<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 March 31, 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 April 30, 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 ........................................................... 14-28
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS .................................................... 30
Item 2. CHANGES IN SECURITIES ................................................ 30
Item 3. DEFAULTS UPON SENIOR SECURITIES....................................... 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................................... 30
Item 5. OTHER INFORMATION .................................................... 30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................... 30
SIGNATURES ...................................................................... 32
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets ................................................. 4
Condensed Consolidated Statements of Operations ....................................... 5
Condensed Consolidated Statement of Changes in
Shareholders' Equity .................................................................. 6
Condensed Consolidated Statements of Cash Flows ....................................... 7
Notes to Condensed Consolidated Financial Statements................................... 8
</TABLE>
3
<PAGE> 4
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
----------- ------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks-demand......................................................... $ 7,522 $ 9,272
Federal funds sold and securities purchased under agreements to resell................. 20,500 21,000
--------- ------------
Cash and cash equivalents...................................................... 28,052 30,272
Securities available-for-sale, at fair value; aggregate amortized cost of $19,685
at March 31, 1996 and $20,256 at December 31, 1995.................................. 19,463 20,102
FRB stock.............................................................................. 315 315
Loans.................................................................................. 75,790 82,012
Allowance for loan losses........................................................... (3,837) (3,805)
--------- ------------
Net loans...................................................................... 71,953 78,207
Premises and equipment, net............................................................ 1,075 1,126
Other real estate owned................................................................ 581 581
Accrued interest receivable and other assets........................................... 1,266 1,389
--------- ------------
$ 122,705 $ 131,992
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand.......................................................... $ 41,019 $ 44,579
Interest-bearing demand............................................................. 5,276 7,737
Money market accounts............................................................... 19,490 18,901
Savings............................................................................. 3,661 1,927
Time certificates of deposits:
$100,000 and over................................................................ 8,502 8,551
Under $100,000................................................................... 36,290 38,548
--------- ------------
Total deposits................................................................. 114,238 120,243
Securities sold under agreements to repurchase......................................... 1,056 4,497
Accrued interest payable and other liabilities......................................... 1,604 1,241
--------- ------------
Total liabilities.............................................................. 116,898 125,981
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 March 31, 1996 and December 31, 1995..................... 24,614 24,614
Accumulated deficit................................................................. (18,585) (18,449)
Net unrealized loss on securities available-for-sale................................ (222) (154)
--------- ------------
Total shareholders' equity..................................................... 5,807 6,011
--------- ------------
$ 122,705 $ 131,992
========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-month periods ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------- -------
(dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans, including fees......................... $ 1,800 $ 2,615
Securities available-for-sale:
Tax-exempt.................................. -- 6
Taxable..................................... 282 612
Federal funds sold and securities purchased
under agreements to resell.................. 263 223
Interest-bearing deposits with other financial
institutions................................ -- 2
-------- --------
Total interest income................... 2,345 3,458
Interest expense:
Interest-bearing demand....................... 19 40
Money market and savings...................... 174 289
Time certificates of deposits:
$100,000 and over.......................... 128 142
Under $100,000............................. 563 684
-------- --------
Total interest expense on deposits 884 1,155
Federal funds purchased and securities sold
under agreements to repurchase.............. 8 35
-------- --------
Total interest expense.................. 892 1,190
-------- --------
Net interest income..................... 1,453 2,268
Provisions for loan losses...................... -- 146
-------- --------
Net interest income after provision for
loan losses........................... 1,453 2,122
Other operating income (loss):
Loss on sales of securities
available-for-sale.......................... (1) (1,156)
International services........................ 42 66
Investment services........................... 29 72
Deposit-related and other customer services... 98 233
-------- --------
Total other operating income (loss)..... 168 (785)
Other operating expenses:
Salaries and related benefits................. 692 993
