<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 March 31, 1997 was 3,078,146.
This document contains 18 pages.
1
<PAGE>
FORM 10-Q
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
Page(s) in
Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS 3 - 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9 - 16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 17
Item 2. CHANGES IN SECURITIES 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
<PAGE>
Item 1. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
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
3
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
------------- ------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks-demand $ 4,932 $ 5,113
Federal funds sold and securities purchased
under agreements to resell 12,400 23,000
------------- --------------
Cash and cash equivalents 17,332 28,113
Securities available-for-sale, at fair value;
aggregate amortized cost of $5,009 at March 31, 1997
and $4,078 at December 31, 1996 4,895 4,002
Securities held-to-maturity, at amortized cost; aggregate
market value of $19,094 at March 31, 1997 and
$14,355 at December 31, 1996 19,379 14,395
Federal Reserve Bank and other stock 338 233
Loans receivable 59,949 62,547
Allowance for credit losses (2,646) (2,969)
------------- --------------
Net loans 57,303 59,578
Premises and equipment, net 899 943
Other real estate owned 519 556
Accrued interest receivable and other assets 2,103 1,596
------------- --------------
$ 102,768 $ 109,416
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 35,121 $ 34,752
Interest-bearing demand 8,399 7,292
Money market accounts 15,092 15,512
Savings 4,399 5,650
Time certificates of deposit:
$100,000 and over 5,619 9,214
Under $100,000 28,533 31,434
------------- --------------
Total deposits 97,163 103,854
Securities sold under agreements to repurchase 160 --
Accrued interest payable and other liabilities 773 717
------------- --------------
Total liabilities 98,096 104,571
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, 1997 and December 31, 1996 24,614 24,614
Accumulated deficit (19,828) (19,693)
Net unrealized loss on securities available-
for-sale (114) (76)
------------- --------------
Total shareholders' equity 4,672 4,845
------------- --------------
$ 102,768 $ 109,416
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-month periods ended March 31, 1997 and 1996
(Uaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ------------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Interest income:
Loans, including fees $ 1,473 $ 1,800
Securities held-to-maturity 287 --
Securities available-for-sale 85 282
Federal funds sold and securities purchased
under agreements to resell 170 263
---------- ------------
Total interest income 2,015 2,345
Interest expense:
Interest-bearing demand 19 19
Money market and savings 139 174
Time certificates of deposit:
$100,000 and over 109 128
Under $100,000 437 563
---------- ------------
Total interest expense on deposits 704 884
Federal funds purchased and securities sold
under agreements to repurchase 7 8
---------- ------------
Total interest expense 711 892
---------- ------------
Net interest income 1,304 1,453
Provision for credit losses -- --
---------- ------------
Net interest income after provision for
loan losses 1,304 1,453
Other operating income (loss):
Loss on sale of securities available-for-sale 0 (1)
International services 23 42
Investment services 5 29
Deposit-related and other customer services 90 98
---------- ------------
Total other operating income: 118 168
Other operating expenses:
Salaries and related benefits 725 692
Net occupancy 209 192
Furniture and equipment 58 85
Printing and communications 64 62
Insurance and regulatory assessments 131 166
Customer services 125 140
Computer data processing 84 95
Legal services 65 77
Other professional services 50 191
Promotion 24 23
Other real estate owned expenses 6 7
Other expenses 16 27
---------- ------------
Total other operating expenses 1,557 1,757
---------- ------------
Loss before provision for income taxes (135) (136)
Provision for income taxes -- --
---------- ------------
Net loss $ (135) $ (136)
========== ============
Net loss per share $ (0.04) $ (0.04)
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three-month period ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
loss on
Common Stock Securities
--------------------- Accumulated Available-
Shares Amount Deficit for-Sale Total
---------- -------- ----------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ 3,078,146 $24,614 $(19,693) $ (76) $ 4,845
Net unrealized loss on
securities available for sale. -- -- -- (38) (38)
Net loss......................... -- -- (135) -- (135)
---------- -------- ---------- ------------ ----------
Balance at March 31, 1997........ 3,078,146 $ 24,614 $(19,828) $ (114) $ 4,672
=========== ======== ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-month periods ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------- -----------
(Dollars in thousands)
<S> <C> <C>
Net cash flows from operating activities:
Net loss $ (135) $ (136)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 44 60
Net loss on securities available-for-sale -- 1
Net accretion of discounts on securities held-to-maturity (13) --
Net amortization of premiums (accretion of discounts)
on securities available-for-sale (1) 18
Net amortization of premiums (accretion of discounts) on
loans purchased (9) 13
Decrease (increase) in accrued interest receivable
and other assets (470) 123
Increase in accrued interest payable and other
liabilities 56 363
------------- ----------
Net cash provided by ( used in) operating
activities (528) 442
Cash flows from investing activities:
Purchase of securities held-to-maturity (4,971) --
Purchase of securities available-for-sale (2,105) (1,000)
Proceeds from sales of securities available-for-
sale 1,000 114
Proceeds from repayments and maturities of
securities available-for-sale 70 1,438
Net decrease in loans 2,284 6,241
Net purchases of premises and equipment -- (9)
------------- ----------
Net cash provided by (used in) investing activities (3,722) 6,784
Cash flows from financing activities:
Net decrease in demand deposits, money market
and savings accounts (195) (3,698)
Net decrease in time certificates of deposits (6,496) (2,307)
Net increase (decrease) in securities sold under
agreement to repurchase and federal funds purchased 160 (3,441)
------------- ----------
Net cash used in financing activities (6,531) (9,446)
------------- ----------
Net decrease in cash and cash equivalents (10,781) (2,220)
Cash and cash equivalents, January 1 28,113 30,272
------------- ----------
Cash and cash equivalents, March 31 $ 17,332 $ 28,052
============= ==========
Supplemental cash flow information:
Cash paid for:
Interest $ 693 $ 901
Income taxes $ -- $ --
Unrealized loss on securities available-for-sale $ 38 $ 68
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Management Representations
The unaudited consolidated financial statements include the accounts of National
Mercantile Bancorp (the "Company") and its wholly owned subsidiary, Mercantile
National Bank (the "Bank") both sometimes referred to as "Company". These
unaudited financial statements reflect, in management's opinion, all adjustments
(consisting of normal recurring adjustments) necessary for the fair presentation
of the Company's financial position and the results of its operations and cash
flows for the periods presented. The results for the quarter ended March 31,
1997 are not necessarily indicative of the results expected for any subsequent
period or for the full year ending December 31, 1997. These financial
statements should be read in conjunction with the financial statements included
in the 1996 Annual Report on Form 10-K for the year ended December 31, 1996
("1996 From 10-K").
