<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 September 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 October 31, 1995 was 3,078,146.
This document contains 33 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 . . . . . . . . . . . . . . . . . . . . . . . . 14-29
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 30
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . 31
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . 31
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . 31
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 32
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations . . . . . . . . . . . . 5
Condensed Consolidated Statement of Changes in
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . 7
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 8
</TABLE>
3
<PAGE> 4
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1995 and December 31, 1994
<TABLE>
<CAPTION>
September 30, December 31
1995 1994
(Unaudited)
------------- -----------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks-demand......................... $ 9,259 $ 22,210
Federal funds sold and securities purchased
under agreements to resell.......................... 19,800 24,500
------------- -------------
Cash and cash equivalents..................... 29,059 46,710
Interest-bearing deposits with other
financial institutions............................... 183 195
Securities available-for-sale, at fair value;
aggregate amortized cost of $19,858 at September 30,
1995 and $64,540 at December 31, 1994................ 19,566 61,483
Federal Reserve Bank stock, at cost.................... 442 573
Loans receivable held for sale, at fair value.......... -- 6,599
Loans receivable....................................... 89,376 115,284
Allowance for credit losses.......................... (3,459) (3,063)
------------- -------------
Net loans receivable.......................... 85,917 112,221
Premises and equipment, net............................ 1,495 1,684
Other real estate owned................................ 1,369 1,529
Income taxes receivable................................ -- 77
Accrued interest receivable and other assets........... 1,449 1,908
------------- -------------
$ 139,480 $ 232,979
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand........................... $ 54,286 $ 87,430
Interest-bearing demand.............................. 6,365 13,844
Money market accounts................................ 21,462 28,823
Savings.............................................. 3,025 1,696
Time certificates of deposit:
$100,000 and over.................................. 9,439 12,261
Under $100,000..................................... 33,005 63,761
------------- -------------
Total deposits................................ 127,582 207,815
Securities sold under agreements to repurchase......... 2,920 12,572
Accrued interest payable and other liabilities......... 1,879 2,284
------------- -------------
Total liabilities............................. 132,381 222,671
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
September 30, 1995 and December 31, 1994........... 24,614 24,614
Accumulated deficit.................................. (17,223) (11,249)
Net unrealized loss on securities available-
for-sale........................................... (292) (3,057)
------------- -------------
Total shareholders' equity.................... 7,099 10,308
------------- -------------
$ 139,480 $ 232,979
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three- and nine-month periods
ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees................................ $ 2,367 $ 4,212 $ 7,275 $ 13,388
Securities held-to-maturity.......................... -- 132 -- 441
Securities available-for-sale:
Tax-exempt......................................... 2 16 12 40
Taxable............................................ 325 944 1,105 2,714
Trading securities................................... -- 9 -- 130
Federal funds sold and securities purchased
under agreements to resell......................... 175 44 671 175
Interest-bearing deposits with other financial
institutions....................................... 2 1 5 2
----------- ----------- ----------- -----------
Total interest income......................... 2,871 5,358 9,068 16,890
Interest expense:
Interest-bearing demand.............................. 33 37 111 108
Money market and savings............................. 231 351 793 917
Time certificates of deposit:
$100,000 and over.................................. 135 124 410 311
Under $100,000..................................... 426 847 1,630 2,436
----------- ----------- ----------- -----------
Total interest expense on deposits............ 825 1,359 2,944 3,772
Federal funds purchased and securities sold
under agreements to repurchase..................... 32 52 91 202
----------- ----------- ----------- -----------
Total interest expense........................ 857 1,411 3,035 3,974
----------- ----------- ----------- -----------
Net interest income........................... 2,014 3,947 6,033 12,916
Provision for credit losses............................ 1,720 2,366 2,247 5,551
----------- ----------- ----------- -----------
Net interest income after provision for
credit losses............................... 294 1,581 3,786 7,365
Other operating income (loss):
Gain (loss) on sale of trading securities............ -- 11 -- (112)
(Loss) gain on sale of securities available-for-sale. (6) 8 (1,225) (53)
Loss on termination of interest rate swap............ -- -- (1,294) --
International services............................... 42 81 175 379
Investment services.................................. 52 59 210 216
Deposit-related and other customer services.......... 110 128 609 586
Other income-shareholders' insurance claims.......... -- -- 730 --
Loss on other real estate owned...................... -- (244) (160) (392)
Loss on sale of other assets......................... -- (1,086) -- (1,086)
----------- ----------- ----------- -----------
Total other operating income (loss)........... 198 (1,043) (955) (462)
Other operating expenses:
Salaries and related benefits........................ 964 1,318 2,878 3,934
Severance costs...................................... 88 131 122 131
Net occupancy........................................ 432 439 1,316 1,370
Furniture and equipment.............................. 97 117 285 403
Printing and communications.......................... 54 70 211 297
Insurance and regulatory assessments................. 200 286 765 933
Customer services.................................... 210 204 652 613
Computer data processing............................. 114 107 324 376
Legal services....................................... 239 181 563 533
Other professional services.......................... 396 269 1,311 879
Promotion............................................ 34 83 106 188
Other real estate owned expenses..................... 4 18 22 62
Other expenses....................................... 181 127 250 241
----------- ----------- ----------- -----------
Total other operating expenses................ 3,013 3,350 8,805 9,960
----------- ----------- ----------- -----------
Loss before income taxes...................... (2,521) (2,812) (5,974) (3,057)
Provision for income taxes............................. -- -- -- --
----------- ----------- ----------- -----------
