 6(b) plus
Executive's costs and expenses (including but not limited to reasonable
attorneys' fees) incurred in connection with such dispute and interest thereon
at the rate of ten percent (10%) per year from the date which the applicable
payment would have been made pursuant to Section 6(b) plus Executive's costs and
expenses (including but not limited to reasonable attorneys' fees) incurred in
connection with such dispute and interest thereon at the rate of ten percent
(10%) per year from the date of payment by Employee.
(b) TERMINATION WITHOUT CAUSE. The Company may, with or without reason,
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terminate the Period of Employment and Executive's employment hereunder without
Cause at any time, by providing Executive written notice of such termination. In
the event of the termination of the Period of Employment and Executive's
employment hereunder due to a termination by the Company without Cause (other
than due to Executive's death or Permanent Disability), then Executive shall be
entitled to:
(i) a lump sum cash payment equal to the greater of (x) base salary
and target bonus for the remainder of the contract term or (y)
twenty-four (24) months base salary and target bonus; and
(ii) continued participation in the Company's group health insurance
plans at the Company's expense until the earlier of (A) the
expiration of the two (2) years from the effective date of
termination or (B) Executive's eligibility for participation in
the group health plan of a subsequent employer or entity for
which Executive provides consulting services; and
(iii) full vesting of all options, equity, and incentive compensation
with no less than one (1) year to exercise the same, as
applicable, and all performance-based awards (other than the
target bonus paid in accordance with Section 6(b)(i)) shall be
paid at the time of termination assuming the achievement of
maximum performance during the applicable performance period;
and
(iv) senior executive outplacement at an outplacement concern of
Executive's selection and reasonably acceptable to the Company,
which outplacement shall be available for at least twelve (12)
months; and
(v) continuation of all benefits, perquisites, and insurance
payments by Company for a period of two (2) years from the
effective date of termination.
If Executive's employment is terminated for Cause, the termination shall
take effect on the effective date (pursuant to Section 24 ("Notices")) of
written notice of such termination to Executive. Executive shall be entitled to
payment of all cash portions of the severance compensation set forth in this
Section on a lump-sum basis on the date of termination.
7. TERMINATION BY EMPLOYEE
(a) TERMINATION WITHOUT GOOD REASON. Executive shall have the right to
-------------------------------
terminate the Period of Employment and Executive's employment hereunder at any
time without
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<PAGE>
Good Reason (as defined below) upon fifteen (15) days prior written notice of
such termination to the Company. Any such termination by the Executive without
Good Reason shall be treated for all purposes of this Agreement as a termination
by the Company for Cause and the provisions of Section 6(a) shall apply.
(b) TERMINATION WITH GOOD REASON. The Executive may terminate the Period
----------------------------
of Employment and resign from employment hereunder for "Good Reason":
(i) if the Company requires Executive to relocate his principal
office to a location more than fifteen (15) miles from his
current office, without Executive's consent; or
(ii) if the Company fails to provide Executive with the compensation
and benefits called for by this Agreement; or
(iii) if the Company (A) assigns Executive to a position other than
President and Chief Executive Officer reporting directly to the
Board, or substantially diminishes Executive's title,
assignment, duties, responsibilities, or operating authority
from those specified in Section 1 ("Duties") or (B) employs any
person other than Executive who (I) reports directly to the
Board or (II) is not subordinate to Executive; provided,
however, this subsection shall not apply to a circumstance in
which the Company retains an internal auditor who shall have a
dotted line reporting relationship to Executive and a direct
reporting relationship to the Audit Committee; or
(iv) for any reason during the twelve (12) month period following a
Change in Control;
provided, however, that none of the events described in Subsection 7(b)(ii), or
7(b)(iii) shall constitute Good Reason unless Executive shall have notified the
Company in writing describing the events which constitute Good Reason and then
only if the Company shall have failed to cure such event within thirty (30) days
after the Company's receipt of such written notice.
Any such termination by Executive for Good Reason shall be treated for
all purposes of this Agreement as a termination by the Company without Cause and
the provisions of Section 6(b) shall apply; provided, however, that if Executive
attempts to resign for Good Reason pursuant to this Section 7(b) and it is
ultimately determined that Good Reason did not exist, Executive shall be deemed
to have resigned from employment without Good Reason and the provisions of
Section 7(a) and, by reference therein, the provisions of Section 6(a), shall
apply.
8. EXPIRATION OF PERIOD OF EMPLOYMENT
If either party elects not to extend the Period of Employment pursuant to
Section 2, unless Executive's employment is earlier terminated pursuant to
Sections 5, 6 or 7, termination of Executive's employment hereunder shall be
deemed to occur on the close of business on the
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<PAGE>
day immediately preceding the anniversary of the next Extension Date following
the delivery of the Non-Extension Notice pursuant to Section 2. If the Company
elects not to extend the Period of Employment, Executive's termination will be
treated for all purposes under this Agreement as a termination by the Company
without Cause under Section 6(b) as of the date of such notice. If Executive
elects not to extend the Period of Employment, Executive's termination will be
treated for all purposes under this Agreement as a termination by Executive
without Good Reason under Section 7(a).
9. GROSS-UP
Notwithstanding any other provision of this Agreement, if and to the extent
any payment made under this Agreement, either alone or in conjunction with other
payments Executive has the right to receive either directly or indirectly from
the Company, would constitute an "excess parachute payment" under Section 280G
of the Internal Revenue Code of 1986, as amended, then Executive shall be
entitled to receive an excise tax gross-up payment not exceeding one million
dollars ($1,000,000) in accordance with Appendix A.
10. MEANS AND EFFECT OF TERMINATION
Any termination of Executive's employment under this Agreement shall be
communicated by written notice of termination from the terminating party to the
other party. The notice of termination shall indicate the specific provision(s)
of this Agreement relied upon in effecting the termination and shall set forth
in reasonable detail the facts and circumstances alleged to provide a basis for
termination, if any such basis is required by the applicable provision(s) of
this Agreement.
11. NON-COMPETITION
Executive acknowledges and recognizes the highly competitive nature of the
businesses of the Company and its affiliates and accordingly agrees as follows:
(a) During the Period of Employment, Executive will not, directly or
indirectly, (i) engage in any business for Executive's own account that competes
with the business of the Company or its affiliates (including, without
limitation, businesses which the Company or its affiliates have specific plans
to conduct in the future and as to which Executive is aware of such planning),
(ii) enter the employ of, or render any services to, any person engaged in any
business that competes with the business of the Company or its affiliates, (iii)
acquire a financial interest in any person engaged in any business that competes
with the business of the Company or its affiliates, directly or indirectly, as
an individual, partner, shareholder, officer, director, principal, agent,
trustee or consultant, or (iv) interfere with business relationships (whether
formed before or after the date of this Agreement) between the Company or any of
its affiliates and customers, suppliers, partners, members or investors of the
Company or its affiliates.
(b) Notwithstanding anything to the contrary in this Agreement, Executive
may, directly or indirectly, own, solely as an investment, securities of any
person engaged in the business of the Company or its affiliates which are
publicly traded on a national or regional stock exchange or on an over-the-
counter market if Executive (i) is not a controlling person of, or a
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<PAGE>
member of a group which controls, such person and (ii) does not, directly or
indirectly, own five percent (5%) or more of any class of securities of such
person.
12. CONFIDENTIALITY.
Executive will not at any time (whether during or after his employment with
the Company), unless compelled by lawful process, disclose or use for his own
benefit or purposes or the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than the Company and any of its
subsidiaries or affiliates, any trade secrets, or other confidential data or
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
financing methods, or plans of the Company or of any subsidiary or affiliate of
the Company; provided that the foregoing shall not apply to information which is
--------
not unique to the Company or which is generally known to the industry or the
public other than as a result of Executive's breach of this covenant. Executive
agrees that upon termination of his employment with the Company for any reason,
he will return to the Company immediately all memoranda, books, papers, plans,
information, letters and other data, and all copies thereof or therefrom, in any
way relating to the business of the Company and its affiliates, except that he
may retain personal notes, notebooks and diaries that do not contain
confidential information of the type described in the preceding sentence.
Executive further agrees that he will not retain or use for his account at any
time any trade names, trademark or other proprietary business designation used
or owned in connection with the business of the Company or its affiliates.
13. INDEMNIFICATION
Executive shall be indemnified to the fullest extent permitted by law
against claims asserted against him personally arising out of, or related to,
the business of the Company or Executive's services for the Company. Company
shall provide directors' and officers' liability insurance coverage, including
indemnification as Director, in an amount reasonably satisfactory to Executive
with carriers who are reasonably satisfactory to Executive.
14. ASSIGNMENT
This Agreement is personal in its nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this Agreement or
any rights or obligations hereunder; provided, however, that, in the event of a
merger, consolidation, or transfer or sale of all or substantially all of the
assets of the Company with or to any other individual(s) or entity, this
Agreement shall, subject to the provisions hereof, be binding upon and inure to
the benefit of such successor and such successor shall discharge and perform all
the promises, covenants, duties, and obligations of the Company hereunder.
15. GOVERNING LAW
This Agreement and the legal relations hereby created between the parties
hereto shall be governed by and construed under and in accordance with the
internal laws of the State of California, without regard to conflicts of laws
principles thereof.
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<PAGE>
16. ENTIRE AGREEMENT
This Agreement embodies the entire agreement of the parties hereto
respecting the matters within its scope. This Agreement supersedes all prior
agreements of the parties hereto on the subject matter hereof. Any prior
negotiations, correspondence, agreements, proposals, or understandings relating
to the subject matter hereof shall he deemed to be merged into this Agreement
and to the extent inconsistent herewith, such negotiations, correspondence,
agreements, proposals, or understandings shall be deemed to be of no force or
effect. There are no representations, warranties, or agreements, whether express
or implied, or oral or written, with respect to the subject matter hereof,
except as set forth herein.
17. MODIFICATIONS
This Agreement shall not be modified by any oral agreement, either express
or implied, and all modifications hereof shall be in writing and signed by the
parties hereto.
18. WAIVER
Failure to insist upon strict compliance with any of the terms, covenants,
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition, nor shall any waiver or relinquishment of, or failure to insist upon
strict compliance with, any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.
19. NUMBER AND GENDER
Where the context requires, the singular shall include the plural, the
plural shall include the singular, and any gender shall include all other
genders.
20. SECTION HEADINGS
The section headings in this Agreement are for the purpose of convenience
only and shall not limit or otherwise affect any of the terms hereof.
21. ARBITRATION
Any controversy arising out of or relating to Executive's employment, this
Agreement, its enforcement or interpretation, or because of an alleged breach,
default, or misrepresentation in connection with any of its provisions, shall be
submitted to arbitration in Orange County, California, before a sole arbitrator
selected from Judicial Arbitration and Mediation Services, Inc., Orange County,
California, or its successor ("JAMS"), or if JAMS is no longer able to supply
the arbitrator, such arbitrator shall be selected from the American Arbitration
Association, and shall be conducted in accordance with the provisions of
California Civil Procedure Code (S)(S) 1280 et seq. as the exclusive remedy of
-- ---
such dispute; provided, however, that provisional injunctive relief may, but
-------- -------
need not, be sought in a court of law while arbitration proceedings are pending,
and any provisional injunctive relief granted by such court shall remain
effective until the matter is finally determined by the Arbitrator. Final
resolution of any dispute through arbitration may include any remedy or relief
which the Arbitrator deems just and equitable. Any
-14-
<PAGE>
award or relief granted by the Arbitrator hereunder shall be final and binding
on the parties hereto and may be enforced by any court of competent
jurisdiction. The parties that they are hereby waiving any rights to trial by
jury in any action, proceeding or counterclaim brought by either of the parties
against the other in connection with any matter whatsoever arising out of or in
any way connected with this Agreement or Executive's employment.
