<PAGE> 1
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, 1995
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to
------------- ------------
Commission File Number: 0-15982
-------------
NATIONAL MERCANTILE BANCORP
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3819685
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East, Los Angeles, California 90067
----------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 277-2265
---------------
Not Applicable
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
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.
/x/ Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Common Stock, no
par value, as of July 31, 1995 was 3,078,146.
This document contains 31 pages.
<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Page(s) in
Form 10-Q
----------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 3-13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 14-28
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 29
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . 29
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . 29
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 29
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 29
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 30
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Changes in
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 8
</TABLE>
3
<PAGE> 4
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
(Unaudited)
--------- -----------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks-demand .......................................... $ 13,923 $ 22,210
Federal funds sold and securities purchased
under agreements to resell ........................................... 24,010 24,500
--------- ---------
Cash and cash equivalents ...................................... 37,933 46,710
Interest-bearing deposits with other
financial institutions ................................................ 198 195
Securities available-for-sale, at fair value;
aggregate amortized cost of $20,788 at June 30, 1995
and $65,113 at December 31, 1994 ...................................... 20,477 62,056
Loans receivable held for sale, at fair value ........................... -- 6,599
Loans receivable ........................................................ 97,579 115,284
Allowance for credit losses ........................................... (3,370) (3,063)
--------- ---------
Net loans receivable ........................................... 94,209 112,221
Premises and equipment, net ............................................. 1,569 1,684
Other real estate owned ................................................. 1,369 1,529
Accrued interest receivable and other assets ............................ 1,681 1,985
--------- ---------
$ 157,436 $ 232,979
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ............................................ $ 63,300 $ 87,430
Interest-bearing demand ............................................... 9,868 13,844
Money market accounts ................................................. 24,003 28,823
Savings ............................................................... 2,810 1,696
Time certificates of deposit:
$100,000 and over ................................................... 9,347 12,261
Under $100,000 ...................................................... 32,286 63,761
--------- ---------
Total deposits ................................................. 141,614 207,815
Securities sold under agreements to repurchase .......................... 4,382 12,572
Accrued interest payable and other liabilities .......................... 1,839 2,284
--------- ---------
Total liabilities .............................................. 147,835 222,671
Shareholders' equity:
Preferred stock, no par value; authorized 1,000,000
shares .............................................................. -- --
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 3,078,146 at
June 30, 1995 and December 31, 1994 ................................. 24,614 24,614
Accumulated deficit ................................................... (14,702) (11,249)
Net unrealized loss on securities available-
for-sale ............................................................ (311) (3,057)
--------- ---------
Total shareholders' equity ..................................... 9,601 10,308
--------- ---------
$ 157,436 $ 232,979
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three- and six-month periods ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
------- ------- ------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ............................. $ 2,422 $ 4,576 $ 5,037 $ 9,176
Investment securities ........................ 369 1,113 989 2,225
Federal funds sold and securities purchased
under agreements to resell ................. 273 85 496 131
------- ------- ------- --------
Total interest income ................. 3,064 5,774 6,522 11,532
Interest expense:
Deposits ..................................... 964 1,176 2,119 2,413
Borrowings ................................... 24 89 59 150
------- ------- ------- --------
Total interest expense ................ 988 1,265 2,178 2,563
------- ------- ------- --------
Net interest income ................... 2,076 4,509 4,344 8,969
Provision for credit losses .................... 381 1,567 527 3,185
------- ------- ------- --------
Net interest income after provision for
credit losses ....................... 1,695 2,942 3,817 5,784
Other operating income:
Gain (loss) on sale of trading securities .... -- (39) -- (123)
Gain (loss) on sale of securities available-
for-sale ................................... (1,341) (30) (2,495) (61)
Fee income ................................... 421 467 790 913
Loss on other real estate owned .............. (169) (133) (178) (192)
Other income - shareholders' insurance claims 730 -- 730 --
------- ------- ------- --------
Total other operating income .......... (359) 265 (1,153) 537
Other operating expenses:
Compensation ................................. 955 1,289 1,948 2,616
Office occupancy ............................. 540 601 1,072 1,217
Other general and administrative ............. 1,594 1,404 3,097 2,733
------- ------- ------- --------
Total other operating expenses ........ 3,089 3,294 6,117 6,566
------- ------- ------- --------
Income (loss) before income taxes ..... (1,753) (87) (3,453) (245)
Provision for income taxes ..................... -- -- -- --
------- ------- ------- --------
Net income (loss) ..................... $(1,753) $ (87) $(3,453) $ (245)
======= ======= ======= ========
Net income (loss) per share ........... $ (0.57) $ (0.03) $ (1.12) $ (0.08)
======= ======= ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six-month period ended June 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (loss)
on
Common Stock Securities
Preferred ---------------------- Accumulated Available-
Stock Shares Amount Deficit for-Sale Total
----------- --------- ------- ----------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ... -- 3,078,146 $24,614 $(11,249) $(3,057) $ 10,308
Decrease in net unrealized
loss on securities available
for sale ................... -- -- -- -- 2,746 2,746
Net loss ..................... -- -- -- (3,453) -- (3,453)
----------- --------- ------- -------- ------- --------
Balance at June 30, 1995 ....... -- 3,078,146 $24,614 $(14,702) $ (311) $ 9,601
=========== ========= ======= ======== ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-month periods ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
-------- --------
(dollars in thousands)
<S> <C> <C>
Net cash flows from operating activities:
Net income (loss) .................................. $ (3,453) $ (245)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Accretion of sublease loss ....................... (192) (193)
Depreciation and amortization .................... 188 249
Provision for credit losses ...................... 527 3,185
Loss (gain) on sale of securities available-
for-sale ....................................... 1,219 61
Net amortization of premiums on securities
held-to-maturity ............................... -- 23
Net amortization of premiums (accretion of
discounts) on securities available-for-sale .... 26 122
Net accretion of discounts on loans purchased .... (133) (2,675)
Accretion of deferred gains, net of amortization
of premiums on interest rate hedging contracts
terminated ..................................... -- (588)
Net loss (gain) on other real estate owned ....... 160 148
Net decrease (increase) in trading securities .... -- 6,978
Decrease (increase) in accrued interest receivable
and other assets ............................... 301 (451)
Increase (decrease) in accrued interest payable
and other liabilities .......................... (253) (384)
-------- --------
Net cash provided by (used in) operating
activities ................................... (1,610) 6,230
Cash flows from investing activities:
Purchase of securities held-to-maturity ............ -- (4,987)
Proceeds from sales of securities held to
maturity ......................................... -- 6,000
Purchase of debt securities available-for-sale ..... -- (13,013)
Proceeds from sales of securities available-
for-sale ......................................... 41,768 --
Proceeds from repayments and maturities of
securities available-for-sale .................... 1,312 6,113
Proceeds from sales of loans ....................... 6,599 --
Purchases of loans ................................. -- (3,085)
Net decrease in loans .............................. 17,618 30,970
Other, net ......................................... (73) 54
-------- --------
Net cash provided by investing activities ...... 67,224 22,052
Cash flows from financing activities:
Net decrease in deposits ........................... (66,201) (67,880)
Net increase (decrease) in securities sold under
agreements to repurchase ......................... (8,190) 1,384
Net proceeds from exercise of stock options ........ -- 1
-------- --------
Net cash used in financing activities .......... (74,391) (66,495)
-------- --------
Net decrease in cash and cash equivalents ............ (8,777) (38,213)
Cash and cash equivalents, beginning ................. 46,710 53,355
-------- --------
Cash and cash equivalents, ending .................... $ 37,933 $ 15,142
======== ========
Supplemental cash flow information:
Cash paid for:
Interest ........................................ $ 2,334 $ 2,667
Income taxes .................................... $ -- $ 35
Loans foreclosed and transferred to other
real estate owned and other assets ............... $ -- $ 2,959
Increase (decrease) in unrealized loss on
securities available-for-sale .................... $ (2,746) $ 2,578
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements include the accounts of
National Mercantile Bancorp (the "Company") and its wholly owned subsidiary,
Mercantile National Bank (the "Bank") both sometimes referred to as "Company".
All significant intercompany transactions and balances have been eliminated. The
accounting and reporting policies of the Company conform with generally accepted
accounting principles and general practice within the banking industry.
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and, therefore, do not include all footnotes
normally required for complete financial statement disclosure. While management
believes that the disclosures presented are sufficient to make the information
not misleading, reference may be made to the consolidated financial statements
and notes thereto included at "Item 8. Financial Statements" of the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Form
10-K").
The accompanying consolidated balance sheets and statements of
operations, changes in shareholders' equity and cash flows reflect, in the
opinion of management, all material adjustments necessary for a fair
presentation of the Company's financial position as of June 30, 1995 and
December 31, 1994 and results of operations and cash flows for the six-month
periods ended June 30, 1995 and 1994. The results of operations for the three
and six-month periods ended June 30, 1995 are not necessarily indicative of the
results of operations for the full year ending December 31, 1995.
Certain items in the 1994 financial statements have been reclassified
to conform to the 1995 presentation.
NOTE 2 - INCOME (LOSS) PER SHARE
Income (loss) per share is computed using the weighted average number
of common shares and common share equivalents outstanding during the period. The
weighted average number of common shares and common share equivalents
outstanding for the three-month periods ended June 30, 1995 and 1994 were
3,078,146 and 3,044,896, respectively. The weighted average number of common
shares and common share equivalents outstanding for the six-month periods ended
June 30, 1995 and 1994 were 3,078,146 and 3,044,836, respectively. Common share
equivalents include the number of shares issuable upon the exercise of stock
options less the number of shares that could have been purchased with the
proceeds from the exercise of the options based upon the higher of the average
price of common shares during the period or the price at the
8
<PAGE> 9
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 2 - INCOME (LOSS) PER SHARE (CONTINUED)
balance sheet date. Loss per share computations exclude common share equivalents
since the effect would be to reduce the loss per share amount.
