<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 September 30, 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 November 10, 1997 was 338,244.
<PAGE>
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................................. 3-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 9-20
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK......................................................... 21
PART II-OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................... 22
Item 2. CHANGES IN SECURITIES................................ 22
Item 3. DEFAULTS UPON SENIOR SECURITIES...................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 22
Item 5. OTHER INFORMATION.................................... 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 22
SIGNATURES................................................... 23
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------- ----
<S> <C>
Consolidated Balance Sheets................................ 4
Consolidated Statements of Operations...................... 5
Consolidated Statement of Changes in Shareholders' Equity.. 6
Consolidated Statements of Cash Flows...................... 7
Notes to Consolidated Financial Statements................. 8
</TABLE>
3
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
ASSETS
------
Cash and due from banks-demand.................................................. $ 6,325 $ 5,113
Federal funds sold.............................................................. 8,200 23,000
Cash and cash equivalents................................................... 14,525 28,113
-------- --------
Interest-bearing deposits with other financial institutions 19 --
Securities available-for-sale, at fair value; aggregate amortized cost of
$24,891 at September 30, 1997 and $4,078 at December 31, 1996................. 24,874 4,002
Securities held-to-maturity, at amortized cost; aggregate market
value of $17,908 at September 30, 1997 and $14,355 at December 31, 1996....... 17,923 14,395
Federal Reserve Bank and other stock............................................ 338 233
Loans receivable................................................................ 56,669 62,547
Allowance for credit losses..................................................... (2,589) (2,969)
-------- --------
Net loans receivable........................................................ 54,080 59,578
Premises and equipment, net..................................................... 818 943
Other real estate owned......................................................... 517 556
Accrued interest receivable and other assets.................................... 1,723 1,596
-------- --------
$114,817 $109,416
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing demand............................................... $ 34,593 $ 34,752
Interest-bearing demand.................................................. 6,108 7,292
Money market accounts.................................................... 17,929 15,512
Savings.................................................................. 5,250 5,650
Time certificates of deposit:
$100,000 and over..................................................... 9,252 9,214
Under $100,000........................................................ 23,287 31,434
-------- --------
Total deposits..................................................... 96,419 103,854
Securities sold under agreements to repurchase............................... 5,057 --
Accrued interest payable and other liabilities............................... 1,207 717
-------- --------
Total liabilities.................................................. 102,683 104,571
Shareholders' equity:
6.5% noncumulative convertible preferred stock, $10 stated
value, authorized 1,000,000 shares, issued and outstanding
900,000 and 0 at September 30, 1997 and December 31, 1996,
respectively......................................................... 7,350 --
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 338,525 and 338,630 at September 30,
1997 and December 31, 1996, respectively............................. 24,612 24,614
Accumulated deficit......................................................... (19,811) (19,693)
Net unrealized loss on securities available-for-sale........................ (17) (76)
-------- --------
Total shareholders' equity........................................ 12,134 4,845
-------- --------
$114,817 $109,416
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees................................................... $1,485 $1,649 $4,435 $ 5,179
Securities held-to-maturity............................................. 306 -- 916 --
Securities available-for-sale........................................... 217 235 348 795
Federal funds sold...................................................... 220 237 540 720
------ ------ ------ -------
Total interest income............................................ 2,228 2,121 6,239 6,694
Interest expense:
Interest-bearing demand................................................. 24 24 70 59
Money market and savings................................................ 172 147 444 476
Time certificates of deposit:
$100,000 and over................................................ 114 95 297 320
Under $100,000................................................... 384 446 1,234 1,513
------ ------ ------ -------
Total interest expense on deposits............................... 694 712 2,045 2,368
Securities sold under agreements to repurchase.......................... 10 6 24 23
------ ------ ------ -------
Total interest expense........................................... 704 718 2,069 2,391
------ ------ ------ -------
Net interest income.............................................. 1,524 1,403 4,170 4,303
Provision for credit losses................................................ -- -- -- --
------ ------ ------ -------
Net interest income after provision for credit losses............ 1,524 1,403 4,170 4,303
Other operating income:
Loss on sale of securities available-for-sale.......................... (12) -- (12) (1)
International services................................................. 30 34 82 97
Investment services.................................................... 4 13 14 68
Deposit-related and other customer services............................ 85 77 251 244
------ ------ ------ -------
Total other operating income..................................... 107 124 335 408
Other operating expenses:
Salaries and related benefits.......................................... 723 749 2,181 1,998
Net occupancy.......................................................... 200 207 615 587
Furniture and equipment................................................ 47 70 152 237
Printing and communications............................................ 55 40 173 151
Insurance and regulatory assessments................................... 126 165 396 492
Customer services...................................................... 164 144 394 446
Computer data processing............................................... 65 90 222 272
Legal services and settlements......................................... 34 122 158 1,379
Other professional services............................................ 53 74 160 552
Promotion.............................................................. 46 26 97 90
Other real estate owned expenses....................................... 5 6 16 26
Other expenses......................................................... 19 16 59 75
------ ------ ------ -------
Total other operating expenses................................... 1,537 1,709 4,623 6,305
------ ------ ------ -------
Income (loss) before provision for income taxes (benefit)........ 94 (182) (118) (1,594)
Provision for income taxes (benefit)....................................... -- -- -- (579)
------ ------ ------ -------
Net earnings (loss).............................................. $ 94 $ (182) $ (118) $(1,015)
====== ====== ====== =======
Earnings (loss) per common share and common equivalent share..... $ 0.08 $(0.54) $(0.35) $ (3.00)
====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
PREFERRED STOCK COMMON STOCK SECURITIES
--------------- ------------ ACCUMULATED AVAILABLE-
SHARES AMOUNT SHARES AMOUNT DEFICIT FOR-SALE TOTAL
-------- -------- -------- -------- ------------ ------------ -------
(DOLLARS IN THOUSANDS EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997.......... -- $ -- 338,630 $24,614 $(19,693) $(76) $ 4,845
Decrease in net unrealized loss
on securities available for
sale.......................... -- -- -- -- -- 59 59
Net loss........................ -- -- -- -- (118) -- (118)
Issuance of 6.5% noncumulative
convertible preferred stock,
$10 stated value, net 900,000 7,350 -- -- -- -- 7,350
Return of fractional shares of
common stock due to reverse
stock split................... -- -- (105) (2) (2)
------- ------ ------- ------- -------- ---- -------
Balance at September 30, 1997....... 900,000 $7,350 338,525 $24,612 $(19,811) $(17) $12,134
======= ====== ======= ======= ======== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Net cash flows from operating
activities:
Net loss......................................................................... $ (118) $ (1,015)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................... 134 147
Net loss on securities available-for-sale................................... 12 1
Net accretion of discountson securities held-to-maturity.................... (30) --
Net amortization of premiums (accretion of discounts) on securities
available-for-sale......................................................... -- 50
Net amortization of premiums (accretion of discounts) on loans purchased.... (27) 18
(Increase) decrease in accrued interest receivable and other assets......... (88) 158
Increase in accrued interest payable and other liabilities.................. 490 433
-------- --------
Net cash provided by (used in) operating activities.................... 373 (208)
Cash flows from investing activities:
Increase in interest-bearing deposits............................................ (19) --
Purchase of securities held-to-maturity.......................................... (6,972) --
Purchase of securities available for sale........................................ (23,119) (1,000)