22. ATTORNEYS' FEES
Executive and the Company agree that in any dispute resolution proceedings
arising out of this Agreement, the prevailing party shall be entitled to its or
his reasonable attorneys' fees and costs incurred by it or him in connection
with resolution of the dispute in addition to any other relief granted.
23. SEVERABILITY
In the event that a court of competent jurisdiction determines that any
portion of this Agreement is in violation of any statute or public policy, then
only the portions of this Agreement which violate such statute or public policy
shall be stricken, and all portions of this Agreement which do not violate any
statute or public policy shall continue in full force and effect. Furthermore,
any court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.
24. NOTICES
All notices under this Agreement shall be in writing and shall be either
personally delivered or mailed postage prepaid, by certified mail, return
receipt requested:
(a) if to the Company:
Pacific Mercantile Bank
Attention George Wells
450 Newport Center Drive
Newport Beach, California 92660
(b) if to Executive:
Raymond E. Dellerba
24901 Dana Maple
Dana Point, CA 92629
Notice shall be effective when personally delivered, or five (5) business days
after being so mailed.
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<PAGE>
25. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument.
26. WITHHOLDING TAXES
The Company may withhold from any amounts payable under this Agreement such
federal, state and local taxes as may be required to be withheld pursuant to any
applicable law or regulation.
IN WITNESS WHEREOF, the Company and Executive have executed this Employment
Agreement as of the date first above written.
THE COMPANY:
By: /s/ GEORGE WELLS
-------------------------------------------
Name: George H. Wells
-------------------------------------------
Title: Chairman, Board of Directors
-------------------------------------------
EMPLOYEE:
/s/ RAYMOND E. DELLERBA
--------------------------------------------------
Raymond E. Dellerba
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<PAGE>
APPENDIX A
----------
(Gross-Up Provisions)
(a) In the event it is determined (pursuant to (b) below) or finally
determined (as defined in (c)(iii) below) that any payment, distribution,
transfer, benefit or other event with respect to the Company or a successor,
direct or indirect subsidiary or affiliate of the Company (or any successor of
affiliate of any of them, and including any benefit plan of any of them), and
arising in connection with an event described in Section 280G(b)(2)(A)(i) of the
Internal Revenue Code of 1986, as amended (the "Code"), occurring after the
Effective Date, to or for the benefit Executive or Executive's dependents, heirs
or beneficiaries (whether such payment, distribution, transfer, benefit or other
event occurs pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Appendix A) (each a "Payment" and collectively the "Payments") is or was subject
to the excise tax imposed by Section 4999 of the Code, and any successor
provision or any comparable provision of state or local income tax law
(collectively, "Section 4999"), or any interest, penalty or addition to tax is
or was incurred by Executive with respect to such excise tax (such excise tax,
together with any such interest, penalty, addition to tax, and costs (including
professional fees)) hereinafter collectively referred to as the "Excise Tax"),
then, within 10 days after such determination or final determination, as the
case may be, the Company shall pay to Executive (or to the applicable taxing
authority on Executive's behalf) an additional cash payment (hereinafter
referred to as the "Gross-Up Payment") equal to the lesser of (i) $1,000,000 or
(ii) an amount such that after payment by Executive of all taxes, interest,
penalties, additions to tax and costs imposed or incurred with respect to the
Gross-Up Payment (including, without limitation, any income and excise taxes
imposed upon the Gross-Up Payment), Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon such Payment or Payments. Subject
to the limitations in clause (i) of the preceding sentence, this provision is
intended to put Executive in the same position as Executive would have been had
no Excise Tax been imposed upon or incurred as a result of any Payment.
(b) Except as provided in subsection (c) below, the determination that a
Payment is subject to an Excise Tax shall be made in writing by a certified
public accounting firm selected by Executive ("Executive's Accountant"). Such
determination shall include the amount of the Gross-Up Payment and detailed
computations thereof, including any assumptions used in such computations (the
written determination of the Executive's Accountant, hereinafter, the
"Executive's Determination"). The Executive's Determination shall be reviewed on
behalf of the Company by a certified public accounting firm selected by the
Company (the "Company's Accountant"). The Company shall notify Executive within
10 business days after receipt of the Executive's Determination of any
disagreement or dispute therewith, and failure to so notify within that period
shall be considered an agreement by the Company to make payment as provided in
subsection (a) above within 10 days from the expiration of such 10 business-day
period. In the event of an objection by the Company to the Executive's
Determination, any amount not in dispute shall be paid within 10 days following
the 10 business-day period referred to herein, and with respect to the amount in
dispute the Executive's Accountant and the Company's Accountant shall jointly
select a third nationally recognized certified public accounting firm to resolve
the dispute and the decision of such third firm shall be final, binding and
conclusive upon the Executive and the Company. In such a case, the third
accounting firm's
Appendix A-1
<PAGE>
findings shall be deemed the binding determination with respect to the amount in
dispute, obligating the Company to make any payment as a result thereof within
10 days following the receipt of such third accounting firm's determination. All
fees and expenses of each of the accounting firms referred to in this Appendix A
shall be borne solely by the Company.
(c) (i) Executive shall notify the Company in writing of any claim by the
Internal Revenue Service (or any successor thereof) or any state or local taxing
authority (individually or collectively, the "Taxing Authority") that, if
successful, would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than 30 days
after Executive receives written notice of such claim and shall apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid; provided, however, that failure by Executive to give such
notice within such 30-day period shall not result in a waiver or forfeiture of
any of Executive's rights under Section 10 and this Appendix A except to the
extent of actual damages suffered by the Company as a result of such failure.
Executive shall not pay such claim prior to the expiration of the 15-day period
following the date on which Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes, interest, penalties
or additions to tax with respect to such claim is due). If the Company notifies
Executive in writing prior to the expiration of such 15-day period (regardless
of whether such claim was earlier paid as contemplated by the preceding
parenthetical) that it desires to contest such claim (and demonstrates to the
reasonable satisfaction of Executive its ability to make the payments to
Executive which may ultimately be required under this section before assuming
responsibility for the claim), Executive shall:
(A) give the Company any information reasonably requested by the
Company relating to such claim;
(B) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney selected
by the Company that is reasonably acceptable to Executive;
(C) cooperate with the Company in good faith in order
effectively to contest such claim; and
(D) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall
bear and pay directly all attorneys fees, costs and expenses
(including additional interest, penalties and additions to tax)
incurred in connection with such contest and shall indemnify and
hold Executive harmless, on an after-tax basis, for all taxes
(including, without limitation, income and excise taxes),
interest, penalties and additions to tax imposed in relation to
such claim and in relation to the payment of such costs and
expenses or indemnification. Without limitation on the foregoing
provisions of this Appendix A, and to the extent its actions do
not unreasonably interfere with or prejudice Executive's disputes
with the Taxing Authority as to other issues, the Company shall
control all proceedings taken in
Appendix A-2
<PAGE>
connection with such contest and, in its reasonable discretion,
may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the Taxing Authority
in respect of such claim and may, at its sole option, either
direct Executive to pay the tax, interest or penalties claimed
and sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company
directs Executive to pay such claim and sue for a refund, the
Company shall advance an amount equal to such payment to
Executive, on an interest-free basis, and shall indemnify and
hold Executive harmless, on an after-tax basis, from all taxes
(including, without limitation, income and excise taxes),
interest, penalties and additions to tax imposed with respect to
such advance or with respect to any imputed income with respect
to such advance, as any such amounts are incurred; and, further,
provided, that any extension of the statute of limitations
relating to payment of taxes, interest, penalties or additions to
tax for the taxable year of Executive with respect to which such
contested amount is claimed to be due is limited solely to such
contested amount; and, provided, further, that any settlement of
any claim shall be reasonably acceptable to Executive and the
Company's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder,
and Executive shall be entitled to settle or contest, as the case
may be, any other issue.
(ii) If, after receipt by Executive of an amount advanced by the
Company pursuant to paragraph (c)(i), Executive receives any refund
with respect to such claim, Executive shall (subject to the Company's
complying with the requirements of this Appendix A) promptly pay to
the Company an amount equal to such refund (together with any interest
paid or credited thereof after taxes applicable thereto), net of any
taxes (including, without limitation, any income or excise taxes),
interest, penalties or additions to tax and any other costs incurred
by Executive in connection with such advance, after giving effect to
such repayment. If, after the receipt by Executive of an amount
advanced by the Company pursuant to paragraph (c)(i), it is finally
determined that Executive is not entitled to any refund with respect
to such claim, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall be treated
as a Gross-Up Payment and shall offset, to the extent thereof, the
amount of any Gross-Up Payment otherwise required to be paid.
(iii) For purposes of this Appendix A, whether the Excise Tax is
applicable to a Payment shall be deemed to be "finally determined"
upon the earliest of: (A) the expiration of the 15-day period referred
to in paragraph (c)(i) above if the Company has not notified Executive
that it intends to contest the underlying claim, (B) the expiration of
any period following which no right of appeal exists, (C) the date
upon which a closing agreement or similar agreement with respect to
the claim is executed by Executive and the Taxing Authority
Appendix A-3
<PAGE>
(which agreement may be executed only in compliance with this Appendix
A), (D) the receipt by Executive of notice from the Company that it no
longer seeks to pursue a contest (which shall be deemed received if
the Company does not, within 15 days following receipt of a written
inquiry from Executive, affirmatively indicate in writing to Executive
that the Company intends to continue to pursue such contest).
(d) As a result of uncertainty in the application of Section 4999 that may
exist at the time of any determination that a Gross-Up Payment is due, it may be
possible that in making the calculations required to be made hereunder, the
parties or their accountants shall determine that a Gross-Up Payment need not be
made (or shall make no determination with respect to a Gross-Up Payment) that
properly should be made ("Underpayment"), or that a Gross-Up Payment not
properly needed to be made should be made ("Overpayment"). The determination of
any Underpayment shall be made using the procedures set forth in paragraph (b)
above and shall be paid to Executive as an additional Gross-Up Payment. The
Company shall be entitled to use procedures similar to those available to
Executive in paragraph (b) to determine the amount of any Overpayment (provided
that the Company shall bear all costs of the accountants as provided in
paragraph (b)). In the event of a determination that an Overpayment was made,
any such Overpayment shall be treated for all purposes as a loan to Executive
with interest at the applicable Federal rate provided for in Section 1274(d) of
the Code; provided, however, that the amount to be repaid by Executive to the
Company shall be subject to reduction to the extent necessary to put Executive
in the same after-tax position as if such Overpayment were never made.
Appendix A-4
<PAGE>
EXHIBIT 10.4
FORM OF
SEVERANCE COMPENSATION AGREEMENT
Dated as of ______ __, 1999
Between
PACIFIC MERCANTILE BANK
And
_____________
The Board of Directors of Pacific Mercantile Bank, a California Corporation
(the "Company") has determined that it is appropriate to reinforce and encourage
the continued attention and dedication of members of the Company's management,
including ________, the Company's ________________ Officer (the "Executive"), to
their assigned duties without distraction in potentially disturbing
circumstances arising from the possibility of a change in control of the
Company.
This Agreement sets forth the severance compensation which the Company
agrees it will pay to the Executive if the Executive's employment with the
Company terminates under one of the circumstances described herein following a
Change in Control of the Company (as defined in Section 2).
