<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-30777
-----------
PACIFIC MERCANTILE BANCORP
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0898238
-------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
450 NEWPORT CENTER DRIVE, SUITE 100, 92660
NEWPORT BEACH, CALIFORNIA
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(949) 644-8040
------------------------
(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------
(Former name, former address and former fiscal
year, if changed, since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
YES [_]. NO [X].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,332,020 shares of Common Stock
as of August 1, 2000
<PAGE>
PACIFIC MERCANTILE BANCORP
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition......................................... 3
June 30, 2000 and December 31, 1999
Consolidated Statements of Operations.................................................. 4
Three months and six months ended June 30, 2000 and 1999
Consolidated Statements of Comprehensive Loss.......................................... 5
Three months and six months ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows.................................................. 6
Three and six months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 9
Item 3. Market Risk............................................................................ 15
Forward Looking Statements and Uncertainties Regarding Future Performance.............. 16
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds.............................................. 17
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
Signatures.......................................................................................... 18
Exhibit Index....................................................................................... 19
</TABLE>
2
<PAGE>
Part I-Financial Information
Item 1. Financial Statements
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 6,854,500 $ 2,531,200
Federal Funds Sold 27,016,000 35,967,000
------------------------------------------------------------------------------------------
Cash and cash equivalents 33,870,500 38,498,200
------------------------------------------------------------------------------------------
Interest Bearing Deposits with Financial Institutions 1,089,000 1,386,000
Securities Available for Sale, at fair value 4,932,700 2,668,800
Loans Held for Sale, at lower of cost or market 15,039,500 2,700,000
Loans, net 73,409,100 44,343,200
Accrued Interest Receivable 657,200 221,100
Premises and Equipment, net 1,329,600 1,178,300
Other Assets 309,300 169,800
------------------------------------------------------------------------------------------
TOTAL ASSETS $130,636,900 $91,165,400
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 33,446,000 $16,607,800
Interest-bearing 62,856,700 57,892,400
------------------------------------------------------------------------------------------
Total deposits 96,302,700 74,500,200
------------------------------------------------------------------------------------------
Accrued Interest Payable 61,900 51,600
Other Liabilities 932,600 595,200
------------------------------------------------------------------------------------------
Total liabilities 97,297,200 75,147,000
------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 2) - -
Stockholders' Equity:
Preferred stock, no par value, 2,000,000 shares
authorized, none issued - -
Common stock, no par value, 10,000,000 shares
authorized, 6,220,410 and 3,720,162 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 36,819,700 19,019,200
Accumulated deficit (3,470,000) (2,992,400)
Accumulated other comprehensive loss, net (10,000) (8,400)
------------------------------------------------------------------------------------------
Total stockholders' equity 33,339,700 16,018,400
------------------------------------------------------------------------------------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $130,636,900 $91,165,400
==========================================================================================
</TABLE>
3
<PAGE>
Part I. Item 1. (continued)
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 1,754,300 $ 74,600 $ 2,954,900 $ 76,700
Federal funds sold 292,600 299,100 835,800 333,300
Securities available for sale 45,900 3,700 86,900 5,000
Interest bearing deposits with financial
institutions 16,500 10,100 38,300 10,100
Other - - - 27,100
-------------------------------------------------------------------------------------------------------
Total interest income 2,109,300 387,500 3,915,900 452,200
-------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 798,000 199,800 1,572,700 205,100
Other borrowings - - - 1,100
-------------------------------------------------------------------------------------------------------
Total interest expense 798,000 199,800 1,572,700 206,200
-------------------------------------------------------------------------------------------------------
Net interest income 1,311,300 187,700 2,343,200 246,000
Provision for loan losses 100,000 90,000 200,000 120,000
-------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 1,211,300 97,700 2,143,200 126,000
-------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges and fees 36,600 2,400 52,400 2,700
Mortgage banking 194,500 - 321,300 -
Other 53,800 (1,000) 88,900 400
-------------------------------------------------------------------------------------------------------