Proceeds from sales of securities available-for-sale............................. 1,865 114
Proceeds from repayments and maturities of securities held-to-maturity........... 3,475 --
Proceeds from repayments and maturities of securities available-for-sale......... 323 5,377
Net decrease in loans receivable................................................. 5,525 16,370
Purchase of other real estate owned.............................................. (43)
Proceeds from the sale of other real estate owned................................ 62
Net purchases of premises and equipment.......................................... (9) (9)
-------- --------
Net cash provided by (used in) investing activities.................... (18,931) 20,871
Cash flows from financing activities:
Net increase (decrease) in emand deposits, money market and savings accounts..... 674 (13,354)
Net decrease in time certificates of deposits.................................... (8,109) (13,649)
Net increase (decrease) in securities sold under agreement to repurchase and
federal funds purchased........................................................ 5,057 (4,063)
Return of fractional shares of common stock due to reverse stock split........... (2) --
Net proceeds from issuance of 900,000 shares of preferred stock.................. 7,350 --
-------- --------
Net cash used in financing activities.................................. 4,970 (31,066)
-------- --------
Net decrease in cash and cash equivalents............................................... (13,588) (10,403)
Cash and cash equivalents, January 1.................................................... 28,113 30,272
-------- --------
Cash and cash equivalents, September 30................................................. $ 14,525 $ 19,869
======== ========
Supplemental cash flow information:
Cash paid for interest........................................................... $ 2,048 $ 2,451
Increase (decrease) in unrealized loss on securities available-for-sale.......... $ (59) 43
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements include the accounts of
National Mercantile Bancorp (the "Company") and its wholly owned subsidiary,
Mercantile National Bank (the "Bank") both sometimes referred to as
"Company". These unaudited consolidated financial statements reflect, in
management's opinion, all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the Company's consolidated
financial position and the results of its operations and cash flows for the
periods presented. The results for the quarter and nine months ended September
30, 1997 are not necessarily indicative of the results expected for any
subsequent period or for the full year ending December 31, 1997. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements included in the 1996 Annual Report on Form
10-K for the year ended December 31, 1996 ("1996 Form 10-K").
NOTE 2--EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of
common shares outstanding during the period. The weighted average number of
common shares and common share equivalents outstanding for the quarter ended
September 30, 1997 was 1,241,973. The weighted average number of common shares
outstanding for the quarter ended September 30, 1996 was 338,630. All periods
presented were restated for the 9.09 to 1 reverse stock split effective June 20,
1997.
Loss per share computations where applicable 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.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" which specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. SFAS No. 128 eliminates both
"primary" and "fully diluted" EPS, and requires the computation and
disclosures of "basic" EPS and "diluted" EPS. SFAS No. 128 shall be
effective for financial statements for both interim and annual periods ending
after December 15, 1997, and earlier application is not permitted. The Company's
analysis of SFAS No. 128 concluded that its adoption would have the following
impact on the EPS disclosures contained herein:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share.................. $ .28 $(.54) $(.35) $(3.00)
Dilluted earnings per share............... $ .08 $(.54) $(.35) $(3.00)
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
National Mercantile Bancorp (the "Company") is the holding company for
Mercantile National Bank (the "Bank"). Because the Bank constitutes
substantially all of the business of the Company, references to the Company in
this Item 2 reflect the consolidated activities of the Company and the Bank.
FINANCIAL CONDITION
The Company's consolidated assets increased during the third quarter of
1997. At September 30, 1997, the Company's consolidated assets increased by $7.8
million or 7.3% to $114.8 million from $107.0 million at June 30, 1997. This
increase was reflected by an increase in investment securities of $20.6 million
partially offset by a decrease of $10.1 million in cash and cash equivalents,
and was primarily the result of an increase in deposits of $3.1 million and an
increase in securities sold under agreements to repurchase of $5.0 million.
At September 30, 1997, the Company's consolidated assets increased by
$5.4 million or 4.9% to $114.8 million from $109.4 million at December 31, 1996.