1. Term. The term of this Agreement shall commence on the date hereof
----
and, subject to earlier termination pursuant to Section 3(b), 3(c) or 3(d)
hereof, shall end three (3) years following the date on which notice of non-
renewal or termination of this Agreement is given by either the Company or
Executive to the other. Thus, this Agreement shall be renewable automatically
on a daily basis so that the outstanding term is always three (3) years
following any effective notice of non-renewal or of termination given by the
Company or Executive, other than in the event of a termination pursuant to
Section 3(b), 3(c) or 3(d) hereof.
2. Change in Control. For purposes of this Agreement, a "Change in
-----------------
Control" of the Company shall be deemed to have occurred if:
2.1 there shall be consummated:
(a) any consolidation or merger of the Company, in which the
Company or such Parent is not the continuing or surviving corporation or
pursuant to which shares of the Company's Common Stock would be converted
into cash, securities or other property, other than a merger of the Company
in which the holders of the Company's Common Stock immediately prior to the
merger have substantially the same proportionate ownership of at least 65%
of common stock of the surviving corporation immediately after the merger,
or
(b) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially
all, of the assets of the Company other than to a corporation in which the
persons who were the holders of the Company's Common Stock immediately
prior to such transaction have substantially the same proportionate
ownership of at least 65% of the common stock of such corporation, or
2.2 the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company, or
2.3 any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall
become the beneficial owner (within the
<PAGE>
meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's
outstanding shares of Common Stock, other than any such person who has record or
beneficial ownership of at least 10% of the Company's outstanding shares of
Common Stock on the date hereof and any persons who acquire shares of stock in
the Company by purchasing shares in a firmly underwritten public offering by the
Company, except for any such transaction in which such person is a corporation
and immediately after such acquisition of beneficial ownership the persons who
were the holders of the Company's Common Stock immediately prior to such
transaction shall have substantially the same proportionate ownership of at
least 65% of the common stock of such corporation; or
2.4 during any period of two consecutive years during the term of
this Agreement, individuals who at the beginning of the two year period
constituted the entire Board of Directors do not for any reason constitute a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
If, during the term of this Agreement, another corporation acquires
beneficial ownership of more than 65% of the Company's outstanding shares in a
transaction that does not constitute a Change in Control of the Company, within
the meaning of the above provisions of this Section 2.4, and if during the
remaining term of this Agreement and while that corporation (a "Parent
Corporation") continues to be the beneficial owner of more than 65% of the
Common Stock of the Company, there occurs one of the transactions described
above in Sections 2.1, 2.2, 2.3 or 2.4 with respect to that Parent Corporation,
such transaction shall constitute a Change in Control of the Company for
purposes of this Agreement.
3. Termination Following Change in Control.
---------------------------------------
3.1 Executive shall become entitled to receive the compensation
provided for in Section 4 hereof if, and only if, a Change in Control of the
Company shall have occurred while the Executive is still an employee of the
Company, and there subsequently occurs a termination of the Executive's
---
employment:
(a) By Executive for Good Reason (as defined in Section 3.5
below); or
(b) By the Company for any reason other than (i) Executive's
death; (ii) Executive's Disability (as defined in Section 3.2 below),
(iii) Executive's reaching Retirement Age (as defined in Section 3.3
below), or (iv) Cause (as defined in Section 3.4 below).
3.2 Death or Disability. If, as a result of the Executive's
-------------------
incapacity due to physical or mental illness, the Executive is absent from his
duties with the Company on a full-time basis for five months, the Company may
elect to terminate his employment and this Agreement for "Disability" by written
notice to Executive; provided, however, that any such termination shall be
effective only at the end of thirty (30) days following the delivery of such
notice and only if Executive fails to return to the full-time performance of
duties by the end of such 30-day notice period. Executive's employment and this
Agreement also shall terminate immediately in the event of the death of the
Executive occurring at any time during the term hereof. Executive shall not be
entitled to any compensation under this Agreement by reason of the termination
of his employment and/or the termination of this Agreement due to his Disability
or death, even if such termination occurs subsequent to a Change in Control.
3.3 Retirement or Voluntary Resignation. This Agreement shall
-----------------------------------
terminate automatically on Retirement (as hereinafter defined) of Executive or
due to the resignation or termination by Executive of his employment for any
reason other than Good Reason (as hereinafter defined). The Company shall have
no obligation to pay and Executive shall have no right to receive any
compensation
2
<PAGE>
under this Agreement on or due to such Retirement or the Executive's resignation
or termination of employment other than for Good Reason, even such termination
occurs subsequent to a Change in Control. The term "Retirement" as used in this
Agreement shall mean termination by the Company or the Executive of the
Executive's employment or of this Agreement based on the Executive's having
reached age 65 or such other age as shall have been fixed in any arrangement
established with the Executive's consent with respect to the Executive.
3.4 Cause. The Company may terminate Executive's Employment and/or
-----
this Agreement for Cause (as hereinafter defined) and the Company shall have no
obligation to pay and the Executive shall have no right to receive any
compensation hereunder by reason of any such termination, even if it occurs
following a Change in Control. The term "Cause" for purposes of this Agreement
shall have the meaning given to it Exhibit A hereto. Notwithstanding the
foregoing, the Executive shall not be deemed, for purposes of this Agreement, to
have been terminated for Cause unless and until there shall have been delivered
to the Executive a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Company's Board of
Directors at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board), finding
that in the good faith opinion of the Board the Executive engaged in conduct
that constitutes grounds for a termination of his employment for Cause and
specifying the particulars thereof in reasonable detail.
3.5 Good Reason. If, prior to the termination of this Agreement,
-----------
there occurs: (i) first a Change in Control and (ii) then, within the
succeeding two years any of the events or circumstances described below in this
Section 3.5 occurs, and (iii) Executive terminates his employment in the manner
and within the applicable time period set forth hereinafter, Executive shall
become entitled to receive the severance compensation set forth in Section 4 of
this Agreement. Any such termination shall constitute a termination for "Good
Reason." For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent) that occurs either
as a result of, or after the occurrence of, any Change in Control:
(a) The Company has materially changed the Executive's position,
duties, responsibilities, status, or offices as in effect immediately prior
to a Change in Control of the Company or has removed the Executive from or
failed to reelect the Executive to any of such positions, except in
connection with the termination of his employment for Disability,
Retirement or Cause or as a result of the Executive's death or Retirement;
(b) A reduction by the Company in the Executive's base salary as
in effect on the date hereof or as the same may be increased from time to
time during the term of this Agreement, or the Company's failure to
increase (within 12 months of the Executive's last increase in base salary)
the Executive's base salary after a Change in Control of the Company in an
amount which at least equals, on a percentage basis, the average percentage
increase in base salary for all officers of the Company effected in the
preceding 12 months;
(c) Any failure by the Company to continue in effect any benefit
plan or arrangement (including, without limitation, the Company's life
insurance, accident, disability and health insurance plans, 401(k) and
bonus plans, stock options, and all other similar plans which are from time
to time made generally available to senior executives of the Company and in
which the Executive is participating at the time of a Change in Control of
the Company, unless replaced by any other plan providing the Executive with
substantially similar benefits (hereinafter referred to as "Benefit
Plans"), or the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce the
Executive's benefits under any such Benefit Plan or deprive the Executive
of any material fringe benefit enjoyed by the Executive at
3
<PAGE>
the time of a Change in Control of the Company which adversely affects
Executive in a manner materially different from other executives of the
Company;
(d) Any failure by the Company to continue in effect any
incentive compensation plan or arrangement (including, without limitation,
the Company's plans enumerated in paragraph (c) above and similar incentive
compensation benefits) in which the Executive is participating at the time
of a Change in Control of the Company, unless replaced by any other plans
or arrangements providing him with substantially similar benefits
(hereinafter referred to as "Incentive Plans"), or the taking of any action
by the Company which would adversely affect the Executive's participation
in any such Incentive Plan or reduce the Executive's potential benefits
under any such Incentive Plan, expressed as a percentage of his base
salary, by more than 10 percentage points in any fiscal year as compared to
the immediately preceding fiscal year;
(e) A relocation of the Company's principal executive offices to
a location outside of Orange County, California, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties at the time of the Change in Control of
the Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations during the 12 months immediately preceding a
Change in Control of the Company;
(f) Any failure by the Company to provide the Executive with the
number of paid vacation days to which the Executive is entitled at the time
of a Change in Control of the Company;
(g) Any material breach by the Company of any provision of this
Agreement which it fails to cure within 15 days of written notice thereof
from the Executive; or
(h) Any failure by the Company to obtain the assumption of this
Agreement by any purchaser of all or substantially all of the assets of the
Company which constitutes a Change in Control of the Company; or
To constitute a Termination for Good Reason, the Executive must give
written notice of the termination by him of his employment to the Company within
45 days of the occurrence of the event constituting Good Reason, which shall
describe such event in reasonable detail. If the Company fails to cure such
event within the succeeding 10 days, such termination shall be effective at the
end of such 10 day period and Executive shall thereupon become entitled to
receive the compensation and benefits set forth in Section 4 hereof.
3.6 Notice of Termination. Any termination by the Company other than
---------------------
pursuant to Section 3.2 due to Executive' Disability, or for Cause pursuant to
Section 3.4, shall be communicated by a Notice of Termination. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate those specific termination provisions in this Agreement relied
upon and which set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provisions so indicated. For purposes of this Agreement, no such purported
termination by the Company shall be effective without such Notice of
Termination.
4. Severance Compensation upon Termination of Employment. Subject to
-----------------------------------------------------
Section 4.5 below, if, within two years following a Change in Control, the
Company shall terminate Executive's employment for any reason other than other
than those set forth in Section 3.2, 3.3 or 3.4 above, or if the Executive shall
terminate his employment for Good Reason, then:
4
<PAGE>
4.1 The Company shall pay to the Executive as severance pay a lump
sum, in cash, in full on the fifth day following the Date of Termination in an
amount equal to ____ months' of the Executive's highest annual base salary in
effect during the 12-month period immediately preceding the Date of Termination,
and (ii) the amount of any bonus that was earned by Executive and was no longer
subject to any contingencies prior to the Date of Termination. All payments
hereunder shall be made net of withholdings required by applicable federal,
state or local laws.
4.2 The Company shall continue for a period of ___ months from the
Date of Termination to provide the following benefits to the Executive if and to
the extent he was receiving such benefits on the day immediately preceding the
Date of Termination:
(a) Participation in the Company's medical, dental and vision
plans; and
(b) Long-term disability insurance.
Provided however, that any benefits payable under this subsection 4.4 shall
- ----------------
terminate at such time as the Executive becomes eligible for similar benefits
from any subsequent employer.
4.3 Limitation. To the extent that any or all of the payments and
----------
benefits provided for in this Agreement constitute "parachute payments" within
the meaning of Section 280G of the Internal Revenue Code (the "Code") and, but
for this Section 4.3, would be subject to the excise tax imposed by Section 4999
of the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 times the Executive's "base amount" (as defined in
the Code). The determination of any reduction of any payment or benefits under
this Section 4 pursuant to the foregoing provision shall be made by a nationally
recognized public accounting firm chosen by the Company in good faith, and such
determination shall be conclusive and binding on the Company and the Executive.