Net occupancy................................. 192 435
Furniture and equipment....................... 85 97
Printing and communications................... 62 75
Insurance and regulatory assessments.......... 166 280
Customer services............................. 140 211
Computer data processing...................... 95 85
Legal services................................ 77 109
Other professional services................... 191 477
Promotion..................................... 23 35
Other real estate owned expenses.............. 7 9
Other expenses................................ 27 231
-------- --------
Total other operating expenses.......... 1,757 3,037
-------- --------
Loss before provision for income taxes.. (136) (1,700)
Provision for income taxes.................... -- --
-------- --------
Net loss................................ $ (136) $ (1,700)
======== ========
Net loss per share...................... $ (0.04) $ (0.55)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three-month period ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Common Stock Securities
-------------------- Accumulated Available-
Shares Amount Deficit for-Sale Total
--------- ------- -------- ----- ------
<S> <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...... -- -- -- (68) (68)
Net loss............................. -- -- (136) -- (136)
--------- ------- -------- ----- ------
Balance at March 31, 1996.............. 3,078,146 $24,614 $(18,585) $(222) $5,807
========= ======= ======== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-month periods ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------- --------
(dollars in thousands)
<S> <C> <C>
Net cash flows from operating activities:
Net loss .................................................. $ (136) $ (1,700)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Accretion of sublease loss .............................. (16) (96)
Depreciation and amortization ........................... 60 98
Provision for loan losses ............................... -- 146
Net loss on securities available-for-sale ............... 1 1,156
Net amortization of premiums (accretion of discounts)
on securities available-for-sale ...................... 18 16
Net amortization of premiums (accretion of discounts)
on loans purchased .................................... 13 (89)
Decrease (increase) in accrued interest receivable
and other assets ...................................... 123 (190)
Increase in accrued interest payable and other
liabilities ........................................... 379 50
------- --------
Net cash provided by (used in) operating
activities ........................................ 442 (609)
Cash flows from investing activities:
Purchase of debt securities available-for-sale ............ (1,000) --
Proceeds from sales of securities available-for-sale ...... 114 33,006
Proceeds from repayments and maturities of securities
available-for-sale ...................................... 1,438 792
Proceeds from sales of loans .............................. -- 6,599
Net decrease in loans ..................................... 6,241 14,066
Net purchases of premises and equipment ................... (9) (42)
------- --------
Net cash provided by investing activities ........... 6,784 54,421
Cash flows from financing activities:
Net decrease in demand deposits, money market
and savings accounts .................................... (3,698) (41,245)
Net decrease in time certificates of deposits ............. (2,307) (20,081)
Net decrease in securities sold under agreements to
repurchase and federal funds purchased .................. (3,441) (10,807)
------- --------
Net cash used in financing activities ............... (9,446) (72,133)
------- --------
Net decrease in cash and cash equivalents ................... (2,220) (18,321)
Cash and cash equivalents, January 1 ........................ 30,272 46,710
------- --------
Cash and cash equivalents, March 31 ......................... $28,052 $ 28,389
======= ========
Supplemental cash flow information:
Cash paid for:
Interest ................................................ $ 901 $ 1,324
Income taxes ............................................ $ -- $ 30
Unrealized loss on securities available-for-sale .......... $ 68 $ 1,619
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 8
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited condensed consolidated financial statements include the
accounts of National Mercantile Bancorp (the "Company") and its wholly owned
subsidiary, Mercantile National Bank (the "Bank") both sometimes referred to as
"Company". All significant intercompany transactions and balances have been
eliminated. The accounting and reporting policies of the Company conform with
generally accepted accounting principles and general practice within the banking
industry.
The condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
footnotes normally required for complete financial statement disclosure. While
management believes that the disclosures presented are sufficient to make the
information not misleading, reference may be made to the consolidated financial
statements and notes thereto included at "Item 8. Financial Statements" of the
Company's Annual Report on Form 10-K for the year ended December 31, 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 condensed consolidated balance sheets and statements
of operations, changes in shareholders' equity and cash flows reflect, in the
opinion of management, all material adjustments necessary for a fair
presentation of the Company's financial position as of March 31, 1996 and
results of operations and cash flows for the three-month periods ended March 31,
1996 and 1995. The results of operations for the three month period ended March
31, 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.
NOTE 2 - LOSS PER SHARE
Loss per share is computed using the weighted average number of common
shares outstanding during the period. The weighted average number of common
shares outstanding for the three-month periods ended March 31, 1996 and 1995 was
3,078,146.