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 quarters ended March 31, 1997 and 1996 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's consolidated assets decreased during the first quarter
of 1997. At March 31, 1997, the Company's consolidated assets decreased by $6.6
million or 6.1% to $102.8 million from $109.4 million at December 31, 1996.
This decrease was due primarily to a $10.8 million decrease in cash and cash
equivalents, $5.0 million increase in securities held-to-maturity, and a $2.3
million decrease in net loans. Consolidated assets decreased by $19.9 million,
or 16.2%, from $122.7 million at March 31, 1996. This decrease was primarily the
result of a net of a $14.6 million decrease in securities available-for-sale, a
$14.7 million decrease in net loans and a $19.4 million increase in securities
held-to-maturity. Customer deposits decreased by 6.4%, or $6.7 million to $97.2
million at March 31, 1997, from $103.9 million at December 31,1996 and $17.1
million, or 14.9%, from $114.2 million at March 31, 1996.
Securities increased to $24.6 million at March 31, 1997, from $18.6 million at
December 31, 1996, and $19.8 million at March 31, 1996. The increase was
primarily due to the purchase of $5.0 million of U.S. government-sponsored
agency and Treasury securities. During the first quarter of 1997, securities
valued at $1.0 million were sold at approximately book value. Net unrealized
losses on securities available-for-sale at March 31, 1997 was $114,000, compared
with $76,000 at December 31, 1996.
During the first quarter of 1997, gross loans outstanding decreased $2.6 million
or 4.2%, to $60.2 million from $62.8 million at December 31, 1996. Loans secured
by real estate comprised 65% and 64% of gross loans at March 31, 1997 and
December 31, 1996. The Bank's allowance for loan losses as a percentage of loans
receivable decreased to 4.41% at March 31, 1997 from 4.75% at December 31, 1996,
and 5.06% at March 31, 1996 due to loan charge-offs of $323,000, net of
recoveries of loans previously charged-off of $126,000, during the first quarter
of 1997.
During the first quarter of 1997, the Bank experienced a decline in total
deposits of $6.7 million or 6.4% to $97.2 million from $103.9 million at
December 31, 1996. This decrease was primarily due to the planned reduction of
high cost time certificates of deposits.
OPERATING RESULTS
The Company recorded a net loss for the quarter ended March 31, 1997 of $135,000
or $0.04 loss per share, as compared with a net loss for the quarter ended March
31, 1996 of $136,000 or $0.04 loss per share.
Total interest income for the quarter ended March 31, 1997 was $2.0 million
compared $2.3 million for the corresponding period of 1996. Total interest
expense for the quarters ended March 31, 1997 and 1996 was $711,000 and
$892,000, respectively. Net interest income for the quarters ended March 31,
1997 decreased to $1.3 million from $1.5 million for the quarter ended December
31, 1997. The reduction in loans, securities and customer deposits which caused
a decrease in net interest income for the quarter ended March 31, 1997, is
consistent with the Company's planned restructuring of the balance sheet.
No provision was made for credit losses for the quarters ended March 31, 1997
and 1996. Charge-offs for the first quarter of 1997 and 1996 were $449,000 and
$54,000, respectively. Recoveries of loans previously charged-off for the first
quarter of 1997 and 1996 were $126,000 and $86,000, respectively. Each month the
Company reviews the allowance for credit losses and makes additional transfers
to the allowance for credit losses as needed. As of March 31, 1997, the Company
believes based on its periodic analysis that the allowance for credit losses was
adequate.
9
<PAGE>
Other operating income decreased to $118,000 for the quarter ended March 31,
1997 from $168,000 for the corresponding period in 1996. The decrease was
primarily due to volume reductions in investment and international services.