5. Termination without Cause in the Absence of a Change in Control. In
---------------------------------------------------------------
the event that, during the term of this Agreement, the Company terminates
Executive's employment for any reason other than (i) Executive's death; (ii)
Executive's Disability (as defined in Section 3.2), (iii) Executive's reaching
Retirement Age (as defined in Section 3.3), or (iv) Cause (as defined in Section
3.4) and there has not been a Change in Control (a "Section 5 Termination"),
then Executive shall be entitled to receive the following compensation:
5.1 The Company shall pay to the Executive as severance pay an amount
equal to six (6) months' of the Executive's highest annual base salary in effect
during the 12-month period immediately preceding the date of such Section 5
Termination, and (ii) the amount of any bonus that was earned by Executive and
was no longer subject to any contingencies prior to the date of such Section 5
Termination, which amounts shall be paid in 12 semi-monthly payments following
such date. All payments hereunder shall be made net of withholdings required by
applicable federal, state or local laws.
5.2 The Company shall, for a period of six (6) months from the date
of such Section 5 Termination, continue to provide the following benefits to the
Executive if and to the extent he was receiving such benefits on the day
immediately preceding the date of such Termination:
(a) Participation in the Company's medical, dental and vision
plans; and
(b) Long-term disability insurance.
Provided however, that any benefits payable under this subsection 5.2 shall
- ----------------
terminate at such time as the Executive becomes eligible for similar benefits
from any subsequent employer.
5
<PAGE>
6. No Obligation to Mitigate Damages; No Effect on Other Contractual
-----------------------------------------------------------------
Rights.
- ------
(a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor, except as set forth in whichever of Section 4.2 or
5.2 is applicable, shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by the Executive as the result
of employment by another employer after the date of the termination of
Executive's employment, provided such other employer is not a competitor of the
Company.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue to the
date of the termination of Executive's employment, whether pursuant to Section
3.1 or Section 5, solely as a result of the passage of time, under any Benefit
Plan or Incentive Plan, or other written contract, plan or arrangement to which
the Company is a party.
7. Successor to the Company.
------------------------
(a) The Company will require any successor or assignee to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance reasonably satisfactory to the Executive, expressly,
absolutely and unconditionally to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. Any failure of
the Company to obtain such agreement prior to the effectiveness of any such
succession or assignment shall be a material breach of this Agreement and shall
entitle the Executive to terminate the Executive's employment for Good Reason.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor or assignee to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 7 or
which otherwise becomes bound by all of the terms and provisions of this
Agreement by operation of law. If at any time during the term of this Agreement
the Executive is employed by any corporation a majority of the voting securities
of which is then owned by the Company, "Company" as used in Sections 8, 13 and
14 of this Agreement shall in addition include such employer. In such event,
the Company agrees that it shall pay or shall cause such employer to pay any
amounts that become due and payable to the Executive pursuant to whichever of
Section 4 or Section 5 hereof is applicable.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
8. Release of Claims. The obligations of the Company under Section 4 of
-----------------
this Agreement shall constitute the only obligations and liability of the
Company arising from a termination of Executive's employment under the
circumstances set forth in Section 3.1 hereof following a Change in Control of
the Company and the obligations and liability of the Company under Section 5 of
this Agreement shall constitute the only obligations of the Company arising from
a termination of Executive's employment under the circumstances set forth in
Section 5 hereof. Upon the Company's tender of payment hereunder pursuant to
Section 4, or completion of the installment payments under Section 5, as the
case may be, the Company shall have no obligation to Executive by reason of his
employment or the termination thereof other than those set forth herein, and the
Executive agrees that receipt of such payment shall constitute a full and final
settlement and release of all claims or rights against the Company whether under
this Agreement or any other employment contract or agreement, that the Company
has
6
<PAGE>
with the Executive, and Executive shall execute all appropriate agreements
reflecting such settlement and release.
9. Notice. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return-receipt requested, postage- prepaid, as follows:
If to the Company: If to Executive
President _________________________________
Pacific Mercantile Bank _________________________________
450 Newport Center Drive, Suite 100 _________________, CA 9_____
Newport Beach, CA 92660
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
10. Amendments and Waivers. No provisions of this Agreement may be
----------------------
amended, modified, waived or discharged unless such amendment, modification,
waiver or discharge is set forth in a writing signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
11. Validity. The invalidity or unenforceability of any provisions of
--------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
13. Governing Law; Legal Proceedings, Fees and Expenses; Waiver of Jury
-------------------------------------------------------------------
Trial. This Agreement shall be governed by and construed in accordance with the
- -----
laws of the State of California. In the event any controversy, claim or dispute
arises between the parties hereto relating to this Agreement, the California
Superior Court for the County of Orange shall have exclusive jurisdiction over
such controversy claim or dispute, and each party further agrees (i) to accept
and not challenge the subject matter or the personal jurisdiction or the venue
of such court, (ii) that it shall not assert the defense of forum nonconviens,
and (iii) that it shall accept service of process in any such proceeding by
registered or certified mail. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH PARTY
EXPRESSLY AND IRREVOCABLY WAIVES ANY RIGHT IT OR HE MAY HAVE TO A TRIAL BY JURY
WITH RESPECT TO ANY SUCH CONTROVERSY, CLAIM OR DISPUTE AND EXPRESSLY AND
IRREVOCABLY AGREES THAT THE JUDGE SHALL BE THE SOLE TRIER OF FACT IN ANY SUCH
PROCEEDING. EACH PARTY IS AWARE THAT THE RIGHT TO A TRIAL BY JURY IS A
CONSTITUTIONAL RIGHT AND REPRESENTS THAT SUCH PARTY IS HEREBY WAIVING
VOLUNTARILY AND WITH AN UNDERSTANDING OF THE CONSEQUENCES THEREOF. The Company
shall pay all legal fees and expenses which the Executive may incur as a result
of the Company's contesting the validity, enforceability or the Executive's
interpretation of, or determinations under, this Agreement unless the Company
prevails in such contest.
7
<PAGE>
14. Confidentiality. The Executive shall retain in confidence any and all
---------------
confidential information known to the Executive concerning the Company and its
business so long as such information is not otherwise publicly disclosed.
15. Entire Agreement. This Agreement contains all of the terms agreed
----------------
upon between the Executive and the Company with respect to the subject matter
hereof and replaces and supersedes all prior severance agreements between the
Executive and the Company.
16. Headings and Interpretation. This Agreement is the result of arms'-
---------------------------
length negotiations between the parties hereto and no provision of this
Agreement, because of any ambiguity found to be contained herein, shall be
construed against a party by reason of the fact that such party or its legal
counsel was the draftsman of that provision. Unless otherwise indicated
elsewhere in this Agreement, (a) the term "or" shall not be exclusive, (b) the
term "including" shall mean "including, but not limited to," and (c) the terms
"herein," "hereof," "hereto," "hereunder" and other terms similar to such terms
shall refer to this Agreement as a whole and not merely to the specific section,
subsection, paragraph or clause where such terms may appear. The Section and
paragraph headings in this Agreement are included for convenience of reference
and shall not be considered in interpreting, construing or giving effect to any
of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
"COMPANY" "EXECUTIVE"
PACIFIC MERCANTILE BANCORP
By:
-------------------------------------- -----------------------------------
Raymond E. Dellerba, President and CEO
8
<PAGE>
EXHIBIT A
DEFINITION OF CAUSE
As used in this Severance Compensation Agreement herein, the term "Cause"
means any of the following:
(1) The failure of Executive to perform, in all material respects, the
duties assigned to him or her by such the President or Board of Directors of the
Company, which continues unremedied for a period of 30 days following the
receipt by Executive of a notice of such failure;
(2) The commission by the Executive of a felony, or of a misdemeanor
involving moral turpitude;
(3) The breach of any duties of Executive under any non-competition,
confidentiality or trade secret or invention transfer or similar agreement
entered into by the Executive with the Company;
(4) The commission of an action or an omission to act on the part of
the Executive which results in the incurrence by the Company of any criminal
liability or any material civil liability,
(5) Any violation of any material policies established by the Company
that is not remedied within a period of 15 days following the receipt by
Executive of a notice of such violation; and
(6) the issuance of an order, directive, instruction, recommendation or
report by any federal or state regulatory agency having jurisdiction over the
Company that leads the Board of Directors to determine, in good faith, that it
would be in the best interests of the Company to terminate Executive's
employment due to criticism of such Executive's performance by any such agency.
<PAGE>
[Confidential treatment is being sought for certain portions of this Exhibit, as
indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 406."
Such omitted portions have been filed with the Securities and Exchange
Commission.]
EXHIBIT 10.10
Agreement Number:
AGREEMENT
between
FISERV SOLUTIONS, INC.
1615 Murray Canyon Road, Suite 505
San Diego, CA 92108-4319
and
Pacific Mercantile Bank
450 Newport Center Drive
Newport Beach, California 92660
Date: September 15, 1998
Fiserv
<PAGE>
AGREEMENT dated as of September 15, 1998 ("Agreement") between FISERV SOLUTIONS,
INC., a Wisconsin corporation ("Fiserv"), and Pacific Mercantile Bank, a
California corporation ("Client").
===============================================================================
Fiserv and Client hereby agree as follows:
1. Term. The initial term of this Agreement shall be five (5) years and,
----
unless written notice of non-renewal is provided by either party at least 180
days prior to expiration of the initial term or any renewal term, this Agreement
shall automatically renew for a renewal term of five (5) years. This Agreement
shall commence on the earliest of the day Fiserv Services (as defined below) are
first used by Client or January 31, 1999.
2. Services. (a) Services Generally. Fiserv, itself and through its
-------- ------------------
affiliates, agrees to provide Client, and Client agrees to obtain from Fiserv
services ("Services") and products ("Products") (collectively, "Fiserv
Services") described in the attached Exhibits:
Exhibit A - Account Processing Services
Exhibit L - Material Purchased Through Fiserv
Exhibit M - Software Products
The Exhibits set forth specific terms and conditions applicable to the
Services and/or Products, and, where applicable, the Fiserv affiliate so
performing. Client may select additional services and products from time to
time by incorporating an appropriate Exhibit to this Agreement.
(b) Conversion Services. Fiserv will convert Client's existing applicable
-------------------
data and/or information to the Fiserv Services. Those activities designed to
transfer the processing from Client's present servicer to the Fiserv Services
are referred to as "Conversion Services". Client agrees to cooperate with
Fiserv in connection with Fiserv's provision of Conversion Services and to
provide all necessary information and assistance to facilitate the conversion.
Client is responsible for all out-of-pocket expenses associated with the
Conversion Services. Fiserv will provide Conversion Services as required in
connection with Fiserv Services.
(c) Training Services. Fiserv shall provide training, training aids, user
-----------------
manuals, and other documentation for Client's use as Fiserv finds necessary to
enable Client personnel to become familiar with Fiserv Services. If requested
by Client, classroom training in the use and operation of Fiserv Services will
be provided at a training facility designated by Fiserv. All such training aids
and manuals remain Fiserv's property.
3. Fees for Fiserv Services. (a) General. Client agrees to pay Fiserv:
------------------------ -------
(i) estimated fees for Fiserv Services for the following month as specified
in the Exhibits;
(ii) estimated out-of-pocket charges for the following month payable by
Fiserv for the account of Client; and
(iii) estimated Taxes (as defined below) thereon (collectively, "Estimated
Fees").
Fiserv shall timely reconcile Estimated Fees paid by Client for the Fiserv
Services for the month and the fees and charges actually due Fiserv based on
Client's actual use of Fiserv Services for such month. Fiserv shall either
issue a credit to Client or provide Client with an invoice for any additional
fees or other charges owed. Fiserv may change the amount of Estimated Fees
billed to reflect appropriate changes in actual use of Fiserv Services.
Estimated Fees may be increased from time to time as set forth in the Exhibits.
Upon notification to and acceptance by Client, Fiserv may increase its fees in
excess of amounts listed in the Exhibits in the event that Fiserv implements
major system enhancements to comply with changes in law, government regulation,
or industry practices.