Total noninterest income 284,900 1,400 462,600 3,100
-------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 1,036,500 266,900 1,767,400 493,600
Occupancy expense 146,600 70,300 262,000 126,400
Equipment expense 107,800 33,400 209,700 42,700
Professional fees 158,300 58,700 306,200 96,900
Other operating expense 282,300 154,700 527,400 222,600
-------------------------------------------------------------------------------------------------------
Total noninterest expense 1,731,500 584,000 3,082,700 982,200
-------------------------------------------------------------------------------------------------------
Loss before income taxes (235,300) (484,900) (476,900) (853,100)
Income tax expense - 800 800 800
-------------------------------------------------------------------------------------------------------
Net loss $ (235,300) $ (485,700) $ (477,700) $ (853,900)
=======================================================================================================
Weighted average number of shares
outstanding 3,994,900 2,090,600 3,857,500 2,090,600
=======================================================================================================
Net loss per share $ (0.06) $ (0.23) $ (0.12) $ (0.41)
=======================================================================================================
</TABLE>
4
<PAGE>
Part I. Item 1. (continued)
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $(235,300) $(485,700) $(477,700) $(853,900)
Other comprehensive loss, net of tax:
Unrealized loss on securities available for sale,
net of tax effect (2,900) - (1,600) -
-----------------------------------------------------------------------------------------------------------
Total comprehensive loss $(238,200) $(485,700) $(479,300) $(853,900)
===========================================================================================================
</TABLE>
5
<PAGE>
Part I. Item 1. (continued)
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------------------------------------------------------
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (477,700) $ (853,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 194,500 54,300
Provision for loan losses 200,000 120,000
Net accretion of discounts on investment
securities (900) -
Net change in accrued interest receivable (436,100) (28,700)
Net change in other assets (139,500) (198,000)
Net change in accrued interest payable 10,300 39,800
Net change in other liabilities 337,400 83,300
-------------------------------------------------------------------------------
Net cash used in operating activities (312,000) (783,200)
-------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in interest bearing
deposits with financial institutions 297,000 (792,000)
Purchase of securities available for sale (2,264,600) (250,900)
Net increase in loans held for sale (12,339,500) -
Net increase in loans (29,265,900) (6,302,000)
Increase in premises and equipment (345,800) (629,400)
-------------------------------------------------------------------------------
Net cash used in investing activities (43,918,800) (7,974,300)
-------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 21,802,500 35,263,100
Proceeds from sale of common stock, net of
offering expenses 17,799,600 8,298,300
Proceeds from exercise of stock options 1,000 -
Repayment of advances from founders - (470,000)
-------------------------------------------------------------------------------
Net cash provided by financing activities 39,603,100 43,091,400
-------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (4,627,700) 34,333,900
Cash and cash equivalents, beginning of period 38,498,200 177,300
-------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 33,870,500 $34,511,200
===============================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Unrealized loss on investment securities,
available-for-sale, net of tax $ 1,600 $ -
Cash paid for interest on deposits and
other borrowings $ 1,569,000 $ 166,300
Cash paid for income taxes $ 800 $ 800
</TABLE>
6
<PAGE>
PACIFIC MERCANTILE BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Business and Significant Accounting Policies
Organization
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all footnotes as would be necessary for a fair presentation of financial
position, results of operations, changes in cash flows and comprehensive income
in conformity with generally accepted accounting principles. However, these
interim financial statements reflect all normal recurring adjustments which, in
the opinion of the management, are necessary for a fair presentation of the
results for the interim periods presented. All such adjustments were of a normal
recurring nature. The Consolidated Statements of Financial Condition,
Consolidated Statements of Operations and Consolidated Statements of Cash Flows
are presented in the same format as that used in the Company's Registration
Statement on Form S-1 filed under the Securities Act of 1933, as amended, as
such Registration Statement was declared effective on June 14, 2000.
The consolidated financial statements include the accounts of Pacific
Mercantile Bancorp and its wholly owned subsidiary Pacific Mercantile Bank
(which together shall be referred to as the "Company"). The Company is a bank
holding company which was incorporated on January 7, 2000 in the State of
California. Pacific Mercantile Bank (the "Bank") is a banking 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").