The international services department was closed in December, 1995, resulting in
reduced letter of credit and foreign exchange functions.
Other operating expenses decreased $200,000, or 11.4%, to $1.6 million for the
first quarter of 1997 from $1.8 million for the corresponding period in 1996.
The reduction between the quarters was primarily the result of the decrease in
insurance and regulatory assessments of $35,000 and a decrease in other
professional services of $141,000, partially offset by an increase in salaries
and related expenses of $33,000. These reductions are the result of management's
continued effort to reduce the utilization of outside consultants through the
addition of executive management and the streamlining of operating functions.
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. As a result of existing net operating loss
carryforwards ("NOL") for financial statement purposes (discussed in the 1996
Form 10-K), the Company's 1997 and 1996 net losses did not give rise to
additional income tax benefits. At December 31, 1996, the Company had $22.3
million and $11.8 million of income tax NOL for federal and state income tax
purposes, respectively. The federal NOL expires beginning in 2007 through 2011
and the state NOL expires beginning in 1997 through 2001.
NET INTEREST INCOME AND INTEREST RATE RISK
NET INTEREST INCOME
The Company's earnings depend largely upon net interest income, representing the
amount by which interest generated from earning assets exceeds interest expense
on interest-bearing liabilities. A primary factor affecting the level of net
interest income is the Bank's net interest margin representing the difference
between the yield earned on interest-earning assets and the rate paid on
interest-bearing liabilities. The net interest margin is affected by the change
in the relative amounts of average interest-earning assets and average interest-
bearing liabilities. In addition, the Company's ability to generate profitable
levels of net interest income is dependent on its ability to maintain sound
asset quality and appropriate levels of capital and liquidity.
<TABLE>
<CAPTION>
Table 1 Three-Month Periods Ended
Average Balance Sheets and -------------------------------------------------------------
Analysis of Net Interest Income March 31, 1997 December 31, 1996
(Dollars in thousands) --------------------------- ----------------------------
Average Average
Balances Balances
--------- ---------
Interest Average Interest Average
Income/ Yield/ Income/ Yield
Amount Expense Rate Amount Expense Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and securities
purchased under agreements to resell $12,993 $170 5.31% $22,867 $304 5.29%
Securities held-to-maturity:
U.S. Treasury and agency, corporate
and other securities 17,463 287 6.67% 3,531 62 6.98%
Securities available-for-sale:
U.S. Treasury and agency, corporate
and other securities 6,081 85 5.67% 10,263 133 5.16%
Loans (1) (2) 61,599 1,473 9.70% 63,408 1,564 9.81%
-------- -------- -------- ------ -----
Total earning assets $98,136 $2,015 8.33% $100,069 $2,063 8.20%
------- ------
Nonearning assets:
Cash and due from banks - demand 4,736 5,226
Other assets 3,199 2,868
Allowance for credit losses (2,976) (3,034)
--------- --------
Total assets $103,095 $105,130
======== ========
</TABLE>
<TABLE>
<CAPTION>
Table 1 (continued) Three-Month Periods Ended
Average Balance Sheets and -------------------------------------------------
Analysis of Net Interest Income March 31, 1996
(Dollars in thousands) -------------------------------------------------
Average Balances
----------------
Interest Average
Income/ Yield/
Amount Expense Rate
-------- -------- -------
<S> <C> <C> <C>
Federal funds sold and securities $20,090 $263 5.27%
purchased under agreements to resell
Securities held-to-maturity:
U.S. Treasury and agency, corporate -- -- --
and other securities
Securities available-for-sale:
U.S. Treasury and agency, corporate
and other securities 19,908 282 5.70%
Loans (1) (2) 77,778 1,800 9.31%
-------- --------
$117,776 $2,345 8.01%
Total earning assets =======
Nonearning assets:
Cash and due from banks - demand 6,990
Other assets 2,889
Allowance for credit losses (3,823)
---------
Total assets $123,832
=========
</TABLE>
<TABLE>
<CAPTION>
Table 1 (continued) Three-Month Periods Ended
Average Balance Sheets and ----------------------------------------------------------------
Analysis of Net Interest Income March 31, 1997 December 31, 1996
(Dollars in thousands) ------------------------------- ------------------------------
Average Average
Balances Balances
-------- --------
Interest Average Interest Average
Income/ Yield/ Income/ Yield/
Amount Expense Rate Amount Expense Rate
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and shareholder's equity:
Interest-bearing deposits:
Demand $6,078 $19 1.27% $5,133 $17 1.32%
Money market and savings 19,463 139 2.90% 21,453 158 2.93%
Time certificates of deposit:
$100,000 or more 8,081 109 5.47% 7,269 99 5.42%
Under $100,000 30,353 437 5.84% 27,673 412 5.92%
------- ------ ------- ------
Total time certificates of deposit 38,434 546 5.76% 34,942 511 5.82%
------- ------ ------- -----
Total interest-bearing deposits 63,975 704 4.46% 61,528 868 4.44%
Federal funds purchased and securities
sold under agreement to repurchase 131 1 3.10% 357 2 2.23%
Other short-term borrowings 505 6 4.82% -- -- --
------ ----- ------ ----
Total interest-bearing liabilities $64,611 $711 4.46% $61,885 $688 4.42%
----- -----
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 32,844 36,600