(b) Additional Charges. Fees for out-of-pocket expenses, such as telephone,
------------------
microfiche, courier, and other charges incurred by Fiserv for goods or services
obtained by Fiserv on Client's behalf shall be billed to Client at cost plus the
applicable Fiserv administrative fee. Such out-of-pocket expenses may be
changed from time to time upon notification of a fee change from a
vendor/provider.
(c) Taxes. Fiserv shall add to each invoice any sales, use, excise, value
-----
added, and other taxes and duties however designated that are levied by any
taxing authority relating to the Fiserv Services ("Taxes"). In no event shall
"Taxes" include taxes based upon the net income of Fiserv.
<PAGE>
(d) Exclusions. The Estimated Fees do not include, and Client shall be
----------
responsible for, furnishing transportation or transmission of information
between Fiserv's service center(s), Client's site(s), and any applicable
clearing house, regulatory agency, or Federal Reserve Bank.
(e) Payment Terms. Estimated Fees are due and payable monthly upon receipt
-------------
of invoice. Client shall pay Fiserv through the Automated Clearing House. In
the event any amounts due remain unpaid beyond the 30th day after payment is
due, Client shall pay a late charge of 1.5% per month. Client agrees that it
shall neither make nor assert any right of deduction or set-off from Estimated
Fees on invoices submitted by Fiserv for Fiserv Services.
4. Access to Fiserv Services. (a) Procedures. Client agrees to comply with
------------------------- ----------
applicable regulatory requirements and procedures for use of Services
established by Fiserv.
(b) Changes. Fiserv continually reviews and modifies Fiserv systems used in
-------
the delivery of Services (the "Fiserv System") to improve service and comply
with government regulations, if any, applicable to the data and information
utilized in providing Services. Fiserv reserves the right to make changes in
Services, including but not limited to operating procedures, type of equipment
or software resident at, and the location of Fiserv's service center(s). Fiserv
will notify Client of any material change that affects Client's normal operating
procedures, reporting, or service costs prior to implementation of such change.
(c) Communications Lines. Fiserv shall order the installation of appropriate
--------------------
communication lines and equipment to facilitate Client's access to Services.
Client understands and agrees to pay charges relating to the installation and
use of such lines and equipment as set forth in the Exhibits.
(d) Terminals and Related Equipment. Client shall obtain necessary and
-------------------------------
sufficient terminals and other equipment, approved by Fiserv and compatible with
the Fiserv System, to transmit and receive data and information between Client's
location(s), Fiserv's service center(s), and/or other necessary location(s).
Fiserv and Client may mutually agree to change the type(s) of terminal and
equipment used by Client.
5. Client Obligations. (a) Input. Client shall be solely responsible for
------------------ -----
the input, transmission, or delivery to and from Fiserv of all information and
data required by Fiserv to perform Services unless Client has retained Fiserv to
handle such responsibilities, as specifically set forth in the Exhibits. The
information and data shall be provided in a format and manner approved by
Fiserv. Client will provide at its own expense or procure from Fiserv all
equipment, computer software, communication lines, and interface devices
required to access the Fiserv System. If Client has elected to provide such
items itself, Fiserv shall provide Client with a list of compatible equipment
and software; Client agrees to pay Fiserv's standard fee for recertification of
the Fiserv System resulting therefrom.
(b) Client Personnel. Client shall designate appropriate Client personnel
----------------
for training in the use of the Fiserv System, shall supply Fiserv with
reasonable access to Client's site during normal business hours for Conversion
Services and shall cooperate with Fiserv personnel in their performance of
Services, including Conversion Services.
(c) Use of Fiserv System. Client shall (i) comply with any operating
--------------------
instructions on the use of the Fiserv System provided by Fiserv; (ii) review all
reports furnished by Fiserv for accuracy; and (iii) work with Fiserv to
reconcile any out of balance conditions. Client shall determine and be
responsible for the authenticity and accuracy of all information and data
submitted to Fiserv.
(d) Client's Systems. Client shall be responsible for ensuring that its
----------------
systems are Year 2000 compliant and capable of passing and/or accepting date
formats from and/or to the Fiserv System.
6. Ownership and Confidentiality. (a) Definition.
----------------------------- ----------
(i) Client Information. "Client Information" means: (A) confidential plans,
------------------
customer lists, information, and other proprietary material of Client that is
marked with a restrictive legend, or if not so marked with such legend or is
disclosed orally, is identified as confidential at the time of disclosure
(and written confirmation thereof is promptly provided to Fiserv); and (B)
any information and data concerning the business and financial records of
Client's customers prepared by or for Fiserv, or used in any way by Fiserv in
connection with the provision of Fiserv Services (whether or not any such
information is marked with a restrictive legend).
(ii) Fiserv Information. "Fiserv Information" means: (A) confidential plans,
------------------
information, research, development, trade secrets, business affairs
(including that of any Fiserv client, supplier, or affiliate), and other
proprietary material of Fiserv that is marked with a restrictive legend, or
if not so marked with such legend or is disclosed orally, is identified as
confidential at the time of disclosure (and written confirmation thereof is
promptly provided to Client); and (B) Fiserv's proprietary computer programs,
including custom software modifications, software documentation and training
aids, and all data, code, techniques, algorithms, methods, logic,
architecture, and designs embodied or incorporated therein (whether or not
any such information is marked with a restrictive legend).
<PAGE>
(iii) Information. "Information" means Client Information and Fiserv
-----------
Information. No obligation of confidentiality applies to any Information
that the receiving party ("Recipient") (A) already possesses without
obligation of confidentiality; (B) develops independently; or (C) rightfully
receives without obligation of confidentiality from a third party. No
obligation of confidentiality applies to any Information that is, or becomes,
publicly available without breach of this Agreement.
(b) Obligations. Recipient agrees to hold as confidential all Information it
-----------
receives from the disclosing party ("Discloser"). All Information shall remain
the property of Discloser or its suppliers and licensors. Information will be
returned to Discloser at the termination or expiration of this Agreement.
Recipient will use the same care and discretion to avoid disclosure of
Information as it uses with its own similar information that it does not wish
disclosed, but in no event less than a reasonable standard of care. Recipient
may use Information for any purpose that does not violate such obligation of
confidentiality. Recipient may disclose Information to (i) employees and
employees of affiliates who have a need to know; and (ii) any other party with
Discloser's written consent. Before disclosure to any of the above parties,
Recipient will have a written agreement with such party sufficient to require
that party to treat Information in accordance with this Agreement. Recipient
may disclose Information to the extent required by law. However, Recipient
agrees to give Discloser prompt notice so that it may seek a protective order.
The provisions of this sub-section survive any termination or expiration of this
Agreement.
(c) Residuals. Nothing contained in this Agreement shall restrict Recipient
---------
from the use of any ideas, concepts, know-how, or techniques contained in
Information that are related to Recipient's business activities ("Residuals"),
provided that in so doing, Recipient does not breach its obligations under this
Section. However, this does not give Recipient the right to disclose the
Residuals except as set forth elsewhere in this Agreement.
(d) Fiserv System. The Fiserv System contains information and computer
-------------
software that are proprietary and confidential information of Fiserv, its
suppliers, and licensors. Client agrees not to attempt to circumvent the
devices employed by Fiserv to prevent unauthorized access to the Fiserv System,
including, but not limited to, alterations, decompiling, disassembling,
modifications, and reverse engineering thereof.
(e) Confidentiality of this Agreement. Fiserv and Client agree to keep
---------------------------------
confidential the prices, terms and conditions of this Agreement, without
disclosure to third parties.
7. Regulatory Agencies, Regulations and Legal Requirements. (a) Client
------------------------------------------------------- ------
Files. Records maintained and produced for Client ("Client Files") may be
- -----
subject to examination by such Federal, State, or other governmental regulatory
agencies as may have jurisdiction over Client's business to the same extent as
such records would be subject if maintained by Client on its own premises.
Client agrees that Fiserv is authorized to give all reports, summaries, or
information contained in or derived from the data or information in Fiserv's
possession relating to Client when formally requested to do so by an authorized
regulatory or government agency.
(b) Compliance with Regulatory Requirements. Client agrees to comply with
---------------------------------------
applicable regulatory and legal requirements, including without limitation:
(i) submitting a copy of this Agreement to the appropriate regulatory
agencies prior to the date Services commence;
(ii) providing adequate notice to the appropriate regulatory agencies of the
termination of this Agreement or any material changes in Services;
(iii) retaining records of its accounts as required by regulatory
authorities;
(iv) obtaining and maintaining, at its own expense, any Fidelity Bond
required by any regulatory or governmental agency; and
(v) maintaining, at its own expense, such casualty and business interruption
insurance coverage for loss of records from fire, disaster, or other causes,
and taking such precautions regarding the same, as may be required by
regulatory authorities.
8. Warranties. (a) Fiserv Warranties. Fiserv represents and warrants that:
---------- -----------------
(i)(A) Services will conform to the specifications set forth in the Exhibits;
(B) Fiserv will perform Client's work accurately provided that Client
supplies accurate data and information, and follows the procedures described
in all Fiserv documentation, notices, and advices; (C) Fiserv personnel will
exercise due care in provision of Services; (D) the Fiserv System will comply
in all material respects with all applicable Federal and State regulations
governing Services; and (E) the Fiserv System is or will be Year 2000
compliant. In the event of an error or other default caused by Fiserv
personnel, systems, or equipment, Fiserv shall correct the data or
information and/or reprocess the affected item or report at no additional
cost to Client. Client agrees to supply Fiserv with a written request for
correction of the error within 7
<PAGE>
days after Client's receipt of the work containing the error. Work
reprocessed due to errors in data supplied by Client, on Client's behalf by a
third party, or by Client's failure to follow procedures set forth by Fiserv
shall be billed to Client at Fiserv's then current time and material rates;
and
(ii) it owns or has a license to furnish all equipment or software comprising
the Fiserv System. Fiserv shall indemnify Client and hold it harmless
against any claim or action that alleges that the Fiserv System use infringes
a United States patent, copyright, or other proprietary right of a third
party. Client agrees to notify Fiserv promptly of any such claim and grants
Fiserv the sole right to control the defense and disposition of all such
claims. Client shall provide Fiserv with reasonable cooperation and
assistance in the defense of any such claim.
THE WARRANTIES STATED ABOVE ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES
MADE BY FISERV. FISERV DOES NOT MAKE, AND CLIENT HEREBY EXPRESSLY WAIVES, ALL
OTHER WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE STATED EXPRESS WARRANTIES ARE IN LIEU OF ALL
LIABILITIES OR OBLIGATIONS OF FISERV FOR DAMAGES ARISING OUT OF OR IN CONNECTION
WITH THE DELIVERY, USE, OR PERFORMANCE OF FISERV SERVICES.
(b) Client Warranties. Client represents and warrants that: (A) no
-----------------
contractual obligations exist that would prevent Client from entering into this
Agreement; (B) it has complied with all applicable regulatory requirements; and
(C) Client has requisite authority to execute, deliver, and perform this
Agreement. Client shall indemnify and hold harmless Fiserv, its officers,
directors, employees, and affiliates against any claims or actions arising out
of (X) the use by Client of the Fiserv System in a manner other than that
provided in this Agreement; and (Y) any and all claims by third parties through
Client arising out of the performance and non-performance of Fiserv Services by
Fiserv, provided that the indemnity listed in clause (Y) hereof shall not
--------
preclude Client's recovery of direct damages pursuant to the terms and subject
to the limitations of this Agreement.
