<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to ____________
Commission File Number: 0-15982
NATIONAL MERCANTILE BANCORP
(Exact name of registrant as specified in its charter)
California 95-3819685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1840 Century Park East, Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 277-2265
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Common Stock, no
par value, as of July 31, 1996 was 3,078,146.
This document contains 32 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 . . . . . . . . . . . . . . . . . . . . . . 31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Changes in
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 8
</TABLE>
3
<PAGE> 4
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30, December 31
1996 1995
(Unaudited)
----------- -----------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks-demand......................... $ 4,614 $ 9,272
Federal funds sold and securities purchased
under agreements to resell.......................... 15,700 21,000
--------- ---------
Cash and cash equivalents..................... 20,314 30,272
Securities available-for-sale, at fair value;
aggregate amortized cost of $19,187 at June 30, 1996
and $20,256 at December 31, 1995..................... 18,925 20,102
FRB stock.............................................. 274 315
Loans receivable....................................... 69,278 82,012
Allowance for loan losses............................ (3,064) (3,805)
--------- ---------
Net loans receivable.......................... 66,214 78,207
Premises and equipment, net............................ 1,038 1,126
Other real estate owned................................ 581 581
Accrued interest receivable and other assets........... 1,574 1,389
--------- ---------
$ 108,920 $ 131,992
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand........................... $ 36,612 $ 44,579
Interest-bearing demand.............................. 4,597 7,737
Money market accounts................................ 16,421 18,901
Savings.............................................. 3,246 1,927
Time certificates of deposit:
$100,000 and over.................................. 7,515 8,551
Under $100,000..................................... 32,104 38,548
--------- ---------
Total deposits................................ 100,495 120,243
Securities sold under agreements to repurchase......... 1,101 4,497
Accrued interest payable and other liabilities......... 2,254 1,241
--------- ---------
Total liabilities............................. 103,850 125,981
Shareholders' equity:
Preferred stock, no par value; authorized 1,000,000
shares............................................. -- --
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 3,078,146 at
June 30, 1996 and December 31, 1995................ 24,614 24,614
Accumulated deficit.................................. (19,282) (18,449)
Net unrealized loss on securities available-
for-sale........................................... (262) (154)
--------- ---------
Total shareholders' equity.................... 5,070 6,011
--------- ---------
$ 108,920 $ 131,992
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three- and six-month periods ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
(dollar in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees................................ $ 1,730 $ 2,422 $ 3,530 $ 5,037
Securities available-for-sale:
Tax-exempt......................................... -- 4 -- 10
Taxable............................................ 278 364 560 976
Federal funds sold and securities purchased
under agreements to resell......................... 220 273 483 496
Interest-bearing deposits with other financial
institutions....................................... -- 1 -- 3
-------- -------- -------- --------
Total interest income......................... 2,228 3,064 4,573 6,522
Interest expense:
Interest-bearing demand.............................. 16 38 35 78
Money market and savings............................. 155 273 329 562
Time certificates of deposit:
$100,000 and over.................................. 97 257 225 275
Under $100,000..................................... 504 396 1,067 1,204
-------- -------- -------- --------
Total interest expense on deposits............ 772 964 1,656 2,119
Federal funds purchased and securities sold
under agreements to repurchase..................... 9 24 17 59
-------- -------- -------- --------
Total interest expense........................ 781 988 1,673 2,178
-------- -------- -------- --------
Net interest income........................... 1,447 2,076 2,900 4,344
Provision for loan losses.............................. -- 381 -- 527
-------- -------- -------- --------
Net interest income after provision for
loan losses................................. 1,447 1,695 2,900 3,817
Other operating income (loss):
Loss on sale of securities available-for-sale........ -- (65) (1) (1,219)
Loss on termination of interest rate swap............ -- (1,276) -- (1,276)
International services............................... 21 67 63 133
Investment services.................................. 26 86 55 158
Deposit-related and other customer services.......... 69 268 167 499
Other income-shareholders' insurance claims.......... -- 730 -- 730
Loss on other real estate owned...................... -- (160) -- (160)
-------- -------- -------- --------
Total other operating income (loss)........... 116 (350) 284 (1,135)
Other operating expenses:
Salaries and related benefits........................ 557 955 1,249 1,948
Net occupancy........................................ 188 449 380 884
Furniture and equipment.............................. 82 91 167 188
Printing and communications.......................... 49 82 111 157
Insurance and regulatory assessments................. 161 285 327 565
Customer services.................................... 162 231 302 442
Computer data processing............................. 87 125 182 210
Legal services and settlements....................... 1,180 215 1,257 324
Other professional services.......................... 287 438 478 915
Promotion............................................ 41 37 64 72
Other real estate owned expenses..................... 13 9 20 18
Other expenses....................................... 31 181 58 412
-------- -------- -------- --------
Total other operating expenses................ 2,839 3,098 4,596 6,135
-------- -------- -------- --------
Loss before provision for income
taxes (benefit)............................. (1,276) (1,753) (1,412) (3,453)
Provision for income taxes (benefit)................... (579) -- (579) --
-------- -------- -------- --------
Net loss...................................... $ (697) $ (1,753) $ (833) $ (3,453)
======== ======== ======== ========
Net loss per share............................ $ (0.23) $ (0.57) $ (0.27) $ (1.12)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six-month period ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
loss on
Common Stock Securities
Preferred ------------------ Accumulated Available-
Stock Shares Amount Deficit for-Sale Total
--------- --------- ------- ----------- ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........ -- 3,078,146 $24,614 $(18,449) $ (154) $ 6,011
Net unrealized loss on
securities available for sale. -- -- -- -- (108) (108)
Net loss........................ -- -- -- (833) -- (833)
-------- --------- ------- -------- ------- -------
Balance at June 30, 1996.......... -- 3,078,146 $24,614 $(19,282) $ (262) $ 5,070
======== ========= ======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-month periods ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (833) $ (3,453)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Accretion of sublease loss......................... -- (192)
Depreciation and amortization...................... 98 188
Provision for loan losses.......................... -- 527
Net loss on sale of securities available-for-sale.. 1 1,219
Net amortization of premiums (accretion of
discounts) on securities available-for-sale...... 36 26
Net amortization of premiums (accretion of
discounts) on loans purchased.................... 27 (133)
Net loss on other real estate owned................ -- 160
Decrease (increase) in accrued interest receivable
and other assets................................. (185) 301
Increase (decrease) in accrued interest payable
and other liabilities............................ 1,013 (253)
-------- --------
Net cash provided by (used in) operating
activities.................................... 157 (1,610)
Cash flows from investing activities:
Proceeds from sales of securities available-
for-sale........................................... 114 41,768
Purchase of debt securities available-for-sale....... (1,000) --
Proceeds from repayments and maturities of
securities available-for-sale...................... 1,959 1,312
Proceeds from sales of loans......................... -- 6,599
Net decrease in loans................................ 11,966 17,618
Net purchases of premises and equipment.............. (10) --
Other, net........................................... -- (73)
-------- --------
Net cash provided by investing activities........ 13,029 67,224
Cash flows from financing activities:
Net decrease in demand deposits, money market
and savings accounts............................... (12,268) (31,812)
Net decrease in time certificates of deposits........ (7,480) (34,389)
Net decrease in securities sold under agreements
to repurchase and federal funds purchased.......... (3,396) (8,190)
-------- --------
Net cash used in financing activities............ (23,144) (74,391)
-------- --------
Net decrease in cash and cash equivalents.............. (9,958) (8,777)
Cash and cash equivalents, January 1................... 30,272 46,710
-------- --------
Cash and cash equivalents, June 30..................... $ 20,314 $ 37,933
======== ========
Supplemental cash flow information:
Cash paid for interest $ 1,686 $ 2,334
Increase (decrease) in unrealized loss on
securities available-for-sale $ 108 $ (2,746)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements include the accounts
of National Mercantile Bancorp (the "Company") and its wholly owned subsidiary,
Mercantile National Bank (the "Bank") both sometimes referred to as "Company".
All significant intercompany transactions and balances have been eliminated.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice within the banking
industry.
The unaudited 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, 1995 ("1995 Form 10-K").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accompanying unaudited consolidated balance sheets and statements
of operations, changes in shareholders' equity and cash flows reflect, in the
opinion of management, all material adjustments necessary for a fair
presentation of the Company's financial position as of June 30, 1996 and
results of operations for the three and six-month periods ended June 30, 1996
and 1995 and cash flows for the six month periods ended June 30, 1996 and 1995.
The results of operations for the three and six-month periods ended June 30,
1996 are not necessarily indicative of the results of operations for the full
year ending December 31, 1996.
Certain items in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
8
<PAGE> 9
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and six-month periods ended June 30, 1996 and
1995 was 3,078,146.
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 of common
shares during the period or the price at the balance sheet date.
NOTE 3 - LOANS AND INTEREST INCOME
At June 30, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $6.8 million, for which the related
allowance for loan losses was $538,000. The average recorded investment in,
and the amount of interest income recognized on those impaired loans during the
three months ended June 30, 1996 were $7.4 million and $175,000, respectively,
and $8.4 million and $410,000, respectively, for the six months ended June 30,
1996. Of the investment in loans that are considered to be impaired, $4.9
million or 72% was represented by a loan which was collateralized by
residential real estate appraised at $10.0 million.
9
<PAGE> 10
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Federal Reserve Board ("FRB") and the Office of the Comptroller of
the Currency (the "OCC") have issued guidelines (the "guidelines") regarding
risk-based capital requirements. The guidelines provide detailed definitions
of regulatory capital and assign different weights to various assets and credit
equivalent amounts of off-balance sheet financial instruments, depending upon
the perceived degree of credit risk to which they expose such entities. Each
banking organization is required to maintain a specified minimum ratio of
capital to the total of such risk-adjusted assets and off-balance sheet
financial instruments.
The risk-based capital ratios of the Company and the Bank are
calculated under the guidelines by dividing their respective qualifying total
capital by their respective total risk-weighted assets. The Company's
qualifying total capital and total risk-weighted assets are determined on a
fully consolidated basis. Total qualifying capital is comprised of the sum of
core capital elements ("Tier 1 capital") and supplementary capital elements
("Tier 2 capital"). At June 30, 1996 and December 31, 1995, 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 2 in the Notes
to Consolidated Financial Statements in the Company's 1995 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
The capital leverage ratio standards require a minimum ratio of Tier 1
capital to adjusted total assets ("capital leverage ratio") of 3%. The
leverage ratio is only a minimum. Institutions experiencing or anticipating
significant growth or those with other than minimum risk profiles will be
expected to maintain capital well above the minimum levels.
On December 14, 1995, the Bank entered into a formal agreement with
the OCC (the "Formal Agreement"), pursuant to which the Bank is required to
maintain (i) a capital leverage ratio equal to at least 6.5% and (ii) a Tier 1
risk-based capital ratio equal to at least 10.0%. As set forth below, the
Bank's capital leverage ratio at June 30, 1996 was 4.67%, and the Tier 1
risk-based capital ratio was 7.04%. As of June 30, 1996, both of these ratios
were not in compliance with the Formal Agreement. The Company entered into a
Memorandum of Understanding with the Federal Reserve Bank of San Francisco on
October 26, 1995, which includes requiring the submission of a plan to increase
the Bank's capital. The Bank's capital plan was submitted to the OCC on
February 8, 1996. 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."
11
<PAGE> 12
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4 - Shareholders' Equity and Regulatory Capital (continued)
Information about the regulatory capital of the Company and the Bank at June
30, 1996 and December 31, 1995 is set forth below.
<TABLE>
<CAPTION>
June 30, 1996
(Unaudited) December 31, 1995
------------------------------------- -------------------------------------
Company Bank Company Bank
----------------- ------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- -------- --------- -------- --------- -------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Risk-based capital (1) (3):
Tier 1 capital $5,332 7.05% $5,322 7.04% $6,166 6.96% $6,157 6.95%
Tier 1 capital minimum
requirement 3,026 4.00% 7,564 10.00% 3,542 4.00% 8,856 10.00%
------- ------ -------- ------- ------- ------- -------- ------
Excess (Deficiency) $2,306 3.05% ($2,242) (2.96%) $2,624 2.96% ($2,699) (3.05%)
======= ====== ======== ======= ======= ======= ======== ======
Total capital $6,304 8.33% $6,293 8.32% $7,306 8.25% $7,297 8.24%
Total capital minimum
requirement 6,051 8.00% 6,051 8.00% 7,085 8.00% 7,085 8.00%
------- ------ -------- ------- ------- ------- -------- ------
Excess $253 0.33% $242 0.32% $221 0.25% $212 0.24%
======= ====== ======== ======= ======= ======= ======== ======
Total risk-weighted assets $75,641 $75,641 $88,558 $88,558
Capital Leverage Ratio (1) (2) (3):
Tier 1 capital $5,332 4.68% $5,322 4.67% $6,166 4.68% $6,157 4.67%
Tier 1 capital minimum
requirement 4,558 4.00% 7,407 6.50% 5,271 4.00% 8,565 6.50%
------- ------ -------- ------- ------- ------- -------- ------
Excess (Deficiency) $774 0.68% ($2,085) (1.83%) $895 0.68% ($2,408) (1.83%)
======= ====== ======== ======= ======= ======= ======== ======
Average total assets, as
adjusted, during three-month
periods ended June 30, 1996
and December 31, 1995 $113,947 $113,947 $131,764 $131,764
</TABLE>
(1) The Bank's minimum Tier 1 risk-based capital and Tier 1 capital leverage
requirements are based on the provisions of the Formal Agreement, which
became effective on December 14, 1995.
(2) The regulatory capital leverage ratio represents the ratio of Tier 1
capital at June 30, 1996 and December 31, 1995 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 UNAUDITED 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 deferred
benefit was recorded for these losses since all available income tax benefits
were recognized in prior years. In the second quarter of 1996 the Company
realized a tax benefit for a federal income tax refund received of
approximately $579,000, related to a carryback of a portion of the Company's
net operating losses, previously unrecognized. Future losses will not result
in additional tax benefits until the Company generates sufficient taxable
income to utilize the present net operating loss carryforwards.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is maintained at a level
considered by management to be adequate to absorb estimated losses in the
existing portfolio. The allowance for loan losses is increased by the
provision for loan losses and decreased by the amount of loan charge-offs, net
of recoveries. While management believes the level of the allowance as of June
30, 1996 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 six month periods ended June 30, 1996 and 1995.
The discussion should be read in conjunction with the Company's unaudited
consolidated financial statements and accompanying notes to the unaudited
consolidated financial statements (see "Item 1. Financial Statements").