Other liabilities 768 1,699
Shareholders' equity 4,872 4,946
-------- --------
Total liabilities and shareholders'
Equity $103,095 $105,130
======== ========
Net interest income (spread) $1,304 3.86% $1,375 3.78%
====== ===== ====== =====
Excess of earning assets over
interest-bearing liabilities (2) $33,525 $38,183 5.47%
======== ======== =====
Net yield on earning assets 5.39%
======
Loans as a percent of total deposits
("loan-to-deposit ratio") 63.6% 64.6%
======= ======
</TABLE>
<TABLE>
<CAPTION>
Table 1 (continued) Three-Month Periods Ended
Average Balance Sheets and ------------------------------------------------
Analysis of Net Interest Income March 31, 1996
(Dollars in thousands) ------------------------------------------------
Average Balances
----------------
Interest Average
Income/ Yield/
Amount Expense Rate
-------- -------- -------
<S> <C> <C> <C>
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand $6,064 $19 1.26%
Money market and savings 23,571 174 2.97%
Time certificates of deposit:
$100,000 or more 8,345 128 6.17%
Under $100,000 38,590 563 5.87%
-------- -----
Total time certificates of deposit 46,935 691 5.92%
-------- -----
Total interest-bearing deposits 76,570 884 4.64%
Federal funds purchased and securities
sold under agreement to repurchase 1,344 8 2.39%
Other short-term borrowings -- -- --
-------- -----
Total interest-bearing liabilities $77,914 $892 4.60%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 38,579
Other liabilities 1,112
Shareholders' equity 6,227
--------
Total liabilities and shareholders'
equity $123,832
=========
Net interest income (spread) $1,453 3.40%
======= =======
Excess of earning assets over
interest-bearing liabilities (2) $39,862
========
Net yeild on earning assets 4.96%
=======
Loans as a percent of total deposits
("loan-to-deposit ratio") 67.5%
=======
(1) Average balances of loans outstanding include all nonperforming loans.
(2) Included in interest income on loans are net loan origination fees (costs), representing an adjustment to yield, amounting to
$21,000, $5,300 and ($8,400) for the three-month periods ended March 31, 1997, December 31, 1996, and March 31, 1996,
respectively.
</TABLE>
The weighted average yield on loans receivable was 9.70% for the quarter ended
March 31, 1997, compared with 9.31% for the corresponding period in 1996. The
weighted average yield on total earning assets was 8.33% for the quarter ended
March 31, 1997, compared with 8.01% for the corresponding period in 1996. The
weighted average rate on interest-bearing deposits was 4.46% for the quarter
ended March 31, 1997, compared with 4.64% for the corresponding period in 1996.
The Company analyzes its earnings performance using, among other measures, the
interest rate spread (the difference between the yield earned on assets and
rates paid on liabilities) and net yield on earning assets (net interest income
expressed as a percentage of average total interest-earnings assets).
During the quarter ended March 31, 1997, the Company's asset base decreased, and
as a result, average interest-earning assets and average interest-bearing
liabilities decreased as well. Average interest-earning assets for the quarter
ended March 31, 1997 decreased to $98.1 million, compared with $100.1 million
for the quarter ended December 31, 1996, and $117.8 million for the quarter
ended March 31, 1996. Average interest-earning assets as a percentage of total
average assets for the quarters ended March 31, 1997 and December 31, 1996 was
95.2%, compared with 95.1% for the quarter ended March 31, 1996. Average
interest-bearing liabilities for the quarter ended March 31, 1997 increased to
$64.6 million, compared with $61.9 million for the quarter ended December 31,
1996, but decreased from $77.9 million for the quarter ended March 31, 1996.
Average interest-bearing liabilities as a percentage of total average assets for
the quarter ended March 31, 1997 increased to 62.7%,
10
<PAGE>
compared with 58.9% for the quarter ended December 31, 1996, and 62.9% for the
quarter ended March 31, 1996.
The average balance of noninterest-bearing deposits for the quarter ended March
31, 1997 decreased to $32.8 million from $36.6 million for the quarter ended
December 31, 1996 and from $38.6 million for the quarter ended March 31, 1996.
Noninterest-bearing deposits as a percentage of total deposits decreased to
33.7% at March 31, 1997, as compared with 37.2% and 33.1% at December 31, 1996
and March 31, 1996, respectively.
Foregone interest income attributable to nonperforming loans amounted to $48,000
for the quarter ended March 31, 1997, compared with $56,000 for the
corresponding period in 1996. (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.)
The Company's net yield on interest-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. The Company incurs
substantial other operating expense to provide accounting, data processing and
other banking-related services to real estate title and escrow clients to the
extent that certain average noninterest-bearing deposits are maintained by such
depositors, and such deposit relationships are deemed to be profitable. Client
service expense related to these deposits is classified as other operating
expense. If client service expenses related to real estate title and escrow
clients were classified as interest expense, the Company's reported interest
expense would increase and other operating expense would decrease by $62,000 and
$82,000 for the quarters ended March 31, 1997 and 1996.