Net loss...................................... $ (2,521) $ (2,812) $ (5,974) $ (3,057)
=========== =========== =========== ===========
Net loss per share............................ $ (0.82) $ (0.92) $ (1.94) $ (1.00)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Nine-month period ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Common Stock Securities
Preferred ------------------- Accumulated Available
Shares 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...................... -- -- -- -- 2,765 2,765
Net loss........................ -- -- -- (5,974) -- (5,974)
----------- ---------- -------- ----------- ------------ ----------
Balance at September 30, 1995..... -- 3,078,146 $ 24,614 $ (17,223) $ (292) $ 7,099
----------- ---------- -------- ----------- ------------ ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-month periods ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(dollars in thousands)
<S> <C> <C>
Net cash flows from operating activities:
Net loss ............................................ $ (5,974) $ (3,057)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Accretion of sublease loss......................... (289) (289)
Depreciation and amortization...................... 277 361
Provision for credit losses........................ 2,247 5,551
Loss on sale of other assets....................... -- 1,086
Loss on sale of securities available-
for-sale......................................... 1,225 53
Net amortization of premiums on securities
held-to-maturity................................. -- 22
Net amortization of premiums (accretion of
discounts) on securities available-for-sale...... 42 147
Net accretion of discounts on loans purchased...... (177) (4,083)
Accretion of deferred gains, net of amortization
of premiums on interest rate hedging contracts
terminated....................................... -- (588)
Loss on other real estate owned................ 160 392
Net decrease in trading securities................. -- 9,992
Decrease (increase) in accrued interest receivable
and other assets................................. 536 (56)
Increase (decrease) in accrued interest payable
and other liabilities............................ (140) 1,249
----------- -----------
Net cash provided by (used in) operating
activities..................................... (2,093) 10,780
Cash flows from investing activities:
Purchase of securities held-to-maturity.............. -- (11,953)
Proceeds from sales of securities held to
maturity........................................... -- 8,015
Purchase of debt securities available-for-sale....... (5,000) (15,006)
Proceeds from sales of securities available-
for-sale........................................... 46,852 --
Proceeds from repayments and maturities of
securities available-for-sale...................... 1,694 9,733
Proceeds from sales of loans......................... 6,599 --
Purchases of loans................................... -- (7,226)
Net decrease in loans................................ 24,234 33,236
Proceeds from sale of other real estate owned........ -- 1,779
Other, net........................................... (52) (78)
----------- -----------
Net cash provided by investing activities........ 74,327 18,500
Cash flows from financing activities:
Net decrease in deposits............................. (80,233) (57,835)
Net decrease in securities sold under
agreements to repurchase........................... (9,652) (4,865)
Net proceeds from exercise of stock options.......... -- 59
----------- -----------
Net cash used in financing activities............ (89,885) (62,641)
----------- -----------
Net decrease in cash and cash equivalents.............. (17,651) (33,361)
Cash and cash equivalents, beginning................... 46,710 53,355
----------- -----------
Cash and cash equivalents, ending...................... $ 29,059 $ 19,994
=========== ===========
Supplemental cash flow information:
Cash paid for:
Interest $ 3,360 $ 4,065
Income taxes $ -- $ 35
Loans foreclosed and transferred to other
real estate owned and other assets $ -- $ 3,709
Increase (decrease) in unrealized loss on
securities available-for-sale $ (2,765) $ 3,093
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited condensed 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 condensed 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 condensed 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 September 30, 1995 and
results of operations and cash flows for the nine-month periods ended September
30, 1995 and 1994. The results of operations for the three and nine-month
periods ended September 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 - LOSS PER SHARE
Loss per share is computed using the weighted average number of common
shares outstanding during the period. The weighted average number of common
shares outstanding for the three-month periods ended September 30, 1995 and
1994 were 3,078,146 and 3,057,560, respectively. The weighted average number
of common shares outstanding for the nine-month periods ended September 30,
1995 and 1994 were 3,078,146 and 3,049,124, respectively. Loss per share
computations exclude common share equivalents since the effect would be to
reduce the loss per share amount. 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
8
<PAGE> 9
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 2 - LOSS PER SHARE (CONTINUED)
of common shares during the period or the price at the balance sheet date.
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 September 30, 1995, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $9.8 million, for which the related
allowance for credit losses was $.9 million. The average recorded investment
in, and the amount of interest income recognized on those impaired loans during
the nine months ended September 30, 1995 was $14.1 million and $1.0 million,
respectively, and for the three months ended September 30, 1995, $10.5 million
and $.3 million, respectively.
9
<PAGE> 10
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED 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 September 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 Tier 1 capital plus 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 0% 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 CONDENSED 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% for the highest rated bank holding
companies and banks. 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 September 30, 1995 was 5.22%, and the total risk-based
capital ratio was 8.95%. As of September 30, 1995, both of these ratios were
not in compliance with the Formal Agreement. The OCC has proposed a revised
agreement that maintains the capital requirements of the Formal Agreement and
imposes additional requirements on the Bank, including the development of a
three year capital plan. The Company has recently entered into a Memorandum of
Understanding with the Federal Reserve Bank of San Francisco, which is in
addition to the Memorandum of Understanding entered into in 1991, requiring the
submission of a plan to increase the Bank's capital. The Bank may be subject
to further regulatory enforcement action by the OCC. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
Information about the regulatory capital of the Company and the Bank
at September 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
September 30, 1995 and December 31, 1994 is set forth below.