Except for the historical information contained herein, the matters
addressed in this Item 2 constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
12E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties, including those
discussed in this Report on Form 10-Q that could cause actual results to differ
materially from those anticipated by the Company's management. The Private
Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe
harbor" provisions for forward-looking statements. All forward-looking
statements made in this Quarterly Report on Form 10-Q are made pursuant to the
Act.
FINANCIAL CONDITION
The Company's consolidated assets continued to decrease during the
first and second quarters of 1996. At June 30, 1996, the Company's
consolidated assets decreased by $23.1 million or 17.5% to $108.9 million from
$132 million at December 31, 1995. This decrease was due primarily to a $10.0
million decrease in cash and cash equivalents, $1.2 million decrease in
securities available for sale, and a $12.0 million decrease in net loans. The
decrease in consolidated assets from March 31, 1996 was $13.8 million, or
11.2%, consisting mainly of a $7.7 million decrease in cash and cash
equivalents, and a $5.7 million decrease in net loans. Customer deposits
decreased by $19.7 million, or 16.4% to $100.5 million at June 30, 1996, from
$120.2 million at December 31, 1995, and $13.7 million, or 12.0% from $114.2
million at March 31, 1996. Securities sold under agreements to repurchase
decreased by $3.4 million to $1.1 million at June 30, 1996 and March 31, 1996,
from $4.5 million at December 31, 1995.
The decrease in the liabilities, accompanied by a decrease in assets
is consistent with the Company's planned restructuring to improve the Company's
capital ratios.
14
<PAGE> 15
OPERATING RESULTS
OVERVIEW
As set forth in the accompanying consolidated statements of
operations, the Company recorded a net loss for the three and six month periods
ended June 30, 1996 of $697,000 or $(.23) per share, and $833,000 or $(.27) per
share, respectively, as compared to a net loss for the three and six month
periods ended June 30, 1995 of $1.8 million or $(.57) per share, and $3.5
million or $(1.12) per share, respectively.
During the three months ended June 30, 1996, the Company recognized a
liability in connection with pending litigation, and realized a tax benefit for
federal income tax refunds received related to a previously unrecognized net
operating loss carryback. The litigation liability is a result of an agreement
in principle related to counterclaims filed against the Bank by Lloyd's
Underwriters and Company Underwriters (discussed in the 1995 Form 10-K) (See
"Legal Proceedings"). The total amount of the settlement of $1.0 million,
reflected in consolidated statements of operations, is conditional on the
recapitalization of the Bank. Since it is management's intention to raise
additional capital in response to, among other things, regulatory agreements
(See "Capital Resources"), the full amount of the agreed upon settlement was
reflected in the accompanying unaudited consolidated financial statements. The
Company and its counsel are currently negotiating formal settlement
documentation and final resolution of this litigation is dependent upon
complete execution of formal settlement documents. The federal income tax
refund of $579,000 represents the realization of previously unrecognized income
tax benefits for the carryback of net operating losses (See "Note 5 Income
Taxes" to Unaudited Consolidated Financial Statements and "Income Taxes"). The
Company incurred expenses for professional services of $145,000 directly
related to efforts to generate this tax refund.
Declining loan balances and sales of securities during 1995 resulted
in decreased total interest income in 1996. Total interest income for the
three and six month periods ended June 30, 1996 was $2.2 million and $4.6
million, respectively, compared with total interest income for the
corresponding periods of 1995 of $3.1 million and $6.5 million, respectively.
Total interest expense for the three and six month periods ended June 30, 1996
was $781,000 and $1.7 million, respectively, compared with total interest
expense for the corresponding periods of 1995 of $988,000 and $2.2 million,
respectively. While the decrease in interest earning loans and securities
caused a $1.9 million decrease in interest income for the six months in 1996
compared with 1995, decreases in deposits and securities sold caused a
reduction of $505,000 in interest expense, as a portion of the decrease in
deposits was attributable to non-interest bearing demand deposits. Net
interest income for the three and six month periods ended June 30, 1996 was
$1.4 million and $2.9 million, respectively, compared with net interest income
for the corresponding periods of 1995 of $2.1 million and $4.3 million,
respectively.
15
<PAGE> 16
The reduction, compared with the corresponding periods of 1995, in
loans, securities and customer deposits, which caused a decrease in net
interest income for the three and six month periods ended June 30, 1996, is
consistent with the Company's planned restructuring and contributed to more
positive operating results. There was no provision for loan losses required
for the six month period in 1996, as compared with a provision of $527,000 for
the corresponding period in 1995. The loss on sale of securities for the six
month period in 1996 was $1,000 compared with $2.5 million during the
corresponding period in 1995. Other operating income, primarily service fees
decreased to $116,000 and $284,000 respectively, for the three and six month
periods ended June 30, 1996 when compared with $421,000 and $790,000,
respectively, for the corresponding periods in 1995. Other operating expenses,
excluding the $1.0 million litigation expense discussed above, decreased to
$1.8 million and $3.6 million, respectively, for the three and six months in
1996, when compared with $3.1 million and $6.1 million, respectively, for the
corresponding periods in 1995, amounting to a 41.4% decrease in expenses for
the six month period. This $2.5 million decrease for the six-month period
ended June 30, 1996 was due primarily to management's efforts to continually
reduce operating expenses, most visibly in compensation expense which decreased
$699,000 or 35.9% and occupancy expense which decreased $504,000 or 57% and
other professional services expense which decreased $437,000 or 47.8% during
the first six months of 1996, compared with the same period in the prior year.
Although no additional provision was made for loan losses for the six
month period ended June 30, 1996, due to reduced loan balances and lower levels
of nonperforming assets, the Bank's allowance for loan losses as a percentage
of nonperforming assets increased to 46.8% at June 30, 1996, from 40.9% at June
30, 1995, and decreased from 58.2% at December 31, 1996.
Total assets of the Company at June 30, 1996 have continued to
decrease. As part of the Company's capital plan for the Bank and the Company's
restructuring of its 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. The Bank's restructuring process is near completion and the
Bank is working towards its goal of returning to profitability.
16
<PAGE> 17
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DEPRESSED REAL ESTATE VALUES
The southern California real estate market is currently showing signs
of improving from experiencing a very serious recession since 1990. Since the
peak in 1990, the average home price has fallen 19.5% in the seven-county
southern California area with a drop of 24.3% in Los Angeles County. Although
home prices continued to fall during the first quarter of 1996 at an average
annual decline of 2% (compared to a 3% decline in 1995), home sales,
residential building permits and employment increased. The drop which home
prices experienced in 1996 has been the smallest in over five years. However,
mortgage defaults and foreclosures have begun to increase again.
While economic conditions nationally and elsewhere in California are
improving, southern California's economy remains weak. Commercial and
residential real estate market values in southern California while showing some
signs of improvement continue to remain depressed, adversely impacting the
financial condition and liquidity of many of the Company's borrowers.
Nonperforming assets at June 30, 1996 totaled $6.6 million including $581,000
of other real estate owned, compared with $7.5 million in non-performing assets
at March 31, 1996 and $6.5 million at December 31, 1995. Other real estate
owned was $581,000 at March 31, 1996 and December 31, 1995.
NONPERFORMING ASSETS
The level of nonperforming assets, as presented in Table 1, decreased
$1.0 million during the second quarter 1996 from the level at March 31, 1996.
The decrease was primarily the result of a decrease in non accrual loans. The
amount of nonperforming loans for which the Company does not hold substantial
collateral amounted to $423,000 at June 30, 1996, or 7.1% of all nonperforming
loans at that date, compared to $1.4 million, or 20.2% at March 31, 1996.
NONACCRUAL LOANS. Nonaccrual loans decreased $1.1 million during the
second quarter of 1996 to $805,000 as compared to $1.9 million at March 31,
1996, primarily as a result of the charge-off of two loans. (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 June 30, 1996,
TDRs totaled $5.1 million compared to $5.1 million at March 31, 1996, and $5.2
million at December 31, 1995. Included in these amounts is
17
<PAGE> 18
one loan with a balance of $4.9 million which is secured by a First Trust Deed
on property with a current appraisal value of $10.0 million.
LOANS CONTRACTUALLY PAST DUE NINETY OR MORE DAYS. Loans contractually
past due ninety or more days increased to $111,000 at June 30, 1996 from
$23,000 at March 31, 1996.
LOAN DELINQUENCIES. Loan delinquencies greater than 30 days past due
decreased to $1.4 million or 2.0% of loans receivable at June 30, 1996 from
$2.9 million or 3.8% of loans receivable at March 31, 1996.
LOAN CHARGE-OFFS. As reflected in Table 3, the Company charged-off
loans amounting to $1.1 million, primarily as a result of the charge-off of two
non-accrual loans discussed above, during the three month period ended June 30,
1996, as compared to $54,000 during the previous quarter . Recoveries of loans
previously charged-off totaled $297,000 for the three month period ended June
30, 1996 as compared to $86,000 during the first quarter of 1996.
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.
18
<PAGE> 19
Table 1
Nonperforming Assets
(dollar amounts in thousands)
December 31,
<TABLE>
<CAPTION>
December 31,
June 30, March 31, --------------------
1996 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Nonaccrual loans $ 805 $ 1,868 $ 573 $ 3,426
Troubled debt restructurings 5,054 5,059 5,167 5,582
Loans contractually past due ninety or more days with
respect to either principal or interest and
continuing to accrue interest 111 23 221 1,507
-------- -------- -------- --------
Nonperforming loans 5,970 6,950 5,961 10,515
Other real estate owned 581 581 581 1,529
-------- -------- -------- --------
Total nonperforming assets $ 6,551 $ 7,531 $ 6,542 $12,044
======== ======== ======== ========
Allowance for loan losses as a percent of
nonaccrual loans 380.6% 205.4% 664.0% 89.4%
======== ======== ======== ========
Allowance for loan losses as a percent of
nonperforming loans 51.3% 55.2% 63.8% 29.1%
======== ======== ======== ========
Total nonperforming assets as a percent of
total loans outstanding 9.5% 9.9% 8.0% 10.4%
======== ======== ======== ========
Total nonperforming assets as a percent of
total shareholders' equity 129.2% 129.7% 108.8% 116.8%
======== ======== ======== ========
</TABLE>
<PAGE> 20
Table 2
Loan Portfolio Composition and Allocation of the
Allowance for Credit Losses
<TABLE>
<CAPTION>
(dollar amounts in thousands)
December 31,
June 30, March 31, -------------------------------
1996 1996 1995 1994
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Portfolio Composition:
Real estate construction and land development $ 724 9% $ 1,092 1% $ 1,093 1% $ 948 1%
Commercial loans:
Secured by one-to-four family residential properties 9,925 13% 10,986 15% 11,012 14% 18,398 16%
Secured by multifamily residential properties 2,569 3% 2,226 3% 2,538 3% 2,368 2%
Secured by commercial real properties 31,487 19% 33,711 44% 33,556 41% 32,061 28%
Other - secured and unsecured 15,982 47% 17,734 23% 23,327 28% 43,385 37%
Home equity lines of credit 4,561 1% 5,589 7% 5,857 7% 2,867 1%
Consumer installment and unsecured loans to individuals 4,325 8% 4,702 7% 4,860 6% 15,691 15%
-------- ----- -------- ------ -------- ---- -------- -----
$ 69,573 100% $ 76,040 100% $ 82,243 100% $115,718 100%
Deferred net loan origination fees, purchased
loan discount and gains on termination of
interest rate hedging contracts (295) (250) (231) (434)
-------- -------- -------- --------
Gross loans outstanding $ 69,278 $ 75,790 $ 82,012 $115,284
======= ======== ======== ========
Allocation of the Allowance for Loan Losses:
Real estate construction and land development $ 147 $ 20 11 $ 17
Commercial loans:
Secured by one-to-four family residential properties 399 347 205 77
Secured by multifamily residential properties 49 53 25 51
Secured by commercial real properties 496 870 454 674
Other - secured and unsecured 1,670 1,899 2,521 1,645
Home equity lines of credit 24 131 64 18
Consumer installment and unsecured loans to individuals 278 513 523 578
-------- -------- -------- --------
Allowance allocable to gross loans outstanding 3,063 3,833 3,803 3,060
Commitments to extend credit under standby and
commercial letters of credit 1 4 2 3
-------- -------- -------- --------
Total allowance for credit losses $ 3,064 $ 3,837 $ 3,805 $ 3,063
======= ======== ======== ========
Allowance for loan losses allocable to gross loans
outstanding as a percent of gross loans outstanding 4.42% 5.06% 4.64% 2.66%
======= ======== ======== ========
</TABLE>
<PAGE> 21
Table 3
Analysis of Changes in the Allowance for Loan Losses
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three-month periods ended
--------------------------------------
June 30, March 31, December 31,
1996 1996 1995
-------- --------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 3,837 $ 3,805 $ 3,459
Loans charged off:
Real estate construction and land development -- -- --
Commercial loans:
Secured by one-to-four family residential properties -- -- --
Secured by multifamily residential properties -- -- --
Secured by commercial real properties -- -- --
Other - secured and unsecured 1,065 54 72
Home equity lines of credit -- -- --
Consumer installment and unsecured loans
to individuals 5 -- --
------- ------- -------
Total loan charge-offs 1,070 54 72
Recoveries of loans previously charged off:
Real estate construction and land development -- -- 140
Commercial loans:
Secured by one-to-four family residential properties 1 1 10
Secured by multifamily residential properties -- -- --
Secured by commercial real properties -- -- --
Other - secured and unsecured 273 75 153
Home equity lines of credit -- -- --
Consumer installment and unsecured loans
to individuals 23 10 55
------- ------- -------
Total recoveries of loans previously charged off 297 86 358
------- ------- -------
Net loan charge-offs (recoveries) 773 (32) (286)
Provision for loan losses -- -- 60
------- ------- -------
Balance at end of period $ 3,064 $ 3,837 $ 3,805
======= ======= =======
</TABLE>
<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. During the
six months ended June 30, 1996 the Company's asset base continued to decrease,
and as a result, interest earning assets and interest bearing liabilities
continued to decrease. Interest earning assets at June 30, 1996 decreased to
$103.9 million, compared with $115.8 million at March 31, 1996, and $123.1
million at December 31, 1995. Interest earning assets as a percentage of total
assets was 95.4% at June 30, 1996, compared with 94.3% at March 31, 1996, and
93.3% at December 31, 1995. Interest bearing liabilities at June 30, 1996
decreased to $65.0 million, compared with $74.3 million at March 31, 1996, and
$80.2 million at December 31, 1995. Interest bearing liabilities as a
percentage of total assets was 59.7% at June 30, 1996, compared with 60.5% at
March 31, 1996, and 60.7% at December 31, 1995.