NOTE 3 - LOANS AND INTEREST INCOME
In May, 1993, the FASB issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan." This statement prescribes the recognition criteria
for loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in troubled debt restructurings ("TDRs"). SFAS
No. 114 states that a loan is impaired when it is probable that a creditor will
be unable to collect all principal and interest amounts due according to the
contracted terms of the loan agreement. A creditor is required to measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by determining
the fair value of the collateral for a collateral dependent asset. Regardless of
the measurement method, a creditor shall measure impairment based on the fair
value of the collateral when the creditor determines that foreclosure is
probable. The statement also clarified the existing accounting for in-substance
foreclosures ("ISFs") by stating that a collateral dependent real estate loan
would be reported as real estate owned ("REO") only if the lender had taken
possession of the collateral. The statement is effective for financial
statements issued for fiscal years beginning after December 15, 1994. The Bank
adopted SFAS No. 114 on January 1, 1995. The adoption of SFAS No. 114 had no
material impact on the Bank.
In October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan Income Recognition and Disclosures." This statement
amends the disclosure requirements in SFAS No. 114 to require information about
the recorded investment in certain impaired loans and how a creditor recognizes
interest income related to those impaired loans. Interest on loans, including
impaired loans, is credited to income as earned and is accrued only if deemed
collectible, using the interest method. Unpaid interest income is reversed when
a loan becomes over 90 days contractually delinquent and on other loans, if
management determines it is warranted, prior to being 90 days delinquent. At
June 30, 1995, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $11.2 million, for which the related allowance
for credit losses was $1.6 million. The average recorded investment in, and the
amount of interest income recognized on those impaired loans during the six
months ended June 30, 1995 was $14.8 million and $710,000, respectively, and for
the three months ended June 30, 1995, $10.8 million and $475,000, respectively.
9
<PAGE> 10
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Federal Reserve Board ("FRB") and the Office of the Comptroller of
the Currency (the "OCC") have issued guidelines (the "guidelines") regarding
risk-based capital requirements. The guidelines provide detailed definitions of
regulatory capital and assign different weights to various assets and credit
equivalent amounts of off-balance sheet financial instruments, depending upon
the perceived degree of credit risk to which they expose such entities. Each
banking organization is required to maintain a specified minimum ratio of
capital to the total of such risk-adjusted assets and off-balance sheet
financial instruments.
The risk-based capital ratios of the Company and the Bank are
calculated under the guidelines by dividing their respective qualifying total
capital by their respective total risk-weighted assets. The Company's qualifying
total capital and total risk-weighted assets are determined on a fully
consolidated basis. Total qualifying capital is comprised of the sum of core
capital elements ("Tier 1 capital") and supplementary capital elements ("Tier 2
capital"). At June 30, 1995 and December 31, 1994, Tier 1 capital of the Company
and the Bank consisted of their respective amounts of common shareholders
equity. Tier 1 capital excludes any net unrealized gains or losses resulting
from the implementation of SFAS No. 115. Tier 2 capital consisted of the
allowance for credit losses, subject to limitations.
Under the guidelines, total risk-weighted assets of the Company and the
Bank are determined by assigning balance sheet assets and credit equivalent
amounts of off-balance sheet financial instruments to one of four broad risk
categories having risk weights ranging from zero% to 100% (see Note 7 in the
Notes to Consolidated Financial Statements in the Company's 1994 Annual Report
on Form 10-K). The aggregate dollar amount of each category is multiplied by the
risk weight associated with that category and the resulting weighted values from
each category are summed to determine total risk-weighted assets.
Each bank holding company and national bank must maintain (i) a minimum
ratio of Tier 1 capital to total risk-weighted assets of 4.0% and (ii) a minimum
ratio of total qualifying capital to total qualifying assets ("total risk-based
capital ratio") of 8.0%, with the amount of the allowance for credit losses that
may be included in Tier 2 capital limited to 1.25% of total risk- weighted
assets.
10
<PAGE> 11
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The FRB and OCC have adopted minimum Tier 1 capital leverage ratio
standards applicable to bank holding companies and national banks, respectively.
The capital leverage ratio standards operate in tandem with the guidelines and
require a minimum ratio of Tier 1 capital to adjusted total assets ("capital
leverage ratio") of 3%. The leverage ratio is only a minimum. Institutions
experiencing or anticipating significant growth or those with other than minimum
risk profiles will be expected to maintain capital well above the minimum
levels.
In July 1991, the Bank entered into a formal agreement with the OCC
(the "Formal Agreement"), pursuant to which the Bank was required to maintain
(i) a capital leverage ratio equal to at least 6.5% and (ii) a total risk-based
capital ratio equal to at least 10.0%. As set forth below, the Bank's capital
leverage ratio at June 30, 1995 was 6.39%, which was not in compliance with the
Formal Agreement, and the total risk-based capital ratio was 10.48%.
Accordingly, the Bank may be subject to further regulatory enforcement action by
the OCC.
Information about the regulatory capital of the Company and the Bank at
June 30, 1995 and December 31, 1994 is set forth below.
11
<PAGE> 12
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4 - Shareholders' Equity and Regulatory Capital (continued)
Information about the regulatory capital of the
Company and the Bank at June 30, 1995 and December 31, 1994
is set forth below.
<TABLE>
<CAPTION>
June 30, 1995
(Unaudited) December 31, 1994
------------------------------------------- ---------------------------------------------
Company Bank Company Bank
------------------- ---------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- ----- -------- -----
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk-based capital (3):
Tier 1 capital $ 9,912 9.26% $ 9,850 9.21% $ 13,365 9.84% $ 13,304 9.80%
Tier 1 capital minimum
requirement 4,280 4.00% 4,280 4.00% 5,431 4.00% 5,431 4.00%
-------- ------ -------- ----- -------- ----- -------- -----
Excess $ 5,632 5.26% $ 5,570 5.21% $ 7,934 5.84% $ 7,873 5.80%
======== ====== ======== ===== ======== ===== ======== =====
Total capital $ 11,275 10.54% $ 11,213 10.48% $ 15,079 11.11% $ 15,018 11.06%
Total capital minimum
requirement 8,560 8.00% 10,700 10.00% (1) 10,862 8.00% 13,578 10.00% (1)
-------- ------ -------- ----- -------- ----- -------- -----
Excess $ 2,715 2.54% $ 513 0.48% $ 4,217 3.11% $ 1,440 1.06%
======== ====== ======== ===== ======== ===== ======== =====
Total risk-weighted assets $106,998 $106,998 $135,777 $135,777
Capital Leverage Ratio
Standard (2) (3):
Tier 1 capital $ 9,912 6.43% $ 9,850 6.39% $ 13,365 5.65% $ 13,304 5.62%
Tier 1 capital minimum
requirement (1) 6,166 4.00% 10,021 6.50% (1) 9,461 4.00% 15,374 6.50% (1)
-------- ------ -------- ----- -------- ----- -------- -----
Excess $ 3,746 2.43% $ (171) -0.11% $ 3,904 1.65% $ (2,070) -0.88%
======== ====== ======== ===== ======== ===== ======== =====
Average total assets, as
adjusted, during three-month
periods ended June 30, 1995
and December 31, 1994 $154,162 $154,162 $236,526 $236,526
</TABLE>
_____________________________
(1) The Bank's minimum total risk-based capital and Tier 1 capital leverage
requirements are based on the provisions of the Formal Agreement, which
became effective on October 31, 1991.
(2) The regulatory capital leverage ratio represents the ratio of Tier 1
capital at June 30, 1995 and December 31, 1994 to average total assets
during the respective three-month periods then ended.
(3) Tier 1 capital excludes any net unrealized gains or losses on securities
available-for-sale recognized in the balance sheet as a result of
implementing Statement of Financial Accounting Standards No. 115.
12
<PAGE> 13
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
As discussed in the 1994 Form 10-K, the Company has recognized losses
for financial statement purposes which have not yet been recognized on an income
tax return. No benefit was recorded for these losses since all available income
tax benefits were recognized in prior years. Future losses will not result in
additional tax benefits until the Company generates sufficient taxable income to
utilize the present net operating loss carryforwards. The Company's 1995
year-to-date net loss did not result in additional tax benefits.
NOTE 6 - ALLOWANCE FOR CREDIT LOSSES
The Company's allowance for credit losses is maintained at a level
considered by management to be adequate to absorb estimated losses in the
existing portfolio. The allowance for credit losses is increased by the
provision for credit losses and decreased by the amount of loan charge-offs, net
of recoveries.
In the third quarter of 1994, the OCC reviewed the Bank's treatment of
recording discounts on loans purchased in the fourth quarter of 1993 and the
second quarter of 1994. The OCC determined that previously recorded allowance
amounts related to the purchased loans, amounting to $3.9 million for the 1993
purchases and $.2 million for the 1994 purchases, should have been recorded as
discounts on the purchased loans and recognized in interest income over the term
of the loans using a method which generally produces a level yield on the net
investment in the loans. In addition, an allowance for credit losses related to
the purchased loans should have been established in a manner consistent with
that used by the Company for the loans it originates and a charge against
earnings made during 1994 to reflect the additional provision amounts required.
Adjustments to reflect the accounting treatment discussed above were
made by the Company in 1994 resulting in additional loan interest income for the
six month period ended June 30, 1994 of $2.4 million, and an increase to the
provision for loan losses during the same period of $2.6 million. For the three
month period ended June 30, 1994 the effect of the adjustment was to increase
loan interest income by $1.3 million and to increase the provision for loan loss
by $1.3 million.