On June 12, 2000 the Company acquired the Bank by means of a merger as a
result of which the Bank became a wholly-owned subsidiary of the Company and the
Bank's shareholders became the Company's shareholders, owning the same number
and percentage of the Company's shares as they had owned in the Bank (the
"Reorganization"). Prior to the Reorganization, the Company had only nominal
assets and had not conducted any business. All financial information included
herein has been restated as if the Reorganization was effective for all periods
presented. Additionally, the number of common shares outstanding gives
retroactive effect to a two-for-one stock split of the Bank's outstanding shares
that became effective on April 14, 2000.
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.
Loans
At June 30, 2000, the Company had no nonaccrual, impaired, or restructured
loans and had no loans with principal more than 90 days past due that were still
accruing interest.
Loss Per Share
Basic loss per share for each of the periods presented was computed by
dividing the net loss by the weighted average number of shares of common stock
outstanding during each such period. The weighted average number of shares used
in the loss per share computation for the six month periods ended June 30, 2000
and 1999 was 3,857,500 and 2,090,600, respectively.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.-)
Comprehensive Income (Loss)
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.
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 and SFAS No. 138. SFAS No. 137 and SFAS No. 138 defer the effective date of
the pronouncement from fiscal years beginning June 15, 1999 to fiscal years
beginning June 30, 2000 and amend the reporting and accounting standards for
derivative instruments and for hedging activities. 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, SFAS No. 137, and SFAS No. 138 will not have
a material impact on the Bank's results of operations or financial condition.
2. Commitments and Contingencies
In order to meet the financing needs of its customers in the normal course
of business, the Company is party to financial instruments with off-balance
sheet risk. 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 June 30, 2000, the Company was
committed to fund certain loans amounting to approximately $32,298,000. The
Company 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 Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon an extension of credit is based
on management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment,
residential real estate and income-producing commercial properties.
The Bank is subject to legal actions normally associated with financial
institutions. At June 30, 2000, neither the Company nor the Bank had any
pending contingencies that would be material to the consolidated financial
condition or results of operations of the Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Background. The following discussion presents information about the
consolidated results of operations, financial condition, liquidity and capital
resources of the Company and the Bank, which is a wholly-owned subsidiary of the
Company. Substantially all of the Company's operations are conducted by the Bank
and the Bank accounts for substantially all of the Company's revenues. This
information should be read in conjunction with the Company's quarterly unaudited
consolidated financial statements and notes thereto contained earlier in this
Report.
Although the Company was not incorporated until January 7, 2000 and did not
conduct any business operations until June 12, 2000, when it acquired 100%
ownership of the Bank, for accounting purposes, the inception of the Company is
deemed to have occurred on May 29, 1998, the date when the organizers of the
Bank established an organizing committee to file necessary applications for
regulatory approvals and begin preparations for the opening of the Bank.
Pursuant to those regulatory approvals, the Bank was incorporated in November
1998 and it received its charter, completed the initial issuance and sale of its
shares and commenced banking operations on March 1, 1999. As a result, prior to
March 1, 1999, the Bank had no shares outstanding and generated no revenues from
operations.
The second quarter ended June 30, 1999 was our first quarter of operations;
and during the first half of 1999, we had only four months of operations, from
March 1, 1999 to June 30, 1999, when our operating results were adversely
affected by non-recurring organizational and start-up expenses. As a result,
readers of this Report are cautioned that comparisons of second quarter and six
months ended June 30, 2000 to the corresponding periods of 1999 are of limited
usefulness.
This Report also contains information regarding operating trends and
expectations regarding our future performance (which is referred to as "forward-
looking information"). That information is subject to, and qualified by the
discussion of, the uncertainties and risks contained below in the Section of
this Report entitled "FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING
FUTURE PERFORMANCE" and readers of this Report are urged to read that Section in
it entirety.