<TABLE>
<CAPTION>
September 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 $7,391 7.70% $ 7,363 7.67% $13,365 9.84% $13,304 9.80%
Tier 1 capital minimum
requirement 3,838 4.00% 3,838 4.00% 5,431 4.00% 5,431 4.00%
--------- ------- --------- -------- --------- -------- --------- -------
Excess $3,553 3.70% $ 3,525 3.67% $ 7,934 5.84% $ 7,873 5.80%
========= ======= ========= ======== ========= ======== ========= =======
Total capital $8,618 8.98% $ 8,590 8.95% $15,079 11.11% $15,018 11.06%
Total capital minimum
requirement 7,676 8.00% 9,595 10.00% (1) 10,862 8.00% 13,578 10.00% (1)
--------- ------- --------- -------- --------- -------- --------- -------
Excess (deficiency) $ 942 0.98% $(1,005) -1.05% $ 4,217 3.11% $ 1,440 1.06%
========= ======= ========= ======== ========= ======== ========= =======
Total risk-weighted assets $95,946 $ 95,946 $135,777 $135,777
Capital Leverage Ratio Standard (2) (3):
Tier 1 capital $7,391 5.24% $ 7,363 5.22% $13,365 5.65% $13,304 5.62%
Tier 1 capital minimum
requirement (1) 5,637 4.00% 9,160 6.50% (1) 9,461 4.00% 15,374 6.50% (1)
--------- ------- --------- -------- --------- -------- --------- -------
Excess (deficiency) $1,754 1.24% $(1,797) -1.28% $ 3,904 1.65% $(2,070) -0.88%
========= ======= ========= ======== ========= ======== ========= =======
Average total assets, as
adjusted, during three-month
periods ended September 30,
1995 and December 31, 1994 $140,920 $140,920 $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 September 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
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. While management believes the level of the allowance as of
September 30, 1995 is adequate to absorb losses inherent in the loan portfolio,
additional deterioration in the economy of the Bank's lending area could result
in levels of loan losses that could not be reasonably predicted at that date.
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 nine-month periods ended September 30, 1995 and
1994. The discussion should be read in conjunction with the Company's
condensed consolidated financial statements and accompanying notes to the
condensed consolidated financial statements (see "Item 1. Financial
Statements").
FINANCIAL CONDITION
At September 30, 1995, the Company's consolidated assets decreased by
$93.5 million, or 40.1%, to $139.5 million from $233 million at December 31,
1994. This decrease was due primarily to a $17.7 million decrease in cash and
cash equivalents, a $42.0 million decrease in securities, the sale of $6.6
million of loans and a decrease in net loans of $26.3 million. The decrease in
consolidated assets from June 30, 1995 was $18.0 million, consisting primarily
of a $8.9 million decrease in cash and cash equivalents and a $8.3 million
decrease in net loans. Customer deposits decreased by $80.2 million or 38.6%
to $127.6 million at September 30, 1995, from $207.8 million at December 31,
1994. Securities sold under agreements to repurchase decreased by $9.7 million
to $2.9 million at September 30, 1995, from $12.6 million at December 31, 1994.
The decrease in customer deposits from June 30, 1995 was $14.0 million.
Securities sold under agreements to repurchase decreased by $1.5 million from
June 30, 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 nine-month
periods ended September 30, 1995 of $2.5 million or $(.82) per share, and $6.0
million or ($1.94) per share, respectively as compared to a net loss for the
three and nine-month periods ended September 30, 1994 of $2.8 million or $(.92)
per share and $3.1 million or $(1.00) per share, respectively.
Declining loan balances and sales of securities during 1995 continued
to negatively impact the Company's total interest income. Total interest
income for the three month and nine month periods ended September 30, 1995 was
$2.9 million and
14
<PAGE> 15
$9.1 million, respectively, compared with total interest income for the
corresponding periods of 1994 of $5.4 million and $16.9 million, respectively.
Total interest expense for the three month and nine month periods ended
September 30, 1995 was $.9 million and $3.0 million, respectively, compared
with total interest expense for the corresponding periods of 1994 of $1.4
million and $4.0 million, respectively. While the decrease in interest earning
loans and securities caused a significant decrease in interest income, the
decrease in deposits had less of an impact on interest expense, as $33.1
million (41%) of the decrease in deposits for the nine months ended September
30, 1995 was attributable to non-interest bearing demand deposits. Net
interest income for the three month and nine month periods ended September 30,
1995 was $2.0 million and $6.0 million, respectively, compared with net
interest income for the corresponding periods of 1994 of $3.9 million and $12.9
million, respectively. The provision for credit losses for the three month and
nine month periods ended September 30, 1995 was $1.7 million and $2.2 million,
respectively, compared with the corresponding amounts for 1994 of $2.4 million
and $5.6 million. Loss on sale of securities available for sale for the nine
month period ended September 30, 1995 was $2.5 million, including the loss of
$1.3 million on the termination of a related interest rate swap, while the net
unrealized loss on securities available for sale decreased for the same period
by $2.8 million. Loss on sale of securities available for sale for the nine
month period ended September 30, 1994 was $53 thousand, while the net
unrealized loss on securities available for sale increased for the same period
by $3.1 million. Net loss for the three month and nine month periods ended
September 30, 1994, included losses on the sale of other assets of $1.1
million.
The losses on sale of securities and other assets were realized as a
part of the Company's planned restructuring to minimize future interest rate
risk and future losses.