Total loans receivable at June 30, 1996 decreased to $69.3 million,
compared with $75.8 million at March 31, 1996, and $82.0 million at December
31, 1995. Loans receivable as a percentage of total assets was 63.6% at June
30, 1996, compared with 61.8% at March 31, 1996, and 62.1% at December 31,
1995. Total deposits at June 30, 1996 decreased to $100.5 million, compared
with $114.2 million at March 31, 1996, and $120.2 million at December 31, 1995,
while interest bearing deposits at June 30, 1996 decreased to $63.9 million,
compared with $73.2 million at March 31, 1996, and $75.7 million at December
31, 1995. Total deposits as a percentage of total assets was 92.3% at June 30,
1996, compared with 93.1% at March 31, 1996, and 91.1% at December 31, 1995.
Interest bearing deposits as a percentage of total deposits was 63.6% at June
30, 1996, compared with 64.1% at March 31, 1996, and 62.9% at December 31,
1995, while interest bearing deposits as a percentage of loans receivable was
92.2% at June 30, 1996, compared with 96.6% at March 31, 1996, and 92.3% at
December 31, 1995.
22
<PAGE> 23
EFFECTS OF NONPERFORMING LOANS ON NET INTEREST INCOME. Foregone
interest income attributable to nonperforming loans amounted to $36,000 for the
three month period ended June 30, 1996, compared with $45,000 for the
corresponding period in 1995. (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 $95,000 and $130,000 for the three month periods ended June
30, 1996 and 1995, respectively, and by $177,000 and $248,000 for the six month
periods ended June 30, 1996 and 1995, 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.
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.
23
<PAGE> 24
The weighted average yield on loans receivable was 9.67% and 9.48% for
the three and six month periods ended June 30, 1996, compared with 9.90% and
9.32% for the corresponding periods in 1995. Weighted average yield on total
earning assets was 8.23% and 8.11% for the three and six month periods ended
June 30, 1996, compared with 8.65% and 8.18% for the corresponding periods in
1995. Weighted average rate on all deposits was 4.58% and 4.61% for the three
and six month periods ended June 30, 1996, compared with 4.62% and 4.89% for
the corresponding periods in 1995.
INVESTMENT SECURITIES
Investment securities decreased to $18.9 million at June 30, 1996,
from $19.5 million at March 31, 1996, and $20.1 million at December 31, 1995.
The decrease from December 31, 1995 was primarily due to principal payments
received and to a lesser extent the sale of a security valued at $114,000
generating a loss of $1,000. Investment securities sold in 1995 valued at
$42.8 million resulted in realized losses during the first and second quarters
of $1.2 million. Net unrealized losses on securities available for sale at
June 30, 1996 increased to $262,000 from $222,000 at March 31, 1996, and
$154,000 at December 31, 1995. Management believes that the decline in value
is temporary in nature.
24
<PAGE> 25
OTHER OPERATING INCOME
As set forth in the accompanying unaudited consolidated statements of
operations and discussed in the 1995 Form 10-K, the Company's principal sources
of recurring other operating income continue to be letters of credit, foreign
exchange services, investment services, and deposit-related and other customer
services. Fee income decreased $305,000 or 72.4% in the second quarter of
1996, from the second quarter of 1995, and $505,000 or 63.9% in the first half
of 1996, from the first half of 1995 resulting primarily from reductions in
investment, deposit and other related customer services. The international
services department was closed in December, 1995, while retaining the letter of
credit and foreign exchange functions. The Bank seeks to provide a wide range
of financial services to a limited number of niche markets, primarily with
concerns related to the entertainment, technology and escrow industries, along
with business and private banking and Small Business Administration (SBA)
lending. Management anticipates that fee income from services to these niche
markets and the origination and sale of SBA loans will continue to represent
important sources of other operating income.
OTHER OPERATING EXPENSES
As indicated in the accompanying unaudited consolidated statements of
operations, the Company reduced total operating expenses by $259,000, or 8.4%,
during the second quarter of 1996 from the second quarter of 1995 and $1.5
million or 25.1% in the first half of 1996 from the first half of 1995.
However, included as part of total other operating expense in 1996 is a
litigation settlement of $1.0 million resulting from an agreement in principal
related to counterclaims filed by Lloyd's Underwriters and Company Underwriters
(See "Legal Proceedings"). Other operating expenses excluding the $1.0 million
legal settlement, decreased to $1.8 million and $3.6 million, respectively, for
the three and six months in 1996, representing a 40.6% and 41.4% decrease
respectively when compared to the same period in 1995. Management's continued
efforts to focus on reducing operating expenses has, in part, created the
decreases in 1996. The reduction for the three and six month periods, is
mainly attributable to the reduction in salaries and related expenses of
$398,000 and $699,000, respectively, the reduction in occupancy expenses of
$261,00 and $504,000, respectively, and the reduction in other professional
services of $151,000 and $437,000, respectively. Included as part of the
expense for other professional services is $145,000 directly related to efforts
associated with the federal income tax refund. (See "Note 5 Income Taxes" to
unaudited consolidated financial statements and "Income Taxes").
In 1995, the Company negotiated with its landlord a restructuring of
its lease for the Bank's premises. The restructuring of the Bank's leases
represents an annual savings of $852,000 over the next five years. In
addition, staff reductions of 26% during 1995 represents an approximate annual
savings of $800,000.
25
<PAGE> 26
Operations for the remainder of 1996 and beyond will benefit from the
substantial reductions in operating costs achieved so far. The decrease in
rent expense as a result of the restructuring of the leases, the decrease in
compensation expense as a result of the reduction in staff, and the decrease in
other non-interest expense such as other professional services will contribute
directly to the improved performance in future years.
Management continues to explore measures to further reduce the level
of other operating costs.
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 1995 Form 10-K), the Company's 1996 first and second quarter
net losses did not give rise to additional income tax benefits. During the
second quarter the Company realized a tax benefit for a federal income tax
refund received of approximately $579,000, related to a carryback of a portion
of the Company's net operating losses previously unrecognized.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS
CAPITAL GUIDELINES
See Note 4 of the accompanying notes to unaudited 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 on December 14,
1995 (the "Formal 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) Tier 1 qualifying
capital equal to at least 10.0 percent of the Bank's total risk-weighted assets
("Tier 1 risk-based capital ratio"). As set forth in Note 4, the Bank's
capital leverage ratio and Tier 1 risk-based capital ratio at June 30, 1996
were 4.67% and 7.04%, respectively. At June 30, 1996, the Bank was not in
compliance with the capital requirements required by the Formal Agreement. The
Formal Agreement also requires the Bank to appoint a new chief financial
officer (which the Bank has complied with in August, 1996), to make certain
determinations as to the reasonableness of any salary, consulting fee, expense
reimbursement or other type of compensation, to review
26
<PAGE> 27
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 Company
submitted a capital plan for the Bank on February 8, 1996 to the OCC and a copy
to the FRB. The Company is updating its strategic plan, which was filed with
the "OCC" in March 1996. As a result of the Bank's failure to comply with all
of the requirements of the Formal Agreement, the Bank may be subject to further
regulatory enforcement action by the OCC.
The Company entered into a Memorandum of Understanding ("MOU") on October 26,
1995 with the Federal Reserve Bank of San Francisco ("FRBSF"). The 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 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. There 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, 1995 and the first half of 1996, the Bank could not
have declared dividends to the Company at June 30, 1996 without the prior
approval of the OCC. In addition, management expects the Formal 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 MOU prohibits 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 , 1995 and the first half of 1996, 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
27
<PAGE> 28
since December 31, 1993 (see "Credit Portfolio Composition and Credit Risk")
with the June 30, 1996 level of $6.5 million representing a decrease of $1.0
million from March 31, 1996. Increases in nonperforming assets may negatively
affect the Company's ability to generate adequate earnings to the extent that
such nonperforming assets result in increased provisions for credit losses and
charge-offs or adversely affect the level of income from loans in those future
periods (see "Net Interest Income and Interest Rate Risk"). For the immediate
future, the Company and the Bank intend to maintain their capital leverage
ratio and its Tier 1 risk-based capital ratio primarily through the declining
loan balances and earning asset levels. 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 raise additional capital
to ensure the Bank's growth and prosperity.
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 has only limited expenses at the present time and has no
ability to fund the Bank's cash needs. In order to meet the Bank's cash needs
the Bank must demonstrate the ability to produce a consistant level of adequate
earnings. The Bank's ability to establish adequate earnings is dependent
primarily on augmenting capital sufficient to support growth of its asset base.
The Company is evaluating available methods to raise additional capital.
28
<PAGE> 29
LIQUIDITY TRENDS
During 1995, the Bank has experienced a decline, continuing through
the first half of 1996, in total deposits. During the six months ended June
30, 1996, total deposits decreased with reductions in virtually all deposit
categories except savings deposits which increased.
Time certificates of deposit of $100,000 or more were $7.5 million at
June 30, 1996 compared with $8.5 million at March 31, 1996 and at December 31,
1995. Time certificates of deposit of $100,000 or more continued to play a
less significant role as a source of funding, representing the continuation of
a trend which began in 1991. In general, deposits of more than $100,000 are
considered to be more volatile than fully-insured deposits in denominations of
less than $100,000.
The Bank maintains a wholesale institutional funds acquisition
operation ("money desk"). This operation provided 26% of the Bank's average
total funding sources during the second quarter of 1996, as compared to 23%
during the second quarter of 1995, while noninterest- bearing demand deposits
provided 35% of average total funding sources during the second quarter of
1996, compared to 38% during the comparable 1995 period. 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
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, "Lloyds"). The Bank and BCMB
claim that Lloyd's owes them a further $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 or about November 1991,
Lloyd's paid approximately $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 lacked
authority to issue the insurance policies and endorsements on behalf
of all of the insurers under which payment was made and secondly, that
material misrepresentations were made to the Leading Underwriter as to
the likely budget for the film and that if the leading Underwriter had
known the true position he would not have accepted the film under the
relevant policies. Lloyd's position, therefore, is that such payment
should be returned to Lloyd's.
An agreement in principle was reached on June 7, 1996 with Lloyds for
the settlement of the Bank's claim against Lloyds and Lloyds'
counterclaims against the Bank. The parties and their counsel are
negotiating formal settlement documentation and final resolution of
this litigation is dependent upon complete execution of formal
settlement documents. The Bank has determined to enter into the
contemplated settlement not as a result of the Bank's conclusions as
to the merits of Lloyds' counterclaims against the Bank, but solely as
a matter of resolving those counterclaims in connection with the
Bank's effort to recapitalize.
The settlement is conditional on the recapitalization of the Bank and,
in light of that condition, "tolling" agreements have been entered
into with various third parties to preserve the Bank's ability to
institute, if necessary, further proceedings against those third
parties for potential losses that may arise from the continuation of
the Lloyds' counterclaims, should the settlement not be concluded.
The settlement contemplates that the Bank will pay $500,000 to Lloyds
upon completion of the Bank's recapitalization and a further $500,000
on the second anniversary of that payment. Settlement negotiations
also contemplate that BCMB will release the Bank from any claim that
BCMB might have against the Bank should BCMB suffer loss in connection
with Lloyds' counterclaims against BCMB in the continuing litigation.
Discussions with BCMB in this regard have not yet been concluded. No
assurances can be made that BCMB will agree to such release or in fact
that the overall settlement will be effectuated.
30
<PAGE> 31
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K.
4 Warrant Agreement dated April 30, 1996 between the Company and
U. S. Stock Transfer Corporation
10.1 Employment Agreement and Addendum dated June 21, 1996 between
Mercantile National Bank and Scott A. Montgomery
10.2 Letter Agreement dated June 5, 1996 between Mercantile
National Bank and John Kendall Whiting
10.3 Letter Agreement dated June 5, 1996 between Mercantile
National Bank and Carol A. Ward.
(b) Reports on Form 8-K.
None.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Mercantile Bancorp
---------------------------
(Registrant)
August 15, 1996 /s/ Howard P. Ladd
----------------------
Howard P. Ladd
Chief Executive Officer
August 15, 1996 /s/ Howard P. Ladd
----------------------
Howard P. Ladd
Acting Chief Financial Officer
32
<PAGE> 1
Exhibit 4
Warrant Agreement, dated as of April 30, 1996 (the "Issue Date")
between NATIONAL MERCANTILE BANCORP, a California corporation (the "Company"),
and U.S. STOCK TRANSFER CORPORATION (the "Transfer and Warrant Agent").
WHEREAS, the Company proposes to issue Common Stock Subscription
Warrants, as hereinafter described (the "Warrants"), to purchase up to an
aggregate of 169,800 fully paid and nonassessable shares of its Common Stock,
no par value ("Common Stock"), and the shares of Common Stock issuable upon
exercise of the Warrants being referred to herein as the "Warrant Shares"),
each Warrant entitling the holder thereof to purchase one share of Common Stock
at an Exercise Price (defined in Section 9 hereof) of $3.55 per Warrant,
subject to adjustment as hereinafter provided;
WHEREAS, the Warrants described herein shall be issued to the
Authorized Claimants, as such term is defined in the Stipulation of Settlement
dated December 21, 1994 (Civil Action No. CV-93-7359 (AAH)) made in connection
with the action filed in the United States District Court from the Eastern
District of Pennsylvania captioned National Mercantile Bancorp, et al v Howard
P. Ladd, et al., C.A. No. 92-CV-58103; and
WHEREAS, the Company desires the Transfer and Warrant Agent to act on
behalf of the Company, and the Transfer and Warrant Agent is willing so to act,
in connection with the issuance of the Warrants and the other matters provided
herein.
NOW, THEREFORE, in consideration of the foregoing and for the purpose
of defining the terms and provisions of the Warrants and the respective rights
and obligations thereunder of the Company and the registered holders of the
Warrants (the "Holders"), the Company and the Transfer and Warrant Agent hereby
agree as follows:
SECTION 1. Appointment of Transfer and Warrant Agent. The Company
hereby appoints the Transfer and Warrant Agent to act as agent for the Company
in accordance with the provisions hereinafter set forth in this Agreement, and
the Transfer and Warrant Agent hereby accepts such appointment. As used
herein, the term "Transfer and Warrant Agent" shall mean the Transfer Agent and
Warrant Agent and any successor appointed hereunder.
SECTION 2. Form and Countersignature of Warrants.
2.1 Form of Warrant. The text of the Warrant and the subscription
form (the "Subscription Form") shall be substantially as set forth in Exhibit A
attached hereto. The Warrants shall be executed on behalf of the Company by
one or more authorized officers. The signature of any such officers on the
Warrants may be made manually or by facsimile.