The accompanying financial statements for the three month and six month
periods ended June 30, 1994 have been restated for these adjustments.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section presents management's discussion and analysis of the
consolidated financial condition and operating results of National Mercantile
Bancorp (the "Company") and its subsidiary, Mercantile National Bank (the
"Bank"), for the three and six-month periods ended June 30, 1995 and 1994 and
updates the discussion provided at "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" of the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). The
discussion should be read in conjunction with the Company's consolidated
financial statements and accompanying notes to the consolidated financial
statements (see "Item 1. Financial Statements").
FINANCIAL CONDITION
At June 30, 1995, the Company's consolidated assets decreased by $75.5
million, or 32.4%, to $157.4 million from $233 million at December 31, 1994.
This decrease was due primarily to an $8.8 million decrease in cash and cash
equivalents, a $41.6 million decrease in securities, the sale of $6.6 million of
loans and a decrease in net loans of $18.0 million. The decrease in consolidated
assets from March 31, 1995 was $3.1 million, consisting primarily of an $8.0
million decrease in securities and a $3.9 million decrease in loans, net of a
$9.5 million increase in cash and cash equivalents. Customer deposits decreased
by $66.2 million or 31.9% to $141.6 million at June 30, 1995, from $207.8
million at December 31, 1994. Securities sold under agreements to repurchase
decreased by $8.2 million to $4.4 million at June 30, 1995, from $12.6 million
at December 31, 1994. The decrease in customer deposits from March 31, 1995 was
$4.9 million. Securities sold under agreements to repurchase increased by $2.6
million from March 31, 1995.
The decrease in the liabilities, accompanied by a decrease in assets is
consistent with the Company's planned restructuring to improve the Company's
capital ratios.
OPERATING RESULTS
OVERVIEW
As set forth in the accompanying consolidated statements of operations,
the Company recorded a net loss for the three and six-month periods ended June
30, 1995 of $1.8 million or $(.57) per share, and $3.5 million or ($1.12) per
share, respectively as compared to a net loss for the three and six-month
periods ended June 30, 1994 of $87,000 or $(.03) per share and $245,000 or
$(.08) per share, respectively.
14
<PAGE> 15
Declining loan balances continued to negatively impact the Company's
loan interest income, while sales of securities resulted in decreased interest
income from securities in 1995. Total interest income for the three month and
six month periods ended June 30, 1995 was $3.1 million and $6.5 million,
respectively, compared with total interest income for the corresponding periods
of 1994 of $5.8 million and $11.5 million, respectively. Total interest expense
for the three month and six month periods ended June 30, 1995 was $1 million and
$2.2 million, respectively, compared with total interest expense for the
corresponding periods of 1994 of $1.3 million and $2.6 million, respectively.
While the decrease in interest earning loans and securities caused a significant
decrease in interest income, the impact of the decrease in deposits was less on
interest expense, as $24.1 million (36%) of the decrease in deposits was
attributable to non-interest bearing demand deposits. Net interest income for
the three month and six month periods ended June 30, 1995 was $2.1 million and
$4.3 million, respectively, compared with net interest income for the
corresponding periods of 1994 of $4.5 million and $9.0 million, respectively.
The provision for credit losses for the three month and six month periods ended
June 30, 1995 was $381 thousand and $527 thousand, respectively, compared with
the corresponding amounts for 1994 of $1.6 million and $3.2 million. Loss on
sale of securities available for sale for the three month and six month periods
ended June 30, 1995 was $1.3 million and $2.5 million, respectively, while the
net unrealized loss on securities available for sale decreased for the same
periods by $1.3 million and $2.7 million, respectively. Loss on sale of
securities available for sale for the three month and six month periods ended
June 30, 1994 was $30 thousand and $61 thousand, respectively, while the net
unrealized loss on securities available for sale increased for the same periods
by $1.2 million and $2.6 million, respectively.
Net loss for the three month and six month periods ended June 30, 1995,
including realized losses on the sale of securities available for sale was $1.8
million and $3.5 million, respectively. The losses on sale of securities were
realized as a part of the Company's planned restructuring of the securities
portfolio to minimize future interest rate risk.
In order to improve asset quality and future profitability, the Bank
sold, in February 1995, criticized and/or nonperforming loans and loans that
were previously charged off, in the amount of $6.6 million which represented 14%
of the decrease of loans.
Loan interest income included $557,000 of interest income received in
the first quarter of 1994, from the Company's prime rate-based interest rate
floor contract, which became effective in June 1992 and expired in June 1994.
Also included was $1.1 million in discount accretion associated with the loan
portfolio purchased in 1993 (see "Net Interest Income and Interest Rate Risk").
The allowance for credit losses decreased $4.1 million at June 30, 1995
from June 30, 1994. The decrease is primarily attributed to the overall decrease
in loan balances,
15
<PAGE> 16
the decrease in non-performing loans, and the sale of loans previously written
down. The allowance for credit losses totaled $3.4 million at June 30, 1995,
compared with $3.4 million at March 31, 1995, and $3.1 million at December 31,
1994. However, the Bank's allowance for credit losses as a percentage of
nonperforming assets increased to 40.9% at June 30, 1995, and 38.9% at March 31,
1995 from 25.4% at December 31, 1994 as a result of the 31.6% decrease in
nonperforming assets during the first six months of 1995. Non-performing assets
decreased by 5.0% from March 31, 1995.
Other operating income decreased $1.7 million in the first six months
of 1995 from the first six months of 1994 as a result of the sale of $41.8
million of investment securities available-for-sale at a net realized loss of
$2.5 million. Realized loss on sale of securities for the three month period
ended June 30, 1995 was $1.3 million. Other operating income decreased by $600
thousand for the three month period ended June 30, 1995, compared with the
corresponding period in 1994. Fee income also decreased in 1995 from the same
periods in 1994 due to reduced loan and deposit acitivity in 1995 as a result of
the smaller loan and deposit bases. Other income in 1995 included $730 thousand
in income from insurance proceeds, included in the three month period ended June
30, 1995.
Other operating expenses decreased 6.2% and 6.8% for the three and six
month periods ended June 30, 1995 as compared to the same periods in the prior
year. The decrease was due primarily to management's efforts to continue to
reduce operating expenses. Compensation expense decreased $668 thousand or
25.5%, for the first six months of 1995, compared with the same period in the
prior year.
Total assets of the Company at June 30, 1995 have continued to
decrease. As discussed in the 1994 Form 10-K, and as part of the Company's
capital plan for the Bank and its restructuring of the organization, the Company
had reduced the Bank's asset size through sales of securities available-for-sale
which were funded by high cost deposits, reduced classified assets through the
sale of loans and reduced operating expenses through consolidating functions and
reduction of personnel. The restructuring of the Bank began during the third
quarter of 1994 and the Bank continues to improve the quality of its assets,
minimize its interest rate risk, generate fee income and reduce overhead
expenses in efforts to return to profitability. However, should a reduction in
asset size continue to occur without corresponding reductions in operating
expenses, interest income from the reduced earning asset base may not cover
operating expenses.
16
<PAGE> 17
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DECLINING REAL ESTATE VALUES
As previously discussed in the 1994 Form 10-K, while economic
conditions nationally and elsewhere in California are improving, southern
California's economy remained weak. Commercial and residential real estate
market values in southern California continue to remain depressed, adversely
impacting the financial condition and liquidity of many of the Company's
borrowers. Net loan charge-offs were at an historic high for 1994. Nonperforming
assets at June 30, 1995 totaled $8.2 million and included $1.4 million of other
real estate owned, compared with $12.0 million in Non-performing assets at
December 31, 1994, and $8.7 million at March 31, 1995. Other real estate owned
was $1.5 million at December 31, 1994 and March 31, 1995.
NONPERFORMING ASSETS
The level of nonperforming assets, as presented in Table 1 and defined
in the 1994 Form 10-K, decreased $3.8 million during the first six months of
1995 from the level at December 31, 1994, and decreased $400 thousand from March
31, 1995. The decrease was primarily the result of the sale of classified assets
in February, 1995. The amount of nonperforming loans for which the Company does
not hold substantial collateral amounted to $2.0 million at June 30, 1995, or
29.1% of all nonperforming loans at that date, compared to $2.9 million, or
24.1% at December 31, 1994, and $1.2 million or 13.9% at March 31, 1995.
NONACCRUAL LOANS. Nonaccrual loans are defined and the accounting for
such loans is discussed in the 1994 Form 10-K. Nonaccrual loans decreased $2.1
million during the first six months of 1995 to $1.3 million as compared to $3.4
million at December 31, 1994. Nonaccrual loans were $800 thousand at March 31,
1995. Loans reported as nonaccrual at December 31, 1994 of $2.7 million were
sold in the first six months of 1995. $70 thousand of loans reported as
nonaccrual at December 31, 1994 were charged-off by the Company during the first
six months of 1995. (See "Net Interest Income and Interest Rate Risk" for a
discussion of the effects on operating results of nonaccruing loans.)
TROUBLED DEBT RESTRUCTURINGS. Included within nonperforming loans
presented in Table 1 are troubled debt restructurings ("TDR"), as defined in the
1994 Form 10-K. TDRs represent loans for which the Company has modified the
terms of loans to borrowers by reductions in interest rates or extensions of
maturity dates at below-market rates for loans with similar credit risk
characteristics. At June 30, and March 31, 1995 TDRs totaled $4.9 million
compared to $5.6 million at December 31, 1994. The decrease in troubled debt
restructurings at June 30, and March 31, 1995 from December 31, 1994 represents
the sale of loans totaling $620 thousand and the migration of one
17
<PAGE> 18
loan totaling $60 thousand to loans contractually past due ninety or more days
and still accruing interest.
LOANS CONTRACTUALLY PAST DUE NINETY OR MORE DAYS. Loans contractually
past due ninety or more days are defined in the 1994 Form 10-K. Loans in this
category decreased to $700 thousand at June 30, 1995 from $1.5 million at March
31, 1995 and at December 31, 1994.