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
20.3% of the decrease in loans.
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 $3.0 million at September
30, 1995 from September 30, 1994. The decrease is primarily attributed to the
overall decrease in loan balances, the decrease in non-performing loans, and
the sale of loans previously written down. The allowance for credit losses
totaled $3.5 million at September 30, 1995, compared with $3.4 million at June
30, 1995, $3.4 million at March 31, 1995, and $3.1 million at December 31,
1994. Loan charge-offs for the three month period ended September 30, 1995 was
$1.6 million. Provision for credit losses for the same period was
15
<PAGE> 16
$1.7 million as a result of adequately providing for the increased risk of
losses associated with purchased loans. However, the Bank's allowance for
credit losses as a percentage of nonperforming assets increased to 50.7% at
September 30, 1995, from 40.9% at June 30, 1995, 38.9% at March 31, 1995, and
25.4% at December 31, 1994 as a result of the 43.3% decrease in nonperforming
assets during the first nine months of 1995. Non-performing assets decreased
by 17.1% from June 30, 1995.
Other operating income (loss) for the nine months of 1995 was a net
loss of $1.0 million including a net realized loss of $2.5 million as a result
of the sale of $42.0 million of investment securities available for sale and
the termination of a related swap. Other operating income (loss) for the nine
months of 1994 was a net loss of $.5 million including a loss on sale of the
movie library of $1.1 million, recorded in the third quarter of 1994. Fee
income also decreased in 1995 from the same periods in 1994 due to reduced loan
and deposit activity in 1995 as a result of the smaller loan and deposit bases.
Other income for the nine months of 1995 included $730 thousand in income from
insurance proceeds.
Other operating expenses decreased 10.1% and 11.6% for the three and
nine month periods ended September 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 $1.1
million or 26.2%, for the first nine months of 1995, compared with the same
period in the prior year.
Total assets of the Company at September 30, 1995 have continued to
decrease. 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
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 September 30, 1995 totaled $6.8 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 $8.2 million at June 30,
1995. Other real estate owned was $1.5 million at December 31, 1994.
NONPERFORMING ASSETS
The level of nonperforming assets, as presented in Table 1, decreased
$5.2 million during the first nine months of 1995 from the level at December
31, 1994, and decreased $1.4 million from June 30, 1995. The decrease was
primarily the result of the sale of classified assets in February, 1995 and the
decrease in nonaccrual loans. The amount of nonperforming loans for which the
Company does not hold substantial collateral amounted to $.6 million at
September 30, 1995, or 10.8% of all nonperforming loans at that date, compared
to $2.9 million, or 24.1% at December 31, 1994, and $2.0 million or 29.1% at
June 30, 1995.
NONACCRUAL LOANS. Nonaccrual loans decreased $3.2 million during the
first nine months of 1995 to $.2 million as compared to $3.4 million at
December 31, 1994. Nonaccrual loans were $1.3 million at June 30, 1995. Loans
reported as nonaccrual at December 31, 1994 of $2.7 million were sold in the
first quarter of 1995. Of the loans reported as nonaccrual at December 31,
1994, $568,000 were charged-off by the Company during the first nine 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"). 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 September 30,
1995, TDRs totaled $5.2 million compared to $4.9 million at June 30, 1995 and
$5.6 million at December 31, 1994. The decrease in troubled debt
restructurings at June 30, 1995 from December 31, 1994 represents the sale of
loans totaling $620 thousand as well as the migration of one loan totaling $60
thousand to loans contractually past due ninety or more days and still accruing
interest. The increase in TDRs at September 30, 1995 resulted from the
addition of $339 thousand in loans to this category.
17
<PAGE> 18
LOANS CONTRACTUALLY PAST DUE NINETY OR MORE DAYS. Loans contractually
past due ninety or more days decreased to $54 thousand at September 30, 1995
from $664 thousand at June 30, 1995 and $1.5 million at December 31, 1994.
LOAN DELINQUENCIES. Loan delinquencies decreased to $1.2 million or
1.4% of net loans outstanding at September 30, 1995 from $3.1 million or 3.2%
of net loans outstanding at June 30, 1995, $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 $1.6 million and $2.6 million during the three and nine
month periods ended September 30, 1995 respectively, as compared to $2.9
million and $7.6 million during the corresponding periods in 1994. Recoveries
of loans previously charged-off totaled $11 thousand and $709 thousand for the
three and nine month periods ended September 30, 1995 as compared to $938
thousand and $1.8 million 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 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.
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.