<PAGE> 2
2.2 Countersignature of Warrants. The Warrants shall be
countersigned manually or by facsimile by the Transfer and Warrant Agent and
shall not be valid for any purpose unless so countersigned. Warrants may be
countersigned by the Transfer and Warrant Agent and may be issued or delivered
by the Transfer and Warrant Agent, notwithstanding that the persons whose
manual or facsimile signatures appear thereon as proper officers of the Company
shall have ceased to be such officers at the time of such countersignature,
issuance or delivery. Warrants shall be dated as of the date of issuance or
countersignature thereof by the Transfer and Warrant Agent.
SECTION 3. Issuance and Registration of Warrants.
3.1 Initial Issuance of Warrants. The Transfer and Warrant Agent
shall issue the Warrants upon receipt of, and in accordance with, a statement
from an authorized representative of the Company as contemplated by Section
15.10 hereof specifying the identity of, and number of Warrants to be issued to,
each person or entity to be issued Warrants.
3.2 Registration. The Warrants shall be numbered and shall be
registered in a warrant register maintained by the Transfer and Warrant Agent
as they are issued. The Company and the Transfer and Warrant Agent may deem
and treat the registered holder of a Warrant Certificate as the absolute owner
thereof (notwithstanding any notation of ownership or other writing thereon
made by anyone), for the purpose of any exercise or conversion thereof and any
distribution to the holder thereof and for all other purposes and neither the
Company nor the Transfer and Warrant Agent shall be affected by any notice to
the contrary. The Company shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person.
SECTION 4. Transfer and Exchange of Warrants.
4.1 Transfer and Exchange of Warrants. The Warrants shall not be
transferable except in the event of death and then only by virtue of the laws
of descent and distribution or divorce pursuant to a domestic relations order
as defined in Section 414(p)(1)(B) of the U.S. Internal Revenue Code of 1986,
as amended ("Permitted Transfer"). Any attempted transfer of the Warrants
other than a Permitted Transfer shall be ineffective, null and void. Any such
Permitted Transfer shall be made only on the books of the Transfer and Warrant
Agent maintained at the principal office of the Transfer and Warrant Agent upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession or authority
to transfer. The Company and the Transfer and Warrant Agent shall be entitled
to request such information and documentation as they shall deem appropriate in
their sole discretion prior to permitting the transfer of Warrants as
contemplated hereby, and shall not be required to so transfer any Warrants if
there shall exist any legal or other impediment (including as relates to the
securities laws) in respect of such transfer. Warrants may be transferred only
in whole, so as to allow the Holder of each Warrant to purchase one full share
of Common
-2-
<PAGE> 3
Stock. Upon any such registration of a Permitted Transfer, the Transfer and
Warrant Agent shall countersign and deliver a new Warrant or Warrants to the
person entitled thereto.
4.2 Exchange of Warrant Certificates. Each Warrant certificate
may be exchanged upon surrender at the principal office of the Transfer and
Warrant Agent for another certificate or certificates entitling the Holder
thereof to purchase a like aggregate number of Warrant Shares as the
certificate or certificates surrendered then entitle such Holder to purchase.
Any Holder desiring to exchange a Warrant certificate or certificates shall
make such request in writing delivered to the Transfer and Warrant Agent, and
shall surrender, properly endorsed, the certificate or certificates to be so
exchanged. Thereupon, the Transfer and Warrant Agent shall countersign and
deliver to the Holder a new Warrant certificate or certificates, as the case
may be, as so requested, in the name of such Holder. No fractional Warrant
certificates shall be issued and no new Warrant certificate entitling the
Holder thereof to purchase fractional shares will be issued.
SECTION 5. Terms of Warrants, Exercise of Warrants.
5.1 Term of Warrants. Subject to the terms of this Agreement,
each Holder shall have the right, which may be exercised commencing at the
opening of business on June 2, 1996 (the "Initial Exercise Date") until 5:00
p.m., New York time, on June 2, 1999 (the "Expiration Date"), to purchase from
the Company the number of fully paid and nonassessable Warrant Shares which the
Holder may at the time be entitled to purchase on exercise of such Warrants.
5.2 Exercise of Warrants. A Warrant may be exercised upon
surrender to the Transfer and Warrant Agent at its principal office of the
certificate or certificates evidencing the Warrants to be exercised, together
with the Subscription Form duly completed and signed, which signature shall be
guaranteed by an eligible guarantor institution which is a member of a
signature guarantee program satisfactory to the Transfer and Warrant Agent (an
"Eligible Institution"), and upon payment to the Transfer and Warrant Agent for
the account of the Company of the Exercise Price (as defined in Section 9
hereof and subject to adjustment in accordance with the provisions of Section
10 hereof) for the number of Warrant Shares in respect of which such Warrants
are then exercised. Payment of the aggregate Exercise Price shall be made by
certified or official bank check.
Subject to Section 6 hereof, upon the surrender of Warrants and
payment of the Exercise Price as aforesaid, the Transfer and Warrant Agent
shall cause to be issued and delivered as soon as practicable to the Holder a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of such Warrants. No certificate for fractional Warrant
Shares, or cash in lieu thereof, will be issued. Such certificate or
certificates shall be deemed to have been issued and the holder shall be deemed
to have become a holder of record of such Warrant Shares as of the date of
actual issuance of the Warrant Shares to the Holder. If at the date of
surrender of such Warrants and payment of such Exercise Price the transfer
books for the Warrant Shares shall be closed, the Company
-3-
<PAGE> 4
shall be under no duty to deliver any certificate for such shares until such
time as such books shall be opened; provided, however, that such transfer books
shall not be closed at any one time for a period longer than twenty (20) days.
The rights of purchase represented by the Warrants shall be exercisable, at the
election of the Holders thereof, either in full or from time to time in part,
and in the event that a certificate evidencing Warrants is exercised in respect
of less than all of the Warrant Shares purchasable on such exercise at any time
prior to the date of expiration of the Warrants, a new certificate evidencing
the remaining Warrant or Warrants will be issued to the Holder thereof, and the
Transfer and Warrant Agent is hereby authorized to countersign and deliver the
required new Warrant certificate or certificates pursuant to the provisions of
this Section and Section 2 hereof.
5.3 Compliance with Government Regulations. The Company covenants
that if any Warrant Shares required to be reserved for purposes of exercise of
Warrants require, under any federal securities law or applicable government
rules or regulations of any national securities association or exchange,
registration with or approval of any governmental authority, or listing on any
such national securities association or exchange before such shares may be
issued upon exercise, the Company will in good faith prior to the issuance of
such shares endeavor to cause such shares to be duly registered, approved or
listed on the relevant national securities association or exchange, as the case
may be; provided, however, that the Company shall not be required to take such
actions at a time where the public trading price of the Common Stock (as
determined in good faith by the Company) is less than the Exercise Price; and
provided, further, that in no event shall such Warrant Shares be issued, and
the Company is hereby authorized to suspend the exercise of all Warrants, for
the period during which such registration, approval or listing is required but
not in effect. The Company covenants that it will use reasonable efforts to
obtain any required approvals or registration under state "blue sky" securities
laws for the issuance of the Warrant Shares; provided, however, that Warrants
may not be exercised by, or Warrant Shares issued to, any Holder in any state
where such exercise or issuance would be unlawful.
SECTION 6. Payment of Taxes. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of Warrant Shares
upon the exercise of Warrants.
SECTION 7. Mutilated or Missing Warrants. In case any of the
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company may in its discretion issue, and the Transfer and
Warrant Agent shall countersign and deliver in exchange and substitution for
and upon cancellation of the mutilated Warrant certificate, or in lieu of and
in substitution for the Warrant certificate lost, stolen or destroyed, a new
Warrant certificate of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence satisfactory to the Company and the
Transfer and Warrant Agent of such loss, theft or destruction of such Warrant
and an indemnity or bond, if requested, also satisfactory to them. An
applicant for such a substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Transfer and Warrant Agent may prescribe.
-4-
<PAGE> 5
SECTION 8. Reservation of Warrant Shares; Purchase and Cancellation
of Warrants.
8.1 Reservation of Warrant Shares. There have been reserved, and
the Company shall at all times keep reserved, out of its authorized Common
Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the outstanding Warrants.
The Transfer and Warrant agent for the Common Stock and every subsequent
transfer agent for any Warrant Shares will be authorized and directed at all
times to reserve such number of authorized shares of Common Stock as shall be
required for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer and Warrant Agent and with every subsequent transfer
agent for any Warrant Shares. The Company will supply the Transfer and Warrant
Agent and any such subsequent transfer agent with duly executed stock
certificates for such purposes.
8.2 Purchase of Warrants by the Company. The Company shall have
the right, except as limited by law, other agreements or herein, to purchase or
otherwise acquire Warrants at such times, in such manner and for such
consideration as it may deem appropriate.
8.3 Cancellation of Warrants. In the event the Company shall
purchase or otherwise acquire Warrants, the same shall thereupon be delivered
to the Transfer and Warrant Agent and be cancelled by it and retired. The
Transfer and Warrant Agent shall cancel any Warrant surrendered for exchange,
substitution, transfer or exercise in whole or in part and such cancelled
Warrant Certificate shall be disposed of by the Transfer and Warrant Agent in a
manner satisfactory to the Company.
SECTION 9. Exercise Price. The price per share at which a Warrant
Share shall be purchasable upon exercise of a Warrant (the "Exercise Price")
shall be $3.55, subject to adjustment as provided in Section 10 hereof.
SECTION 10. Adjustments. The Exercise Price and the number and kind
of securities subject to purchase upon the exercise of each Warrant shall be
subject to adjustment from time to time upon the happening of certain events,
as hereinafter set forth.
10.1 Adjustments. (a) In the event that, on or after the Issue Date
and prior to the Expiration Date, the Company shall (i) declare a dividend or
make a distribution on its shares of Common Stock payable in shares of Common
Stock, (ii) subdivide or reclassify the outstanding Common Stock into a greater
number of shares of Common Stock, or (iii) combine or reclassify the
outstanding Common Stock into a smaller number of shares of Common Stock, the
Exercise Price in effect and number of Warrant Shares which are to be issued
upon exercise of a Warrant at the time of the record date for such dividend or
of the effective date of such subdivision, combination or reclassification,
shall be proportionately adjusted so that the holder of any Warrant exercised
after such time shall be entitled to receive the aggregate number of Warrant
Shares which, if such Warrant had been exercised
-5-
<PAGE> 6
immediately prior to such date, he would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In the event, on or after the Issue Date and prior to
the Expiration Date, of any merger or consolidation of the Company with or into
any other person or company where all of the Common Stock is converted into
other stock or securities or property (a "Merger Transaction"), the Holder of
Warrants shall receive upon such exercise of the Warrants and payment of the
Exercise Price the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such merger or consolidation, by a
Holder of the number of Warrant Shares into which such Warrants so exercised
might have been exercised immediately prior to such merger or consolidation,
subject to adjustments which, for events subsequent to the effective date of
such merger or consolidation, shall be on terms as nearly equivalent as
practicable to the adjustments provided above. The above provisions shall
similarly apply to successive mergers and consolidations.
(c) The Company may make such reduction in the Exercise
Price, in addition to those required by clauses (a) or (b) of this Section
10.1, as it considers to be advisable in order that any event treated for
federal income tax purposes as a dividend of stock or stock rights shall not
be taxable to the recipients.
(d) Notwithstanding anything to the contrary contained in
this Section 10.1, no adjustment in the Exercise Price shall be required
unless such adjustments would require an increase or decrease of at least one
percent in such price; provided, however, that any adjustments which by reason
of this Section 10.1(d) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Section 10.1 shall be made to the nearest cent.
(e) In any case in which this Section 10 shall require
that any adjustment in the Exercise Price be made effective as of immediately
after a record date for a specified event, the Company may elect to defer until
the occurrence of the event the issuing to the Holder of any Warrant exercised
after that record date of the Warrant Shares and other capital stock of the
Company, if any, issuable upon the exercise over and above the Warrant Shares
and other capital stock of the Company, if any, issuable upon the exercise on
the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or other
appropriate instrument evidencing the Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(f) Notwithstanding anything to the contrary contained in
this Section 10.1, no adjustment to the Exercise Price or other terms of the
Warrants need be made if Holders are to participate in any transaction on a
basis, and with notice, that the
-6-
<PAGE> 7
Board of Directors of the Company determines to be fair and appropriate in
light of the basis and notice on which holders of Common Stock participate in
the transaction.
10.2 Notice of Adjustment. Whenever the Exercise Price is
adjusted, as herein provided, the Company shall cause the Transfer and Warrant
Agent promptly to give notice to the Holders as provided in Section 18 hereof
of such adjustment or adjustments and shall deliver to the Transfer and Warrant
Agent a certificate setting forth the Exercise Price after such adjustment,
setting forth a brief statement of the facts requiring such adjustment and
setting forth the computation by which such adjustment was made. Such
certificate shall be conclusive evidence of the correctness of such adjustment.
The Transfer and Warrant Agent shall be entitled to rely on such certificate
and shall be under no duty or responsibility with respect to any such
certificate, except to exhibit the same, from time to time, to any Holder
desiring an inspection thereof during reasonable business hours. The Transfer
and Warrant Agent shall not at any time be under any duty or responsibility to
any Holders to determine whether any facts exist which may require any
adjustment of the Exercise Price or other stock or property purchasable on the
exercise thereof, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed in making such
adjustment.
10.3 Statement on Warrants. Irrespective of any adjustments in the
Exercise Price or the number or kind of shares or other property purchasable
upon the exercise of the Warrants or other amendments to or corrections of this
Agreement, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
SECTION 11. No Fractional Interests. No Warrant entitling Holder to
purchase fractional interests in Warrant Shares and no fractional Warrant
Shares, or cash or other consideration in lieu thereof, will be issued.
SECTION 12. No Rights as Stockholders. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
Holders the right to vote or to receive dividends or to consent or to receive
notice as stockholders in respect of any meeting of stockholders for the
election of directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
SECTION 13. Disposition of Proceeds on Exercise of Warrants;
Inspection of Warrant Agreement. The Transfer and Warrant Agent shall account
promptly to the Company with respect to Warrants exercised and concurrently pay
to the Company all monies received by the Transfer and Warrant Agent for the
purchase of the Warrant Shares through the exercise of such Warrants.
The Transfer and Warrant Agent shall keep copies of this Agreement and
any notices given or received hereunder available for inspection by the Holders
during normal business hours at its principal office. The Company shall supply
the Transfer and Warrant
-7-
<PAGE> 8
Agent from time to time with such number of copies of this Agreement as the
Transfer and Warrant Agent may request.