9. Limitation of Liability. (a) General. IN NO EVENT SHALL FISERV BE
----------------------- -------
LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES ARISING FROM CLIENT'S USE OF FISERV SERVICES, OR FISERV'S
SUPPLY OF EQUIPMENT OR SOFTWARE, REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT
OR IN CONTRACT. CLIENT MAY NOT ASSERT ANY CLAIM AGAINST FISERV MORE THAN 2
YEARS AFTER SUCH CLAIM ACCRUED. FISERV'S AGGREGATE LIABILITY FOR ANY AND ALL
CAUSES OF ACTION RELATING TO SERVICES SHALL BE LIMITED TO THE TOTAL FEES PAID BY
CLIENT TO FISERV FOR SERVICES RESULTING IN SUCH LIABILITY IN THE [*] PERIOD
PRECEDING THE DATE THE CLAIM ACCRUED. FISERV'S AGGREGATE LIABILITY FOR A
DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO [*].
(b) Lost Records. If Client's records or other data submitted for processing
------------
are lost or damaged as a result of any failure by Fiserv, its employees, or
agents to exercise reasonable care to prevent such loss or damage, Fiserv's
liability on account of such loss or damages shall not exceed the reasonable
cost of reproducing such records or data from exact duplicates thereof in
Client's possession.
10. Disaster Recovery. (a) General. Fiserv maintains a disaster recovery
----------------- -------
plan ("Disaster Recovery Plan") for each Service. A "Disaster" shall mean any
unplanned interruption of the operations of or inaccessibility to Fiserv's
service center in which Fiserv, using reasonable judgment, requires relocation
of processing to a recovery location. Fiserv shall notify Client as soon as
possible after Fiserv deems a service outage to be a Disaster. Fiserv shall
move the processing of Client's standard services to a recovery location as
expeditiously as possible and shall coordinate the cut-over to back-up
telecommunication facilities with the appropriate carriers. Client shall
maintain adequate records of all transactions during the period of service
interruption and shall have personnel available to assist Fiserv in implementing
the switchover to the recovery location. During a Disaster, optional or on-
request services shall be provided by Fiserv only to the extent adequate
capacity exists at the recovery location and only after stabilizing the
provision of base services.
(b) Communications. Fiserv shall work with Client to establish a plan for
--------------
alternative communications in the event of a Disaster.
(c) Disaster Recovery Test. Fiserv shall test the Disaster Recovery Plan
----------------------
annually. Client agrees to participate in and assist Fiserv with such test, if
requested by Fiserv. Upon Client request, test results will be made available to
Client's management, regulators, auditors, and insurance underwriters.
(d) Client Plans. Fiserv agrees to release information necessary to allow
------------
Client's development of a disaster recovery plan that operates in concert with
the Disaster Recovery Plan.
(e) No Warranty. Client understands and agrees that the Disaster Recovery
-----------
Plan is designed to minimize, but not eliminate, risks associated with a
Disaster affecting Fiserv's service center(s). Fiserv does not warrant that
Fiserv Services will be uninterrupted or error free in the event of a Disaster;
no
* Omitted pursuant to Rule 406.
<PAGE>
performance standards shall be applicable for the duration of a Disaster. Client
maintains responsibility for adopting a disaster recovery plan relating to
disasters affecting Client's facilities and for securing business interruption
insurance or other insurance necessary for Client's protection.
11. Termination. (a) Material Breach. Except as provided elsewhere in this
----------- ---------------
Section 11, either party may terminate this Agreement in the event of a material
breach by the other party not cured within 90 days following written notice
stating, with particularity and in reasonable detail, the nature of the claimed
breach.
(b) Failure to Pay. In the event any invoice remains unpaid by Client 30
--------------
days after due, or Client deconverts any data or information from the Fiserv
System without prior written consent of Fiserv, Fiserv, at its sole option, may
terminate this Agreement and/or Client's access to and use of Fiserv Services.
Any invoice submitted by Fiserv shall be deemed correct unless Client provides
written notice to Fiserv within 15 days of the invoice date specifying the
nature of the disagreement.
(c) Remedies. Remedies contained in this Section 11 are cumulative and are
--------
in addition to the other rights and remedies available to Fiserv under this
Agreement, by law or otherwise.
(d) Defaults. If Client:
--------
(i) defaults in the payment of any sum of money due; or breaches this
Agreement in any material respect or otherwise defaults in any material
respect in the performance of any of its obligations and Client fails to cure
such default or breach within thirty (30) days after receipt of a written
notice thereof from Fiserv or, if the default or breach is not susceptible of
cure within such 30-day period, then only if Client fails to commence efforts
to effectuate a cure thereof within such 30-day period or fails to continue
to pursue such cure diligently thereafter; or
(ii) commits an act of bankruptcy or becomes the subject of any proceeding
under the Bankruptcy Code or becomes insolvent or if any substantial part of
Client's property becomes subject to any levy, seizure, assignment,
application, or sale for or by any creditor or governmental agency;
then, in any such event, Fiserv may, upon written notice, terminate this
Agreement and be entitled to recover from Client as liquidated damages an amount
equal to [*]. Client agrees to reimburse Fiserv for any expenses Fiserv may
incur, including reasonable attorneys' fees, in taking any of the foregoing
actions.
(e) Convenience. Client may terminate this Agreement during any term by
-----------
paying a termination fee based on the remaining unused term of this Agreement,
the amount to be determined by [*] books on the date of termination. Client
understands and agrees that Fiserv losses incurred as a result of early
termination of the Agreement would be difficult or impossible to calculate as of
the effective date of termination since they will vary based on, among other
things, the number of clients using the Fiserv System on the date the Agreement
terminates. Accordingly, the amount set forth in the first sentence of this
subsection represents Client's agreement to pay and Fiserv's agreement to accept
as liquidated damages (and not as a penalty) such amount for any such Client
termination.
(f) Merger. In the event of a merger between Client and another organization
------
in which Client is not the surviving organization and where the other
organization was not previously a user of Fiserv services similar to the
Services, Fiserv will allow an early termination of this Agreement upon the
following terms and conditions:
(i) written notice must be given 3 months in advance, specifying the
termination date;
(ii) Fiserv may specify a deconversion date based on its previous commitments
and work loads; and
(iii) Fiserv may charge a termination fee in accordance with subsection (e)
above.
(g) Return of Data Files. Upon expiration or termination of this Agreement,
--------------------
Fiserv shall furnish to Client such copies of Client Files as Client may request
in Fiserv's standard machine readable format along with such information and
assistance as is reasonable and customary to enable Client to deconvert from the
Fiserv System, provided, however, that Client consents and agrees and authorizes
-------- -------
Fiserv to retain Client Files until (i) Fiserv is paid in full for (A) all
Services provided through the date such Client Files are returned to Client; and
(B) any and all other amounts that are due or will become due under this
Agreement; (ii) Fiserv is paid its then standard rates for the services
necessary to return such Client Files; (iii) if this Agreement is being
terminated, Fiserv is paid any applicable termination fee pursuant to subsection
(d), (e), or (f) above; and (iv) Client has returned to Fiserv all Fiserv
Information. Unless directed by Client in writing to the contrary, Fiserv shall
be permitted to destroy Client Files any time after 30 days from the final use
of Client Files for processing.
* Omitted pursuant to Rule 406.
<PAGE>
(h) Miscellaneous. Client understands and agrees that Client is responsible
-------------
for the deinstallation and return shipping of any Fiserv-owned equipment located
on Client's premises.
12. Arbitration. (a) General. Except with respect to disputes arising from
----------- -------
a misappropriation or misuse of either party's proprietary rights, any dispute
or controversy arising out of this Agreement, or its interpretation, shall be
submitted to and resolved exclusively by arbitration under the rules then
prevailing of the American Arbitration Association, upon written notice of
demand for arbitration by the party seeking arbitration, setting forth the
specifics of the matter in controversy or the claim being made. The arbitration
shall be heard before an arbitrator mutually agreeable to the parties; provided,
that if the parties cannot agree on the choice of arbitrator within 10 days
after the first party seeking arbitration has given written notice, then the
arbitration shall be heard by three arbitrators, one chosen by each party, and
the third chosen by those two arbitrators. The arbitrators will be selected
from a panel of persons having experience with and knowledge of information
technology and at least one of the arbitrators selected will be an attorney. A
hearing on the merits of all claims for which arbitration is sought by either
party shall be commenced not later than 60 days from the date demand for
arbitration is made by the first party seeking arbitration. The arbitrator(s)
must render a decision within 10 days after the conclusion of such hearing. Any
award in such arbitration shall be final and binding upon the parties and the
judgment thereon may be entered in any court of competent jurisdiction.
(b) Applicable Law. The arbitration shall be governed by the United States
--------------
Arbitration Act, 9 U.S.C. 1-16. The arbitrators shall apply the substantive law
of the State of Wisconsin, without reference to provisions relating to conflict
of laws. The arbitrators shall not have the power to alter, modify, amend, add
to, or subtract from any term or provision of this Agreement, nor to rule upon
or grant any extension, renewal, or continuance of this Agreement. The
arbitrators shall have the authority to grant any legal remedy available had the
parties submitted the dispute to a judicial proceeding.
(c) Situs. If arbitration is required to resolve any disputes between the
-----
parties, the proceedings to resolve the first such dispute shall be held in
Milwaukee, Wisconsin, the proceedings to resolve the second such dispute shall
be held in Los Angeles, California, and the proceedings to resolve any
subsequent disputes shall alternate between Milwaukee, Wisconsin and Los
Angeles, California.
13. Insurance. Fiserv carries the following types of insurance policies:
---------
[*]
14. Audit. Fiserv employs an internal auditor responsible for ensuring the
-----
integrity of its processing environments and internal controls. In addition,
Fiserv provides for periodic independent audits of its operations. Fiserv shall
provide Client with a copy of the audit of the Fiserv service center providing
Services within a reasonable time after its completion and shall charge each
client a fee based on the pro rata cost of such audit. Fiserv shall also
provide a copy of such audit to the appropriate regulatory agencies, if any,
having jurisdiction over Fiserv's provision of Services.
15. General. (a) Binding Agreement. This Agreement is binding upon the
------- -----------------
parties and their respective successors and permitted assigns. Neither this
Agreement nor any interest may be sold, assigned, transferred, pledged, or
otherwise disposed of by Client, whether pursuant to change of control or
otherwise, without Fiserv's prior written consent. Client agrees that Fiserv
may subcontract any Services to be performed hereunder. Any such subcontractors
shall be required to comply with all applicable terms and conditions.
(b) Entire Agreement. This Agreement, including its Exhibits, which are
----------------
expressly incorporated herein by reference, constitutes the complete and
exclusive statement of the agreement between the parties as to the subject
matter hereof and supersedes all previous agreements with respect thereto.
Modifications of this Agreement must be in writing and signed by duly authorized
representatives of the parties. Each party hereby acknowledges that it has not
entered into this Agreement in reliance upon any representation made by the
other party not embodied herein. In the event any of the provisions of any
Exhibit are in conflict with any of the provisions of this Agreement, the terms
and provisions of this Agreement shall control unless the Exhibit in question
expressly provides that its terms and provisions shall control.
(c) Severability. If any provision of this Agreement is held to be
------------
unenforceable or invalid, the other provisions shall continue in full force and
effect.
(d) Governing Law. This Agreement will be governed by the substantive laws
-------------
of the State of Wisconsin, without reference to provisions relating to conflict
of laws. The United Nations Convention of Contracts for the International Sale
of Goods shall not apply to this Agreement.
* Omitted pursuant to Rule 406.