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<PAGE> 19
Table 1
Nonperforming Assets
<TABLE>
<CAPTION>
(dollar amounts in thousands) December 31,
Sept 30, June 30, March 31, --------------------
1995 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 189 $ 1,303 $ 765 $ 3,426 $ 7,780
Troubled debt restructurings 5,215 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 54 664 1,466 1,507 2,502
-------- -------- -------- -------- --------
Nonperforming loans 5,458 6,864 7,133 10,515 15,866
Other real estate owned 1,369 1,369 1,529 1,529 6,175
-------- -------- -------- -------- --------
Total nonperforming assets $ 6,827 $ 8,233 $ 8,662 $ 12,044 $ 22,041
======== ======== ======== ======== ========
Allowance for credit losses as a percent of
nonaccrual loans 1830.2% 258.6% 440.1% 89.4% 86.1%
======== ======== ======== ======== ========
Allowance for credit losses as a percent of
nonperforming loans 63.4% 49.1% 47.2% 29.1% 42.2%
======== ======== ======== ======== ========
Total nonperforming assets as a percent of
total loans outstanding 7.6% 8.4% 8.5% 10.4% 13.6%
======== ======== ======== ======== ========
Total nonperforming assets as a percent of
total shareholders' equity 96.2% 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
<TABLE>
<CAPTION>
(dollar amounts in thousands) December 31,
September 30, ----------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Loan Portfolio Composition:
Real estate construction and land development $ 932 1% $ 948 1% $ 1,676 1%
Commercial loans:
Secured by one-to-four family residential properties 10,287 11% 18,398 16% 20,098 12%
Secured by multifamily residential properties 3,464 4% 2,368 2% 4,985 3%
Secured by commercial real properties 33,480 37% 32,061 28% 40,330 25%
Other - secured and unsecured 30,336 34% 43,385 37% 66,665 41%
Home equity lines of credit 6,206 7% 2,867 2% 7,122 4%
Consumer instalment and unsecured loans to individuals 4,901 6% 15,691 14% 22,073 14%
------- ---- -------- ---- -------- ----
$89,606 100% $115,718 100% $162,949 100%
Deferred net loan origination fees, purchased
loan discount and gains on termination of
interest rate hedging contracts (230) (434) (1,158)
-------- -------- --------
Gross loans outstanding $ 89,376 $115,284 $161,791
-------- -------- --------
Allocation of the Allowance for Credit Losses:
Real estate construction and land development $ 16 17 $ 30
Commercial loans:
Secured by one-to-four family residential properties 347 77 499
Secured by multifamily residential properties 66 51 472
Secured by commercial real properties 902 674 1,422
Other - secured and unsecured 1,912 1,645 2,181
Home equity lines of credit 113 18 149
Consumer instalment and unsecured loans to individuals 101 578 1,937
-------- -------- --------
Allowance allocable to gross loans outstanding 3,457 3,060 6,690
Commitments to extend credit under standby and
commercial letters of credit 2 3 7
-------- -------- --------
Total allowance for credit losses $ 3,459 $ 3,063 $ 6,697
======== ======== ========
Allowance for credit losses allocable to gross loans
outstanding as a percent of gross loans outstanding 3.88% 2.66% 4.14%
===== ===== =====
</TABLE>
20
<PAGE> 21
Table 3
Analysis of Changes in the Allowance for Credit Losses
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three-month periods ended
-------------------------- ------------ ------------ ------------
September 30, June 30, March 31, December 31, September 30
1995 1995 1995 1994 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,370 $ 3,367 $ 3,063 $ 6,047 $ 5,991
Loans charged off:
Real estate construction and land development -- -- -- -- 45
Commercial loans:
Secured by one-to-four family residential properties -- 50 70 788 904
Secured by multifamily residential properties -- -- -- -- --
Secured by commercial real properties 53 191 -- 1,407 --
Other - secured and unsecured 1,505 -- 92 3,129 1,654
Home equity lines of credit -- -- -- 257 --
Consumer instalment and unsecured loans
to individuals 84 466 49 1,024 247
------------ ------------ ------------ ------------ ------------
Total loan charge-offs 1,642 707 211 6,605 2,850
Recoveries of loans previously charged off:
Real estate construction and land development -- -- -- -- --
Commercial loans:
Secured by one-to-four family residential properties 1 59 1 17 4
Secured by multifamily residential properties -- -- -- -- --
Secured by commercial real properties -- -- -- -- --
Other - secured and unsecured 4 89 342 929 906
Home equity lines of credit -- -- -- -- --
Consumer instalment and unsecured loans
to individuals 6 181 26 498 28
------------ ------------ ------------ ------------ ------------
Total recoveries of loans previously charged off 11 329 369 1,444 938
------------ ------------ ------------ ------------ ------------
Net loan charge-offs 1,631 378 (158) 5,161 1,912
Provision for credit losses 1,720 381 146 2,177 2,366
------------ ------------ ------------ ------------ ------------
Balance at end of period $ 3,459 $ 3,370 $ 3,367 $ 3,063 $ 6,445
------------ ------------ ------------ ------------ ------------
</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.
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. The
Company's asset base continued to decrease, and as a result interest earning
assets and interest bearing liabilities continued to decrease. If this trend
continues without a corresponding reduction in operating expenses, interest
income from the reduced earning asset base may not cover operating expenses of
the Bank. Interest earning assets at September 30, 1995 decreased to $129.4
million, compared with $142.3 million at June 30, 1995, $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 92.7% at September 30, 1995, compared with 90.4%
at June 30, 1995, 93.7% at March 31, 1995 and 89.6% at December 31, 1994.
Interest bearing liabilities at September 30, 1995 decreased to $76.2 million,
compared with $82.7 million at June 30, 1995, $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 54.6% at September 30, 1995, compared with 52.5%
at June 30, 1995, 60.4% at March 31, 1995 and 57.1% at December 31, 1994.
Total loans receivable at September 30, 1995 decreased to $89.4
million, compared with $97.6 million at June 30, 1995, $101.5 million at March
31, 1995 and $115.3 million at December 31, 1994. Loans receivable as a
percentage of total assets was 64.1% at September 30, 1995, compared with 62.0%
at June 30, 1995, 63.2% at March 31, 1995 and 52.3% at December 31, 1994.