SECTION 14. Merger or Consolidation or Change of Name of Transfer
and Warrant Agent. Any corporation into which the Transfer and Warrant Agent
may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Transfer and Warrant
Agent shall be a party, or any corporation succeeding to substantially all of
the business of the Transfer and Warrant Agent, shall be the successor to the
Transfer and Warrant Agent hereunder without the execution of filing of any
paper or any further act on the part of any of the parties hereto, provided
that such corporation would be eligible for appointment as a successor Transfer
and Warrant Agent under the provisions of Section 16 hereof. In case at the
time such successor to the Transfer and Warrant Agent shall succeed to the
agency created by this Agreement any of the Warrants shall have been
countersigned but not delivered, any such successor to the Transfer and Warrant
Agent may adopt the countersignature of the original Transfer and Warrant Agent
and deliver such Warrants so countersigned; and in case at that time any of the
Warrants shall not have been countersigned, any successor to the Transfer and
Warrant Agent may countersign such Warrants either in the name of the
predecessor Transfer and Warrant Agent or in the name of the successor Transfer
and Warrant Agent; and in any such cases such Warrants shall have the full
force provided in the Warrants and in this Agreement.
In case at any time the name of the Transfer and Warrant Agent shall
be changed and at such time any of the Warrants shall have been countersigned
but not delivered, the Transfer and Warrant Agent may adopt the
countersignatures under its prior name and deliver such Warrants so
countersigned; and in case at that time any of the Warrants shall not have been
countersigned, the Transfer and Warrant Agent may countersign such Warrants
either in its prior name or in its changed name; and in all such cases such
Warrants shall have the full force provided in the Warrants and in this
Agreement.
SECTION 15. Concerning the Transfer and Warrant Agent. The Transfer
and Warrant Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the Company
and the Holders, by their acceptance of Warrants, shall be bound.
15.1 Correctness of Statements. The statements contained herein
and in the Warrants shall be taken as statements of the Company and the
Transfer and Warrant Agent assumes no responsibility for the correctness of any
of the same except such as describe the Transfer and Warrant Agent or action
taken by it. The Transfer and Warrant Agent assumes no responsibility with
respect to the distribution of the Warrants except as otherwise provided
herein.
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<PAGE> 9
15.2 Breach of Covenants. The Transfer and Warrant Agent shall not
be responsible for any failure of the Company to comply with any of the
covenants of the Company contained in this Agreement or in the Warrant.
15.3 Reliance on Counsel. The Transfer and Warrant Agent may
consult at any time with legal counsel satisfactory to it (who may be counsel
for the Company) and the Transfer and Warrant Agent shall incur no liability or
responsibility to the Company or to any Holder in respect of any action taken,
suffered or omitted by it hereunder in good faith and in accordance with the
opinion or the advice of such counsel.
15.4 Proof of Actions Taken. Whenever in the performance of its
duties under this Agreement the Transfer and Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed conclusively to be proved and established by a certificate signed
by an officer of the Company and delivered to the Transfer and Warrant Agent;
and such certificate shall be full authorization to the Transfer and Warrant
Agent for any action taken or suffered in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
15.5 Compensation and Indemnification. The Company agrees to pay
the Transfer and Warrant Agent reasonable compensation for all services
rendered by the Transfer and Warrant Agent in the performance of its duties
under this Agreement, to reimburse the Transfer and Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature reasonably incurred by the Transfer and Warrant Agent in the performance
of its duties under this Agreement, and to indemnify the Transfer and Warrant
Agent and save it harmless against any and all liabilities, including
judgments, costs and reasonable counsel fees, for anything done or omitted by
the Transfer and Warrant Agent in the performance of its duties under this
Agreement except as a result of the Transfer and Warrant Agent's gross
negligence or bad faith. In connection with such indemnification, the Company
shall be entitled to conduct any litigation and shall only be required to pay
the reasonable costs and fees of one counsel selected by the Company. The
Transfer and Warrant Agent will cooperate in the defense of any such action
and will not settle such action without the consent of the Company.
15.6 Other Transactions in Securities of Company. The Transfer and
Warrant Agent and any stockholder, director, officer or employee of the
Transfer and Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested or contract with or lend
money to the Company or otherwise act as fully and freely as though the
Transfer and Warrant Agent was not Transfer and Warrant Agent under this
Agreement. Nothing herein shall preclude the Transfer and Warrant Agent from
acting in any other capacity for the Company or for any legal entity including,
without limitation, acting as a lender to the Company or an affiliate thereof.
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15.7 Liability of Transfer and Warrant Agent. The Transfer and
Warrant Agent shall act hereunder solely as the agent of the Company and its
duties shall be determined solely by the provisions hereof. The Transfer and
Warrant Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own gross negligence or
bad faith. Anything in this Agreement to the contrary notwithstanding, in no
event shall the Transfer and Warrant Agent be liable for special, indirect or
consequential loss or damage whatsoever (including, but not limited to, lost
profits) even if the Transfer and Warrant Agent has been advised of the
likelihood of such loss or damage and regardless of the form of action.
15.8 Reliance on Documents. The Transfer and Warrant Agent will
not incur any liability or responsibility to the Company or to any Holder for
any action taken in reliance on any notice, resolution, waiver, consent, order,
certificate, or other paper, document or instrument reasonably believed by it
to be genuine and to have been signed, sent or presented by the proper party or
parties.
15.9 Validity of Agreement. The Transfer and Warrant Agent shall
not be under any responsibility in respect of the validity of this Agreement or
the execution and delivery hereof (except the due execution hereof by the
Transfer and Warrant Agent) or in respect of the validity and execution of any
Warrant (except its countersignature thereof); nor shall the Transfer and
Warrant Agent by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Warrant Shares (or other
stock) to be issued pursuant to this Agreement or any Warrant, or as to whether
any Warrant Shares (or other stock) will, when issued, be validly issued, fully
paid and nonassessable, or as to the Exercise Price or the number or amount of
Warrant Shares or other securities or other property issuable upon exercise of
any Warrant.
15.10 Instructions from Company. The Transfer and Warrant Agent is
hereby authorized and directed to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board, the
President, any Vice Chairman of the Board, or any Executive, Senior or other
Vice President of the Company or any other employee of the Company expressly
authorized in writing by any of such persons as having the authority to deliver
instructions hereunder, and to apply to such officers or employees for advice
or instructions in connection with its duties, and shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officers or employees.
SECTION 16. Change of Transfer and Warrant Agent. The Transfer and
Warrant Agent may resign and be discharged from its duties under this Agreement
by giving to the Company 30 days' notice in writing. The Transfer and Warrant
Agent may be removed by like notice to the Transfer and Warrant Agent from the
Company. If the Transfer and Warrant Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Transfer and Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after such removal
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<PAGE> 11
or after it has been notified in writing of such resignation or incapacity by
the resigning or incapacitated Transfer and Warrant Agent or by any Holder (who
shall with such notice submit his Warrant for inspection by the Company), then
any Holder may apply to any court of competent jurisdiction located in Los
Angeles, California for the appointment of a successor to the Transfer and
Warrant Agent. Pending appointment of a successor to the Transfer and Warrant
Agent, either by the Company or by such a court, the duties of the Transfer and
Warrant Agent shall be carried out by the Company. Any successor Transfer and
Warrant Agent, whether appointed by the Company or such a court, shall be a
bank or trust company or a transfer agent within the meaning of Section
3(a)(25) of the Securities Exchange Act of 1934, as amended, in good standing,
incorporated under the laws of the United States of America or any state
thereof and having at the time of its appointment as Transfer and Warrant Agent
a combined capital and surplus of at least $5,000,000. After appointment, the
successor Transfer and Warrant Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Transfer and Warrant Agent without further act or deed; but the former transfer
and warrant agent shall deliver and transfer to the successor warrant agent any
property at the time held by it hereunder, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. Failure to file
any notice provided for in this Section 16, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
warrant agent or the appointment of the successor warrant agent, as the case
may be. In the event of such resignation or removal, the successor warrant
agent shall mail, by first class mail, postage prepaid, to each Holder, written
notice of such removal or resignation and the name and address of such
successor warrant agent.
SECTION 17. Identity of Transfer Agent. Forthwith upon the
appointment of any subsequent transfer agent for the Common Stock, or any other
shares of the Company's capital stock issuable upon exercise of the Warrant,
the Company will file with the Transfer and Warrant Agent a statement setting
forth the name and address of such subsequent transfer agent.
SECTION 18. Notices. Any notice pursuant to this Agreement by the
Company or by any Holder to the Transfer and Warrant Agent, or by the Transfer
and Warrant Agent or by any Holder to the Company, shall be in writing and
shall be delivered in person, by overnight courier, or by facsimile
transmission (with hard copy to follow promptly by first class mail or
overnight courier), or mailed first class, postage prepaid (a) to the Company
at its offices at 1840 Century Park East, Los Angeles, California 90067, Fax:
(310) 201-0629, Attention: (1); or (b) to the Transfer and Warrant Agent at 1745
Gardena Avenue, Glendale, California 91204-2991, Fax (2), Attention: (3). Each
party hereto may from time to time change the address as facsimile numbers to
which notices to it are to be delivered or mailed hereunder by notice to the
other party.
Any notice required to be mailed pursuant to this Agreement by the
Company or the Transfer and Warrant Agent to the Holders shall be in writing
and shall be mailed first class, postage prepaid, or otherwise delivered, to
such Holders at their respective addresses
1 - President
2 - 818-502-0674 or 818-502-1737
3 - Operations - Jim Hunter
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<PAGE> 12
on the books of the Transfer and Warrant Agent. Any other notices which the
Company or the Transfer and Warrant Agent may wish to provide to the Holder may
be made in such manner (including by publication in a newspaper of national
circulation) as the Company or the Transfer and Warrant Agent, as the case may
be, shall elect. Any notice requested by any other person may be dispatched in
the discretion of the Transfer and Warrant Agent, but at no expense to the
Transfer and Warrant Agent or the Company.
SECTION 19. Supplements and Amendments. The Company and the Transfer
and Warrant Agent may from time to time supplement or amend this Agreement
without the approval of any Holder in order to cure any ambiguity or to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and the
Transfer and Warrant Agent may deem necessary or desirable, which shall not
materially adversely affect the interest of the Holders. The Company and the
Transfer and Warrant Agent may from time to time supplement or amend this
Agreement in any other respect with the written consent of the Holders of not
less than a majority of the Warrants then outstanding; provided, however, that
no change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or increase in the Exercise Price of any Warrant, or
acceleration of the Expiration Date of any Warrant, shall be made without the
written consent of the Holder of such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
SECTION 20. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Transfer and Warrant
Agent shall bind and inure to the benefit of their respective successors and
assigns hereunder.
SECTION 21. Applicable Law. This Agreement and each Warrant issued
hereunder shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts made and to be performed within
such State, without giving effect to principles of conflicts of laws. The
parties consent to the exclusive jurisdiction of the state and federal courts
located in Los Angeles, California in all cases arising out of this Agreement
or the subject matter thereof, and to the service of process of such courts
(and will not initiate or maintain an action in any other venue without the
consent of both parties hereto). Any action brought by any person (other than
the Company and the Transfer and Warrant Agent) arising under or relating to
this Agreement and the Warrants shall be brought only in the state and federal
courts located in Los Angeles, California.
SECTION 22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Transfer and Warrant Agent, and the Holders any legal or equitable right,
remedy or claim under this Agreement; this Agreement shall be for the sole and
exclusive benefit of the Company, the Transfer and Warrant Agent and the
Holders of the Warrants.
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<PAGE> 13
SECTION 23. Counterparts. This Agreement may be executed in
counterparts and by facsimile and each of such counterparts and facsimile
copies shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument.
SECTION 24. Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 25. Captions. The captions of the Sections and subsections
of this Agreement have been inserted for convenience only and shall have no
substantive effect.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, all as of the day and year first above written.
NATIONAL MERCANTILE BANCORP
By: /s/ HOWARD P. LADD
--------------------------------
Name: Howard P. Ladd
Title: Chairman, President & CEO
U.S. STOCK TRANSFER CORPORATION
By: /s/ CARTER G. MCINTYRE
--------------------------------
Name: Carter G. McIntyre
Title: Vice President
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<PAGE> 15
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 21st day of June, 1996 (the "Effective Date"), between MERCANTILE NATIONAL
BANK, a national banking association organized and existing under the laws of
the United States (the "Bank"), and SCOTT A. MONTGOMERY ("Montgomery").
WITNESSETH:
A. The Bank wishes to retain Montgomery's exclusive services as
its President and Chief Executive Officer subject to the terms and conditions
set forth in this Agreement.
B. Montgomery wishes to accept such employment and to enter into
this Agreement subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of mutual promises of the parties set
forth in this Agreement, the Bank and Montgomery hereby agree as follows:
1. Employment - The Bank hereby employs Montgomery, and
Montgomery accepts employment, as President and Chief Executive Officer of the
Bank, to perform such duties as may from time to time be appropriate, subject
at all times to the control and direction of the Board of Directors of the Bank
and the terms and conditions of this Agreement. It is understood and agreed
that Montgomery shall at all times report solely to the Board of Directors of
the Bank and that Montgomery's responsibilities shall at all times be
consistent with those which would normally be assigned to the chief executive
officer of a commercial bank in size and condition similar to the Bank.
1.1 Exclusive Employment - During the term of this
Agreement, Montgomery shall devote his time, attention and energies to the
business and affairs of the Bank and to the performance of his duties hereunder
and shall not, without the prior written consent of the Bank, participate in
any other business activity or render services for any other person, firm,
corporation or for-profit organization, or for any non-profit organization
where such service is or would be related to Montgomery's employment under this
Agreement, except that Montgomery may retain his position as member of the
Board of Directors of Tracy Federal Bank, F.S.B. until no later than April. 30,
1997, provided that such directorship gives rise to no conflict of interest
with the Bank or parent company of the Bank, National Mercantile Bancorp
("Bancorp"), and further provided that Montgomery's performance of the
responsibilities of that directorship does not impair, hinder or detract from
Montgomery's performance of his duties hereunder.
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<PAGE> 1
1.2 Performance of Duties for Bancorp - Montgomery agrees
to perform duties for Bancorp as may be delegated or assigned to him by Bancorp
and are not inconsistent with his duties as President and Chief Executive
Officer of the Bank. Montgomery shall be given the title of Executive Vice
President and Chief Administrative Officer of Bancorp, but Montgomery shall not
be deemed an employee of Bancorp, and shall receive no additional remuneration
for duties he performs pursuant to this paragraph.
1.3 Directorships of Bank and Bancorp - Montgomery shall
be elected a member of the respective Boards of Directors of the Bank and
Bancorp, but shall receive no director's fees or other additional remuneration
for his services as a member of said Boards of Directors.
1.4 Personal Investments - Montgomery may from time to
time engage in normal personal investments which do not conflict with or
detract from the performance of his duties hereunder.