LOAN DELINQUENCIES. Loan delinquencies decreased to $3.1 million or
3.2% of net loans outstanding at June 30, 1995 from $9.7 million, or 9.9% of net
loans outstanding at March 31, 1995 and $6.4 million or, 5.1% of net loans
outstanding at December 31, 1994.
LOAN CHARGE-OFFS. As reflected in Table 3, the Company charged-off
loans amounting to $700 thousand and $900 thousand during the three and six
month periods ended June 30, 1995 respectively, as compared to $3.9 million and
$4.8 million during the corresponding periods in 1994. Recoveries of loans
previously charged-off totaled $300 thousand and $700 thousand for the three and
six month periods ended June 30, 1995 as compared to $500 thousand and $900
thousand during the same periods in 1994.
FUTURE EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DEPRESSED REAL
ESTATE VALUES ON THE ALLOWANCE FOR CREDIT LOSSES. As discussed in the 1994 Form
10-K and indicated in Table 2, a significant percentage of the Company's loan
portfolio continues to be unsecured or collateralized by real property. The
prolonged effects of the southern California economic recession and attendant
depressed residential and commercial real estate values may continue to
adversely impact the financial condition and liquidity of the Company's
borrowing customers. As such, the Company may continue to experience high levels
of, or further increases in, nonperforming loans, provisions for credit losses
and charge-offs of nonperforming loans.
As discussed in the 1994 Form 10-K, loan losses are fully or partially
charged against the allowance when, in management's judgment, the full
collectibility of a loan's principal is in doubt. However, there is no precise
method of predicting specific losses which ultimately may be charged against the
allowance and, as such, management is unable to reasonably estimate the amount
of loans to be charged-off in future periods.
18
<PAGE> 19
Table 1
Nonperforming Assets
(dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31,
June 30, March 31 --------------------
1995 1995 1994 1993
--------- ----- -------- --------
<S> <C> <C> <C> <C>
Nonaccrual loans $ 1,303 765 $ 3,426 $ 7,780
Troubled debt restructurings 4,897 4,902 5,582 5,584
Loans contractually past due ninety or more days with
respect to either principal or interest and
continuing to accrue interest 664 1,466 1,507 2,502
------------------- -------- --------
Nonperforming loans 6,864 7,133 10,515 15,866
Other real estate owned 1,369 1,529 1,529 6,175
------------------- -------- --------
Total nonperforming assets $ 8,233 8,662 $ 12,044 $ 22,041
=================== ======== ========
Allowance for credit losses as a percent of
nonaccrual loans 258.6% 440.1% 89.4% 86.1%
=================== ======== ========
Allowance for credit losses as a percent of
nonperforming loans 49.1% 47.2% 29.1% 42.2%
=================== ======== ========
Total nonperforming assets as a percent of
total loans outstanding 8.4% 8.5% 10.4% 13.6%
=================== ======== ========
Total nonperforming assets as a percent of
total shareholders' equity 85.8% 86.2% 116.8% 99.3%
=================== ======== ========
</TABLE>
19
<PAGE> 20
Table 2
Loan Portfolio Composition and Allocation of the
Allowance for Credit Losses
(dollar amounts in thousands)
<TABLE>
<CAPTION> December 31,
June 30, March 31, --------------------------------
1995 1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C> <C>
Loan Portfolio Composition:
Real estate construction and land development $ 925 1% 947 1% 948 1% $ 1,676 1%
Commercial loans:
Secured by one-to-four family residential properties 11,813 12% 12,407 12% 18,398 16% 20,098 12%
Secured by multifamily residential properties 3,457 4% 3,427 3% 2,368 2% 4,985 3%
Secured by commercial real properties 33,812 35% 33,819 33% 32,061 28% 40,330 25%
Other - secured and unsecured 34,533 35% 38,058 37% 43,385 37% 66,665 41%
Home equity lines of credit 7,159 7% 8,699 9% 2,867 2% 7,122 4%
Consumer instalment and unsecured loans to individuals 6,162 6% 4,434 5% 15,691 14% 22,073 14%
-------- --- ------- --- --------- ---
$ 97,861 100% 101,791 100% 115,718 100% $ 162,949 100%
Deferred net loan origination fees, purchased
loan discount and gains on termination of
interest rate hedging contracts (282) (326) (434) (1,158)
-------- --------- --------- ---------
Gross loans outstanding $ 97,579 101,465 115,284 $ 161,791
======== ========= ========= =========
Allocation of the Allowance for Credit Losses:
Real estate construction and land development $ 14 6 17 $ 30
Commercial loans:
Secured by one-to-four family residential properties 343 74 77 499
Secured by multifamily residential properties 7 20 51 472
Secured by commercial real properties 790 499 674 1,422
Other - secured and unsecured 1,934 2,357 1,645 2,181
Home equity lines of credit 116 115 18 149
Consumer instalment and unsecured loans to individuals 162 291 578 1,937
-------- --------- --------- ---------
Allowance allocable to gross loans outstanding 3,366 3,362 3,060 6,690
Commitments to extend credit under standby and
commercial letters of credit 4 5 3 7
-------- --------- --------- ---------
Total allowance for credit losses $ 3,370 3,367 3,063 $ 6,697
======== ========= ========= =========
Allowance for credit losses allocable to gross loans
outstanding as a percent of gross loans outstanding 3.45% 3.31% 2.66% 4.14%
======== ========= ========= =========
</TABLE>
20
<PAGE> 21
Table 3
Analysis of Changes in the Allowance for Credit Losses
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three-month periods ended
----------------------------------------
June 30, March 31, December 31,
1995 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 3,367 $ 3,063 $ 6,047
Loans charged off:
Real estate construction and land development -- -- --
Commercial loans:
Secured by one-to-four family residential properties 50 70 788
Secured by multifamily residential properties -- -- --
Secured by commercial real properties 191 -- 1,407
Other - secured and unsecured -- 92 3,129
Home equity lines of credit -- -- 257
Consumer instalment and unsecured loans
to individuals 466 49 1,024
------- ------- -------
Total loan charge-offs 707 211 6,605
Recoveries of loans previously charged off:
Real estate construction and land development -- -- --
Commercial loans:
Secured by one-to-four family residential properties 59 1 17
Secured by multifamily residential properties -- -- --
Secured by commercial real properties -- -- --
Other - secured and unsecured 89 342 929
Home equity lines of credit -- -- --
Consumer instalment and unsecured loans
to individuals 181 26 498
------- ------- -------
Total recoveries of loans previously charged off 329 369 1,444
------- ------- -------
Net loan charge-offs 378 (158) 5,161
Provision for credit losses 381 146 2,177
Allowance for purchased loans
------- ------- -------
Balance at end of period $ 3,370 $ 3,367 $ 3,063
======= ======= =======
</TABLE>
21
<PAGE> 22
NET INTEREST INCOME AND INTEREST RATE RISK
NET INTEREST INCOME
Net interest income (the amount by which interest generated from
earning assets exceeds interest expense on interest-bearing liabilities)
represents the Company's most significant source of earnings. A primary factor
affecting the level of net interest income is the Bank's net interest margin or
the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities, as well as the change in the relative amounts of
average interest-earning assets and interest-bearing liabilities.
As discussed in the 1994 Form 10-K, the Company's ability to generate
profitable levels of net interest income is largely dependent on its ability to
maintain sound asset credit quality and appropriate levels of capital and
liquidity (see "Credit Portfolio Composition and Credit Risk," "Capital
Resources," and "Liquidity").
The Company analyzes its earnings performance using, among other
measures, the interest rate spread and net yield on earning assets, as defined
in the 1994 Form 10-K. Interest earning assets at June 30, 1995 decreased to
$142.3 million, compared with $150.5 million at March 31, 1995 and $208.6
million at December 31, 1994. Interest earning assets as a percentage of total
assets was 90.4% at June 30, 1995, compared with 93.7% at March 31, 1995 and
89.6% at December 31, 1994. Interest bearing liabilities at June 30, 1995
decreased to $82.7 million, compared with $97.0 million at March 31, 1995 and
$133.0 million at December 31, 1994. Interest bearing liabilities as a
percentage of total assets was 52.5% at June 30, 1995, compared with 60.4% at
March 31, 1995 and 57.1% at December 31, 1994.
Total loans receivable at June 30, 1995 decreased to $97.6 million,
compared with $101.5 million at March 31, 1995 and $115.3 million at December
31, 1994. Loans receivable as a percentage of total assets was 62.0% at June 30,
1995, compared with 63.2% at March 31, 1995 and 52.3% at December 31, 1994.
Total deposits at June 30, 1995 decreased to $141.6 million, compared with
$146.5 million at March 31, 1995 and $207.8 million at December 31, 1994, while
interest bearing deposits at June 30, 1995 decreased to $78.3 million, compared
with $95.2 million at March 31, 1995 and $120.4 million at December 31, 1994.
Total deposits as a percentage of total assets was 90.0% at June 30, 1995,
compared with 91.2% at March 31, 1995 and 89.2% at December 31, 1994. Interest
bearing deposits as a percentage of total deposits was 55.3% at June 30, 1995,
compared with 65.0% at March 31, 1995 and 57.9% at December 31, 1994, while
interest bearing deposits as a percentage of loans receivable was 80.3% at June
30, 1995, compared with 93.8% at March 31, 1995 and 98.8% at December 31, 1994.
EFFECTS OF NONPERFORMING LOANS ON NET INTEREST INCOME. Foregone
interest income attributable to nonperforming loans amounted to $54 thousand and
$99 thousand for the three and six month periods ended June 30, 1995, compared
with $400 thousand
22
<PAGE> 23
and $700 thousand for the corresponding periods in 1994. Although the Bank sold
a large portion of the nonperforming loans in February 1995, to the extent that
additional loans are identified as nonperforming in future periods, operating
results will continue to be adversely affected. (See "Credit Portfolio
Composition and Credit Risk" for a discussion of the Company's asset credit
quality experience and the effects of nonperforming loans on the provision and
allowance for credit losses.)