8
<PAGE> 9
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 2 - LOSS PER SHARE (CONTINUED)
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 March 31, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $9.3 million, for which the related
allowance for credit losses was $1.2 million. The average recorded investment
in, and the amount of interest income recognized on those impaired loans during
the three months ended March 31, 1996 were $9.4 million and $200,000,
respectively. Of the investment in loans that are considered to be impaired,
$4.9 million or 53% 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Federal Reserve Board ("FRB") and the Office of the Comptroller of
the Currency (the "OCC") have issued guidelines (the "guidelines") regarding
risk-based capital requirements. The guidelines provide detailed definitions of
regulatory capital and assign different weights to various assets and credit
equivalent amounts of off- balance sheet financial instruments, depending upon
the perceived degree of credit risk to which they expose such entities. Each
banking organization is required to maintain a specified minimum ratio of
capital to the total of such risk-adjusted assets and off- balance sheet
financial instruments.
The risk-based capital ratios of the Company and the Bank are
calculated under the guidelines by dividing their respective qualifying total
capital by their respective total risk-weighted assets. The Company's qualifying
total capital and total risk-weighted assets are determined on a fully
consolidated basis. Total qualifying capital is comprised of the sum of core
capital elements ("Tier 1 capital") and supplementary capital elements ("Tier 2
capital"). At March 31, 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 CONDENSED 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 March 31, 1996 was 4.86%, and the Tier 1 risk-based capital
ratio was 7.23%. As of March 31, 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."
Information about the regulatory capital of the Company and the Bank at
March 31, 1996 and December 31, 1995 is set forth below.
11
<PAGE> 12
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4 - Shareholders' Equity and Regulatory Capital (continued)
Information about the regulatory capital of the Company and the Bank at March
31, 1996 and December 31, 1995 is set forth below.
<TABLE>
<CAPTION>
March 31, 1996
(Unaudited) December 31, 1995
------------------------------- ------------------------------
Company Bank Company Bank
------ ----- ------ ----- ------ ----- ------ -----
Anount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------ -----
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk-based capital(1)(3):
Tier 1 capital........................... $ 6,030 7.24% $ 6,019 7.23% $ 6,166 6.96% $ 6,157 6.95%
Tier 1 capital minimum requirement....... 3,329 4.00% 8,323 10.00% 3,542 4.00% 8,856 10.00%
------- ----- -------- ----- ------- ----- -------- ------
Excess (Deficiency).............. $ 2,701 3.24% $ (2,304) (2.77%) $ 2,624 2.96% $ (2,699) (3.05%)
======= ===== ======== ====== ======= ===== ======== ======
Total capital............................ $ 7,105 8.54% $ 7,094 8.52% $ 7,306 8.25% $ 7,297 8.24%
Total capital minimum requirement........ 6,658 8.00% 6,658 8.00% 7,085 8.00% 7,085 8.00%
------- ----- ------- ----- ------- ----- -------- ------
Excess........................... $ 447 0.54% $ 436 0.52% $ 221 0.25% $ 212 0.24%
======= ===== ======== ====== ======= ===== ======== ======
Total risk-weighted assets....................... $83,229 $ 83,229 $88,558 $ 88,558
Capital Leverage Ratio(1)(2)(3):
Tier 1 capital........................... $ 6,030 4.86% $ 6,019 4.86% $ 6,166 4.68% $ 6,157 4.67%
Tier 1 capital minimum requirement....... 4,959 4.00% 8,058 6.50% 5,271 4.00% 8,565 6.50%
------- ----- -------- ------ ------- ----- -------- ------
Excess (Deficiency).............. $ 1,071 0.86% $ (2,039) (1.64%) $ 895 0.68% $ (2,408) (1.83%)
======= ===== ======== ====== ======= ===== ======== ======
Average total assets, as adjusted, during
three-month periods ended March 31, 1996
and December 31, 1995......................... $123,963 $123,963 $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 March 31, 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.
<PAGE> 13
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - INCOME TAXES
The Company has recognized losses for financial statement purposes
which have not yet been recognized on an income tax return. No benefit was
recorded for these losses since all available income tax benefits were
recognized in prior years. Future losses will not result in additional tax
benefits until the Company generates sufficient taxable income to utilize the
present net operating loss carryforwards. The Company's 1996 year-to-date net
loss did not result in additional tax benefits.
NOTE 6 - ALLOWANCE FOR CREDIT LOSSES
The Company's allowance for credit losses is maintained at a level
considered by management to be adequate to absorb estimated losses in the
existing portfolio. The allowance for credit losses is increased by the
provision for credit losses and decreased by the amount of loan charge-offs, net
of recoveries. While management believes the level of the allowance as of March
31, 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 month periods ended March 31, 1996 and 1995. The
discussion should be read in conjunction with the Company's condensed
consolidated financial statements and accompanying notes to the condensed
consolidated financial statements (see "Item 1. Financial Statements").