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
Table 2
Loan Portfolio Composition and Allocation of the
Allowance for Credit Losses
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------------
1997 1996 1995
---------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio Composition:
Real estate construction and land development $ 3,394 6% $ 3,441 5% $ 4,185 5%
Commercial loans:
Secured by one to four family residential properties 6,062 10% 6,233 11% 9,637 12%
Secured by multifamily residential properties 2,869 5% 2,879 5% 2,876 3%
Secured by commercial real properties 25,654 43% 26,629 42% 28,734 35%
Other - secured and unsecured 15,154 25% 16,508 26% 27,393 33%
Home equity lines of credit 462 1% 581 1% 3,983 5%
Consumer installment and unsecured loans to individuals 6,602 10% 6,545 10% 5,435 7%
------------ ------------ ------------
Gross loans outstanding 60,197 100% $ 62,816 100% $ 82,243 100%
Deferred net loan origination fees, purchased
loan discount and gains on termination of
interest rate hedging contracts (248) (269) (231)
--------- --------- -------
Loans receivable 59,949 $ 62,547 $ 82,012
========= ========= =======
Allocation of the Allowance for Loan Losses:
Real estate construction and land development 64 42 11
Commercial loans:
Secured by one to four family residential properties 231 479 205
Secured by multifamily residential properties 54 41 25
Secured by commercial real properties 738 590 454
Other - secured and unsecured 1,332 1,642 2,521
Home equity lines of credit 12 13 64
Consumer installment and unsecured loans to individuals 214 161 523
-------- -------- -------
Allowance allocable to loans receivable 2,645 $ 2,968 $ 3,803
Commitments to extend credit under standby and
commercial letters of credit 1 1 2
-------- -------- -------
Total allowance for credit losses $ 2,646 $ 2,969 $ 3,805
======== ======== =======
Allowance for credit losses allocable as a percent
of loans receivable 4.41% 4.75% 4.64%
======== ========= =======
</TABLE>
The Bank's real estate construction and land development loans are primarily
short-term interim loans made to finance construction of commercial and single
family residential property. Commercial loans secured by real estate consist
primarily of loans made based on the borrower's cash flow and which are secured
by deeds of trust on commercial and residential property to provide another
source of repayment in the event of default. Other secured and unsecured
commercial loans include revolving lines of credit, term loans for equipment and
short-term working capital lines of credit.
NONPERFORMING ASSETS
Table 3
Nonperforming Assets
(dollar in thousands)
<TABLE>
<CAPTION>
December 31,
March 31, --------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans $ 871 $ 928 $ 573
Troubled debt restructurings 5,004 5,016 5,167
Loans contractually past due 90 days or more with
respect to either principal or interest and
still accruing interest 14 300 221
-------- -------- --------
Nonperforming loans 5,889 6,244 5,961
Other real estate owned 519 556 581
-------- -------- --------
Total nonperforming assets $ 6,408 $ 6,800 $ 6,542
======= ======= =======
Allowance for loan losses as a percent of
nonaccrual loans 303.8% 319.9% 664.0%
======= ======= =======
Allowance for loan losses as a percent of
nonperforming loans 44.9% 47.5% 63.8%
======= ======= =======
Total nonperforming assets as a percent of
loans receivable 10.7% 10.9% 8.0%
======= ======= =======
Total nonperforming assets as a percent of
total shareholders' equity 137.2% 140.4% 108.8%
======= ======= =======
</TABLE>
The level of nonperforming assets, as presented in Table 3, decreased $400,000
during the first quarter of 1997 to $6.4 million from $6.8 million at December
31, 1997. Included in nonperforming assets is other real estate owned of
$519,000 and $556,000 at March 31, 1997 and December 31, 1996, respectively.
Nonaccrual loans decreased $57,000 during the first quarter of 1997 to $871,000
as compared with $928,000 at December 31, 1996 and $1.9 million at March 31,
1996. (See "Net Interest Income and Interest Rate Risk" for a discussion of the
effects on operating results of nonaccruing loans.)
Troubled debt restructurings ("TDR") 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. TDRs totaled $5.0 million at March 31, 1997
11
<PAGE>
and December 31, 1996, compared with $5.2 million at March 31, 1996. Included
in TDRs is one loan with a balance of $4.9 million that is secured by a first
deed of trust on a single family residence which, as of December 31, 1996, had
an appraised value of $10 million.
Loan delinquencies greater than 30 days past due increased to $2.5 million or
4.2% of loans receivable at March 31, 1997 from $2.3 million or 3.7% of loans
receivable at December 31, 1996. Loans contractually past due 90 days or more
and still accruing interest decreased to $14,000 at March 31, 1997 from $300,000
at December 31, 1996.