This increase was due primarily to a $20.9 million increase in securities
available-for-sale and a $3.5 million increase in securities held-to-maturity
partially offset by a $13.6 million decrease in cash and cash equivalents and a
$5.5 million decrease in net loans receivable. Customer deposits decreased by
7.2%, or $7.5 million to $96.4 million at September 30, 1997 from $103.9 million
at December 31, 1996, while securities sold under agreements to repurchase
increased $5.1 million during the same period.
Securities increased to $43.1 million at September 30, 1997 from $18.6
million at December 31, 1996. This increase was primarily due to the purchase of
$30.0 million of U.S. government-sponsored agency and Treasury securities
partially offset by sales and maturities of $5.3 million. Net unrealized losses
on securities available-for-sale at September 30, 1997 was $17,000, compared
with $76,000 at December 31, 1996.
At September 30, 1997, loans receivable outstanding decreased $5.9
million or 9.4%, to $56.7 million from $62.6 million at December 31, 1996. Loans
secured by real estate comprised 64% of loans receivable at September 30, 1997
and December 31, 1996. The allowance for loan losses as a percentage of loans
receivable decreased to 4.6% at September 30, 1997 from 4.8% at December 31,
1996. This decrease is the result of loans charged-off of $380,000, net of
recoveries of loans previously charged-off of $315,000, during the first nine
months of 1997.
OPERATING RESULTS
The Company recorded net income for the three months ended September 30,
1997 of $94,000 or $0.08 per share, compared with a net loss for the three
months ended September 30, 1996 of $182,000 or $0.54 loss per share. The
improvement in earnings during the third quarter of 1997 compared to the
corresponding period in 1996 was primarily the result of the investment of net
proceeds of $7.35 million raised from the capital offerings completed on June
30, 1997. During the nine months ended September 30, 1997, the Company recorded
a net loss of $118,000 or $0.35 loss per share compared to a net loss of $1.0
million or $3.00 loss per share during the nine months ended September 30, 1996.
Total interest income for the three and nine month periods ended September
30, 1997 was $2.2 million and $6.2 million, respectively, compared with total
interest income for the corresponding periods of 1996 of $2.1 million and $6.7
million, respectively. Total interest expense for the three and nine month
periods ended September 30, 1997 was $704,000 and $2.1 million, respectively,
compared with total interest expense for the corresponding periods in 1996 of
$718,000 and $2.4 million, respectively.
9
<PAGE>
Net interest income for the three and nine month periods ended September
30, 1997 was $1.5 million and $4.2 million, respectively, compared with net
interest income for the corresponding periods of 1996 of $1.4 million and $4.3
million, respectively.
Reduced levels of interest income, interest expense and net interest
income were the direct result of lower volumes of average interest earning
assets and average interest bearing liabilities during the nine month period
ended September 30, 1997 compared to the corresponding period in 1996.
No provision was made for loan losses for the nine month periods ended
September 30, 1997 and 1996. Loans charged-off during the three and nine month
periods ended September 30, 1997 were $45,000 and $695,000, respectively,
compared with $66,000 and $1,190,000, respectively, during the corresponding
periods in 1996. Recoveries of loans previously charged-off totaled $88,000 and
$315,000, respectively, during the three and nine month periods ended September
30, 1997, compared with $54,000 and $437,000, respectively, during the
corresponding periods in 1996. Each month the Company reviews the allowance for
loan losses and makes provision as needed. As of September 30, 1997, the Company
believes, based on its periodic analysis, the allowance for credit losses is
adequate to absorb known and inherent risk in the loan portfolio.
Other operating income decreased during the three and nine month period
ended September 30, 1997 to $107,000 and $335,000, respectively, from $124,000
and $408,000, respectively, during the corresponding periods in 1996. The
decrease was primarily due to volume reduction in investment and international
services.