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
At March 31, 1996, the Company's consolidated assets decreased by $9.3
million, or 7.0%, to $122.7 million from $132 million at December 31, 1995. This
decrease was due primarily to a $2.2 million decrease in cash and cash
equivalents and a decrease in net loans of $6.2 million. Customer deposits
decreased by $6.0 million or 5.0% to $114.2 million at March 31, 1996, from
$120.2 million at December 31, 1995. Securities sold under agreements to
repurchase decreased by $3.4 million to $1.1 million at 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.
OPERATING RESULTS
OVERVIEW
As set forth in the accompanying consolidated statements of operations,
the Company recorded a net loss for the three month period ended March 31, 1996
of $136,000 or $(.04) per share, as compared to a net loss for the three month
period ended March 31, 1995 of $1.7 million or $(.55) per share.
14
<PAGE> 15
Declining loan balances and sales of securities during 1995 resulted in
decreased total interest income in 1996. Total interest income for the three
month period ended March 31, 1996 was $2.3 million, compared with total interest
income for the corresponding period of 1995 of $3.5 million. Total interest
expense for the three month period ended March 31, 1996 was $892,000 compared
with total interest expense for the corresponding period of 1995 of $1.2
million. While the decrease in interest earning loans and securities caused a
$1.1 million decrease in interest income, the decrease in deposits had a
$271,000 impact on interest expense, as a part of the decrease in deposits was
attributable to non-interest bearing demand deposits. Net interest income for
the three month period ended March 31, 1996 was $1.5 million compared with net
interest income for the corresponding period of 1995 of $2.3 million.
Although the decrease in loans and securities, as well as in customer
deposits, caused a decrease in net interest income for the three month period
ended March 31, 1996, compared with the corresponding period of 1995, the
Company's planned restructuring which caused these decreases resulted in more
positive results for the three month period in 1996 as compared with the
corresponding period in 1995. There was no provision for loan losses required
for the three month period in 1996, as compared with a provision of $146,000 for
the corresponding period in 1995. The loss on sale of securities for the three
month period in 1996 was $1,000 compared with $1.2 million during the
corresponding period in 1995. While other operating income from services
decreased to $169,000 for the three month period ended March 31, 1996 compared
with $371,000 for the corresponding period in 1995, other operating expenses
decreased to $1.8 million for the three months in 1996, compared with $3.0
million for the corresponding period in 1995, which amounts to a 42.1% decrease
in expenses. Although no additional provision was made for loan losses for the
three month period ended March 31, 1996, due to reduced loan balances and lower
levels of nonperforming assets, the Bank's allowance for credit losses as a
percentage of nonperforming assets increased to 50.9% at March 31, 1996, from
38.9% at March 31, 1995.
Other operating expenses decreased $1.3 million or 42.1% for the three
month period ended March 31, 1996 as compared to the same period in the prior
year. The decrease was due primarily to management's efforts to continue to
reduce operating expenses. Compensation expense decreased $301,000 or 30.3%, for
the first three months of 1996, compared with the same period in the prior year.
Total assets of the Company at March 31, 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
15
<PAGE> 16
to profitability. The Bank's restructuring process is near completion and the
Bank is working towards its goal of returning to profitability. However, should
a reduction in asset size continue to occur without corresponding reductions in
operating expenses, interest income from the reduced earning asset base may not
cover operating expenses.
16
<PAGE> 17
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DEPRESSED REAL ESTATE VALUES
While economic conditions nationally and elsewhere in California are
improving, southern California's economy remained weak. Commercial and
residential real estate market values in southern California continue to remain
depressed, adversely impacting the financial condition and liquidity of many of
the Company's borrowers. Nonperforming assets at March 31, 1996 totaled $7.5
million and included $581,000 of other real estate owned, compared with $6.5
million in non-performing assets at December 31, 1995. Other real estate owned
was $581,000 at December 31, 1995.
NONPERFORMING ASSETS
The level of nonperforming assets, as presented in Table 1, increased
$1.0 million during the first three months of 1996 from the level at December
31, 1995. The increase was primarily the result of an increase in non accrual
loans. The amount of nonperforming loans for which the Company does not hold
substantial collateral amounted to $1.4 million at March 31, 1996, or 20.2% of
all nonperforming loans at that date, compared to $335,000, or 5.6% at December
31, 1995. The increase at March 31, 1996 was mainly due to two loans added to
this category in March.