Table 4
Analysis of Changes in the Allowance for Credit Losses
(Dollars in thousands)
<TABLE>
<CAPTION>
Three-month periods ended
------------------------------------
March 31, December 31 March 31,
1997 1996 1996
----------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period $ 2,969 $ 3,805 $ 3,805
Loans charged-off:
Real estate construction and land development -- -- --
Commercial loans:
Secured by one to four family residential properties 204 9 --
Secured by multifamily residential properties -- -- --
Secured by commercial real properties 52 -- --
Other - secured and unsecured 159 1,183 54
Home equity lines of credit -- -- --
Consumer installment and unsecured loans
to individuals 34 108 --
---------- --------- -----------
Total loan charge-offs 449 1,300 54
Recoveries of loans previously charged-off:
Real estate construction and land development -- -- --
Commercial loans:
Secured by one to four family residential properties 0 26 1
Secured by multifamily residential properties -- -- --
Secured by commercial real properties -- -- --
Other - secured and unsecured 119 398 75
Home equity lines of credit -- -- --
Consumer instalment and unsecured loans
to individuals 7 40 10
--------- --------- -----------
Total recoveries of loans previously charged-off 126 464 86
--------- --------- -----------
Net loan charge-offs (recoveries) 323 836 (32)
Provision for loan losses -- -- --
--------- --------- -----------
Balance at end of period $ 2,646 $ 2,969 $ 3,837
========= ========= ===========
</TABLE>
Loan charged-offs were $449,000 for the first quarter, as compared with $54,000
for the corresponding period in 1996. Recoveries of loans previously charged-
off totaled $126,000 for the first quarter, as compared with $86,000 during the
first quarter of 1996.
The Financial Accounting Standards Board issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") considers a loan impaired
when, based on current information and events, it is probable a creditor will be
unable to collect all amounts contractually due under the a loan agreement. Due
to the size and nature of the Bank's loan portfolio, impaired loans are
determined by a periodic evaluation on an individual loan basis.
At March 31, 1997 and 1996, the Bank had classified $910,000 and $2.0 million of
its loans as impaired under SFAS No. 114, with specific reserves of $220,000 and
$1.0 million, respectively. In addition, $5.9 million and $7.3 million of the
Bank's loans were classified as impaired with no related specific reserves at
March 31, 1997 and 1996, respectively. The average recorded investment in
impaired loans during the quarters ended March 31, 1997 and 1996 was $7.0
million and $9.4 million, respectively. Impaired loans as of March 31, 1997
included nonaccrual loans of $871,000. Interest income on impaired loans which
are performing is recognized on an accrual basis and interest income on such
loans totaled $148,000 and $193,000 for the first quarters of 1997 and 1996,
respectively. Of the investment in loans that are considered to be impaired at
March 31, 1997, $4.9 million or 72.0% was represented by a loan that is
collateralized by a single family residence which, as of December 31, 1996, had
an appraised value of $10 million.
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 is subject 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.
<TABLE>
<CAPTION>
Table 5 1997
Interest Rate Maturities of Amounts Maturing or Repricing in
Assets and Funding sources -----------------------------------------------
at March 31, 1997 After After
(Dollars in thousands) three one
months year
Less than but but
three within within After Not Rate
months one year 5 years 5 years Sensitive Total
---------- ---------- ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal Funds sold and securities
purchased under agreements to resell $ 12,400 $ -- $ -- $ -- $ -- $12,400
Securities held-to-maturity -- 984 18,395 -- -- 19,379
Securities held-for-sale 2,000 -- -- 2,895 -- 4,895
Federal Reserve Bank and other stock -- -- -- 338 -- 338
Loans receivable 34,173 19,514 4,028 2,234 -- 59,949
---------- ---------- ---------- --------- ---------- --------
Total earning assets 48,573 20,498 22,423 5,467 -- 96,961
Non-earning assets
Cash and due from banks -- -- -- -- 4,932 4,932
Other real estate owned -- -- -- -- 519 519
All other assets -- -- -- -- 3,002 3,002
Allowance for credit losses -- -- -- -- (2,646) (2,646)
---------- ---------- ---------- --------- ---------- --------
Total assets 48,573 20,498 22,423 5,467 5,807 102,768
Liabilities & Shareholders' Equity:
Interest-bearing Deposits:
Interest-bearing demand, money
market and savings 27,890 -- -- -- -- 27,890
Time certificates of deposit 7,124 20,958 6,070 -- -- 34,152
Federal funds purchased and securities
sold under agreements to repurchase 160 -- -- -- -- 160
---------- ---------- ---------- --------- ---------- --------
Total Interest-bearing liabilities 35,174 20,958 6,070 -- -- 62,202
---------- ---------- ---------- --------- ---------- --------
Noninterest-bearing liabilities:
Noninterest bearing deposits -- -- -- -- 35,121 35,121
Other liabilities -- -- -- -- 773 773
Shareholders' equity -- -- -- -- 4,672 4,672
---------- ---------- ---------- --------- ---------- --------
Total liabilities & shareholders equity 35,174 20,958 6,070 -- 40,566 102,768
---------- ---------- ---------- --------- ---------- --------
Interest rate-sensitivity gap 13,399 (460) 16,353 5,467 (34,759) --
========== ========== ========== ========= ========== ========
Cumulative interest rate-sensitivity gap $ 13,399 $ 12,939 $ 29,292 $ 34,759 -- --
========== ========== ========== ========= ========== ========
Cumulative rate sensitivity gap as a
percent of cumulative earning assets 28% 19% 32% 36%
==== ==== ==== ====
</TABLE>
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.