Overview of Recent Operating Results. We achieved rapid growth during the
first half of 2000 and, although we sustained net losses of $235,300 or $0.06
per share and $447,700 or $0.12 per share in the second quarter and six months
ended June 30, 2000, respectively, we did improve our operating results during
those periods as compared to the corresponding periods of 1999 and also as
compared to the last six months of 1999. Those losses were primarily
attributable to increases in non-interest expense, primarily salaries and
employee benefits, as we added personnel needed to serve our growing customer
base and to implement marketing programs designed to attract new borrowers and
depositors in our service areas. Those increases in non-interest expense more
than offset increases we achieved in interest income and net interest income in
the quarter and six months ended June 30, 2000. Set forth below are key
financial performance ratios for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average assets (1) (0.83)% (6.01)% (0.87)% (9.35)%
Return on average shareholders' equity (1) (5.46)% (25.86)% (5.76)% (9.19)%
Net interest margin 4.91% 2.44% 4.49% 2.89%
Total Capital to risk weighted assets 26.00% 51.80% 26.00% 51.80%
Tier I Capital to risk weighted assets 25.10% 50.90% 25.10% 50.90%
Tier I Capital to average assets 24.20% 22.20% 24.20% 22.20%
Allowance for credit losses to total loans 1.30% 1.90% 1.30% 1.90%
Loss per share $ (0.06) $ (0.23) $ (0.12) $ (0.41)
</TABLE>
-------------
(1) Annualized
9
<PAGE>
Results of Operations
Net Interest Income. Net interest income, the major source of our
operating income, represents the difference between interest earned on interest
earning assets 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 "net interest margin."
We generated net interest income of $1,311,300 and $2,343,200,
respectively, in the quarter and six months ended June 30, 2000. This compares
to net interest income of $187,700 and $246,000, for the corresponding quarter
and six months of 1999. These increases in net interest income were largely
attributable to increases in interest income to $2,109,300 and $3,915,900,
respectively, in the quarter and six months ended June 30, 2000, which more than
offset increases in our interest expense in those same periods to $798,000 and
$1,572,700, respectively. Those increases in interest income were largely
attributable to increases of $80,302,700 and $70,202,100, respectively, in our
average loan volume for those two periods, which generated $1,679,700 and
$2,878,200, respectively, of additional interest income for us in the quarter
and six months ended June 30, 2000 as compared to the same periods of 1999. The
increases in interest expense were primarily attributable to increases of
$46,636,600 and $53,491,400, respectively, in the average volume of our deposits
during the quarter and six months ended June 30, 2000, compared to the
corresponding periods of 1999. Our net interest margin for the quarter and six
months ended June 30, 2000 improved to 4.91% and 4.49%, respectively, as
compared to 2.44% and 2.89%, respectively, for the corresponding periods of
1999. Those improvements were largely attributable to the changes in the mix of
earning assets to a greater proportion of loans on which we earn higher rates of
interest than on other interest earning assets.
Noninterest Income. Noninterest income consists of service charges on
deposit accounts, mortgage banking income and other noninterest income. Non-
interest income for the quarter and six months ended June 30, 2000 consisted
primarily of loan origination and processing fees and yield spread premium
generated by the mortgage banking division which originates conforming and non-
conforming, agency quality, residential first and home equity mortgage loans.
This division commenced operations in August 1999 and, therefore, a comparison
of noninterest income for the first half of 2000 to noninterest income for the
same period of 1999 is not meaningful.
Noninterest Expense. Total noninterest expense for the quarter and six
months ended June 30, 2000 were $1,731,500 and $3,082,700, respectively, as
compared to $584,000 and $982,200, respectively, for the corresponding periods
of 1999. Salaries and employee benefits are the largest components of
noninterest expense and the increases in noninterest expense in the first half
of 2000 were attributable primarily to the addition of experienced banking
personnel required to meet the needs of our growing customer base. Other
operating expense primarily consisted of stationary and supplies, advertising
and messenger services and check charges for customers. For the quarters ended
June 30, 2000 and 1999, annualized noninterest expense as a percentage of
average earning assets was 6.45% and 7.57%, respectively.
Financial Condition
Assets. Assets totaled $130,636,900 at June 30, 2000, as compared to
$91,165,400 at December 31, 1999. The increase is largely attributable to
increases in the volume of loans made during the six months ended June 30, 2000.