COMPARISON OF NET YIELD AND INTEREST RATE SPREAD. The Company's net
yield on earning assets remains high in comparison with the interest rate spread
due to the continued significance of noninterest-bearing demand deposits
relative to total funding sources. While these deposits are noninterest-bearing,
they are not cost-free funds, as the Company incurs substantial other operating
expense to provide accounting, data processing and other banking-related
services to these customers to the extent that certain average
noninterest-bearing deposits are maintained by such depositors, and such deposit
relationships are deemed to be profitable.
Customer service expense related to these deposits is classified as
noninterest expense. If customer service expenses related to real estate title
and escrow customers were classified as interest expense, the Company's reported
net interest income and noninterest expense would be reduced correspondingly.
INTEREST RATE RISK MANAGEMENT
As discussed in the 1994 Form 10-K, interest rate risk management
focuses on controlling changes in net interest income that result from
fluctuating market interest rates as they impact the rates earned and paid on
interest-earning assets and interest-bearing liabilities whose interest rates
are subject to change prior to their maturity. Net interest income can be
vulnerable to fluctuations arising from changes in market interest rates to the
extent that the yields on various categories of earning assets respond
differently to such changes from the costs of interest rate-sensitive funding
sources. The 1994 10-K also discusses the means employed by management to
measure and control this source of risk. The Company's management of interest
rate risk currently makes limited use of off-balance sheet hedging techniques,
including interest rate swap agreements. These techniques are utilized only
after obtaining Board of Directors approval for the transaction.
HEDGING CONTRACTS. In December 1994, the Bank entered into an interest
rate swap contract. Under the terms of the agreement, the Bank received a
floating U.S. libor rate, initial rate of 6.8%, and paid an 8.2% fixed rate.
Payments were calculated on a $30 million notional amount based on a three year
term to be paid semi annually. The original expiration of the contract was March
31, 1995, and was subsequently extended to July 31, 1995. The swap was
terminated in the second quarter of 1995, with a realized loss of $1.3 million.
23
<PAGE> 24
In October, 1993, the Bank entered into an interest rate swap contract. Under
the terms of the agreement, the Bank received 6.0% fixed and paid floating-rate
prime for 21 months on a $10 million notional amount. The swap is intended to
bring the Bank's interest rate sensitivity "gap" back within policy guidelines
for interest rate risk exposure. The Bank had moved slightly outside of these
guidelines during the third quarter of 1993, primarily due to the September 7,
1993, $20.8 million loan purchase which consisted of almost all floating-rate
prime based loans. The swap matured on August 2, 1995.
INTEREST RATE MATURITIES OF ASSETS AND FUNDING SOURCES. Management also
monitors the sensitivity of net interest income to potential interest rate
changes by distributing the interest rate maturities of assets and supporting
funding liabilities into interest rate-sensitivity periods, summarizing interest
rate risk in terms of the resulting interest rate-sensitivity "gaps". As
discussed in the 1994 Form 10-K, the gap position is but one of several
variables that affect net interest income. The gap measure is a static indicator
and, as such, is not an appropriate means for forecasting changes in net
interest income in a dynamic business and economic environment. Consequently,
these measures are not used in isolation by management in forecasting short-term
changes in net interest income.
Weighted average yield on loans receivable was 8.79% in June, 1995,
compared with 9.60% in March, 1995 and 9.38% in December, 1994. Weighted average
yield on total earning assets was 7.93% in June, 1995, compared with 8.65% in
March, 1995 and 7.43% in December, 1994. Weighted average rate on all deposits
was 2.7% in June, 1995, compared with 3.05% in March, 1995 and 2.73% in
December, 1994.
INVESTMENT SECURITIES
Investment securities decreased to $20.4 million at June 30, 1995, from
$28.5 million at March 31, 1995 and $62.1 million at December 31, 1994. The
decrease was due to sales of securities available for sale, resulting in
realized losses during the first and second quarters of 1995. Net unrealized
losses on securities available for sale at June 30, 1995 decreased to $311
thousand from $1.6 million at March 31, 1995 and $3.1 million at December 31,
1994.
24
<PAGE> 25
OTHER OPERATING INCOME
As set forth in the accompanying consolidated statements of operations
and discussed in the 1994 Form 10-K, the Company's principal sources of
recurring other operating income continue to be international services, foreign
exchange services, investment services, and deposit-related and other customer
services. Fee income decreased $46 thousand or 9.9% in the second quarter of
1995, from the second quarter of 1994, and decreased $123 thousand or 13.5% for
the first six months of 1995 from the same period in 1994, resulting primarily
from decreases in international services and investment services. Management
anticipates that fee income from international services and investment services
and the origination and sale of Small Business Administration loans will
continue to represent important sources of other operating income.
OTHER OPERATING EXPENSES
As indicated in the accompanying consolidated statements of operations,
the Company reduced total operating expenses by $205 thousand, or 6.2%, during
the second quarter of 1995 from the second quarter of 1994, and $449 thousand or
6.8% for the first six months of 1995 from the same period in 1994. The
reductions result, in part, from management's efforts to continue to reduce
operating expenses. The reduction is mainly attributable to a $334 thousand or
25.9% and $668 thousand or 25.5% reduction in salaries and related expenses for
the three and six month periods ended June 30, 1995.
Management continues to explore measures to further reduce the level of
other operating costs. Further reductions in operating expenses will be required
as the Bank's assets are reduced along with corresponding net interest income.
The Company is in a dialogue with its landlord in an effort to obtain
some relief from the present terms of the lease for the Bank's premises.
Achieving some form of relief from the present leases's rental rates is
important to the Bank's future. The company has recently been advised by its
independent accountants that it should consider the disclosure requirements of
recently issued AICPA Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties," which may apply to the Company's lease
negotiation activities and which is effective for fiscal years beginning after
December 15, 1995.
INCOME TAXES
The Company has recognized losses for financial statement purposes
which have not yet been recognized on an income tax return. As a result of
existing net operating loss carryforwards for financial statement purposes
(discussed in the 1994 Form 10- K), the Company's 1995 first and second quarter
net losses did not give rise to additional income tax benefits.
25
<PAGE> 26
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS
RISK-BASED CAPITAL GUIDELINES
The 1994 Form 10-K and Note 3 of the accompanying notes to consolidated
financial statements discuss the risk-based capital guidelines of the Federal
Reserve Board ("FRB") and the OCC, which are applicable to the Company and the
Bank, respectively, (together, the "guidelines"). The 1994 Form 10-K and Note 3
also discuss the minimum Tier 1 capital leverage ratio standards of the FRB and
OCC which are applicable to the Company and the Bank, respectively (together,
the "leverage ratio standards").
FORMAL AGREEMENT
As discussed in the 1994 Form 10-K and Note 3 of the accompanying notes
to consolidated financial statements, the Bank entered into a formal agreement
with the OCC in July 1991 (the "Agreement"), pursuant to which the Bank is
required to maintain (i) Tier 1 capital equal to at least 6.5 percent of the
Bank's adjusted total assets ("capital leverage ratio") and (ii) total
qualifying capital equal to at least 10.0 percent of the Bank's total
risk-weighted assets ("total risk-based capital ratio"). As set forth in Note 3,
the Bank's capital leverage ratio and total risk-based capital ratio at June 30,
1995 were 6.39% and 10.48%, respectively. At June 30, 1995, the Bank was not in
compliance with maintaining a capital leverage ratio of 6.5% pursuant to the
Formal Agreement. Accordingly, the Bank may be subject to further regulatory
enforcement action by the OCC.
FUTURE EFFECTS OF AGREEMENT ON DIVIDENDS. The 1994 Form 10-K describes
statutory and regulatory limitations on the amount of cash dividends which may
be distributed by a national bank. As a result of those limitations and reported
net losses in 1990, 1991, 1992 and 1994, the Bank could not have declared
dividends to the Company at June 30, 1995 without the prior approval of the OCC.
In addition, management expects the Agreement will substantially impair the
ability of the Bank to declare and pay dividends to the Company during the
foreseeable future, since the Bank currently intends to retain any earnings in
order to augment its regulatory capital. As dividends from the Bank are the
principal source of income to the Company, it is unlikely that the Company will
declare and pay dividends in the foreseeable future. As described in the 1994
Form 10-K, in accordance with a Memorandum of Understanding entered into with
the Federal Reserve Bank of San Francisco (the "FRBSF") in 1991, the Company has
agreed to refrain from paying dividends without the prior written approval of
the FRBSF.
26
<PAGE> 27
FUTURE EFFECTS OF NONPERFORMING LOANS AND CREDIT LOSSES ON CAPITAL RESOURCES
As discussed in the 1994 Form 10-K, the ability of the Company and the
Bank to maintain appropriate levels of capital resources is ultimately dependent
on their ability to support earning asset growth with continued earnings. The
Company experienced net losses in 1990, 1991, 1992 and 1994, primarily as a
result of increased provisions for credit losses, losses on the sale of
investment securities, losses on OREO and other assets, and reductions in
interest earning assets without a corresponding reduction in operating expenses.