Total deposits at September 30, 1995 decreased to $127.6 million, compared with
$141.6 million at June 30, 1995, $146.5 million at March 31, 1995 and $207.8
million at December 31, 1994, while interest bearing deposits at September 30,
1995 decreased to $73.3 million, compared with $78.3 million at June 30, 1995,
$95.2 million at March 31, 1995 and $120.4 million at December 31, 1994. Total
deposits as a percentage of total assets was 91.5% at September 30, 1995,
compared with 90.0% at June 30, 1995, 91.2% at March 31, 1995 and 89.2% at
December 31, 1994. Interest bearing deposits as a percentage of total
22
<PAGE> 23
deposits was 57.5% at September 30, 1995, compared with 55.3% at June 30, 1995,
65.0% at March 31, 1995 and 57.9% at December 31, 1994, while interest bearing
deposits as a percentage of loans receivable was 82.0% at September 30, 1995,
compared with 80.3% at June 30, 1995, 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 $33,000 and
$132,000 for the three and nine month periods ended September 30, 1995,
compared with $200,000 and $900,000 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, by $652,000 and $613,000 for the nine month periods ended
September 30, 1995 and 1994, respectively.
INTEREST RATE RISK MANAGEMENT
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 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.
23
<PAGE> 24
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, which 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.
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 was 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".
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.
The weighted average yield on loans receivable was 9.86% and 9.78% for
the three month and nine month periods ended September 30, 1995, compared with
12.26% and 12.41% for the corresponding periods in 1994. The yield on loans in
1994 was significantly higher as a result of accretion of discount associated
with a purchased loan portfolio. This accretion represented yields of 3.99%
and 3.79% for the three and nine month periods in 1994. Weighted average yield
on total earning assets was 8.75% and 8.37% for the three month and nine month
periods ended September 30, 1995, compared with 9.82% and 9.76% for the
corresponding periods in 1994. Weighted average rate on all deposits was 4.65%
and 4.70% for the three month and nine month periods ended September 30, 1995,
compared with 4.05% and 3.67% for the corresponding periods in 1994.
INVESTMENT SECURITIES
Investment securities decreased to $20.0 million at September 30,
1995, from $20.4 million at June 30, 1995, $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 September 30, 1995 decreased to $292 thousand from $311 thousand at
June 30, 1995, $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 condensed 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 foreign exchange services,
investment services, and deposit-related and other customer services. Fee
income decreased $64 thousand or 23.9% in the third quarter of 1995, from the
third quarter of 1994, and decreased $187 thousand or 15.8% for the first nine
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 condensed consolidated statements of
operations, the Company reduced total operating expenses by $337,000, or
10.1%, during the third quarter of 1995 from the third quarter of 1994, and
$1.1 million or 11.6% for the first nine 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 $397,000
or 27.4% and $1.1 million or 26.2% reduction in salaries and related expenses
for the three and nine month periods ended September 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 currently negotiating with its landlord to restructure
its lease for the Bank's premises. It is essential that the lease be
materially restructured so that the Company can reduce its operating expenses.
During the negotiation process, the Company has ceased making its rental
payments under the lease. Pursuant to the terms of the lease, if the landlord
provides written notice to the Company and the Company fails to pay such rental
payments within five (5) days of such notice, the Company will be in material
default under the lease. The landlord has not provided such written notice to
the Company.
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, second and third
quarter net losses did not give rise to additional income tax benefits.
25
<PAGE> 26
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS
CAPITAL GUIDELINES
See Note 4 of the accompanying notes to condensed consolidated
financial statements for a discussion of the capital requirements applicable to
the Company and the Bank.
FORMAL AGREEMENT
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 4, the Bank's capital leverage ratio and
total risk-based capital ratio at September 30, 1995 were 5.22% and 8.95%,
respectively. At September 30, 1995, the Bank was not in compliance with both
capital requirements maintaining neither a capital leverage ratio of 6.5% nor a
total risk-based capital ratio of 10.0% pursuant to the Formal Agreement. The
OCC has proposed a revised agreement that maintains the capital requirements of
the Formal Agreement and imposes additional requirements on the Bank. The
proposed revised agreement requires the Bank to appoint a new chief executive
officer and chief financial officer, to make certain determinations as to the
reasonableness of any salary, consulting fee, expense reimbursement or other
type of compensation, to review the need for, and the reasonableness of, all
existing consulting, employment and severance contracts, to prepare a written
analysis of any new products or services, to maintain the Bank's liquidity at a
level sufficient to sustain current and anticipated operations, to develop a
three year capital plan and strategic plan, and to improve the Bank's loan
administration. The Bank may be subject to further regulatory enforcement
action by the OCC. The Bank has recently appointed Scott A. Montgomery as
President, Chief Executive Officer and a Director of the Bank, subject to
regulatory approval.
The Company entered into a Memorandum of Understanding ("1995 MOU") on
October 26, 1995 with the Federal Reserve Bank of San Francisco ("FRB"). This
MOU is separate from the Memorandum of Understanding entered into by the
Company and the FRB in 1991 (the "1991 MOU") which remains in effect. The 1995
MOU prohibits the Company from paying dividends without prior approval of the
FRB, requires the submission of a plan to increase the Bank's capital ratios,
requires the Company to conduct a review of the senior and executive management
of the Company and the Bank, prohibits the incurrence or renewal of debt
without the FRB's approval, restricts cash expenditures in excess of $10,000 in
any month and prohibits the Company from making
26
<PAGE> 27
acquisitions or divestitures or engaging in new lines of business without the
FRB's approval. The Company may be subject to further regulatory enforcement
action by the FRB.