Loans Held for Sale. Loans intended for sale in the secondary market
totaled $2,700,000 at December 31, 1999 and $15,039,500 at June 30, 2000. This
increase was attributable primarily to the purchase of $9,370,800 of residential
mortgage loans from an unrelated mortgage banking company during January 2000 as
well as a $4,975,000 increase in outstanding loans attributable to the mortgage
banking division. The purchased 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 June 30, 2000 were made
to customers in Southern California, the primary market areas being Orange and
Los Angeles Counties. The greatest concentrations were in real estate loans and
commercial loans, which represent 56% and 35%, respectively, of the loan
portfolio at June 30, 2000, as compared to 68% and 23%, respectively, at
December 31, 1999.
10
<PAGE>
The loan portfolio consisted of the following at June 30, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------- -----------------------
<S> <C> <C> <C> <C>
Real estate loans $41,519,600 55.93% $30,653,600 68.07%
Commercial loans 25,705,000 34.63% 10,471,600 23.25%
Construction loans 3,069,500 4.13% 90,600 0.20%
Consumer loans 3,939,000 5.31% 3,815,200 8.47%
--------------------------------------------------
Gross loans 74,233,100 100.00% 45,031,000 100.00%
======== ========
Deferred fee income 126,000 62,200
Allowance for possible loan losses (950,000) (750,000)
----------- -----------
Loans, net $73,409,100 $44,343,200
=========== ===========
</TABLE>
The following table sets forth the maturity distribution of Bank's loan
portfolio (excluding consumer loans) at June 30, 2000:
<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 $ 3,675,600 $ 1,616,500 $32,949,300 $38,241,400
Fixed rate -- 1,817,300 1,460,900 3,278,200
Commercial loans
Floating rate 16,844,700 4,919,100 139,700 21,903,500
Fixed rate 1,042,800 2,078,000 680,700 3,801,500
Construction loans
Floating rate 2,400,700 -- -- 2,400,700
Fixed rate 668,800 -- -- 668,800
----------- ----------- ----------- -----------
Total $24,632,600 $10,430,900 $35,230,600 $70,294,100
=========== =========== =========== ===========
</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 an allowance for possible loan losses by
means of periodic charges to income known as "provisions for loan losses."
Loans are charged against the allowance for loan losses when management believes
that collection of the carrying amount of the loan has become unlikely.
Periodic additions are made to the allowance (i) to replenish and thereby
maintain the adequacy of the allowance following the occurrence of loan losses,
and (ii) to increase the allowance in response to increases in the volume of
outstanding loans and deterioration in economic conditions or in the financial
condition of borrowers. The Bank evaluates the adequacy of and makes provisions
in order to maintain or increase the allowance for possible loan losses on a
quarterly basis. As a result, provisions for possible loan losses will normally
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 June 30, 2000, the
allowance had been increased to $950,000, which represented 1.3% of outstanding
loans as of that date. The Bank carefully monitors changing economic
conditions, the loan portfolio by category, borrowers' financial condition and
the history of the portfolio in determining the adequacy of the allowance for
loan losses. We are not currently aware of any information indicating that
there will be material deterioration in our loan portfolio, and we believe that
the allowance for loan losses at June 30, 2000 is adequate to provide for losses
inherent in the portfolio. However, the allowance was established on the basis
of estimates developed primarily from historical industry loan loss data because
the Bank commenced operations in March 1999 and 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 loans increases, additional provisions for loan losses will be
required to maintain the allowance for loan losses at levels deemed adequate. In
addition, if economic conditions were to deteriorate, it would become necessary
to increase the provision to an even greater extent.
11
<PAGE>
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 June 30, 2000, we had no loans classified as
impaired. We exclude from our impairment calculations smaller, homogeneous loans
such as consumer installment loans and lines of credit. Also, loans that
experience insignificant payment delays or shortfalls are generally not
considered impaired.