The Company experienced decreases in the level of nonperforming assets since
December 31, 1993 (see "Credit Portfolio Composition and Credit Risk") with the
June 30, 1995 level of $8.2 million representing a decrease of $429 thousand
from March 31, 1995 and a decrease of $3.8 million over the level at December
31, 1994. This decrease was due primarily to the sale of loans in the first
quarter of 1995. Increases in nonperforming assets may negatively affect the
Company's ability to generate adequate earnings to the extent that such
nonperforming assets result in increased provisions for credit losses and
charge-offs or adversely affect the level of income from loans in those future
periods (see "Net Interest Income and Interest Rate Risk"). For the immediate
future, the Company and the Bank intend to maintain regulatory capital ratios in
excess of those required by the Agreement primarily as a result of declining
loan balances and earning asset levels since 1991 rather than increases in
capital from retained earnings or other sources. At the same time, the Company
is committed to pursuing all options regarding the future of the Bank, including
working with investment banking advisors on efforts to find a strategic
alliance. In the long term, absent a strategic alliance, additional capital will
have to be raised to ensure the Bank's growth and prosperity.
LIQUIDITY
LIQUIDITY MANAGEMENT
The 1994 Form 10-K discusses several aspects of the Company's liquidity
management, including the importance of sound asset credit quality and
appropriate levels of capital resources to maintaining access to adequate levels
of liquidity (see "Credit Portfolio Composition and Credit Risk" and "Capital
Resources"). The 1994 Form 10-K also discusses the Company's liquidity
objectives and related liquidity measurement guidelines. The Company was in
compliance with its guidelines during the second quarter of 1995.
The accompanying consolidated statements of cash flows present certain
information about cash flows from operating, investing and financing activities.
The Company's principal cash flows relate to investing and financing activities,
rather than operating activities. While the statements present the periods' net
cash flows from lending and deposit activities, they do not reflect certain
important aspects of the
27
<PAGE> 28
Company's liquidity, as described in the 1994 Form 10-K, including (i)
anticipated liquidity requirements under outstanding credit commitments to
customers (ii) intraperiod volatility of deposits, particularly fluctuations in
the volume of commercial customers' noninterest-bearing demand deposits, and
(iii) unused borrowings available under federal funds lines, repurchase
agreements and other arrangements. As such, management believes that the
measurements provided in the liquidity guidelines, discussed in the 1994 Form
10-K, are generally more indicative of the Company's overall liquidity position.
A source of operating cash flows is net interest income. See "Net Interest
Income and Interest Rate Risk" for a discussion of the impact of recent trends
and events on this source of operating cash flows. While the Company no longer
has a credit accommodation facility at a correspondent bank, an accommodation
has been put in place at the Federal Reserve Bank. Management monitors the
Bank's assets and liabilities on a daily basis to ensure that funding sources
remain adequate to meet anticipated demand.
LIQUIDITY TRENDS
As discussed in the 1994 Form 10-K, the Company has experienced a
decline, continuing through the second quarter of 1995, in total deposits.
During the three months ended June 30, 1995, total deposits decreased, while
demand deposits increased. Total deposits including demand deposits, decreased
at June 30, 1995 as compared to December 31, 1994.
Time certificates of deposit of $100,000 or more continued to represent
a less significant source of funding during the three and six months ended June
30, 1995. This represents the continuation of a trend which began in 1991. In
general, deposits of more than $100,000 are considered to be more volatile than
fully-insured deposits in denominations of less than $100,000.
The 1994 Form 10-K describes the Company's wholesale institutional
funds acquisition operation ("money desk"). This operation provided 18% of the
Company's average total funding sources during the 1995 second quarter, as
compared to 34% during the year-earlier second quarter, while
noninterest-bearing demand deposits provided 43% of average total funding
sources during the 1995 second quarter, compared to 36% during the comparable
1994 period. As discussed in the 1994 Form 10-K, management's plan to reduce
asset size through the sale of securities which were funded by these types of
deposits will eventually phase out the money desk operation where higher
interest-rate-bearing, more volatile funds were obtained through outside
brokers. On the other hand, the Bank will enhance its efforts to obtain direct,
non-brokered funds through its own marketing programs within its own market
area, through direct solicitation as well as by attracting traditional local
market area deposits.
28
<PAGE> 29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Due to the nature of their business, National Mercantile Bancorp (the
"Company") and its wholly owned subsidiary, Mercantile National Bank (the
"Bank") are parties to claims and legal proceedings arising in the ordinary
course of business. After taking into consideration information furnished by
counsel to the Company and the Bank as to the current status of various claims
and proceedings to which the Company and/or the Bank is a party, management is
of the opinion that the aggregate potential liability represented thereby will
not have a material adverse effect upon the consolidated financial condition of
the Company.
All material pending legal matters requiring disclosure have been
disclosed in the Company's 1994 Form 10-K. No material legal developments have
occurred since filing the Form 10-K.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Charles N. Winner resigned as a director of the Company as of June 12,
1995. Robert E. Thomson, the Company's Vice Chair, assumed the position of
President/CEO of the Bank on an interim basis on August 9, 1995 replacing Donald
T. Thornburg, whose contract expired. Mr. Thornburg also resigned as a director
of the Company as of that date. Efforts have begun to search for a permanent
President/CEO for the Bank, as well as a permanent CFO. Mr. Howard Ladd, the
Company's Chairman, is the acting President/CEO of the Company. Warner F. Wolfen
resigned as a director of the Company as of August 18, 1995.
29
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K.
Item 10.1: Form of Severance Agreement between the Company, Mercantile
National Bank and some of its officers.
(b) Reports on Form 8-K.
None.
30
<PAGE> 31
SIGNATURES
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.
National Mercantile Bancorp
-------------------------------
(Registrant)
August 22, 1995 /s/ Robert E. Thomson
-------------------------------
Robert E. Thomson
Vice-Chair of the Board
August 22, 1995 /s/ Robert E. Thomson
-------------------------------
Robert E. Thomson
Acting Chief Financial Officer
31
<PAGE> 1
1
EXHIBIT 10.1
MERCANTILE NATIONAL BANK
SEVERANCE AGREEMENT
May, 1995
Agreement made as of by and between National Mercantile
Bancorp, with its principal office located at 1840 Century Park East,
Los Angeles, California 90067 (the "Company"), Mercantile National Bank (the
"Bank"), at the same location, and who resides at
(The "Executive").
WITNESSETH:
WHEREAS, the Executive has previously been employed by the Bank without
an employment agreement; and
WHEREAS, the Company, the Bank, and the Executive (individually a
"Party" and together the "Parties") desire that the Executive's rights to
compensation and benefits that have been granted to the Executive because of the
Executive's services to the Bank shall be assured should certain events occur;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and for other good and valuable consideration, the
Parties agree as follows:
<PAGE> 2
2
1. Definitions.
(a) "Base Salary" shall mean the Executive's highest annualized
base salary in any 30-day period during the three years immediately preceding
the commencement of the Term of Employment, or any increased salary thereafter
granted to the Executive by the Bank.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean (i) the Executive has committed a felony
involving moral turpitude, or (ii) the Executive in carrying out the Executive's
duties under this Agreement is guilty of (A) willful gross neglect or (B)
willful gross misconduct resulting, in the case of either (A) or (B), in
material harm to the Company or the Bank, unless such act, or failure to act,
under this clause (ii) was believed by the Executive in good faith to be in the
best interests of the Company or the Bank.
(e) A "Change in Control" shall mean the occurrence of any one
of the following events, notwithstanding the prior occurrence of any other event
constituting a "Change in Control":
(i) any "person," as such term is used in Sections 3(a) (9) and 13(d)
of the Securities Exchange Act of 1934 (the "1934 Act"), other than the Company,
another corporation of which the Company owns more that 50% of its Voting Stock
(a "subsidiary") or any employee Benefit plan sponsored by the Company or a
Subsidiary, becomes a "beneficial owner," as such term is used in Rule 13d-3
promulgated under the 1934 Act, of 24.9% or more of the Voting Stock of the
Company or the Bank;
(ii) the majority of the Board consists of individuals other than the
Incumbent Directors;
(iii) the Company or Bank adopts any plan of liquidation providing for
the distribution of all or substantially all of its assets;
(iv) all or substantially all of the business of the Company or the
Bank is disposed of pursuant to a merger, consolidation or other transaction in
which the Company or the Bank is not the surviving corporation, or is
substantially or
<PAGE> 3
3
completely liquidated (unless the shareholders of the Company immediately prior
to such merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock
of the Company, all of the Voting Stock or other ownership interests of the
entity or entities, if any, that succeed to the business of the Company); or
(v) the Company or the Bank, combines with another company and is the
surviving corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination (other than the shareholders
who, immediately prior to the combination, were "affiliates" of such other
company, as such term is defined in the rules of the Securities and Exchange
Commission), do not beneficially own, directly or indirectly, more than 50% of
the Voting Stock of the combined company; provided, however, that
notwithstanding the occurrence of any events described in clauses (i), (iii),
(iv) and (v) above, no "Change in Control" shall be deemed to have occurred if
immediately following such event (A) members of the Board or employees of the
Company and its Subsidiaries who file or are required to file (or immediately
prior to such event, filed or were required to file), reports under
Section 16(a) of the 1934 Act (the "Reporting Employees"), are beneficial
owners, directly or indirectly, in the aggregate of 20% of the Voting Stock
of the Company or its successor, as the case may be, and (B) no person, as
defined above (other than a person (x) in which a Reporting Employee or
Reporting Employees hold an interest of 10% or more and (y) through which
such Reporting Employee or Reporting Employees beneficially own, in the
aggregate, at least 5% of such Voting Stock), is the beneficial owner,
directly or indirectly, as a result of such event, of a greater percentage of
such Voting Stock than the percentage then held by the Reporting Employees as
determined pursuant to clause (A) of this proviso; provided, however, that
no "Change of Control" shall be deemed to have occurred as a result of
regulatory takeover by the Company or the Bank, and in such event this
agreement shall be of no force and effect what-so-ever.
(f) "Confidential Information" shall mean all nonpublic
information concerning the Company's or the Bank's business relating to its
products, customer lists, financial information, marketing plans and strategies.