1.5 Non-Competition During Employment Term - During the
term of his employment hereunder, Montgomery shall not, directly or indirectly,
either as an employee, employer, consultant, agent, principal, partner,
shareholder, corporate officer or director, or in any other individual or
representative capacity, engage or participate in any business or activity
within the Bank's primary service area that is in competition with any business
in which the Bank or Bancorp is then presently engaged, or in which the Bank or
Bancorp then contemplates becoming engaged, without first obtaining the written
consent of the Bank or Bancorp.
2. Term - Montgomery's employment under this Agreement commenced
on November 1, 1995, and shall expire on December 31, 1999, unless terminated
sooner as hereinafter provided (the "term" or "term of employment").
3. Compensation and Benefits - In consideration of Montgomery's
performance of his duties and responsibilities as set forth in this Agreement,
Montgomery shall receive the following compensation and benefits:
3.1 Base Salary - From November 1, 1995 until October 31,
1996, the Bank shall pay Montgomery a semimonthly salary at an annualized rate
of $190,000.00, less applicable withholding. From November 1, 1996 until
October 31, 1997, the Bank shall pay Montgomery a semimonthly salary at an
annualized rate of $210,000.00, less applicable withholding. From November 1,
1997 until October 31, 1998, the Bank shall pay Montgomery a semimonthly salary
at an annualized rate of $230,000.00, less applicable withholding. From
November 1, 1998 until December 31, 1999, the Bank shall pay Montgomery a
semi-monthly salary at an annualized rate of $250,000, less applicable
withholding.
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<PAGE> 2
3.2 Signing Bonus - Upon execution of this Agreement, the
Bank shall pay Montgomery a signing bonus of two months' salary calculated at
an annualized rate of $190,000.00, less applicable withholding.
3.3 Incentive Compensation - In the event the Bank
achieves a pretax net profit during any calendar (January 1 - December 31)
year during the term of Montgomery's employment, Montgomery shall receive an
incentive bonus in an amount equivalent to five percent (5%) of the Bank's
pretax net profit for that calendar year, less applicable withholding. Such
incentive bonus shall be paid, if earned, on or before April 1 of the year
following the year during which the applicable pretax net profit was earned.
Additionally, in the event the Bank achieves a pretax net profit and a return
ratio of at least one and one-half percent (1.5%) of pretax net profit to
assets during a calendar year, the Board of Directors shall award Montgomery an
additional incentive bonus in an amount equivalent to two percent (2%) of the
Bank's pretax net profit for that calendar year, less applicable withholding.
Such additional incentive bonus shall be paid, if earned, on or before April I
of the year following the year during which the applicable pretax net profit
was earned. Montgomery understands and agrees that nothing in this Agreement
is intended to create or imply any right on his part to receive, or duty on the
part of the Bank to pay, a bonus or incentive compensation for any calendar
year in which the Bank fails to achieve a pretax net profit; provided, however,
that in the event the Bank fails to achieve a pretax net profit or suffers a
pretax net loss during any calendar year during the term of Montgomery's
employment, the Bank's Board of Directors may, in its sole and absolute
discretion, award Montgomery a discretionary incentive bonus in an amount it
deems appropriate under the circumstances, taking into account such factors as
Montgomery's performance of his duties hereunder, the Bank's net profit for
that calendar year, and the economic climate within which the Bank is
operating. However, in no event shall such annual bonuses, whether incentive
or discretionary, exceed an amount which, when added to Montgomery's base
compensation for the calendar year for which the applicable pretax profit (or
loss) is calculated, bring Montgomery's total compensation for the calendar
year to an amount in excess of $350,000.00, except that for calendar year 1999
such total compensation shall not be an amount in excess of $400,000. Thus,
for example, in calendar year 1996 Montgomery will be paid a base salary of
$190,000.00, and therefore may be eligible for an incentive or discretionary
bonus of up to $160,000.00, provided the other terms and conditions of this
paragraph are satisfied.
3.4 Stock Options - Pursuant to a separate option
agreement, Bancorp shall grant to Montgomery non-qualified options to purchase
200,000 shares of Bancorp common stock (the "Non-Qualified Stock Options")
under the National Mercantile Bancorp 1990 Stock Option Plan (the " 1990 Plan")
on the date hereof. Such stock option agreement, which must be executed by
Montgomery and Bancorp, shall include, among others, the following terms and
conditions:
3.4.1 The exercise price for each option shall
equal $1.25 per share of stock.
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<PAGE> 3
3.4.2 Subject to the terms of paragraph 3.4.6,
below, the Non-Qualified Stock Options shall vest and become immediately
exercisable in full six (6) months after the date of grant.
3.4.3 The Non-Qualified Options shall expire ten
(10) years from the date of grant, provided, however, that if Montgomery ceases
to be employed by the Bank for any reason other than death or permanent
disability, the Non-Qualified Options shall expire three (3) months after the
date Montgomery ceases to be employed by the Bank (unless by its terms it
expires sooner), and if Montgomery ceases to be employed by the Bank by reason
of death or permanent disability, the Non-Qualified Options shall expire one
(1) year after the date of such death or disability unless by its terms it
expires sooner.
3.4.4 Rights in the Event of Recapitalization of
Bancorp. Bancorp and Montgomery acknowledge that Bancorp is contemplating
entering into an agreement with a third party or parties on or before December
31, 1999, with respect to a recapitalization of Bancorp whereby the
shareholders of Bancorp may be granted rights to acquire additional shares of
Bancorp's common stock, or the third party or parties may acquire ten percent
(10%) or more of the outstanding shares of Bancorp's common stock (the
"Recapitalization"). Subject to shareholder approval of certain amendments to
the 1990 Plan as described in Paragraph 3.4.4(h), in the event a
Recapitalization occurs on or before December 31, 1999, and in the event that,
as a consequence of the Recapitalization, the total number of shares of
Bancorp's common stock to which Montgomery would be entitled if he exercised
all of the Non-Qualified Options equals less than 6.5% of the outstanding
shares of common stock of Bancorp, Montgomery shall be granted additional
options to purchase the number of shares of Bancorp common stock equivalent to
the difference between the number of shares in respect of which the
Non-Qualified Options may be exercised, and the number of shares constituting
6.5% of the outstanding shares of common stock of Bancorp immediately after the
Recapitalization is consummated ("the Additional Options"), subject to the
following terms and conditions:
(a) If the Recapitalization results in
the issuance of convertible
preferred Bancorp stock, Bancorp
stock warrants, or some other
similar security which is
convertible into Bancorp common
stock (collectively "Convertible
Securities"), for the purposes of
calculating the number of Additional
Options to be granted Montgomery the
calculation of the total number of
outstanding shares of Bancorp common
stock shall include the number of
shares of common stock into which
the Convertible Securities are
convertible.
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<PAGE> 4
(b) The Additional Options shall be
granted on the later of (i) the
first business day immediately
following the consummation of the
Recapitalization, or (ii) the first
business day immediately following
shareholder approval of the
Amendment described in paragraph
3.4.4(h), below.
(c) Subject to the terms of paragraph
3.4.6, below, and the following
proviso, the Additional Options
shall vest and become exercisable
six (6) months after the date of
grant, provided, however, that if
the Recapitalization results in the
issuance of Convertible Securities,
the Additional Options shall only
vest and become exercisable in such
increments as reflect, pro rata, the
percentage of the total number of
shares of Bancorp's common stock
issuable upon conversion of the
Convertible Securities which have
actually been issued.
(d) The exercise price for each
Additional Option shall equal the
average of the bid and asked prices
of Bancorp common stock as quoted on
the NASDAQ Stock Market on the date
the Additional Options are granted.
If, for any reason, no such price is
available, the exercise price for
each Additional Option shall equal
the fair market value of a share of
Bancorp common stock on the date the
Additional Options are granted as
determined by the Stock Option
Committee of Bancorp's Board of
Directors in their sole discretion.
(e) The Additional Options shall be
deemed incentive options to the
maximum extent permitted by law and
the 1990 Plan.
(f) The Additional Options shall expire
ten (10) years from the date of
grant, provided, however, that if
Montgomery ceases to be employed by
the Bank for any reason other than
death or permanent disability, the
Additional Options shall be expire
three (3) months after the date
Montgomery ceases to be employed by
the Bank (unless by its terms it
expires sooner) and if Montgomery
ceases to be employed
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<PAGE> 5
by the Bank by reason of death or
permanent disability, the
Non-Qualified Options shall expire
one (1) year after the date of such
death or disability unless by its
terms it expires sooner.
(g) In the event that the
Recapitalization is not consummated
on or before December 31, 1999,
Montgomery shall not be entitled to
receive the Additional Options
provided for in this Paragraph
3.4.4. Further, in the event that
the Recapitalization referred to in
this Paragraph 3.4.4 is successfully
consummated before December 31,
1999, and subsequent or additional
recapitalizations occur during or
after the term of Montgomery's
employment, Montgomery shall not be
entitled to Additional Options with
respect to such subsequent or
additional recapitalizations.
(h) Montgomery acknowledges that at
present there are not sufficient
shares available under the National
Mercantile Bancorp 1990 or 1994
Stock Option Plans (collectively,
the "Plans") to grant Montgomery the
Additional Options (or the Option
and Tandem SAR referred to in
paragraph 3.5), and that shareholder
approval for an amendment to the
Plans providing for additional
shares is required. Bancorp agrees
to amend the 1990 Plan to authorize
500,000 additional shares (the
"Amendment") and to submit the
Amendment to the shareholders of
Bancorp for approval at the next
annual or special shareholders
meeting. Bancorp's Board of
Directors shall recommend and
solicit approval of the Amendment.
3.4.5 All stock options issued pursuant to
Paragraph 3.4 of this Agreement, whether Non-Qualified Options or Additional
Options, shall be subject to all terms and conditions, including the
anti-dilution provisions, contained in the 1990 Plan.
3.4.6 Notwithstanding the foregoing provisions, no
portion of the Non-Qualified or Additional Stock Options may be exercised by
Montgomery to the extent that the exercise of such Stock Options will cause an
ownership change to occur pursuant to Section 382 of the Internal Revenue Code.
Section 382 provides, among other things, that utilization of
6
<PAGE> 6
net operating losses will be restricted if there is a change in ownership of
the loss corporation. Changes in ownership are determined by reference to 5%
shareholders.
3.4.7 The Non-Qualified and Additional Stock
Options shall not be considered for the purposes of Paragraph 3.3 of this
Agreement when determining whether Montgomery's total compensation for any
calendar year exceeds the salary caps set forth in Paragraph 3.3.
3.5 Stock Appreciation Rights. Pursuant to a separate
stock rights agreement, and subject to shareholder approval of certain
amendments to the 1990 Plan as described in Paragraph 3.5.6, Bancorp shall
grant to Montgomery a non-qualified stock option ("Option") and tandem stock
appreciation right ("Tandem SAR") with respect to 75,000 shares of Bancorp
common stock (the "Option and Tandem SAR") under the 1990 Plan. Such stock
rights agreement, which must be executed by Montgomery and Bancorp, shall
include, among others, the following terms and conditions:
3.5.1 The Option and Tandem SAR shall be granted on
the first business day immediately following shareholder approval of the
Amendment described in paragraph 3.5.5 below.
3.5.2 Subject to the terms of Paragraph 3.5.8,
below, the Option and Tandem SAR with respect to 37,500 of said shares shall
vest and become exercisable on June 30, 1998, and shall expire on January 1,
2000, and the Option and Tandem SAR with respect to the remaining 37,500 of
said shares shall vest and become exercisable on December 31, 1999, and shall
expire on January 31, 2000.
3.5.3 Any portion of the Option and Tandem SAR
which is not vested at the time Montgomery ceases to be employed by the Bank
for any reason shall immediately expire and be forfeited. Any portion of the
Option and Tandem SAR which is vested but has not been exercised at the time
Montgomery ceases to be employed by the Bank for any reason shall expire thirty
(30) days after the date Montgomery ceased to be employed by the Bank (unless
by its terms it expires sooner).
3.5.4 The exercise price for each Option under the
Option and Tandem SAR shall equal the fair market value of a share of Bancorp
common stock on the date of execution of this Agreement. "Fair market value"
shall mean the average of the bid and asked prices of Bancorp common stock as
quoted on the NASDAQ stock market on the applicable date. If, for any reason,
no such price is available, "fair market value" shall mean the fair market
value of a share of Bancorp common stock as determined by the Stock Option
Committee of Bancorp's Board of Directors in their sole discretion.
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<PAGE> 7
3.5.5 In accordance with the terms of the 1990 Plan,
Montgomery may exercise the Option and Tandem SAR by either (i) exercising the
Option portion of the Option and Tandem SAR and paying the exercise price with
respect to the shares of Bancorp common stock underlying the exercised Option
and receiving such shares of Bancorp common stock or (ii) exercising the Tandem
SAR portion of the Option and Tandem SAR in which case Bancorp shall pay to
Montgomery an amount equal to the excess, if any, of the fair market value of a
share of the stock on the exercise date over the fair market value of the stock
as of the date of execution of this Agreement, multiplied by the number of
shares of stock for which the Option and Tandem SAR is exercised, which amount
may, in the sole discretion of the Stock Option Committee of the Board of
Directors of Bancorp, be paid to Montgomery in cash or in Bancorp common stock,
subject to all other terms and conditions of the 1990 Plan. In the event
Montgomery elects to exercise the Option with respect to any portion of the
Option and Tandem SAR, Montgomery shall be deemed to have forfeited the Tandem
SAR with respect to that portion of the Option and Tandem SAR. In the event
Montgomery elects to exercise the Tandem SAR with respect to any portion of the
Option and Tandem SAR, Montgomery shall be deemed to have forfeited the Option
with respect to that portion of Option and Tandem SAR.
3.5.6 Montgomery acknowledges that at present there
are not sufficient shares available under the Plans to grant Montgomery the
Option and Tandem SAR (or the Additional Options referred to in paragraph
3.4.4), and that shareholder approval for an Amendment to the Plans providing
for additional shares is required. Bancorp agrees to amend the 1990 Plan to
authorize 500,000 additional shares (the "Amendment") and to submit the
amendment to the shareholders of Bancorp for approval at the next annual or
special shareholders meeting to be effective retroactively to the date of
execution to this Agreement. Bancorp's Board of Directors shall recommend and
solicit approval of the Amendment.
3.5.7 The Option and Tandem SAR issued pursuant to
Paragraph 3.5 of this Agreement shall be subject to all terms and conditions,
including the anti-dilution provisions, contained in the 1990 Plan.