A summary of the transactions in the allowance for loan losses for the six
months ended June 30, 2000 and the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------
<S> <C> <C>
Balance, beginning of period $750,000 $ --
Provision for loan losses 200,000 750,000
Recoveries -- --
Amounts charged off -- --
-------------------------------
Balance, end of period $950,000 $750,000
===============================
</TABLE>
Nonperforming Assets. There were no nonaccrual loans, restructured loans
or loans which were considered impaired at December 31, 1999 or June 30, 2000.
Deposits. At June 30, 2000 deposits totaled $96,302,700, which included
$19,470,000 of certificates of deposits of $100,000 or more. By comparison
deposits at December 31, 1999, totaled $74,500,200, which included $21,782,100
of certificates of deposit of $100,000 or more.
Set forth below is maturity schedule of domestic time certificates of
deposits outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Certificates of Deposit Certificates of Deposit of
Maturities Under $100,000 $100,000 or more
---------------------------------- -------------- ----------------
<S> <C> <C>
Three Months or Less $ 823,000 $16,645,900
Over Three and though Six Months 1,010,100 1,119,400
Over Six through Twelve Months 1,571,600 1,256,400
Over Twelve Months 112,300 448,300
-------------- ----------------
$3,517,400 $19,470,000
============== ================
</TABLE>
Liquidity
The Company's liquidity needs are actively managed to insure sufficient
funds are available to meet the ongoing needs of the Bank's customers. The
Company projects the future sources and uses of funds and maintains sufficient
liquid funds for unanticipated events. The primary sources of funds include
payments on loans, the sale or maturity of investments and 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. The Bank maintains 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 $39,603,100 for the
six months ended June 30, 2000. Net cash used in operating activities,
primarily representing the net loss for the six months ended June 30, 2000,
totaled $312,000. Net cash used in investing activities, primarily representing
increases in loans and loans held for sale, totaled $43,918,800.
At June 30, 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 $38,676,000 or 30% of total assets.
12
<PAGE>
Investments and Investment Policy
The investment policy, as established by the Board of Directors, is to
provide for the liquidity needs of the Bank and to generate a favorable return
on investments without undue interest rate risk, credit risk or asset
concentrations.
The Bank is authorized to invest in obligations issued or fully guaranteed
by the United States government, certain federal agency obligations, certain
time deposits, certain municipal securities and federal funds sold. It is our
policy that there will be no trading account. The weighted average maturity of
U.S. government obligations, federal agency securities and municipal obligations
cannot exceed 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.
The following is a summary of the major components of securities available
for sale and a comparison of the amortized cost, estimated fair values, and
gross unrealized gains and losses as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated
June 30, 2000 Cost Unrealized Gains Unrealized (Losses) Fair Value
------------------------------- ----------- ---------------- ------------------- ----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and
Obligations of U.S. Govt. $4,461,800 $ -- $(10,000) $4,451,800
Agencies
Federal Reserve Bank Shares $ 480,900 -- -- 480,900
---------------------------------------------------------------------------------------------------
Total $4,942,700 $ -- $(10,000) $4,932,700
===================================================================================================
<CAPTION>
Amortized Gross Gross Estimated
December 31, 1999 Cost Unrealized Gains Unrealized (Losses) Fair Value
------------------------------- ----------- ---------------- ------------------- ----------
<S> <C> <C> <C> <C>
Available for Sale:
Obligations of U.S. Govt.
Agencies $2,242,000 $ -- $(8,400) $2,233,600
Federal Reserve Bank Shares $ 435,200 -- -- 435,200
---------------------------------------------------------------------------------------------------
Total $2,667,200 $ -- $(8,400) $2,668,800
===================================================================================================
</TABLE>
At June 30, 2000, U.S. government agency securities with a carrying value
of $745,300 were pledged to secure a discount line at the Federal Reserve Bank.
The amortized cost and estimated fair value of debt securities at June 30,
2000 by contractual maturities are shown in the following table.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Maturing
-----------------------------------------------------------------------------------------------------------------------
Over Three Months Over One Year Over Five Total
June 30, 2000 Three Months or less through Twelve Months Through Five Years Years
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available for Sale,
amortized cost $750,000 $2,961,800 $750,000 $ -- $4,461,800
-----------------------------------------------------------------------------------------------------------------------
Available for Sale,
estimated fair value $748,200 $2,958,400 $745,200 -- 4,451,800
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average yield is 6.25% for securities maturing less than one
year, 6.38% for securities maturing in one to five years and 6.0% for Federal
Reserve Bank stock.