FUTURE EFFECTS OF AGREEMENT ON DIVIDENDS. These are 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, 1994 and the first three quarters of 1995, the Bank could
not have declared dividends to the Company at September 30, 1995 without the
prior approval of the OCC. In addition, management expects the Agreement (and
the proposed amended 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. Moreover, the 1991 MOU and the 1995 MOU
prohibit the Company from paying dividends without the prior written approval
of the FRB.
FUTURE EFFECTS OF NONPERFORMING LOANS AND CREDIT LOSSES ON CAPITAL RESOURCES
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, 1994 and the first three quarters of 1995,
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 September 30, 1995 level of $6.8 million representing a
decrease of $1.4 million from June 30, 1995 and a decrease of $5.2 million over
the level at December 31, 1994. This decrease was due primarily to the sale of
loans in the first quarter of 1995, and a decrease in nonaccrual loans in the
third 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 raise regulatory capital ratios in
excess of those required by the Agreement primarily through the declining loan
balances and earning asset levels since 1991 and from 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.
27
<PAGE> 28
LIQUIDITY
LIQUIDITY MANAGEMENT
The accompanying consolidated statements of cash flows present certain
information about cash flows from operating, investing and financing
activities. The Bank'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 Bank's liquidity, 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. The management believes that the liquidity
guidelines are generally more indicative of the Bank'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
Bank 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. While management
believes the Bank's funding sources are adequate to meet anticipated demand, no
assurance can be made that demand on the Bank's resources will not exceed the
Bank's funding sources.
The Company (as opposed to the Bank) has approximately $20,000 of
liquid assets on its books. The Company has only limited expenses at the
present time but has no ability to fund the Bank's cash needs. The Company is
evaluating available methods to raise additional capital.
LIQUIDITY TRENDS
During 1994, the Company has experienced a decline, continuing through
the third quarter of 1995, in total deposits. During the three months ended
September 30, 1995, total deposits decreased, while savings deposits and time
certificates of deposit increased. Total deposits decreased at September 30,
1995 as compared to December 31, 1994, while savings deposits increased.
Time certificates of deposit of $100,000 or more continued to
represent a less significant source of funding during 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.
28
<PAGE> 29
The Company maintains a wholesale institutional funds acquisition
operation ("money desk"). This operation provided 18% of the Company's average
total funding sources during the 1995 third quarter, as compared to 34% during
the year-earlier third quarter, while noninterest-bearing demand deposits
provided 42% of average total funding sources during the 1995 third quarter,
compared to 34% during the comparable 1994 period. 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. However, the Bank's policy is to activate the
money desk operation as necessary if the Bank's liquidity falls below specified
levels. Brokered deposits will not be solicited through Money Desk activities.
29
<PAGE> 30
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.
In February 1995, counterclaims were filed against the Bank in an
action commenced by British & Commonwealth Merchant Bank ("BCMB"), as agent for
itself and the Bank, in England against Lloyd's Underwriters and Company
Underwriters (collectively, "Lloyd's"). The Bank and BCMB claim that Lloyd's
owes them $120,659 of insurance proceeds relating to a claim filed by BCMB (for
itself and the Bank) for approximately $7.8 million under policies insuring
repayment of a loan from the Bank and BCMB to Performance Guarantees, Inc. for
production of a film entitled "Barr Sinister". In November 1991, Lloyd's paid
the $7.8 million in insurance proceeds, which Lloyd's now seeks to recover a
half each from the Bank and BCMB. In its counterclaim, Lloyd's contends that
the Leading Underwriter and Hayward & Co., the insurance broker, lacked
authority to bind Lloyd's and to issue the insurance policies under which
payment was made and that declarations made by the broker to bring the film
within the insurance coverage were inaccurate. Lloyd's position, therefore, is
that such payment should be returned to Lloyd's.
The Bank believes it has meritorious defenses to these counterclaims
and intends to defend the counterclaims vigorously. The Bank also believes
that, if it is unsuccessful in the counterclaims, the Bank has claims against
other parties for recovery of any amounts it may have to repay to Lloyd's.
On or about October 7, 1992, an action was commenced by two
shareholders of National Mercantile Bancorp, Messrs. Berlin and Zlotnick, in
the United States District Court for the Eastern District of Pennsylvania
against the Company and the following former and current directors, officers,
and/or employees of the Company: Messrs. Ladd, Thornburg, Hughes, Tomich,
Bell, Guldeman, Smith, Brewer, Wolfen, Winner, Thomson, Hickey, Grahm, and
Domyan and Ms. Romero and Ms. Thornton. The plaintiffs contended that the
claims were being asserted (a) on a derivative basis on behalf of the Company
and (b) on behalf of a purported class of (i) purchasers of the Company's stock
during the period October 7, 1989 through July 12, 1994 and (ii) persons who
owned shares of the Company on the record dates and who were eligible to vote
at the 1990, 1991 and 1992 Annual Meetings of Shareholders of the Company.
30
<PAGE> 31
The complaint was a derivative and class action case, which purported
to assert various violations of the Securities and Exchange Act of 1934 and
state common law claims for violation of the directors' alleged duty of candor,
common law negligent misrepresentation and breach of fiduciary duty, and waste
of corporate assets. The plaintiffs sought class certification, declaratory
and injunctive relief, consequential and punitive damages in an unspecified
amount and attorneys' fees.