Confidential Information
<PAGE> 4
4
does not include information that is or becomes, available to the public, unless
such availability occurs through an unauthorized act on the part of Executive.
(g) "Disability" shall have the same meaning as is currently
given that term under the Company's or Bank's long-term disability plan, except
that it shall have the meaning given in any amendment to such plan to the extent
that the meaning of such term is modified to the benefit of the Executive.
(h) "Good Reason" shall mean the following:
(i) without the Executive's express written consent, the assignment of
any duties inconsistent with, or the diminution of, the Executive's positions,
titles, offices, duties, responsibilities and status with the Bank as in effect
immediately preceding the Reference Date or a change without good cause in the
Executive's reporting responsibilities as in effect immediately preceding the
Reference Date or any removal of the Executive from or any failure to re-elect
the Executive to any titles, offices or positions held by the Executive
immediately preceding the Reference Date except in connection with the
termination of the Executive's employment either for Disability or by the
Executive other than for Good Reason;
(ii) a failure by the Company or the Bank to pay the Executive a salary
at an annualized rate equal to the Base Salary in accordance with the Company's
or Bank's standard payroll policies as provided in Section 4;
(iii) a reduction by the Company or the Bank in the Executive's bonus
opportunity, if any, below an amount equal to the product of the Executive's
highest Bonus Percentage during the preceding three years multiplied by the
Executive's Base Salary, or the failure by the Company or the Bank in
determining the Executive's bonus to apply performance standards and other
criteria that are comparable to and consistent with those applied in review of
the Executive's performance in determining the Executive's annual bonuses in
years prior to the Reference Date, if any, or to apply such standards and other
criteria on a comparable basis;
(iv) the failure by the Company or the Bank to continue in effect any
benefit or compensation plan in which the Executive was participating
immediately preceding the Reference Date (unless a plan providing substantially
similar benefits is adopted and participation therein by the Executive is
provided), the taking of any action by the
<PAGE> 5
5
Company or the Bank, which would adversely affect the Executive's participation
in or materially reduce the benefits under any such plan or deprive the
Executive of any material fringe benefit then enjoyed by the Executive, or the
failure by the Company, or the Bank to provide the Executive with the number of
paid vacation days to which the Executive was entitled in accordance with the
Company's or the Bank's normal vacation policies and practices as in effect
immediately preceding the Reference Date;
(v) transfer of the Executive out of the Company's or the
Bank's principal office or the relocation of the Company's or the Bank's
principal office (or the Executive's own office location within a radius of
twenty miles from the location of the Executive's office immediately preceding
the Reference Date), to a location more than twenty miles from such office or
offices, except for required travel on the Company's or the Bank's business to
an extent substantially consistent with the Executive's business travel
obligations in carrying out the Executive's normal duties in the ordinary course
of the Company's or the Bank's business immediately preceding the commencement
of the Term of Employment, or, in the event the Executive consents to any such
relocation, the failure by the Company or the Bank to pay (or reimburse the
Executive for) all reasonable moving expenses incurred by the Executive relating
to a change of the Executive's principal residence in connection with such
relocation in accordance with the Company's or Bank's relocation policies as in
effect immediately preceding the commencement of the Term of Employment
(including the tax gross-up, if any, of such payment), and to indemnify the
Executive against any loss (defined as the difference between the actual sale
price of such residence and the fair market value of such residence as
determined by a reputable real estate appraiser designated by the Executive and
reasonably satisfactory to the Company or the Bank) realized in the sale of the
Executive's principal residence in connection with any such change of
residence; or
(vi) the failure of the Company or the Bank to obtain the assumption in
writing of its obligation to perform this Agreement by any successor as
contemplated in section 16 below not less than five days prior to a merger,
consolidation or sale as contemplated in that section.
<PAGE> 6
6
(i) "Incumbent Director(s)" shall mean the members of the Board
on the date of this Agreement, provided that any person becoming a director
subsequent to the date of this Agreement whose election or nomination for
election was approved by two-thirds (but in no event less than two) of the
directors who at the time of such election or nomination comprise the Incumbent
Directors shall, for purposes of this Agreement, be considered to be an
Incumbent Director.
(j) "Reference Date" shall mean the later of the (i) date on
which the Term of Employment commences or (ii) if one or more Changes in Control
occur after the commencement of the Term of Employment, the date on which the
latest Change in Control occurs.
(k) "Term of Employment" shall mean the period commencing on
the earlier of (i) the date of the first Change in Control following the date of
this Agreement, provided that the Executive is employed by the Company or the
Bank on the date of such Change in Control, and (ii) the date immediately
preceding the date, if any, on which the Executive's employment is terminated by
the Company or the Bank prior to the occurrence of such first Change in Control,
if the Executive can reasonably demonstrate that the Executive's termination (A)
was at the direction or request of a third party that had taken steps reasonably
calculated to thereafter effect the Change in Control or (B) otherwise occurred
in connection with or in anticipation of a change in control and in the case of
either (i) or (ii) above, ending on the last day of any one-year period during
which no Change in Control shall have occurred.
(l) "Termination for Good Reason" shall mean a termination by
the Executive of employment for Good Reason. A Termination for Good Reason shall
not take effect unless (i) the Executive shall have delivered a written notice
to the Company or the Bank within 90 days of the Executive having knowledge of
one of the events constituting Good Reason stating that the Executive intends to
terminate employment as a result of one of those events, which event shall be
specified with particularity, and (ii) the Company or the Bank, shall have
failed to correct the situation to the reasonable satisfaction of the Executive
within 30 days after its receipt of the notice.
<PAGE> 7
7
(m) "Termination Without Cause" shall mean a termination of the
Executive's employment by the Company or the Bank, other than due to Disability
or Cause.
(n) "Voting Stock" of any corporation shall mean the capital
stock of any class or classes having general voting power under ordinary
circumstances, in the absences of contingencies, to elect the directors of such
corporation.
2. Term of Agreement.
This Agreement shall be effective as of the date first written
above and shall terminate upon the later of (a) the first anniversary of the
date either Party notifies the other that it or The Executive does not want the
term of the Agreement to continue or (b) the end of the Term of Employment, if
any.
3. Positions, Duties and Responsibilities.
During the Term of Employment, the Company or the Bank shall
employ the Executive in a position having responsibilities at least equivalent
to those of the position held by the Executive on the date immediately preceding
the Reference Date. During the Term of Employment and subject to the provisions
of Section 3(b) below, the Executive shall devote full business time and
attention to the business and affairs of the Company or the Bank, and shall use
best efforts, skills and abilities to promote their interests.
(b) Anything herein to the contrary notwithstanding, nothing
shall preclude the Executive from (i) engaging in charitable and community
affairs and managing personal investments, provided that such activities do not
materially interfere with the performance of duties or responsibilities
hereunder, or (ii) serving as an officer or director or any other corporation
either (A) at the Executive's initiative with the permission of the Board or of
the Bank or (B) at the request of the Board with the written approval of the
Executive.
4. Salary.
During the Term of Employment, the Company shall pay the Executive
the Base Salary in accordance with the Company's standard payroll practices. The
Base Salary shall be reviewed annually for increase at the discretion of the
Company or the Bank.
<PAGE> 8
8
5. Annual Bonus.
During the Term of Employment, the Executive shall be paid an
annual bonus at the discretion of the Company or the Bank.
6. Long Term Incentives.
During the Term of Employment, the Executive shall be eligible to
participate, in accordance with applicable terms and provisions, in the
long-term incentive plans for senior executives of the Company, or the Bank, if
any, including, without limitation, the Company's stock option plan or plans,
share unit plan or plans, long-term incentive plan or plans, stock purchase and
loan plan or plans and officers' and directors' deferred compensation plan or
plans. The Executive's participation in these or other plans shall take into
account the Executive's positions and responsibilities at the Company or the
Bank.
7. Employee Benefit Plans.
During the Term of Employment, the Executive shall be eligible to
participate, in accordance with applicable plans and provisions, in all employee
benefit plans and programs including, without limitation, hospital, dental, and
major medical plans, pension, 401(k), savings and similar plans, group term life
insurance, long and short term disability plans, travel, accident and accidental
death and dismemberment plans and programs, and any supplements provided to such
plans or programs, whether funded or unfunded, applicable generally to
executives of the Company, or the Bank, at a level comparable to the level of
the Executive.
8. Perquisites.
During the Term of Employment, the Executive shall be entitled to
all the perquisites generally available to senior executives of the Company, or
the Bank, immediately preceding the commencement of the Term of Employment.
9. Expenses.
During the Term of Employment, the Company or the Bank shall
promptly reimburse the Executive for any reasonable, out-of-pocket business
expenses the Executive incurs in performing duties and discharging
responsibilities under this Agreement upon the submission by the Executive of
appropriate documentation of such expenses in accordance with the Company's or
the Bank's usual practices and policies.
<PAGE> 9
9
10. Termination Without Cause or for Good Reason During the Term of
Employment.
In the event of a Termination Without Cause or a Termination for
Good Reason, in either case during the Term of Employment, the Executive shall
be entitled to:
(a) a lump sum payment equal to the sum of six months of the
Executive's Base Salary if the Executive's Date of Termination is within twelve
months of the Reference Date; and
(b) any salary earned (i.e., accrued through the date of
termination) but not yet paid;
(c) any bonuses earned but not yet paid;
(d) long-term incentives, if any, in accordance with the terms
and conditions of the applicable long term incentive plan or program;
(e) continued participation in all employee benefit plans or
programs in which the Executive was participating on the date of the termination
of the Executive's employment until the earlier of,
(i) 6 months following termination of the Executive's employment, or
(ii) the Executive's receipt of equivalent coverage and benefits under
the plans and programs of a subsequent employer; (f) other benefits in
accordance with the plans and programs of the Company or the Bank applicable
generally to executives of the Company or the Bank at a level comparable to the
level of the Executive.