Other operating expense decreased during the three and nine month periods
ended September 30, 1997 by $172,000 or 10.1%, and $682,000 or 12.9%,
respectively, to $1.5 million and $4.6 million, respectively, from $1.7 million
and $5.3 million, respectively, during the corresponding periods in 1996,
excluding the legal settlement of $1.0 million recorded during the second
quarter of 1996. The reduction of $682,000 or 12.9% for the nine month period
ended September 30, 1997 was primarily due to decreases in insurance and
regulatory assessments of $96,000, legal services of $221,000 and other
professional services of $392,000, partially offset by an increase in salaries
and related benefits of $183,000. 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 income tax
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.
10
<PAGE>
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.
The following table presents average balance sheet information for the
Company, together with interest income and yields earned on average interest-
earning assets and interest expense and rates paid on average interest-bearing
liabilities for periods indicated.
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
----------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------------- ------------------------------------
AVERAGE AVERAGE
BALANCES INTEREST AVERAGE BALANCES INTEREST AVERAGE
-------- INCOME/ YIELD/ -------- INCOME/ YIELD/
AMOUNT EXPENSE RATE AMOUNT EXPENSE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
securities purchased under
agreements to resell................... $ 13,122 $ 540 5.50% $ 18,466 $ 720 5.21%
Interest-bearing deposits
with other financial
institutions........................... 3 -- -- -- -- --
Securities held-to-maturity:
U.S. Treasury and agency,
corporate and other
securities........................... 18,365 916 6.67% -- -- --
Securities available-for-sale:
U.S. Treasury and agency,
corporate and other
securities........................... 7,590 348 6.13% 18,815 795 5.64%
Loans(1)(2)............................. 59,439 4,435 9.98% 72,181 5,179 9.58%
-------- ------ -------- ------
Total earning assets.................. 98,519 6,239 8.47% 109,462 6,694 8.17%
Nonearning assets:
Cash and due from banks-demand........ 4,778 6,096
Other assets.......................... 3,465 2,894
Allowance for credit losses........... (2,940) (3,741)
-------- --------
Total assets.......................... $103,822 $114,711
======== ========
Liabilities and shareholder's equity:
Interest-bearing deposits:
Demand................................ $ 7,464 $ 70 1.25% $ 6,177 $ 59 1.28%
Money market and savings.............. 20,245 444 2.93% 21,594 476 2.94%
Time certificates of deposit:
$100,000 or more.................... 7,258 297 5.47% 7,814 320 5.47%
Under $100,000...................... 27,906 1,234 5.91% 34,058 1,513 5.93%
-------- ------ -------- ------
Total time certificates
of deposit......................... 35,164 1,531 5.82% 41,872 1,833 5.85%
-------- ------ -------- ------
Total interest-bearing
deposits............................. 62,873 2,045 4.35% 69,643 2,368 4.54%
Federal funds purchased and
securities sold under
agreement to repurchase................ 484 18 4.97% 1,402 23 2.19%
Other short-term borrowings............. 173 6 4.64% -- -- --
-------- ------ -------- ------
Total interest-bearing
liabilities.......................... 63,530 2,069 4.35% 71,045 2,391 4.50%
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits............................. 32,236 36,489
Other liabilities..................... 1,039 1,507
Shareholders' equity.................... 7,017 5,670
-------- --------
Total liabilities and
shareholders' equity................. $103,822 $114,711
======== ------ ======== ------
Net interest income (spread............. $4,170 4.11% $4,303 3.67%
====== ==== ====== ====
Excess of earning assets over
interest-bearing liabilities........... $ 34,989 $ 38,417
======== ========
Net yield on earning assets(3).......... 5.66% 5.25%
==== ====
</TABLE>
- -------------
(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 $88,000 and $17,000 for
the nine-month periods ended September 30, 1997, September 30, 1996,
respectively.
(3) Computed on a tax equivalent basis. If customer service expense was
classified as interest expense and deducted in computing net interest
income, net yield on interest-earning assets would have been 5.37% and
4.95%, respectively, for the nine months ended September 30, 1997 and 1996.