NONACCRUAL LOANS. Nonaccrual loans increased $1.3 million during the
first three months of 1996 to $1.9 million as compared to $573,000 at December
31, 1995. (See "Net Interest Income and Interest Rate Risk" for a discussion of
the effects on operating results of nonaccruing loans.)
TROUBLED DEBT RESTRUCTURINGS. Included within nonperforming loans
presented in Table 1 are troubled debt restructurings ("TDR"). TDRs represent
loans for which the Company has modified the terms of loans to borrowers by
reductions in interest rates or extensions of maturity dates at below-market
rates for loans with similar credit risk characteristics. At March 31, 1996,
TDRs totaled $5.1 million compared to $5.2 million at December 31, 1995.
Included in these amounts is 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 decreased to $23,000 at March 31, 1996 from
$221,000 at December 31, 1995.
LOAN DELINQUENCIES. Loan delinquencies increased to $2.9 million or
3.8% of loans receivable at March 31, 1996 from $1.2 million or 1.5% of loans
receivable at December 31, 1995, mainly due to the two nonaccrual loans
discussed above. Also
17
<PAGE> 18
included in the delinquencies at March 31, 1996 was a $600,000 loan secured by
commercial real estate which has since been fully repaid.
LOAN CHARGE-OFFS. As reflected in Table 3, the Company charged-off
loans amounting to $54,000 during the three month period ended March 31, 1996,
as compared to $92,000 during the corresponding period in 1995. Recoveries of
loans previously charged-off totaled $86,000 for the three month period ended
March 31, 1996 as compared to $369,000 during the same period in 1995.
Recoveries since March 31, 1996 of loans previously charged-off were over
$200,000.
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>
<CAPTION>
Table 1
Nonperforming Assets-
(dollar amounts in thousands)
December 31,
March 31, -----------------------
1996 1995 1994
--------- ------ -------
<S> <C> <C> <C>
Nonaccrual loans $1,868 $ 573 $ 3,426
Troubled debt restructurings 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 23 221 1,507
-------- ------ -------
Nonperforming loans 6,950 5,961 10,515
Other real estate owned 581 581 1,529
------- ------ -------
Total nonperforming assets $7,531 $6,542 $12,044
======= ====== =======
Allowance for loan losses as a percent of
nonaccrual loans 205.4% 664.0% 89.4%
======= ====== =======
Allowance for loan losses as a percent of
nonperforming loans 55.2% 63.8% 29.1%
======= ====== =======
Total nonperforming assets as a percent of
total loans outstanding 9.9% 8.0% 10.4%
======= ====== =======
Total nonperforming assets as a percent of
total shareholders' equity 129.7% 108.8% 116.8%
======= ====== =======
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
Table 2
Loan Portfolio Composition and Allocation of the
Allowance for Loan Losses
(dollar amounts in thousands)
December 31,
March 31, ----------------------------------
1996 1995 1994
------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio Composition:
Real estate construction and land development $ 1,092 1% $ 1,093 1% $ 948 1%
Commercial loans:
Secured by one-to-four family residential properties 10,986 14% 11,012 13% 18,398 16%
Secured by multifamily residential properties 2,226 3% 2,538 3% 2,368 2%
Secured by commercial real properties 33,711 44% 33,556 41% 32,061 28%
Other - secured and unsecured 17,734 23% 23,327 28% 43,385 37%
Home equity lines of credit 5,589 6% 5,857 6% 2,867 1%
Consumer instalment and unsecured loans to individuals 4,702 9% 4,860 8% 15,691 15%
------- --- ------- --- -------- ---
$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 (250) (231) (434)
------- ------- --------
Gross loans outstanding $75,790 $82,012 $115,284
======= ======= ========
Allocation of the Allowance for Loan Losses:
Real estate construction and land development $ 11 $ 11 $ 17
Commercial loans:
Secured by one-to-four family residential properties 205 205 77
Secured by multifamily residential properties 25 25 51
Secured by commercial real properties 454 454 674
Other - secured and unsecured 2,551 2,521 1,645
Home equity lines of credit 64 64 18
Consumer instalment and unsecured loans to individuals 523 523 578
------- ------- --------
Allowance allocable to gross loans outstanding 3,833 3,803 3,060
Commitments to extend credit under standby and
commercial letters of credit 4 2 3
------- ------- --------
Total allowance for loan losses $ 3,837 $ 3,805 $ 3,063
======= ======= ========
Allowance for loan losses allocable to gross loans
outstanding as a percent of gross loans outstanding 5.06% 4.64% 2.66%