On December 22, 1994, the parties to the action filed a stipulation
for settlement (the "Stipulation") with the Court. According to the
Stipulation, all claims in the action were to be settled, discharged and
dismissed with prejudice. The monetary portion of the settlement was to be
funded solely by the Company's insurer for the relevant time period
(approximately $1.6 million was being held in an escrow account) and none of
the defendants were to be required to pay any portion of the settlement. The
Stipulation was approved by the Court on May 1, 1995 and the period for appeal
has expired. This action has been concluded except for the issuance of the
warrants and the election of the two new directors as stipulated. The Company
will be required to issue warrants to the class to purchase shares of the
common stock of the Company equal to 5.0% of the present issued and outstanding
shares of the common stock of the Company. The exercise price of the warrants
shall be 10% less than the average market price of the Company's shares traded
during the previous sixty days prior to July 12, 1994. The warrants shall be
exercisable during a three year period which shall commence one year after the
effective date of the Settlement. Plaintiffs' attorneys received 30% of
the monetary portion of both the derivative and class settlement amount and
will receive 30% of the warrants. In the two year period after the approval of
the proposed settlement, the Company will be required to elect two new members
to its Board of Directors from a list supplied by the plaintiffs.
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
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. Mr Scott Montgomery has been hired by
the Board of Directors as President and CEO of the
31
<PAGE> 32
Bank, and as a director of the Company, subject to final regulatory approval.
Efforts continue in the process of hiring a permanent Chief Financial Officer
for the Bank. Mr. Howard Ladd, the Company's Chairman, is the acting
President/CEO of the Company. Warner F. Wolfen resigned as a director and
secretary of the Company as of August 18, 1995. A. Thomas Hickey was appointed
Secretary. Michael R. Peevey resigned as a director as of September 8, 1995.
The Company and the Bank were not in compliance with its regulatory
minimum required number of directors during the quarter ended September 30,
1995 but were brought into compliance with this requirement as of November 10,
1995 with the addition of Mr. Scott Montgomery to the boards of the Company and
the Bank.
The Company has retained an advisor specializing in raising capital
and strategic planning to assist the Company in preparing a three year capital
plan and strategic plan for the Bank.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K.
Item 10.1: Form of Stay Bonus Agreement between the Company,
Mercantile National Bank and some of its officers.
(b) Reports on Form 8-K.
None.
32
<PAGE> 33
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)
November 17, 1995 /s/ HOWARD P. LADD
-------------------------------
Howard P. Ladd
Chief Executive Officer
November 17, 1995 /s/ ROBERT E. THOMSON
-------------------------------
Robert E. Thomson
Acting Chief Financial Officer
33
<PAGE> 1
EXHIBIT 10.1
MERCANTILE NATIONAL BANK
STAY BONUS AGREEMENT
Agreement made as of , 1995 by and between National Mercantile
Bancorp, with its 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 is employed by the Bank; and
WHEREAS, the Company has retained Sutro & Co. to advise it concerning
enhancing shareholder value; and
WHEREAS, the Bank considers it worthwhile to retain Executive's
services through the completion of whatever process emerges in the next few
months to enhance shareholder value.
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
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.
(d) 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;
<PAGE> 3
(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 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; or that no "Change
<PAGE> 4
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; or
(vi) the Company or the Bank sells, through a "private placement" or
"public offering" as such terms are used in the Securities Act of 1933 (the
"1933 Act") or any combination of private placements or public offerings a
number of shares equal to 66.7% of its currently outstanding shares during the
Term of this Agreement as set out in Section 2, exclusive of any shares issued
to employees or former employees pursuant to the exercise of employee stock
options.
(e) "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 shall also include the existence of and
the contents of this Stay Bonus Agreement. Confidential Information 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.
(f) "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.
(g) "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.
(h) "Reference Date" shall mean (i) the date immediately
preceding the date on which one or more Changes in Control occur; or (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
<PAGE> 5
thereafter effect the Change in Control or (B) otherwise occurred in connection
with or in anticipation of a Change in Control.
(i) "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 Stay Bonus Agreement shall be effective as of the date first
written above and shall terminate upon the earlier of (a) the second
anniversary of that date or (b) the date Executive is no longer employed by
Bank.
3. Stay Bonus.
Upon the occurrence of any Change of Control, the Executive
immediately shall be paid an amount equal to ten per cent (10%) of the
Executive's Base Salary.
4. Indemnifications.
(a) If 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 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
<PAGE> 6
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 the amount owed under 4(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.
(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 4 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.
5. 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
<PAGE> 7
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.
6. 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.
7. 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 executives of the Company or the Bank are eligible to participate.
8. 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 shall be assigned or transferred pursuant to a merger or
consolidation in which the Company or the Bank is not 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
<PAGE> 8
such assignee or transferee shall assume the liabilities, obligations, and
duties of the Company or the Bank, as contained in this Stay Bonus 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 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.
9. 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.
10. 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 hereto.
11. 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.
12. 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
<PAGE> 9
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
13. 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 4, 5 and 6.
14. Beneficiaries References.
The Executive shall be entitled to select (and change) a
beneficiary or beneficiaries to receive any compensation or benefit which had
become due prior to but, by reason of timing might actually be 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.
15. 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.
16. 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 or the Bank;
Mr. Howard P. Ladd
Chairman of the Board
Mercantile National Bank
1840 Century Park East
Los Angeles, CA 90067
<PAGE> 10
If to the Executive;
17. 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.
18. Counterparts.
This Agreement may be executed in two or more counterparts.
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> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 9,259
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0
0
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</TABLE>