12
<PAGE>
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS
Shareholders' Equity and Regulatory Capital (continued)
<TABLE>
March 31, 1997
(Unaudited) December 31, 1996
---------------------------------------------- ----------------------------------------
Company Bank Company Bank
--------------------- -------------------- ---------------- --------------------
Amount Assets Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- --------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk-based capital (1) (3):
Tier 1 capital $4,786 7.11% $4,775 7.10% $ 4,921 6.96% $4,911 6.95%
Tier 1 capital minimum
requirement 2,692 4.00% 6,729 10.00% 2,828 4.00% 7,071 10.00%
------- ------- ------ ------- ------ ------ ------ ------
Excess (Deficiency) $2,094 3.11% ($1,954) (2.90%) $ 2,093 2.96% ($2,160) (3.05%)
======= ====== ======== ======== ====== ====== ======== =======
Total capital $ 5,649 8.39% $ 5,638 8.38% $ 5,831 8.25% $ 5,820 8.24%
Total capital minimum
requirement 5,383 8.00% 5,383 8.00% 5,657 8.00% 5,657 8.00%
------- ------- ------ ------- ------ ------ ------ ------
Excess $ 266 0.39% $ 255 0.38% $ 174 0.25% $ 163 0.24%
======= ====== ======== ======== ====== ====== ======== =======
Total risk-weighted assets $67,291 $67,291 $70,710 $70,710
Capital Leverage Ratio (1) (2) (3):
Tier 1 capital $4,786 4.64% $4,775 4.63% $ 4,921 4.68% $4,911 4.67%
Tier 1 capital minimum
requirement 4,127 4.00% 6,706 6.50% 4,210 4.00% 6,841 6.50%
------- ------- ------ ------- ------ ------ ------ ------
Excess (Deficiency) $659 0.64% ($1,931) (1.87%) $ 711 0.68% ($1,930) (1.83%)
======= ====== ======== ======== ====== ====== ======== =======
Average total assets, as
adjusted, during three-month
periods ended March 31, 1997
and December 31, 1996 $103,174 $103,174 $105,249 $105,249
(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, 1997
and December 31, 1996 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.
</TABLE>
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"). The Bank's capital leverage ratio and Tier 1 risk-based
capital ratio at March 31, 1997 were 4.63% and 7.10%, respectively. At March
31, 1997, 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 had 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
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 updated 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 ("FRB"). 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, 1996 and the first quarter of
1997, the Bank could not have declared dividends to the Company at March 31,
1997 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 to its shareholders without the prior written approval of the FRB.
PLANS TO RAISE ADDITIONAL CAPITAL
On February 10, 1997, the Company filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-2 pursuant to
the Securities Act of 1933, as amended, with respect to a proposed rights
offering (the "Public Offering") to its shareholders and certain qualified
investors (the "Standby Purchasers"). The Commission declared the Registration
Statement effective on May 13, 1997. The Public Offering provides for the
purchase of a minimum of $2.5 million to a maximum of
13
<PAGE>
$8.0 million of 6.5% non cumulative convertible preferred stock ("Preferred
Stock") with a $10.00 stated value, for a subscription price of $1.10 per share
( $10.00 after giving effect to the Company's proposed 9.09 to 1 reverse stock
split). In connection with the Public Offering, the Company has entered into
purchase agreements with the Standby Purchasers pursuant to which the Standby
Purchasers have agreed to purchase between $1.0 million and $2.5 million of
Preferred Stock. The maximum available to the Standby Purchasers is subject to a
reduction based on the level of shareholder participation.
In addition, the Company entered into private purchase agreements with Conrad
Company, a bank holding company which is controlled by Carl Pohlad and Wildwood
Enterprises, Inc. Profit Sharing Plan and Trust (the "Private Offering"). The
Private Offering provides for the acquisition of a minimum of $2.5 to a maximum
of $5.5 million of Preferred Stock at a purchase price per share of $1.10 per
share ($10.00 after giving effect to the reverse stock split). The shares of
Preferred Stock available in the Private Offering are subject to a reduction
based on the level of shareholder participation. The Company anticipates that
between $8.0 million and $9.0 million will be raised from the Public Offering
and the Private Offering.
The primary purposes of the Public Offering and the Private Offering are to
enable the Company to downstream sufficient capital to the Bank, to comply with
the capital requirements of formal regulatory agreements entered into between
the Bank and the OCC and the Company and the FRB and to facilitate the
implementation of the business strategies of the Company and the Bank. Proceeds
from the Public Offering and the Private Offering will not be used to pay
dividends on the Preferred Stock.
14
<PAGE>
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. 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 consistent 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. See
"Capital Resources - Plans to Raise Capital."
LIQUIDITY TRENDS
Time certificates of deposit of $100,000 or more were $5.6 million at March 31,
1997, compared with $9.2 million at December 31, 1996 and $8.5 million at March
31, 1996. 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.