======= ======= ========
</TABLE>
<PAGE> 21
Table 3
Analysis of Changes In the Allowance for Credit Losses
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three-month periods ended
----------------------------------------
March 31, December 31, March 31,
1996 1995 1995
--------- ------------ ---------
<S> <C> <C> <C>
Balance at beginning of period............................... $ 3,805 $ 3,459 $ 3,063
Loans charged off:
Real estate construction and land development.............. -- -- --
Commercial loans:
Secured by one-to-four family residential properties..... -- -- 70
Secured by multifamily residential properties............ -- -- --
Secured by commercial real properties.................... -- -- --
Other -- secured and unsecured........................... 54 72 92
Home equity lines of credit................................ -- -- --
Consumer instalment and unsecured loans
to individuals........................................... -- -- 49
------- ------- -------
Total loan charge-offs............................... 54 72 211
Recoveries of loans previously charged off;
Real estate construction and land development.............. -- 140 --
Commercial loans:
Secured by one-to-four family residential properties..... 1 10 1
Secured by multifamily residential properties............ -- -- --
Secured by commercial real properties.................... -- -- --
Other -- secured and unsecured........................... 75 153 342
Home equity lines of credit................................ -- -- --
Consumer instalment and unsecured loans
to individuals........................................... 10 55 26
------- ------- -------
Total recoveries of loans previously charged off..... 86 358 369
------- ------- -------
Net loan charge-offs (recoveries)............................ (32) (286) (158)
Provision for credit losses.................................. -- 60 146
------- ------- -------
Balance at end of period..................................... $ 3,837 $ 3,805 $ 3,367
======= ======= =======
</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. The
Company's asset base continued to decrease, and as a result interest earning
assets and interest bearing liabilities continued to decrease. Operating
expenses decreased during this period. If this trend continues without a
corresponding reduction in operating expenses, interest income from the reduced
earning asset base may not cover operating expenses of the Bank. Interest
earning assets at March 31, 1996 decreased to $115.8 million, compared with
$123.1 million at December 31, 1995, and $150.5 million at March 31, 1995.
Interest earning assets as a percentage of total assets was 94.3% at March 31,
1996, compared with 93.3% at December 31, 1995, and 93.7% at March 31, 1995.
Interest bearing liabilities at March 31, 1996 decreased to $74.3 million,
compared with $80.2 million at December 31, 1995, and $97.0 million at March 31,
1995. Interest bearing liabilities as a percentage of total assets was 60.5% at
March 31, 1996, compared with 60.7% at December 31, 1995, and 60.4% at March 31,
1995.
Total loans receivable at March 31, 1996 decreased to $75.8 million,
compared with $82.0 million at December 31, 1995, and $101.5 million at March
31, 1995. Loans receivable as a percentage of total assets was 61.8% at March
31, 1996, compared with 62.1% at December 31, 1995, and 63.2% at March 31, 1995.
Total deposits at March 31, 1996 decreased to $114.2 million, compared with
$120.2 million at December 31, 1995, and $146.5 million at March 31, 1995, while
interest bearing deposits at March 31, 1996 decreased to $73.2 million, compared
with $75.7 million at December 31, 1995, and $95.2 million at March 31, 1995.
Total deposits as a percentage of total assets was 93.1% at March 31, 1996,
compared with 91.1% at December 31, 1995, and 91.2% at March 31, 1995. Interest
bearing deposits as a percentage of total deposits was 64.1% at March 31, 1996,
compared with 62.9% at December 31, 1995, and 65.0% at March 31, 1995, while
interest bearing deposits as a percentage of loans receivable was 96.6% at March
31, 1996, compared with 92.3% at December 31, 1995, and 93.8% at March 31, 1995.
22
<PAGE> 23
EFFECTS OF NONPERFORMING LOANS ON NET INTEREST INCOME. Foregone
interest income attributable to nonperforming loans amounted to $56,000 for the
three month period ended March 31, 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
$82,000 and $118,000 for the three month periods ended March 31, 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.