11
<PAGE>
The weighted average yield on loans receivable was 9.98% for the nine
month period ended September 30, 1997, compared with 9.58% for the corresponding
period in 1996. This increase was primarily attributable to the increase in the
prime interest rate and the renewal and corresponding increase of the interest
rate on the Company's largest loan during 1997. The weighted average yield on
investment securities was 6.49% during the nine month period ended September 30,
1997 compared with 5.64% for the corresponding period in 1996. This improvement
was a result of the purchase of higher yielding investment securities combined
with the sale of lower yielding investment securities. The weighted average
yield on total earning assets was 8.47% for the nine month period ended
September 30, 1997, compared with 8.17% for the corresponding period in 1996.
The weighted average rate on interest-bearing deposits was 4.35% for the nine
month period ended September 30, 1997, compared with 4.54% for the corresponding
period in 1996. This decrease in the weighted average rate was due primarily to
the reduction in volume of time certificates of deposit during 1997. 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 nine month period ended September 30, 1997, the Company's
asset base increased, however, average assets decreased to $103.8 million
compared to $114.7 million during the corresponding period in 1996. Average
interest-earning assets for the nine month period ended September 30, 1997
decreased to $98.5 million, compared with $109.5 million during the
corresponding period in 1996. Average interest-earning assets as a percentage of
total average assets for the nine month periods ended September 30, 1997 and
1996 was 95%. Average interest-bearing liabilities for the nine month period
ended September 30, 1997 decreased to $63.5 million, compared with $71.0 million
during the corresponding period in 1996. Average interest-bearing liabilities as
a percentage of total average assets for each of the nine month periods ended
September 30, 1997 and 1996 was 61% and 62%, respectively.
The average balance of noninterest-bearing deposits for the nine month
period ended September 30, 1997 decreased to $32.2 million from $36.5 million
for the corresponding period in 1996. The average balance of noninterest-bearing
deposits as a percentage of total deposits was 34% at September 30, 1997 and
September 30, 1996.
Foregone interest income attributable to nonperforming loans amounted to
$48,000 for the quarter ended September 30, 1997, compared with $44,000 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. 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 $79,000 and $81,000 for the quarters ended September 30, 1997
and 1996, respectively, and $193,000 and $257,000 for the nine month period
ended September 30, 1997 and 1996, respectively.
12
<PAGE>
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
The following table sets forth certain information concerning the
composition of the loan portfolio and the allocation of the allowance for credit
losses at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
PERCENT PERCENT PERCENT
SEPTEMBER 30, OF GROSS OF GROSS OF GROSS
1997 LOANS 1996 LOANS 1995 LOANS
------------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio Composition:
Real estate construction and
land development........................ $ 3,249 6% $ 3,441 5% $ 4,185 5%
Commercial loans:
Secured by one to four family
residential properties................ 6,117 11% 6,233 11% 9,637 12%
Secured by multifamily
residential properties................ 2,506 4% 2,879 5% 2,876 3%
Secured by commercial real
properties............................ 23,951 42% 26,629 42% 28,734 35%
Other--secured and unsecured........... 15,480 27% 16,508 26% 27,393 33%
Home equity lines of credit.............. 357 1% 581 1% 3,983 5%
Consumer installment and unsecured
loans to individuals.................... 5,325 9% 6,545 10% 5,435 7%
------- --- ------- --- ------- ---
Gross loans outstanding.................... 56,985 100% 62,816 100% $82,243 100%
Deferred net loan origination
fees and purchased loan discount........ (316) (269) (231)
------- ------- -------
Loans receivable......................... $56,669 $62,547 $82,012
======= ======= =======
Allocation of the allowance for
credit losses:
Real estate construction and
land development........................ $ 47 $ 42 $ 11
Commercial loans:
Secured by one to four family
residential properties................ 255 479 205
Secured by multifamily
residential properties................ 36 41 25
Secured by commercial real
properties............................ 661 590 454
Other--secured and unsecured........... 1,282 1,642 2,521
Home equity lines of credit.............. 2 13 64
Consumer installment and unsecured
loans to individuals.................... 305 161 523
------- ------- -------
Allowance allocable to loans
receivable............................ 2,588 2,968 3,803
Commitments to extend credit
under standby and commercial
letters of credit....................... 1 1 2
------- ------- -------
Total allowance for credit losses........ $ 2,589 $ 2,969 $ 3,805
======= ======= =======
Allowance for credit losses allocable
as a percent of loans receivable.......... 4.57% 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.