13
<PAGE>
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.
The following table sets forth information concerning our rate sensitive
assets and rate sensitive liabilities as of June 30, 2000. 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 $ 396,000 $ 693,000 $ - $ - $ - $ 1,089,000
Securities available for sale 748,200 2,958,400 745,200 4,451,800
Federal Reserve Bank stock - - - 480,900 - 480,900
Federal Funds Sold 27,016,000 - - - - 27,016,000
Loans, gross 69,730,300 7,897,500 8,863,700 2,907,100 - 89,398,600
Non-interest earning assets - - - - 8,200,600 3,350,400
----------- ----------- ----------- ----------- ------------ ------------
Total assets $97,890,500 $11,548,900 $ 9,608,900 $ 3,388,000 $ 8,200,600 $130,636,900
----------- ----------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing deposits $ - $ - $ - $ - $ 33,446,000 $ 33,446,000
Interest-bearing deposits 57,338,100 4,957,600 561,000 - - 62,856,700
Long-term borrowings - - - - - -
Other liabilities - - - - 994,500 994,500
Stockholders' equity - - - - 33,339,700 33,339,700
----------- ----------- ----------- ----------- ------------ ------------
Total liabilities and
stockholders equity $57,338,100 $ 4,957,600 $ 561,000 $ - $ 67,780,200 $130,636,900
----------- ----------- ----------- ----------- ------------ ------------
Interest rate sensitivity gap $40,552,400 $ 6,591,300 $ 9,047,900 $ 3,388,000 $(59,579,600) $ -
=========== =========== =========== =========== ============ ============
Cumulative interest rate
Sensitivity gap $40,552,400 $47,143,700 $56,191,600 $59,579,600 $ - $ -
=========== =========== =========== =========== ============ ============
Cumulative % of rate sensitive
assets in maturity period 74.93% 83.78% 91.13% 0.00% 244.76% N/A
=========== =========== =========== =========== ============ ============
Rate sensitive assets to rate
sensitive liabilities 1.71 2.33 17.13 N/A N/A
=========== =========== =========== =========== ============
Cumulative ratio 1.71 1.76 1.89 1.95 N/A
=========== =========== =========== =========== ============
</TABLE>
At June 30,2000, our rate sensitive balance sheet was shown to be in a
positive gap position. This implies that our earnings would increase in the
short-term if interest rates rise and would decline in the short-term if
interest rates were to fall. However, as noted above, this may not necessarily
be the case depending on how quickly rate sensitive assets and liabilities react
to interest rate changes.
14
<PAGE>
Capital Resources
The Company is 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 Company's operating results or financial condition.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action that apply to all bank holding companies and FDIC insured
banks in the United States, the Company (on a consolidated basis) and the Bank
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company (on a consolidated basis) and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management believes
that, as of June 30, 2000, the Company (on a consolidated basis) and the Bank
met all capital adequacy requirements to which they are subject.
On March 1, 1999, the Bank sold 2,090,628 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, the 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 expenses. The Company
sold a total of 2,611,608 shares in its initial public offering, commenced
during the second quarter of 2000, from which it realized proceeds of
approximately $18,690,000, net of approximately $2,200,000 in underwriting
commissions and discounts and other related expenses.
As of June 30, 2000, based on applicable capital 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 Bank's category.
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ----------------------------- -------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ---------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk
Weighted Assets....... $28,348,300 26.0% $8,722,100 (Greater than or $10,902,700 (Greater than or
equal to) 8.0% equal to) 10.0%
Tier I Capital to Risk
Weighted Assets....... 27,398,300 25.1% 4,361,100 (Greater than or 6,541,600 (Greater than or
equal to) 4.0% equal to) 6.0%
Tier I Capital to
Average Assets........ 27,398,300 24.2% 4,524,500 (Greater than or 5,655,700 (Greater than or
equal to) 4.0% equal to) 5.0%
</TABLE>
The Company intends to retain any earnings to support our future growth
and, therefore, does not intend to pay dividends for at least the foreseeable
future. In addition, the Bank has agreed with the FDIC to maintain a Tier 1
Capital to Average Assets ratio of at least eight percent until February 28,
2002.