The weighted average yield on loans receivable was 9.31% for the three
23
<PAGE> 24
month period ended March 31, 1996, compared with 9.6% for the corresponding
period in 1995. Weighted average yield on total earning assets was 8.01% for the
three month period ended March 31, 1996, compared with 8.43% for the
corresponding period in 1995. Weighted average rate on all deposits was 4.64%
for the three month period ended March 31, 1996, compared with 4.53% for the
corresponding period in 1995.
INVESTMENT SECURITIES
Investment securities decreased to $19.5 million at March 31, 1996,
from $20.1 million at December 31, 1995, and $28.5 million at March 31, 1995.
The decrease from March 31, 1995 was due to sales of securities available for
sale, resulting in realized losses during the first and second quarters of 1995.
The decrease from December 31, 1995 was due to principal payments received. Net
unrealized losses on securities available for sale at March 31, 1996 decreased
to $222,000 from $1.6 million at March 31, 1995.
24
<PAGE> 25
OTHER OPERATING INCOME
As set forth in the accompanying condensed 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 $202,000 or 54.4% in the first quarter of 1996,
from the first quarter of 1995, resulting primarily from decreases in investment
services and deposit related and other 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. These niche markets
include the entertainment industry, the technology market, the private banking
market, business banking clients, Small Business Administration clients and
escrow companies. Management anticipates that fee income from services to these
niche markets and the origination and sale of Small Business Administration
loans will continue to represent important sources of other operating income.
OTHER OPERATING EXPENSES
As indicated in the accompanying condensed consolidated statements of
operations, the Company reduced total operating expenses by $1.3 million, or
42.1%, during the first quarter of 1996 from the first quarter of 1995. The
reductions result, in part, from management's efforts to continue to reduce
operating expenses. The reduction is mainly attributable to the reduction in
salaries and related expenses, the reduction in occupancy expenses and the
$286,000 reduction in other professional services.
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.
Operations in 1996 and beyond will benefit from the substantial
reductions in operating costs achieved so far. The reduction in rent expense as
a result of the restructuring of the leases, the reduction in compensation
expense as a result of the reduction in staff, and the reduction in other
non-interest expense will contribute directly to the improved performance in
future years. Expenses in each of these areas is expected to be at levels even
lower than those in 1995. An 18.3% reduction in staff in December, 1995
represents an annual savings of $810,000.
Management continues to explore measures to further reduce the level of
other operating costs.
25
<PAGE> 26
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 quarter net losses
did not give rise to additional income tax benefits.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS
CAPITAL GUIDELINES
See Note 4 of the accompanying notes to condensed consolidated
financial statements for a discussion of the capital requirements applicable to
the Company and the Bank.
FORMAL AGREEMENT
The Bank entered into a formal agreement with the OCC 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 March 31, 1996 were 4.86% and
7.23%, respectively. At March 31, 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
not yet done), to make certain determinations as to the reasonableness of any
salary, consulting fee, expense reimbursement or other type of compensation, to
review the need for, and the reasonableness of, all existing consulting,
employment and severance contracts, to prepare a written analysis of any new
products or services, to maintain the Bank's liquidity at a level sufficient to
sustain current and anticipated operations, to develop a three year capital plan
and strategic plan, and to improve the Bank's loan administration. The Company
submitted a capital plan for the Bank on February 8, 1996 to the OCC and a copy
to the FRB. As a result of the Bank's failure to comply with 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
26
<PAGE> 27
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 quarter of 1996, the Bank could not
have declared dividends to the Company at March 31, 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 quarter 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 since
December 31, 1993 (see "Credit Portfolio Composition and Credit Risk") with the
March 31, 1996 level of $7.5 million representing a decrease of $1.1 million
from March 31, 1995. Increases in nonperforming assets may negatively affect the
Company's ability to generate adequate earnings to the extent that such
nonperforming assets result in increased provisions for credit losses and
charge-offs or adversely affect the level of income from loans in those future
periods (see "Net Interest Income and Interest Rate Risk"). For the immediate
future, the Company and the Bank intend to raise its capital leverage ratio and
its Tier 1 risk-based capital ratio in excess of those required by the Formal
Agreement primarily through the declining loan balances and earning asset levels
and from increases in capital from retained earnings or other sources. At the
same time, the Company is committed to pursuing all options regarding the future
of the Bank, including working with investment banking advisors on efforts to
find a strategic alliance and to raise additional capital to ensure the Bank's
growth and prosperity.