In the event that the Executive is precluded from continued
participation in any employee benefit plan or program, as provided in subsection
(e) above, the Executive shall be provided with the "after tax economic
equivalent" thereof. For purposes of this paragraph, the "after tax economic
equivalent" of the Executive's participation in any employee benefit plan or
program shall be deemed to be the cost that would be incurred by the Executive
in obtaining such benefit at the lowest available individual basis, assuming, if
applicable, that the Executive is insurable.
<PAGE> 10
10
The Company, or the Bank, shall pay the Executive any payments
due under this Section 10 within five business days following the termination of
the Executive's employment (except to the extent that the terms and provisions
of any applicable plan or program preclude a payment within such period) or, if
such payment is requested by the Executive pursuant to the preceding paragraph,
within five business days after the Company's or the Bank's receipt of the
Executive's notice.
11. Covenants of the Company and Bank.
Prior to the commencement of the Term of Employment the Company
or the Bank shall not take any action (a) at the direction or request of any
third party that has taken steps reasonably calculated to thereafter effect a
Change in Control or (b) otherwise in connection with or in anticipation of a
Change in Control, and following the commencement of the Term of Employment
neither the Company, or the Bank, nor any successor thereto shall take any
action, without in either case the express prior written consent of the
Executive, that would result in any changes adversely affecting the Executive
under the Company's stock option plan, long-term incentive plan, share unit plan
or any other compensation plan or program in which the Executive participates on
the date of this Agreement or may participate from time to time hereafter,
including, without limitation, any adverse change in any provision for
acceleration of vesting in the event of a Change in Control.
12. Indemnifications.
(a) If, after the date of commencement of the Term of
Employment, the Executive is made a party or is threatened to be made a party to
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that the Executive is or
was a director or officer of the Company or the Bank, or is or was serving at
the request of the Company or the Bank as a director, officer, member, employee
or agent of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether or not the basis of such Proceeding is an alleged act or failure to act
in an official capacity as a director, officer, member, employee or
<PAGE> 11
11
agent, the Executive shall be indemnified and held harmless by the Company or
the Bank to the fullest extent authorized by California law, as the same exists
or may hereafter be amended, against all expense, liability and loss (including,
without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by the Executive in connection therewith, including, without
limitation, payment of expenses incurred in defending a Proceeding prior to
final disposition of such Proceeding (subject to receipt of an undertaking by
the Executive to repay such amount if it shall ultimately be determined that the
Executive is not entitled to be indemnified by the Company or the Bank under
California law), and such indemnification shall continue as to the Executive
even if the Executive has ceased to be a director, officer, member, employee or
agent of the Company or the Bank or other enterprise and shall inure to the
benefit of the Executive's heirs, executors and administrators.
(b) If a claim under section 12(a) above is not paid in full by
the Company or the Bank within 30 days after a written claim has been received
by the Company or the Bank, the Executive may at any time thereafter bring suit
against the Company or the Bank to recover the unpaid amount of the claim and if
successful in whole or in part, the Executive shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
that the Executive has not met the standards of conduct which make it
permissible under California law for the Company or the Bank to indemnify the
Executive for the amount claimed. Neither the failure of the Company (including
the Board, independent legal counsel, or its stockholders) or the Bank to have
made a determination prior to the commencement of such action that
indemnification of the Executive is proper in the circumstances because the
Executive had met the applicable standard of conduct set forth under California
law, nor an actual determination by the Company (including the Board,
independent legal counsel, or its stockholders) or the Bank, that the Executive
has not met such applicable standard of conduct, shall create a presumption that
the Executive has not met the applicable standard of conduct.
<PAGE> 12
12
(c) The right to indemnification and the payment of expenses
incurred in defending a Proceeding in advance of its final disposition conferred
in this Section 12 shall not be exclusive of any other right which the Executive
may have or hereafter may acquire under any statute, provision of the
certificate of incorporation or by-laws of the Company or the Bank, agreement,
vote of stockholders or disinterested directors or otherwise.
13. Confidentiality.
The Executive shall not, without the prior written consent of
the Company, or the Bank, divulge, disclose or make accessible to any other
person, firm, partnership or corporation or other entity any Confidential
Information pertaining to the business of the Company or the Bank, except (a)
while employed by the Company or the Bank in the business of and for the benefit
of the Company or the Bank (b) when required to do so by a court of competent
jurisdiction, by any governmental agency having supervisory authority over the
business of the Company or the Bank, or by any administrative body or
legislative body (including a committee thereof) with purported or apparent
jurisdiction to order the Executive to divulge, disclose or make accessible such
information.
14. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement
shall, at the discretion of the Executive, be resolved by arbitration to be held
in Los Angeles, California in accordance with the American Arbitration
Association's Commercial Arbitration Rules then in effect. Costs of the
arbitration or litigation, including, without limitation, attorney's fees of
both Parties, shall be borne by the Company and the Bank, and pending the
resolution of any arbitration or court proceeding, the Company or the Bank shall
continue payment of all amounts due the Executive under this Agreement and all
benefits to which the Executive is entitled at the time the dispute arises.
15. Effect of this Agreement on Other Benefits.
Nothing in this Agreement shall curtain the Executive's
entitlement to participate, in accordance with applicable terms and provisions,
in the executive compensation, employee benefit and other plans or programs in
which senior
<PAGE> 13
13
executives of the Company or the Bank are eligible to participate.
16. Assignability: Binding Nature.
This Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Company and the Bank under this Agreement may be assigned or
transferred by the Company or the Bank, except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company or the Bank is the continuing entity, or the sale or liquidation of
all or substantially all of the assets of the Company or the Bank, provided that
the assignee or transferee is the successor to all or substantially all of the
assets of the Company or the Bank and such assignee or transferee assumes the
liabilities, obligations, and duties of the Company or the Bank, as contained in
this Agreement, either contractually or as a matter of law. The Company and the
Bank further agree that in the event of a merger, consolidation, sale of assets
or liquidation as described in the preceding sentence the Company or the Bank
shall take whatever action each legally can in order to cause such assignee or
transferee to assume the liabilities, obligations, and duties of the Company and
the Bank, hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than the
Executive's rights to compensation and benefits, which may be transferred only
by will or operation of law.
17. Representation.
The Company, the Bank, and the Executive each represent and
warrant that each is fully authorized and empowered to enter into this Agreement
and that the performance of its or the Executive's obligations under this
Agreement will not violate any agreement between it or The Executive and any
other person, form or organization.
18. Entire Agreement.
This Agreement contains the entire agreement between the
Parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations and undertakings, whether
written or oral, between the Parties with respect thereto.
<PAGE> 14
14
19. Amendment or Waiver.
No provision in this Agreement may be amended or waived unless
such amendment or waiver is agreed to in writing and signed by the Executive and
a duly authorized officer of the Company or the Bank. No waiver by either party
of any breach by the other Party of any condition or provision of this Agreement
to be performed by the other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
20. Severability.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
21. Survivorship.
The respective rights and obligations of the Parties hereunder
shall survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations, including, but not limited
to, the rights of the Executive under Sections 9, 10, 11, 12, and 14.
22. Beneficiaries References.
The Executive shall be entitled to select (and change) a
beneficiary or beneficiaries to receive any compensation or benefit payable
following the Executive's death, and may change such election, in either case by
giving the Company or the Bank written notice thereof. In the event of the
Executive's death or a judicial determination of the Executive's incompetence,
reference in this agreement to the Executive shall be deemed, where appropriate,
to refer to the Executive's beneficiary, estate, committee, conservator or other
legal representative.
23. Governing Law.
This Agreement shall be governed by and construed in accordance
with the laws of California without reference to principles of conflict of laws.
<PAGE> 15
15
24. Notices.
Any notice given to either Party shall be in writing and shall
be deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give notice of:
If to the Company, the Bank
or the Board;
Mr. Howard P. Ladd
Chairman of the Board
Mercantile National Bank
1840 Century Park East
Los Angeles, CA 90067
If to the Executive;
25. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning
and construction of any provision of this Agreement.
26. Counterparts.
This Agreement may be executed in two or more counterparts.
<PAGE> 16
16
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
By: _______________________
Executive
National Mercantile Bancorp,
"Company"
By: ________________________
Howard P. Ladd
its Chairman
Mercantile National Bank
"Bank"
By: _______________________
Howard P. Ladd
its Chairman
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 13,923
<INT-BEARING-DEPOSITS> 198
<FED-FUNDS-SOLD> 24,010
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,477
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 97,579
<ALLOWANCE> 3,370
<TOTAL-ASSETS> 157,436
<DEPOSITS> 141,614
<SHORT-TERM> 4,382
<LIABILITIES-OTHER> 1,839
<LONG-TERM> 0
<COMMON> 24,614
0
0
<OTHER-SE> (15,013)
<TOTAL-LIABILITIES-AND-EQUITY> 157,436
<INTEREST-LOAN> 5,037
<INTEREST-INVEST> 989
<INTEREST-OTHER> 496
<INTEREST-TOTAL> 6,522
<INTEREST-DEPOSIT> 2,119
<INTEREST-EXPENSE> 2,178
<INTEREST-INCOME-NET> 4,344
<LOAN-LOSSES> 527
<SECURITIES-GAINS> (2,495)
<EXPENSE-OTHER> 6,117
<INCOME-PRETAX> (3,453)
<INCOME-PRE-EXTRAORDINARY> (3,453)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,453)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
<YIELD-ACTUAL> 8.64
<LOANS-NON> 1,303
<LOANS-PAST> 664
<LOANS-TROUBLED> 4,897
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,063
<CHARGE-OFFS> 918
<RECOVERIES> 698
<ALLOWANCE-CLOSE> 3,370
<ALLOWANCE-DOMESTIC> 1,556
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,814
</TABLE>