3.5.8 Notwithstanding the foregoing provisions, no
portion of the Option and Tandem SAR may be exercised by Montgomery to the
extent that the exercise of such Option and Tandem SAR will cause an ownership
change to occur pursuant to Section 382 of the Internal Revenue Code. Section
382 provides, among other things, that utilization of net operating losses will
be restricted if there is a change in ownership of the loss corporation.
Changes in ownership are determined by reference to 5% shareholders.
3.5.9 The Option and Tandem SAR, and amounts
received by Montgomery as a consequence of partial or total exercise of the
Option and Tandem SAR, shall not be considered for the purposes of Paragraph
3.3 of this Agreement when determining whether Montgomery's total compensation
for any calendar year exceeds the salary caps set forth in paragraph 3.3.
8
<PAGE> 8
3.6 Vacation - Montgomery shall be entitled to vacation
time at an annualized rate of twenty (20) days per year, during which time
compensation hereunder shall be paid in full. Montgomery shall take ten (10)
days of such vacation consecutively during each calendar year. However,
Montgomery shall not take more than ten (10) business days of vacation
consecutively without prior approval of the Chairman of the Bank's Board of
Directors. Montgomery shall make every effort to utilize his vacation time
during the calendar year in which it was earned. In the event that Montgomery
does not utilize all of his vacation time during the calendar year in which it
was earned, such vacation time shall carry over to the next calendar year;
provided, however, that in the event that Montgomery's vacation carryover from
prior years together with the current year's accrual reaches 30 days, no
further vacation shall accrue until Montgomery has taken a vacation and his
accrued vacation account has dropped below his maximum 30 day entitlement. No
vacation days will be earned for the period during which Montgomery has
accumulated 30 days of vacation. To meet the Bank's business needs, in January
1998 the Bank may, at its sole option, pay Montgomery for any vacation which he
has accrued but not used, in lieu of vacation carryover. Montgomery shall
comply in all other respects with the Bank's vacation policy.
3.7 Athletic Club Membership - During the term of
Montgomery's employment, the Bank shall pay the initiation fee or other initial
expense, and any periodic dues, with respect to Montgomery's membership in an
athletic club of his choice, provided that Montgomery's membership in such club
is deemed by the Board of Directors of the Bank to be beneficial to the
business interests of the Bank. This provision shall not entitle Montgomery to
membership in a golf club or country club. It is understood and agreed by
Montgomery that the Bank shall have no liability to Montgomery or any third
party for club dues, expenses or any charges whatsoever relating to any period
after the termination of Montgomery's employment with the Bank.
3.8 Luncheon or Dining Club Membership - During the term
of Montgomery's employment, the Bank shall pay the initiation fee or other
initial expense, and any periodic dues, with respect to Montgomery's membership
in a luncheon or dining club of his choice, provided that Montgomery's
membership in such club is deemed by the Board of Directors of the Bank to be
beneficial to the business interests of the Bank. This provision shall not
entitle Montgomery to membership in a golf club or country club. It is
understood and agreed by Montgomery that the Bank shall have no liability to
Montgomery or any third party for club dues, expenses or any charges whatsoever
relating to any period after the termination of Montgomery's employment with
the Bank.
3.9 Automobile - The Bank shall provide Montgomery with a
1996 Cadillac Seville, or equivalent vehicle, to be leased or owned by the Bank
at the Bank's discretion. Upon the termination of his employment, Montgomery
shall have the right to purchase said automobile at the depreciated book value
of the automobile calculated on the effective date of his termination.
9
<PAGE> 9
3.10 Personal Computer - The Bank shall purchase a
portable laptop computer for Montgomery's exclusive use during the term of his
employment with the Bank. Montgomery shall return said computer to the Bank
upon the termination of his employment with the Bank. Upon the termination of
his employment hereunder, Montgomery may purchase said computer at the
depreciated book value of the computer calculated on the effective date of his
termination.
3.11 Relocation Allowance - The Bank shall provide
Montgomery with a relocation allowance of up to $45,000.00 to cover or defray,
as the case may be, all costs and expenses arising out of the relocation of
Montgomery's residence from San Jose to Los Angeles for the purpose of
Montgomery assuming his responsibilities under this Agreement. Relocation
Expenses shall include, but not be limited to, expenses of moving Montgomery's
property and home furnishings from San Jose to Los Angeles, expenses of storing
Montgomery's property and home furnishings in Los Angeles or San Jose and
brokerage commissions and other fees and expenses related to either the sale or
other disposition of Montgomery's San Jose residence or the acquisition by
Montgomery of a permanent residence in the Los Angeles area. Relocation
Expenses shall not include any loss in equity Montgomery may suffer as a
consequence of the sale of his San Jose residence, nor shall Relocation
Expenses include any part of the cost of any residence Montgomery may purchase
in the Los Angeles area.
3.12 Transitional Living Expenses - Beginning November 1,
1995, the Bank shall reimburse Montgomery for the cost of rental or temporary
housing in an amount up to and not exceed $2,100.00 per month, for a
reasonable period no to exceed nine (9) months. Further, during the period
Montgomery resides in said temporary housing, and in addition to the
aforementioned $2,100.00 housing reimbursement, the Bank will reimburse
Montgomery for all of his meals and for travel expenses incurred by Montgomery
and/or his spouse for travel once a week between Los Angeles and San Jose.
3.13 Other Fringe Benefits - During the term of his
employment, Montgomery shall be entitled to and shall receive the benefits from
the Bank's group major medical insurance program as well as any other health,
accident or other insurance programs, any pension or other retirement programs,
and any other fringe benefits and perquisites that the Bank may from time to
time generally accord to its senior executives ("executive benefit programs").
The Bank reserves the right to cancel or to alter or modify the terms,
conditions and/or scope of any of the executive benefit programs at any time
and from time to time by substituting a plan of equal or greater value.
3.14 Expenses and Reimbursement - The Bank shall pay
directly or shall reimburse Montgomery for all reasonable, ordinary and
necessary business expenses incurred or paid by Montgomery during the term of
his employment and in connection with the performance of his services pursuant
to this Agreement, provided that Montgomery presents to the Chairman of the
Bank's Board of Directors or the Chairman of the Audit Committee of the Bank's
Board of Directors expense statements or vouchers and such other supporting
information
10
<PAGE> 10
as the audit committee may from time to time reasonably request, and further
provided that the Chairman of the Board or the Chairman of the Audit Committee
approves such expenses. The Bank shall reimburse Montgomery for reasonable
business expenses incurred in entertaining business guests at any club joined
by Montgomery in accordance with Paragraphs 4.6 and 4.7 of this Agreement. In
the event any month's expenses are not approved by the Chairman of the Board or
the Chairman of the Audit Committee, Montgomery shall submit a summary of those
expenses to the Audit Committee, and Montgomery shall receive reimbursement for
those expenses only upon the approval of a majority of the Audit Committee. In
the event of the termination of Montgomery's employment for any reason, whether
by the Bank or by Montgomery, Montgomery shall be reimbursed within thirty (30)
days of termination for any reasonable, ordinary and necessary documented
business expenses incurred prior to termination, to the extent that such
expenses would otherwise be reimbursable pursuant to the terms of this
Paragraph, upon presentation of expense statements or vouchers and such other
supporting information as the Bank may reasonably request.
3.15 Withholding - Bank shall have the right to withhold
from any payment otherwise due to Montgomery under this Agreement the amount of
income and any other taxes required to be withheld by Bank as employer by
applicable city, state or federal law.
4. Indemnification - Montgomery shall be fully indemnified by the
Bank and Bancorp to the extent permitted by California law, and shall be
defended and held harmless absolutely and irrevocably by the Bank and Bancorp
to the extent permitted by California law, from and against all claims,
demands, liabilities, costs, expenses, damages and causes of action of any
nature whatsoever arising out of, relating to or incidental to Montgomery's
good faith execution of his duties under this Agreement and/or the good faith
execution of his duties as an officer, employee and/or director of the Bank or
Bancorp, provided that Montgomery shall advise the Bank and Bancorp immediately
of any such claim or litigation and cooperate fully with the Bank and Bancorp
in connection therewith, and provided further that the Bank and Bancorp shall
have the right to assume and control the defense of such action and to take
whatever action is necessary to discharge their obligations. The provisions
hereof are in addition to and do not limit any other right to indemnity that
Montgomery has by way of law or agreement.
5. Life Insurance - The Bank shall have the right, but not the
obligation, to take out insurance on the life of Montgomery at its sole cost
and expense and for its sole benefit, and Montgomery acknowledges that he shall
have no right in or to such insurance or the proceeds of that insurance.
Montgomery agrees to cooperate with the Bank in obtaining such insurance and to
submit, at his reasonable convenience, to the usual medical and other
examinations required in connection with obtaining such insurance.
11
<PAGE> 11
6. Property Rights
6.1 Confidential or Proprietary Information - Montgomery
acknowledges that all information concerning or pertaining to the business,
plans and prospects, of the Bank, Bancorp, or any of their related or
affiliated entities, including but not limited to financial information,
customer lists, files, documents, records or specifications, which Montgomery
may now possess or may obtain during or after the term of this Agreement, is
confidential and is the property of the Bank, Bancorp and/or their affiliated
entities. Montgomery agrees that he shall not, without the prior written
consent of the Bank or Bancorp, cause or permit such information to be
published, disclosed, divulged or otherwise made accessible to any other firm,
person or corporation either during or after the term of his employment, and
Montgomery further agrees that such information will at no time be used by him
except in connection with the business of and for the exclusive benefit of the
Bank or Bancorp. Montgomery shall return to the Bank all documents, files,
records or other tangible evidence of such confidential or proprietary
information, including all photocopies, extracts or summaries, prior to the
termination of his employment. The provisions of this Paragraph 7.1 shall
survive the expiration, suspension or termination, for any reason, of this
Agreement and/or Montgomery's employment with the Bank.
6.2 Ownership of Materials and Ideas/Use of Name - The
Bank, as Montgomery's employer, shall own, and Montgomery hereby transfers and
assigns to the Bank, all rights in and to any material and/or ideas written,
suggested or submitted by Montgomery in the course of his employment under this
Agreement, and all other results and proceeds of Montgomery's services under
this Agreement, all without the necessity of any additional compensation;
provided, however, that nothing in this Paragraph 6.2 shall be deemed in any
manner to restrict or qualify Montgomery's ownership or possession of personal
notes, memoranda, correspondence, books or records not constituting trade
secrets or other property of the Bank. During the term of Montgomery's
employment, the Bank and Bancorp shall also have the right (but not the
obligation) to use Montgomery's name without additional consideration in
connection with his services pursuant to this Agreement.
6.3 Delivery of Property - Upon the termination of
Montgomery's employment under this Agreement, Montgomery shall immediately
deliver to the Bank any and all property in his possession or under his control
belonging to the Bank or Bancorp, in good condition, ordinary wear and tear and
damage by any cause beyond his reasonable control excepted.
7. Representation and Warranty - Montgomery represents and
warrants that he will be breaching no contract with any other person or entity
by entering into this Agreement and/or by performing the services provided for
in this Agreement.
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<PAGE> 12
8. Termination of Employment - Notwithstanding any provision of
this Agreement to the contrary, Montgomery's employment hereunder may be
terminated prior to the expiration of the term of this Agreement under the
following circumstances:
8.1 Employment hereunder shall terminate automatically
upon Montgomery's death.
8.2 The Bank may terminate Montgomery's employment
hereunder upon the happening of any of the following events:
8.2.1 The Bank may terminate Montgomery's
employment in the event of Montgomery's permanent disability. For the purposes
of this Agreement, Montgomery shall be deemed to have become "permanently
disabled" if (a) after completing the sixty (60)-day waiting period for
coverage under the Bank's long-term disability program (the "LTD Program"),
Montgomery, because of ill health or physical or mental disability, shall have
become entitled to immediate disability payments under the LTD Program or (b)
Montgomery, because of ill health, physical or mental disability, incompetency
or incapacity, shall have been unable to perform his duties and
responsibilities under this Agreement in the ordinary and usual manner required
of a person in his position either for ninety (90) days consecutively, or
ninety (90) days in any particular period of one hundred twenty (120)
consecutive days.
8.2.2 The Bank may terminate Montgomery's
employment hereunder at any time for cause. For purposes of this Agreement,
the term "cause" shall mean (a) any act of dishonesty, unauthorized disclosure
of confidential information or fraud by Montgomery in the performance of his
duties hereunder; (b) the commission of a felony involving theft or fraud of
any kind; (c) the commission of a fraud or misappropriation or embezzlement of
property of the Bank, Bancorp or of any affiliate or customer of the Bank or
Bancorp; (d) a willful and material breach by Montgomery of obligations under
this Agreement; (e) the inability of the Bank to secure a bond for the services
of Montgomery, or Montgomery engaging in conduct that would preclude the Bank's
ability to bond Montgomery; or (f) a written order or directive from the Office
of the Comptroller of the Currency or the Board of Governors of the Federal
Reserve System ordering the removal of Montgomery as an executive officer or
director of the Bank or Bancorp.
8.2.3 The Bank, by resolution of its Board of
Directors, at any time in its sole and absolute discretion, may terminate
Montgomery's employment hereunder without cause, for any reason.
8.3 Upon any termination pursuant to this Paragraph 8,
Montgomery shall be entitled to all salary and benefits to be paid or provided
by the Bank under this Agreement up to the date of such termination. In
addition, and in lieu of any and all other rights or remedies which Montgomery
may have, if this Agreement is terminated prior to the expiration of its term,
Montgomery shall have the following rights and remedies:
13
<PAGE> 13
8.3.1 In the event of termination based on death or
permanent disability as set forth in Paragraphs 8.1 or 8.2.1 above, the Bank
shall not have any obligation to continue to pay salary and other benefits
provided for in Paragraph 3 and its subparts above, or any other sums proposed
hereunder, except that Montgomery shall be entitled to receive any salary and
benefits accrued but unpaid as of the date of termination, and Montgomery, or
his heirs in the event of his death, shall be entitled to all benefits under
any death or disability plans provided under Paragraph 3.13 above, to the
extent the Bank adopts or establishes any such plan covering Montgomery.
8.3.2 If Montgomery's employment is terminated for
cause, as set forth and defined in Paragraph 8.2.2 above, Montgomery shall be
entitled to receive all base salary and benefits accrued but unpaid as of the
date of termination. The Bank shall have no further obligation to pay the
salary and other benefits provided for in Paragraph 3 and its subparts above,
or any other sums provided hereunder, except as may be required by applicable
law. Such payment shall be made to Montgomery within thirty (30) days after
the date of his termination.