27
<PAGE> 28
LIQUIDITY
LIQUIDITY MANAGEMENT
The accompanying consolidated statements of cash flows present certain
information about cash flows from operating, investing and financing activities.
The Bank's principal cash flows relate to investing and financing activities,
rather than operating activities. While the statements present the periods' net
cash flows from lending and deposit activities, they do not reflect certain
important aspects of the Bank's liquidity, including (i) anticipated liquidity
requirements under outstanding credit commitments to customers (ii) intraperiod
volatility of deposits, particularly fluctuations in the volume of commercial
customers' noninterest-bearing demand deposits, and (iii) unused borrowings
available under federal funds lines, repurchase agreements and other
arrangements. The management believes that the liquidity guidelines are
generally more indicative of the Bank's overall liquidity position. A source of
operating cash flows is net interest income. See "Net Interest Income and
Interest Rate Risk" for a discussion of the impact of recent trends and events
on this source of operating cash flows. While the Bank no longer has a credit
accommodation facility at a correspondent bank, an accommodation has been put in
place at the Federal Reserve Bank. Management monitors the Bank's assets and
liabilities on a daily basis to ensure that funding sources remain adequate to
meet anticipated demand. While management believes the Bank's funding sources
are adequate to meet anticipated demand, no assurance can be made that demand on
the Bank's resources will not exceed the Bank's funding sources.
The Company has only limited expenses at the present time and has no
ability to fund the Bank's cash needs. The Company is evaluating available
methods to raise additional capital.
LIQUIDITY TRENDS
During 1995, the Bank has experienced a decline, continuing through the
first quarter of 1996, in total deposits. During the three months ended March
31, 1996, total deposits decreased, while savings deposits and money market
accounts increased.
Time certificates of deposit of $100,000 or more were $8.5 million at
March 31, 1996 and at December 31, 1995. Time certificates of deposit of
$100,000 or more continued to represent a less significant source of funding.
This represents the continuation of a trend which began in 1991. In general,
deposits of more than $100,000 are considered to be more volatile than
fully-insured deposits in denominations of less than $100,000.
28
<PAGE> 29
The Bank maintains a wholesale institutional funds acquisition
operation ("money desk"). This operation provided 28% of the Bank's average
total funding sources during the first quarter of 1996, as compared to 28%
during the first quarter of 1995, while noninterest-bearing demand deposits
provided 33% of average total funding sources during the first quarter of 1996,
compared to 34% 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
None.
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.
(b) Reports on Form 8-K.
None.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Mercantile Bancorp
(Registrant)
May 15, 1996 /s/ Howard P. Ladd
------------------
Howard P. Ladd
Chief Executive Officer
May 15, 1996 /s/ Howard P. Ladd
------------------
Howard P. Ladd
Acting Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,522
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,463
<INVESTMENTS-CARRYING> 315
<INVESTMENTS-MARKET> 315
<LOANS> 75,790
<ALLOWANCE> (3,837)
<TOTAL-ASSETS> 122,705
<DEPOSITS> 114,238
<SHORT-TERM> 1,056
<LIABILITIES-OTHER> 1,604
<LONG-TERM> 0
0
0
<COMMON> 24,614
<OTHER-SE> (18,807)
<TOTAL-LIABILITIES-AND-EQUITY> 122,705
<INTEREST-LOAN> 1,800
<INTEREST-INVEST> 282
<INTEREST-OTHER> 263
<INTEREST-TOTAL> 2,345
<INTEREST-DEPOSIT> 884
<INTEREST-EXPENSE> 892
<INTEREST-INCOME-NET> 1,453
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 1,757
<INCOME-PRETAX> (136)
<INCOME-PRE-EXTRAORDINARY> (136)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (136)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
<YIELD-ACTUAL> 4.96
<LOANS-NON> 1,868
<LOANS-PAST> 23
<LOANS-TROUBLED> 5,059
<LOANS-PROBLEM> 219
<ALLOWANCE-OPEN> 3,805
<CHARGE-OFFS> 54
<RECOVERIES> 86
<ALLOWANCE-CLOSE> 3,837
<ALLOWANCE-DOMESTIC> 3,837
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