ITEM 3. 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 rates 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 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
15
<PAGE>
including the sensitivity to changes in market interest rates and the maturities
of our interest earning assets and our deposits. See "Asset/Liability
Management."
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE
This Report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains certain forward-looking
information, which reflects management's current views of future financial
performance. The forward-looking information is subject to certain risks and
uncertainties, including but not limited to the following:
Increased Competition. Increased competition from other financial
institutions, mutual funds and securities brokerage and investment banking firms
that offer competitive loan and investment products could require us to reduce
interest rates and loan fees to attract new loans or to increase interest rates
that we offer on time deposits, either or both of which could, in turn, reduce
interest income and net interest margins.
Possible Adverse Changes in Local Economic Conditions. Adverse changes in
local economic conditions could (i) reduce loan demand which could, in turn,
reduce interest income and net interest margins; (ii) adversely affect the
financial capability of borrowers to meet their loan obligations which, in turn,
could result in increases in loan losses and require increases in provisions
made for possible loan losses, thereby adversely affecting operating results;
and (iii) lead to reductions in real property values that, due to our reliance
on real property to secure many of our loans, could make it more difficult for
us to prevent losses from being incurred on non-performing loans through the
sale of such real properties.
Possible Adverse Changes in National Economic Conditions and FRB Monetary
Policies. Changes in national economic conditions, such as increases in
inflation or declines in economic output often prompt changes in Federal Reserve
Board monetary policies that could increase the cost of funds to us and reduce
our net interest margins, particularly if we are unable, due to competitive
pressures or the rate insensitivity of earning assets, to effectuate
commensurate increases in the rates we are able to charge on existing or new
loans.
Changes in Regulatory Policies. Changes of federal and state bank
regulatory policies, such as increases in capital requirements or in loan loss
reserve or in asset/liability ratio requirements, could adversely affect
earnings by reducing yields on earning assets or increasing operating costs.
Effects of Growth. It is our intention to take advantage of opportunities
to increase our business, either through acquisitions of other banks or the
establishment of new banking offices. If we do acquire any other banks or open
any additional banking offices we are likely to incur additional operating costs
that may adversely affect our operating results, at least on an interim basis,
until any acquired bank is integrated into our operations or the new banking
offices are able to achieve profitability.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Quarterly Report, or to make predictions based
solely on historical financial performance.
Readers of this Report are also urged to review the Section entitled "Risk
Factors" in the Prospectus dated June 14, 2000, included in our S-1 Registration
Statement filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold a total of 2,611,608 shares of its common stock its
initial public stock offering stock commenced in June 2000. That offering was
registered on a Form S-1 Registration Statement (File No. 333-33452) filed by
the Company with the Securities and Exchange Commission under the Securities Act
of 1933. That Registration Statement was declared effective on June 14, 2000,
2,500,000 of the shares in the offering were sold on June 20, 2000 and the other
111,608 shares were sold on July 10, 2000 pursuant to the underwriter's
overallotment option. The proceeds of the offering totaled $18,690,000, net of
underwriting discounts and other offering expenses which totaled approximately
approximately $2,200,000. In the quarter ended June 30, 2000, the Company
contributed $11,854,500 of those net proceeds to the Bank to be used to fund new
loans and the acquisition of other interest earning assets. The remaining net
proceeds have been invested in short-term investment grade instruments and are
available to fund the Company's working capital requirements. These uses of the
net proceeds do not represent a material change from the uses thereof described
in the Company's Registration Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports filed on Form 8-K
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 10, 2000 Pacific Mercantile Bancorp
By: /S/ Daniel L. Erickson
---------------------------
Daniel L. Erickson
E.V.P./C.F.O.
(Principal Financial and
Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
27 Financial Data Schedule
19