8.3.3 If Montgomery is terminated by the Bank prior
to the expiration of this Agreement without cause, if the Bank substantially
and adversely changes Montgomery's status, title, position or responsibilities
as provided for in this Agreement and Montgomery resigns as a consequence, or
if the Bank requires Montgomery to be based at any place outside a thirty (30)
mile radius from the Bank's current headquarters except for reasonably required
travel on the Bank's business and Montgomery resigns as a consequence,
Montgomery shall be entitled to receive as severance his base salary at the
then annual rate paid semimonthly for (a) the remainder of the term of this
Agreement, or (b) eighteen (18) months from the date of such termination,
whichever period is shorter in duration, along with any unpaid bonus which
Montgomery had been awarded but not paid by the Bank's Board of Directors under
the terms of Paragraph 3.3 of this Agreement; provided, however, that such
payments shall cease and not be owing in the event that Montgomery breaches any
part of Paragraphs 6 or 9 of this Agreement.
8.3.4 If Montgomery terminates his employment with
the Bank for any reason other than those set forth in Paragraph 8.3.3 above, he
shall be entitled to no severance payments hereunder, and he shall have no
greater rights and obligations than if his employment was terminated for cause
under Paragraph 8.2.2.
8.3.5 In the event Montgomery is terminated without
cause, is receiving severance hereunder, and is rehired by the Bank or Bancorp
during the period of his severance payments, such severance payments, if any
remain, shall be suspended during the term of such reemployment, and shall be
reinstituted at the expiration of such reemployment.
8.3.6 Regardless of the reason for his termination
of employment, Montgomery (and his dependents and beneficiaries, as applicable)
shall be entitled to continued coverage under the Bank's benefit programs to
the same extent as applicable
14
<PAGE> 14
generally to employees of the Bank who have terminated employment. In the
event Montgomery is entitled to severance pursuant to Paragraph 8.3.3, above,
Montgomery's benefits shall continue during the period during which he is
receiving such severance payments as though he were still an employee of the
Bank.
9. No Solicitation of Customers or Employees - In the event of
the termination of Montgomery's employment for any reason, whether by the Bank
or by Montgomery, Montgomery agrees that he shall not, alone or as a member,
employee, or agent of any partnership, or as an officer, agent, employee,
director, or stockholder of any other corporation, whether directly or
indirectly, for a period of one (1) year after the effective date of such
termination, (a) solicit any then existing customer of the Bank or Bancorp for
the opportunity to provide any services of the kind offered to or provided to
that customer by Bank or Bancorp, or (b) solicit for employment any person
employed by the Bank or Bancorp, or encourage or induce any such person to
terminate his or her employment the Bank or Bancorp.
10. General
10.1 Governing Law - This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of
California applicable to agreements made and to be performed entirely in
California.
10.2 Captions - The paragraph headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement or define, limit or extend the
scope of this Agreement or of any particular article or paragraph of this
Agreement.
10.3 Entire Agreement - This Agreement sets forth the
entire agreement and understanding of the parties relating to the subject
matter of this Agreement, and supersedes any and all prior agreements,
arrangements and understandings, written or oral, between the parties relating
to the subject matter, except that the Indemnity Agreement between the Bank and
Montgomery dated November 1, 1995, ("Indemnity Agreement") shall remain in full
force and effect. Other than the Indemnity Agreement, all prior
understandings, representations, negotiations or agreements, if any, between
the parties hereto relating to the employment of Montgomery by the Bank,
including the CEO Term Sheet between Montgomery and the Bank dated November 1,
1995, are hereby terminated, rescinded and superseded by this Agreement, and
Montgomery agrees that any rights and remedies, if any, he may have under any
such prior understandings, representations, negotiations or agreements are
hereby waived and terminated.
10.4 No Other Representations - No representation,
promise, inducement or statement of intention has been made by a party that is
not embodied in this Agreement, and no party shall be bound by or liable for
any alleged representation, promise, inducement or statement of intention not
so set forth.
15
<PAGE> 15
10.5 Assignment - This Agreement, and Montgomery's rights
and obligations under this Agreement, may not be assigned by Montgomery. The
Bank may assign its rights, together with its obligations, under this Agreement
in connection with any sale, transfer or other disposition of all or
substantially all of its business and assets; and such rights and obligations
shall inure to, and be binding upon, any successor to the business or
substantially all of the assets of the Bank or Bancorp, whether by merger,
purchase of stock or assets or otherwise. This Agreement shall be binding
upon, and shall inure to the benefit of, the respective successors and
permitted assigns of the parties.
10.6 Waiver and Modification - This Agreement may not be
amended, modified, superseded, canceled, renewed or extended, and the terms,
conditions or covenants of this Agreement may not be waived, unless by a
written instrument executed by the parties to this Agreement. The failure of a
party at any time or times to require performance of any provision of this
Agreement shall in no manner affect its right at a later time to enforce the
same. No waiver by a party of the breach of any term or covenant contained in
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such breach, or a waiver of the breach of any other term or covenant contained
in this Agreement.
10.7 Acknowledgment - Montgomery hereby acknowledges that
this Agreement is, from the outset, without liability to, or recourse against,
any officer or director of either Bank or Bancorp, and that, except with
respect to Bancorp's indemnity under Paragraph 4, his sole recourse under this
Agreement shall be against Bank.
10.8 Severability/Curtailment - Nothing contained in this
Agreement shall be construed to require the commission of any act contrary to
law, and wherever there is any conflict between any provision of this Agreement
and any material statute, law, ordinance or regulation contrary to which the
parties have no legal right to contract, then the latter shall prevail, but in
any such event the provisions of this Agreement so affected shall be curtailed
and limited only to the minimum extent necessary to bring it within the legal
requirements. The remainder of the affected provision and the other provisions
of this Agreement shall continue in full force and effect and shall in no way
be affected, impaired or invalidated, and the parties shall immediately employ
their best efforts in good faith to negotiate a valid provision to substitute
for the invalidated one.
10.9 Further Assurances - Montgomery and the Bank each
agree, without the necessity of any further consideration, to execute and
deliver such other documents and take such other actions as may be reasonably
requested by any other party in order to consummate more effectively and carry
out more fully the intent and subject matter of this Agreement.
10.10 Dispute Resolution - Any controversy or claim arising
out of this Agreement or out of Montgomery's employment with the Bank or
Bancorp, whether based on
16
<PAGE> 16
contract, tort, statute or otherwise, including but not limited to federal and
state statutes proscribing age discrimination or any other form of
discrimination, shall be submitted exclusively to final and binding arbitration
in Los Angeles, California, to an arbitrator chosen in accordance with the then
existing labor arbitration rules of the American Arbitration Association. Any
such arbitration shall comply with and be governed by the provisions of the
California Arbitration Act, Paragraphs 1280 through 1294.2 of the California
Code of Civil Procedure. Except as provided therein, each party expressly
waives any right it may have to seek redress in any other forum. The
arbitrator chosen by the parties shall have all the powers granted under the
rules of the American Arbitration Association and the California Arbitration
Act including, without limitation, the power to grant any monetary or other
remedy which could be granted by a court of competent jurisdiction considering
such claim based on contract, tort, statutes or otherwise, including, without
limitation, any state, federal or local statute or ordinance concerning
employment. Any and all controversies or claims arising out of this Agreement
or out of Montgomery's employment by the Bank, whether based on contract, tort,
statute or otherwise, shall be asserted, if at all, within six (6) months after
the act or omission giving rise to such controversy or claim unless otherwise
agreed in writing by the Bank and Montgomery.
10.11 Injunction - Not withstanding the dispute resolution
provision of Paragraph 11.10, in the event of a breach of the confidentiality
provisions of Paragraph 6.1 or the non-solicitation provisions of Paragraph 10
of this Agreement, or in the event of conduct injurious to the Bank or Bancorp
or either of their business reputations, Montgomery agrees that in addition to
any other rights the Bank or Bancorp may have, the Bank and/or Bancorp may seek
injunctive relief in an appropriate state or federal court to preclude further
violation or to seek to collect damages.
10.12 Attorneys' Fees - Should Montgomery, the Bank or
Bancorp institute any action or proceeding to enforce any provision of this
Agreement, or for damages by reason of any alleged breach of any provision
hereof, or for a declaration of any party's rights or obligations hereunder, or
to set aside any provision hereof, or for any other remedy, the prevailing party
shall be entitled to be reimbursed by the losing party for all costs, expenses
and reasonable attorneys fees incurred in such action or proceeding.
10.13 Montgomery's Attorneys' Fees - The Bank shall
reimburse Montgomery for his reasonable attorneys' fees and legal expenses
incurred in assisting in the preparation of this Agreement, provided however,
that the Bank shall not be obligated to reimburse Montgomery for attorney fees
and legal expenses in excess of $5,500.00.
10.14 Limitation on Payment - If all or any portion of the
payments payable to Montgomery pursuant to this Agreement, together with other
payments which Montgomery has the right to receive from the Bank or Bancorp,
would cause a deduction disallowance under Section 280G of the Internal Revenue
Code or would cause the imposition of an excise tax under Section 4999 of the
Internal Revenue Code, such payments shall reduced to the extent necessary to
make Section 280G and Section 4999 inapplicable. All payments to
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<PAGE> 17
Montgomery from the Bank or Bancorp under this Agreement or any other agreement
between Montgomery and the Bank or Bancorp shall be subject to 12 U.S.C.
Section 1828(k) and 12 C.F.R. part 359 and any other applicable provision of
law.
IN WITNESS WHEREOF, Mercantile National Bank caused this Agreement to
be executed by its duly authorized officers, and Scott A. Montgomery has duly
executed this Agreement, as of the date set forth against their respective
signatures.
MERCANTILE NATIONAL BANK
Dated: June 24, 1996 By [SIG]
---------------------------------
Title CHAIRMAN
------------------------------
Dated: June 21, 1996 SCOTT A. MONTGOMERY
-----------------------------------
Scott A. Montgomery
Agreed as to the obligations of National Mercantile Bancorp specified
in the foregoing Agreement.
NATIONAL MERCANTILE BANCORP
Dated: June 24, 1996 By [SIG]
---------------------------------
Title CHAIRMAN
------------------------------
18
<PAGE> 18
ADDENDUM
This ADDENDUM TO EMPLOYMENT AGREEMENT ("Addendum") is made and entered
into this 21st day of June, 1996 between Mercantile National Bank (the "Bank"),
a national banking association organized and existing under the laws of the
United States, and Scott A. Montgomery, an individual ("Montgomery"), with
reference to the following facts:
A. Bank and Montgomery are parties to an employment agreement
(the "Employment Agreement") which is effective June 21, 1996.
B. Bank and Montgomery wish to amend and add language to
paragraph 3.4.4 of the Employment Agreement.
NOW, THEREFORE, Bank and Montgomery hereby agree as follows:
The following language is to be inserted as part of paragraph 3.4.4.:
"From time to time, the Board of Directors may, at its
discretion, grant Montgomery additional options beyond those
options already granted as part of this agreement."
MERCANTILE NATIONAL BANK
Dated: June 21, 1996 By [SIG]
-------------------------------
Title CHAIRMAN
-----------------------------
Dated: June 21, 1996 SCOTT A. MONTGOMERY
----------------------------------
Scott A. Montgomery
Agreed as to the obligations of National Mercantile Bancorp specified in the
foregoing Agreement.
NATIONAL MERCANTILE BANCORP
Dated: June 21, 1996 By [SIG]
---------------------------------
Title CHAIRMAN
------------------------------
<PAGE> 19
[LOGO]
Exhibit 10.2
Ken Whiting
Title: Executive Vice President
and Department Head
Entertainment, Business
Banking and Private Banking.
Job Responsibilities: As outlined on the Initial
Expectations Sheet dated
5/15/96. A normal job
description is attached.
Your employment is "at will."
Base Compensation: Until recapitalization has
been completed $10,000 per
month ($120,000 annually).
After recapitalization
$10,833 per month ($130,000
annually).
Incentive Compensation: Annually agreed upon goals
and objectives based on the
annual budget and performance
of the Company. Incentive
could be earned up to 60% of
base salary.
Option Stock: Initial stock option grant
of 20,000 shares plus 20,000
additional shares at the time
of recapitalization based on
the existing National
Mercantile Bancorp stock
option program. Vesting for
all shares would be in
accordance with the National
Mercantile Bancorp's employee
stock option plan.
Signing Bonus: A $15,000 signing bonus
will be paid upon approval by
the OCC under Section 914.
Club Membership: Monthly dues will be paid
for the Lakeside Country Club
not to exceed $550.00 per
month
Automobile: A car allowance of $500.00
per month will be paid.
As an employee of Mercantile National Bank all normal and regular
benefits are available. Vacation would be 20 days per year or four weeks.
KEN WHITING SCOTT A. MONTGOMERY
- ----------------------------- -----------------------------------
Ken Whiting Scott A. Montgomery
Dated: 6/5/96 Dated: 6/5/96
1840 Century Park East, Los Angeles, California 90067-2103 310-277-2265
Exhibit C
<PAGE> 1
[LOGO]
Exhibit 10.3
Carol Ward
Title: Executive Vice President
and Head of Operations
Job Responsibilities: As outlined on the Initial
Expectations Sheet dated
5/15/96. A normal job
description is attached.
Your employment is "at will."
Base Compensation: Until recapitalization has
been completed $9,166.66 per
month ($110,000 annually).
After recapitalization
$10,000 per month ($120,000
annually).
Incentive Compensation: Annually agreed upon goals
and objectives based on the
annual budget and performance
of the Company. Incentive
could be earned up to 60% of
base salary.
Option Stock: Initial stock option grant
of 10,000 shares plus 10,000
additional shares at the time
of recapitalization based on
the existing National
Mercantile Bancorp stock
option program. Vesting for
all shares would be in
accordance with the National
Mercantile Bancorp's employee
stock option plan.
Automobile: A car allowance of $500.00
per month will be paid.
Start Date: Currently Ms. Ward is
performing as a consultant to
two other banking
organizations. The Bank is
willing to hire Ms. Ward
between June 4, 1996 and
September 1, 1996 on the
basis of time available. On
September 1, 1996, the
responsibilities will require
a full time commitment.
Up to September 1, 1996, the
Bank will hire Ms. Ward based
on two to three days per week.
Ms. Ward will be compensated
based on 2/5th of her salary
for two day weeks and 3/5th
of her salary for three day
weeks, etc.
Exhibit C
1840 Century Park East, Los Angeles, California 90067-2103 310-277-2265
<PAGE> 1
As an employee of Mercantile National Bank all normal and regular
benefits are available. Vacation would be 20 days per year or four weeks.
CAROL WARD SCOTT A. MONTGOMERY
- ----------------------------- -----------------------------------
Carol Ward Scott A. Montgomery
Dated: June 5, 1996 Dated: June 6, 1996
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