<PAGE>
(e) Force Majeure. Neither party shall be responsible for delays or failures
-------------
in performance resulting from acts reasonably beyond the control of that party.
(f) Notices. Any written notice required or permitted to be given hereunder
-------
shall be given by: (i) Registered or Certified Mail, Return Receipt Requested,
postage prepaid; (ii) confirmed facsimile; or (iii) nationally recognized
courier service to the other party at the addresses listed on the cover page or
to such other address or person as a party may designate in writing. All such
notices shall be effective upon receipt.
(g) No Waiver. The failure of either party to insist on strict performance
---------
of any of the provisions hereunder shall not be construed as the waiver of any
subsequent default of a similar nature.
(h) Financial Statements. Fiserv shall provide Client and the appropriate
--------------------
regulatory agencies so requiring a copy of Fiserv, Inc.'s audited consolidated
financial statements.
(i) Prevailing Party. The prevailing party in any arbitration, suit, or
----------------
action brought against the other party to enforce the terms of this Agreement or
any rights or obligations hereunder, shall be entitled to receive its reasonable
costs, expenses, and attorneys' fees of bringing such arbitration, suit, or
action.
(j) Survival. All rights and obligations of the parties under this Agreement
--------
that, by their nature, do not terminate with the expiration or termination of
this Agreement shall survive the expiration or termination of this Agreement.
(k) Exclusivity. Client agrees that Fiserv shall be the sole and exclusive
-----------
provider of the services that are the subject matter of this Agreement. For
purposes of the foregoing, the term "Client" shall include Client affiliates.
During the term of this Agreement, Client agrees not to enter into an agreement
with any other entity to provide these services (or similar services) without
Fiserv's prior written consent. If Client acquires another entity, the
exclusivity provided to Fiserv hereunder shall take effect with respect to such
acquired entity as soon as practicable after termination of such acquired
entity's previously existing arrangement for these services. If Client is
acquired by another entity, the exclusivity provided to Fiserv hereunder shall
apply with respect to the level or volume of these services provided immediately
prior to the signing of the definitive acquisition agreement relating to such
acquisition and shall continue with respect to the level or volume of these
services until any termination or expiration of this Agreement.
(l) Recruitment of Employees. Client agrees not to hire Fiserv's employees
------------------------
during the term of this Agreement and for a period of 6 months after any
termination or expiration thereof, except with Fiserv's prior written consent.
16. Price Schedule Adjustments. The prices set forth in Exhibit
--------------------------
A - 2 may, at Fiserv discretion, be subject to annual adjustments effective on
the first anniversary date of this contract as follows:
The base for computing the CPI fee adjustment is [*]. Charges for Exhibit A
SERVICES, shall be adjusted by the percentage change in CPI recorded over the
most recent twelve (12) month period for which the number is available. The
charges so calculated shall be the new charges for Exhibit A SERVICES. In no
event will the new charges for Exhibit A SERVICES be less than the charges which
existed prior to the adjustment.
Upon determination of each adjustment hereunder, the parties shall prepare a
revised Exhibit A-2 schedule of charges. The charges to Client for SERVICES for
any additional or extended Term shall be subject to increase in this manner.
================================================================================
* Omitted pursuant to Rule 406.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date indicated below.
For Client: For Fiserv:
Pacific Mercantile Bank Fiserv Solutions, Inc.
By: /s/ JOHN P. CRONIN By: /s/ JAMES LEVAN
---------------------------------- ----------------------------------
Name: John P. Cronin Name: James LeVan
Title: Executive Vice President, CTO Title: Executive Vice President
Date: 12/14/98 Date: 12/22/98
-------------------------------- --------------------------------
/s/ DANIEL L. ERICKSON
Daniel L. Erickson
<PAGE>
[Confidential treatment is being sought for certain portions of this Exhibit, as
indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 406."
Such omitted portions have been filed with the Securities and Exchange
Commission.]
EXHIBIT 10.11
UVEST BROKERAGE SERVICES AGREEMENT
THIS AGREEMENT, made this 1st day of April, 1999 (the "Agreement"), by and
between UVEST Financial Services Group, Inc. ("UVEST"), and Pacific Mercantile
Bank, ("Financial Institution");
WITNESSETH THAT:
WHEREAS, Financial Institution desires to make a broad range of securities
brokerage services available to its customers; and
WHEREAS, UVEST desires to provide Financial Institution's customers with
such brokerage services.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby covenant and agree as follows:
1. SERVICES
1.1 Services To Be Performed By UVEST
(a) UVEST will accept, establish and maintain cash and/or margin accounts
for customers of Financial Institution pursuant to the policies and guidelines
established by UVEST and in accordance with all applicable laws, regulations,
rules and procedures, including without limitation those of the Securities and
Exchange Act of 1934, as amended, and the National Association of Securities
Dealers, Inc.
(b) UVEST will execute, clear and settle orders for accounts that have been
accepted by UVEST (the "Accounts"), but only insofar as such orders are
transmitted by the Account to UVEST. As used in this Agreement, the term
"securities" includes stocks, bonds (US Treasury, Municipal and Corporate),
mutual funds, unit investment trusts, and listed options, but does not include
commodities.
(c) UVEST shall make available to the Accounts toll-free telephone service
and Internet access for placing orders and for customer service. That telephone
service shall be staffed by personnel of UVEST who may identify the services
provided as services of UVEST, a registered trademark of UVEST Financial
Services Group, Inc.
(d) UVEST will prepare, print and mail to each Account at its address of
record on the books of UVEST confirmation information respecting the execution
of each order for the Account. Each such confirmation will display the name of
UVEST and the Clearing Agent.
(e) UVEST will prepare, print and mail monthly statements to the Accounts
at their address of record on the books of UVEST (or quarterly statements if no
activity in an Account occurs during any quarter covered by such statement and
there is a cash balance or securities position in such Account). No statements
will be prepared for an account if there has been no activity and there is no
cash balance or security position. Each statement will display the name of
UVEST, the Clearing Agent and the Financial Institution.
(f) UVEST will be responsible for the receipt of the customer securities,
delivery of customer securities, making and receiving payment therefor and
holding in custody and
1
<PAGE>
safekeeping all securities. UVEST shall also be responsible for the handling of
margin accounts, the receipt of dividends, interest and other distributions, and
the processing of exchange offers, rights offerings, tender offers, redemptions,
proxy material, annual reports and other material distributed to shareholders
generally. It shall be the responsibility of UVEST to comply with any and all
prospectus delivery requirements with respect to Accounts that purchase
securities requiring such delivery.
(g) All Accounts shall be maintained as accounts of UVEST or of UVEST's
designated Clearing Agent and UVEST will maintain books and records of all
transactions executed by Accounts through it in accordance with applicable law.
(h) UVEST, in its sole judgment, reserves the right to reject any Account
or order thereof and to terminate any Account previously accepted by it as an
Account, which right will not be unreasonably exercised.
(i) UVEST shall be responsible for providing annual dividend and
distribution information as contained in IRS Form 1087 and any other information
required to be reported to Accounts by Federal, state or local tax laws, rules
or regulations, but only with respect to events subsequent to the effective date
of this Agreement.
(j) All transactions in any Account are to be considered cash transactions
until such time as UVEST has received and approved a duly and validly executed
margin agreement. UVEST is responsible for the operation of such margin accounts
in accordance with all-applicable laws, rules and regulations. UVEST shall have
complete authority and control over the terms, conditions and operations of
margin accounts and shall have the right, in its sole discretion, to modify the
margin requirements of any account.
(k) UVEST may delegate any or all of its duties under this Section to a
clearing agent of its choice, which may, but is not required to be Pershing, a
division of Donaldson, Lufkin & Jenrette Securities Corporation (the "Clearing
Agent"). Pershing is the Clearing Agent on the date of this Agreement. UVEST
shall promptly notify the Financial Institution, in writing, of any change to
the Clearing Agent. That written notice shall constitute a representation and
warranty by UVEST to Financial Institution that such new Clearing Agent has the
facilities and holds all federal and state licenses and approvals required under
applicable laws and regulations to act as a Clearing Agent with respect to the
Accounts.
(1) UVEST shall be responsible for managing the process whereby Financial
Institution's customers' accounts are to be automatically debited or credited,
as appropriate, for the settlement of executed securities orders.
1.2 Activities to be Performed by Financial Institution
(a) Financial Institution shall assist customers in completing UVEST's
Brokerage Account Application and Customer Agreement when appropriate, and, as
applicable, other required forms of UVEST and shall forward those completed
applications to UVEST. Copies of UVEST's Brokerage Account Application and
Customer Agreement will be provided to Financial Institution by UVEST. UVEST
shall cause all such Brokerage Account Applications to contain the following
legend:
"I/we have been advised and understand that securities are offered by UVEST
- ---------------------------------------------------------------------------
Investment Services, not by my financial institution, and that they are not
- ---------------------------------------------------------------------------
affiliated in any way. I/we have been advised and understand that securities
- ----------------------------------------------------------------------------
(stocks, bonds, mutual funds, unit investment trusts, and variable annuities)
- -----------------------------------------------------------------------------
offered by UVEST Investment Services (1) are not deposits of this institution
- -----------------------------------------------------------------------------
(2) are not insured or guaranteed by the Federal Deposit
- --------------------------------------------------------
2
<PAGE>
Insurance Corporation (FDIC), NCUA or any other government agency; (3) are not
- ------------------------------------------------------------------------------
obligations of, or guaranteed by my financial institution; or (4) involve
- --------------------------------------------------------------------------
investment risks, including the potential loss of principal I am aware that
- ---------------------------------------------------------------------------
there are fees associated with the purchase or sales of mutual funds and/or
- ---------------------------------------------------------------------------
annuities."
- ------------
(b) Financial Institution agrees to (i) review the information contained in
each Brokerage account Application and Customer Agreement and (ii) use its
reasonable to obtain from each customer and verify such documentation,
agreements and information as deemed necessary.
(c) Financial Institution shall cooperate with UVEST in effecting the
automatic debit or credit of Financial Institution's customers' accounts, as
appropriate, for settlement of securities orders.
1.3 Activities to be Performed by Both Parties
(a) UVEST and the Financial Institution shall undertake a marketing
campaign, the scope of which shall be jointly agreed upon by both UVEST and the
Financial Institution, to promote the brokerage services offered by UVEST to its
customers.
(b) Materials to be utilized in connection therewith will refer to UVEST
and must be reviewed and approved by UVEST and Financial Institution prior to
use.
(c) Neither Financial Institution nor UVEST will make any investment
recommendations and will not exercise any discretionary or other authority with
respect to the Accounts.
(d) Each party shall be responsible for compliance with federal and state
laws and regulations applicable to it. Without limiting the generality of the
foregoing, UVEST agrees that it will (i) perform its duties and responsibilities
hereunder diligently and with due care, (ii) provide full and adequate
supervision to all of its brokers and registered representatives and (iii)
notify the Financial Institution, promptly in writing, of any disciplinary
action that may be taken against it by the Securities Exchange Commission
("SEC") or the National Association of Securities Dealers, Inc. ("NASD")
(e) Each party shall be responsible for the on-going training of personnel
who will assist customers in completing the required forms of UVEST and in the
policies and procedures of UVEST.
(f) Financial Institution will be responsible for determining that no
customer is a minor when such customer completes the UVEST Broker Account
Application and Customer Agreement at Financial Institution. When a customer
utilizes the Internet to establish an account, UVEST will be responsible for
determining that no customer is a minor or subject to a disability under any
law, rule or regulation.