<TABLE>
<CAPTION>
Table 7
Funding Composition and Liquidity Trends
(Dollars in thousands) Three-month period ended
(Balances are period averages) -------------- ----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1997 1996 1996 1996 1996
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits:
Real estate title and escrow company customers $ 7,947 8% $ 8,419 9% $ 8,506 9% $ 11,809 11% $ 8,385 7%
All other noninterest-bearing demand 24,897 26% 28,181 29% 25,458 25% 25,149 24% 30,194 26%
Interest-bearing demand, money market and savings 25,541 26% 26,587 27% 27,326 27% 26,389 25% 29,635 25%
Time certificates of deposit:
Money desk operation 26,359 27% 22,729 23% 24,939 25% 28,030 26% 32,358 28%
All other:
$100,000 or more 5,819 6% 5,487 5% 4,865 5% 5,167 5% 5,688 5%
Under $100,000 6,256 7% 6,726 7% 7,442 8% 8,290 8% 8,889 8%
-------------- ------------- ------------- ------------- -------------
Total time certificates of deposit $ 38,434 40% $ 34,942 35% $ 37,246 38% $ 41,487 39% $ 46,935 41%
-------------- ------------- ------------- ------------- -------------
Total deposits 96,819 100% 98,129 100% 98,536 99% 104,834 99% 115,149 99%
Securities sold under agreements to repurchase 131 0% 357 0% 1,346 1% 1,517 1% 1,344 1%
-------------- ------------- ------------- ------------- -------------
Total funding liabilities $ 96,950 100% $ 98,486 100% $ 99,882 100% $ 106,351 100% $ 116,493 100%
============== ============= ============= ============= =============
Average loan-to-deposit ratio 63.6% 64.6% 67.8% 68.7% 67.5%
========== ========= ========= ========= =========
Period-end pledged securities ratio 21.7% 21.5% 61.3% 61.7% 57.6%
========== ========= ========= ========= =========
</TABLE>
The Bank maintains a wholesale institutional funds acquisition operation ("money
desk"). This operation provided 27% of the Bank's average total funding sources
during the first quarter of 1997, as compared with 28% during the first quarter
of 1996, while noninterest-bearing demand deposits provided 34% of average total
funding sources during the first quarter of 1997, compared with 33% during the
comparable 1996 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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain matters discussed in this Quarterly Report and documents incorporated by
reference may constitute forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation reform Act of 1995
as to which are not historical facts. The Company cautions
15
<PAGE>
readers that the following important factors could affect the Company's business
and cause actual results to differ materially from those expressed in forward-
looking statement made by, or on behalf of, the Company.
Economic conditions. The Company's results are strongly influenced by general
economic conditions in its market area, Southern California, and a deterioration
in these conditions could have a material adverse impact on the quality of the
Bank's loan portfolio and the demand for its products and services. In
particular, changes in economic conditions in the real estate and entertainment
industries may affect the Company's performance. Although 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 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.
Interest rates. Management anticipates that interest rate levels will remain
generally constant in 1997, but if interest rates vary significantly from
present levels, this may vary the Company's results to differ materially.
Government regulation and monetary policy. All forward-looking statements
presume a continuation of the existing regulatory environment and U.S.
government monetary policies. The banking industry is subject to extensive
federal and state regulation, and significant new laws or changes in, or repeals
of, existing laws may cause results to differ materially.
Competition. The Bank competes with numerous other financial institutions and
non-depository financial intermediaries. If the circumstances affecting the
nature or level of competition change, such as the merger of competing financial
institutions or the acquisition of California institutions by out of state
banks, the results may differ materially from the results currently anticipated.
Credit quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with terms of their loans. The Bank has
implemented an enhanced process by which it reviews and manages the credit
quality of the loan portfolio. The ongoing credit control process includes a
stringent risk rating and monitoring system and a quarterly review of loans by
an independent outside loan review consultant. However, these policies and
procedures may not prevent unexpected losses that could adversely affect the
Company's results of operations and financial condition.
While management believes that its assumptions regarding these and other factors
on which forward-looking statements are based are reasonable, such assumptions
are necessarily speculative in nature, and actual outcomes can be expected to
differ to some degree. Consequently, there can be no assurance that the results
described in such forward-looking statements will, in fact, be achieved.
16
<PAGE>
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
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
17
<PAGE>
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, 1997 /s/ Howard P. Ladd
-----------------------
Howard P. Ladd
Chief Executive Officer
May 15, 1997 /s/ Joseph W. Kiley III
-----------------------
Joseph W. Kiley III
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,932
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,895
<INVESTMENTS-CARRYING> 19,379
<INVESTMENTS-MARKET> 19,094
<LOANS> 59,949
<ALLOWANCE> 2,646
<TOTAL-ASSETS> 102,768
<DEPOSITS> 97,163
<SHORT-TERM> 160
<LIABILITIES-OTHER> 773
<LONG-TERM> 0
0
0
<COMMON> 24,614
<OTHER-SE> (19,942)
<TOTAL-LIABILITIES-AND-EQUITY> 102,768
<INTEREST-LOAN> 1,473
<INTEREST-INVEST> 372
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 2,015
<INTEREST-DEPOSIT> 704
<INTEREST-EXPENSE> 711
<INTEREST-INCOME-NET> 1,304
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,557
<INCOME-PRETAX> (135)
<INCOME-PRE-EXTRAORDINARY> (135)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (135)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<YIELD-ACTUAL> 5.38
<LOANS-NON> 871
<LOANS-PAST> 14
<LOANS-TROUBLED> 5,004
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,969
<CHARGE-OFFS> 449
<RECOVERIES> 126
<ALLOWANCE-CLOSE> 2,646
<ALLOWANCE-DOMESTIC> 1,698
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 948
</TABLE>