2. CUSTOMER AND FINANCIAL INSTITUTION FEES
(a) Schedule A attached hereto and incorporated herein by reference sets
forth UVEST's present schedule of charges to Financial Institution's customers
for orders placed via toll-free telephone service. Schedule B attached hereto
and incorporated herein by reference sets forth UVEST's present schedule of
charges to Financial Institution's customers for orders placed via the Internet.
Such charges may be changed by UVEST from time to time, but in no event shall
such charges be higher than UVEST's regular and customary charges for like
services to like institutions.
3
<PAGE>
(b) Schedule C attached hereto and incorporated herein by reference sets
forth UVEST's present schedule of charges to Financial Institution for
development, usage and maintenance of a customized discount brokerage Internet
site.
3. PAYOUT TO FINANCIAL INSTITUTION
As compensation for its activities hereunder, UVEST shall pay to Financial
Institution during the term of this Agreement, [*] per transaction, received
by it via the Internet with respect to all orders executed for Accounts that
were introduced to UVEST by Financial Institution. Amounts due to Financial
Institution shall be payable within 15 days of the end of the month during which
such commissions are received by UVEST.
4. MAINTENANCE OF BOOKS
UVEST shall carry all Accounts as UVEST accounts in the name of the
Financial Institution customer, with a notation on its books that such Accounts
were introduced by Financial Institution. Inadvertent omission of such notations
shall not be deemed to constitute a breach of this Agreement. UVEST shall, upon
written request, give Financial Institution reasonable access during normal
business hours to its books and records relating to Accounts that were
introduced to UVEST by Financial Institution for the purpose of verifying fees
payable under this Agreement.
5. INDEMNIFICATION
5.1 UVEST shall indemnify and hold Financial Institution harmless against
any losses, claims, damages, liabilities or expenses (which shall include, but
not be limited to all costs of defense and investigation and all reasonable
attorney's fees) to which Financial Institution may become subject, insofar as
such losses, claims, damages, liabilities or expenses arise out of or are based
upon any of the following:
(a) negligence or the willful misconduct of UVEST or its employees in
providing the services contemplated hereunder;
(b) the failure of UVEST to perform its obligations under this Agreement.
f) the breach by UVEST of any representations and warranties made by it in
or pursuant to this Agreement.
5.2 Financial Institution shall indemnify and hold UVEST harmless against
any losses, claims, damages, liabilities or expenses (which shall include, but
not be limited to, all costs of defense and investigation and all reasonable
attorney's fees), to which UVEST may become subject, insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any of
the following:
(a) the negligent or willful misconduct of Financial Institution or its
employees in conjunction with its performance of its duties under this Agreement
(b) failure of Financial Institution to perform its obligations under this
Agreement.
f) the breach by Financial Institution of any representations or warranties
made by it in or pursuant to this agreement.
* Omitted pursuant to Rule 406.
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5.3 No liability for indemnification under Sections 5.1 or 5.2 shall arise
unless the party making a claim under this section provides to the party against
whom a claim is being made written notice of the commencement of any action
within 10 days thereof. The failure of a party against whom such claim is made
will not relieve the party against whom such claim is made from any liability
which it may have otherwise than under this Section. If any such action is
brought against any party, and it notifies the other party of the commencement
thereof, the party against whom such claim is made will be entitled to defend or
prosecute such action at its expense and through counsel of its own choosing. No
settlement of any action against the party making a claim under this section
shall be made without the consent of the party against whom such claim is made.
5.4 The indemnification provisions in this Section shall remain operative
and in full force and effect, regardless of the termination of this Agreement
and shall survive any such termination.
6. REPRESENTATIONS, WARRANTIES AND ADDITIONAL COVENANTS
6.1 UVEST represents, warrants and covenants as follows:
(a) UVEST is presently a member in good standing of the National
Association of Securities Dealers, Inc.
(b) UVEST is and during the term of this Agreement will remain duly
licensed in good standing as a broker-dealer under applicable Federal and state
laws and regulations.
(c) UVEST has all the requisite authority, in conformity with all
applicable laws and regulations, to enter into and perform the services
contemplated by this Agreement.
(d) UVEST is in compliance, and during the term of this Agreement will
remain in compliance, with the capital and financial reporting requirements of
(i) the National Association of Securities Dealers, Inc., (ii) the Securities
and Exchange Commission and (iii) every state in which it is licensed as a
broker-dealer.
(e) During the term of this Agreement and all times there after, UVEST
shall keep confidential any information not otherwise generally available to the
public which it may acquire as a result of this Agreement regarding the business
and affairs of Financial Institution. UVEST shall treat the names of Account
holders as confidential and shall not provide such names to third parties except
as authorized in writing by Financial Institution or as required by applicable
statutes, rules and regulations. Financial Institution acknowledges, however,
that, after the termination of this Agreement, UVEST may use the names of
customers to carry out broker-dealer functions for such customers.
f) UVEST represents and warrants that all computer software and hardware
used in the development, usage or maintenance of its customized discount
brokerage Internet site and all computer software and hardware used in
processing transactions in the Accounts over the Internet are Year 2000
compliant, which means that such software and hardware are designed to
be used prior to, during, and after the calendar year 2000 AD, and that
the software and hardware will operate during each of such time periods
without error relating to date data, specifically including any error
relating to, or the product of, date data which represents or references
different centuries or more than one century.
6.2 Financial Institution represents, warrants, and covenants as follows:
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(a) Financial Institution has all the requisite authority in conformity
with all applicable laws and regulations to enter into this Agreement.
(b) Financial Institution shall not generate and/or prepare any statements,
billings or confirmations respecting any Account.
(c) Financial Institution shall keep confidential any information not
generally available to the public, which it may acquire as a result of this
Agreement regarding the business, and affairs of UVEST, such requirement shall
survive the life of this Agreement.
7. TERM - TERMINATION
7.1 The initial term of this Agreement shall expire one year from the date
hereof. After the initial term, this Agreement will be automatically renewed for
additional one-year terms unless and until terminated by either party upon (90)
days written notice of termination to the other party, such termination to be
effective on the expiration of such (90) day period. Accordingly, the earliest
date as of which this Agreement may be terminated by either party pursuant to
this section 7.1 shall be the first anniversary of the date of this Agreement
(provided written notice thereof has been given by either party to the other no
later than the 90th day prior thereto). The account application and customer
agreements that UVEST has with customers of the Financial Institution shall
survive any termination of this Agreement, whether pursuant to this section 7.1
or other sections of this Agreement, and no termination of this Agreement shall
relieve UVEST of its obligations to customers under such applications and
agreements.
7.2 During the term of this Agreement, Financial Institution will not offer
or promote provision of the services contemplated by this Agreement through or
by any broker, or similar provider, other than UVEST.
8. DEFAULT
8.1 Notwithstanding any provision in this Agreement, the following events
or occurrences shall constitute an Event or Default under this Agreement:
(a) failure of either party to comply with the terms of this Agreement
within fifteen days of written notice from the other party of such failure; or
(b) if any representation or warranty made by either party herein shall be
untrue in any material respect; or
(c) a receiver, liquidator or trustee of either party, or of any
substantial part of its property, is appointed by court order and such order
remains in effect for more than 30 days; or either party is adjudicated bankrupt
or insolvent; or a petition is filed against either party under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law or any jurisdiction, whether now or hereafter in effect, and is
not dismissed within 30 days after such filing; or
(d) either party files a petition in voluntary bankruptcy or seeking relief
under any provision of any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law or any jurisdiction,
whether now or hereafter in effect, or consents to the filing of any petition
against it under any such law; or
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(e) either party makes an assignment for the benefit of its creditors, or
admits in writing its inability to pay its debts generally as they become due,
or consents to the appointment of a receiver, trustee or liquidator for it, or
for all or any substantial party of its property.
Upon the occurrence of any such Event of Default, the non-defaulting party
may, at its option, and without waiving any rights or remedies such party may
have against the defaulting party, by notice to the defaulting party, declare
that this Agreement shall be thereby terminated without penalty and such
termination shall be effective as of the date such notice has been sent or
communicated to the defaulting party.
9. REMEDIES CUMULATIVE
The enumeration herein of specific remedies shall not be exclusive of any
other remedies. Any delay or failure by any party to this Agreement to exercise
any right, power, remedy or privilege herein contained, or now or hereafter
existing under any applicable statute of law, shall not be construed to be a
waiver of such right, power, remedy or privilege. No single, partial or other
exercise of any such right, power, remedy or privilege shall preclude the
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
10. MISCELLANEOUS
10.1 Neither Financial Institution nor UVEST shall hold itself out as an
agent of the other or any of the subsidiaries or the companies controlled
directly or indirectly by or affiliated with the other.
10.2 Neither Financial Institution nor UVEST shall, without having obtained
the prior approval of the other, agree to place or place any advertisement in
any newspaper, publication, periodical or any other media if such advertisement
in any manner makes reference to the other and/or of the services embodied in
this Agreement.
10.3 This Agreement may be modified by a writing signed by both parties to
this Agreement. Such modification shall not be deemed a cancellation of this
Agreement.
10.4 This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto. This Agreement may not be assigned
by either party without the prior consent of the other, except that an
assignment by UVEST to a subsidiary or a company affiliated with it (in either
case being a registered broker-dealer) and any assignment by Financial
Institution to another Financial Institution with which it is affiliated shall
be valid in the absence of consent. No assignment permitted to be made without
the consent of the other party shall relieve the assigning party of its
obligations hereunder and assigning party shall be liable for any breach of any
covenants or duties or any representations or warranties of its assignee under
this Agreement. The parties are independent contractors, do not intend to
create, and are not creating any partnership or joint venture or employer or
employee relationship between them. Except as to the extent expressly permitted
elsewhere in this Agreement, neither party is authorized to bind the other party
to any obligation or commitment whatsoever without the express prior written
consent of such party.
10.5 Neither party hereto shall use any service mark, trade name or
trademark of the other party hereto without the prior written consent of the
other. Each party shall have the exclusive right to any such name or mark
developed by it in connection with the services performed by it under this
Agreement.
10.6 In the event of a dispute between the parties, such dispute shall be
settled by arbitration in the county in which the Financial Institution's
headquarters office is located, in accordance with the rules of the American
Arbitration Association.
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10.7 The heading preceding the text, articles and sections hereof have been
inserted for convenience and reference only and shall not be construed to affect
the meaning, construction or effect of this Agreement.
10.8 If any provisions or conditions of this Agreement shall ultimately be
held to be invalid or unenforceable by any court, or regulatory or self-
regulatory agency or body, such invalidity or unenforceability shall attach only
to such provision or condition. The validity of the remaining provisions and
conditions shall not be affected thereby and this Agreement shall be carried out
as if any such invalid or unenforceable provision or condition was not contained
herein.
10.9 For the purposes of any and all notices, consents, directions,
approvals, requests or other communications required or permitted to be
delivered hereunder, UVEST's address shall be 128 South Tryon Street, 13th
Floor, Charlotte, NC, 28202, Attention: President; and Financial Institution's
address shall be: 450 Newport Center Drive, Suite 100, Newport Beach, CA, 92660,
Attention: Raymond E. Dellerba, President & CEO. Notice shall be provided by
registered or certified mail and either party may change its address for notice
purposes as aforesaid.
Made and executed as of the date set forth above.
UVEST Financial Services Group, Inc
By: illegible signature
-------------------------------------------
Title: President & COO
----------------------------------------
Pacific Mercantile Bank
By: DANIEL L. ERICKSON JOHN P. CRONIN
-------------------------------------------
Title: EVP/CFO EVP/CTO
----------------------------------------
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and all references to our Firm) included in or made part of this S-1
registration statement No. 333-33452.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
May 5, 2000