13
<PAGE>
NONPERFORMING ASSETS
The following table sets forth certain information concerning
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
------------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans..................................... $1,399 $1,271 $ 871 $ 928
Troubled debt restructurings......................... 5,480 5,487 5,004 5,016
Loans contractually past due 90 days or more
with respect to either principal or interest
and still accruing interest......................... -- 2 14 300
------ ------ ------ ------
Nonperforming loans............................... 6,879 6,760 5,889 6,244
Other real estate owned.............................. 517 517 519 556
------ ------ ------ ------
Total nonperforming assets........................... $7,396 $7,277 $6,408 $6,800
====== ====== ====== ======
Allowance for loan losses as a percent
of nonaccrual loans................................. 185.1% 200.3% 303.8% 319.9%
====== ====== ====== ======
Allowance for loan losses as a percent
of nonperforming loans.............................. 37.6% 37.7% 44.9% 47.5%
====== ====== ====== ======
Total nonperforming assets as a percent
of loans receivable................................. 13.7% 12.2% 10.7% 10.9%
====== ====== ====== ======
Total nonperforming assets as a percent
of total shareholders' equity....................... 60.9% 60.7% 137.2% 140.4%
====== ====== ====== ======
</TABLE>
The level of nonperforming assets, as presented above, increased $119,000
during the third quarter of 1997 to $7.4 million from $7.3 million at June 30,
1997. Included in nonperforming assets is other real estate owned of $517,000 at
September 30,997 and June 30, 1997.
Nonaccrual loans increased $128,000 during the third quarter of 1997 to
$1.4 million as compared with $1.3 million at June 30, 1997. (See "Net Interest
Income and Interest Rate Risk" for a discussion of the effects on operating
results of nonaccrual 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 $5.5 million at September 30,
1997 and June 30, 1997. Included in TDRs is one loan with a balance of $5.4
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. All TDRs
are currently performing in accordance with their modified terms.
Loan delinquencies greater than 30 days past due decreased to $1.1
million or 2.0% of loans receivable at September 30, 1997 from $1.7 million or
2.8% of loans receivable at June 30, 1997. Loans contractually past due 90 days
or more and still accruing interest decreased to zero at Septmeber 30, 1997 from
$2,000 at June 30, 1997.
Other real estate owned ("OREO") at September 30, 1997 consisted of two
properties totaling $517,000 representing two undeveloped commercially zoned
parcels and one residential parcel. The Bank is currently marketing these
properties for sale.
14
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The following table sets forth information concerning the Company's
allowance for credit losses at the dates and for the periods indicated.
<TABLE>
<CAPTION>
THREE-MONTH NINE-MONTH
PERIODS ENDED PERIODS ENDED
-------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
--------------- -------------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period...................... $2,546 $3,064 $2,969 $3,805
Loans charged-off
Real estate construction and
land development............................ -- -- -- --
Commercial loans
Secured by one to four
family residential
properties............................. -- 9 204 9
Secured by multifamily
residential properties................. -- -- -- --
Secured by commercial real
properties............................. -- -- 56 --
Other-secured and unsecured............. 21 48 365 1,167
Home equity lines of credit.................. -- -- -- --
Consumer installment and
unsecured loans to individuals.............. 24 9 70 14
------ ------ ------ ------
Total loan charge-offs.................. 45 66 695 1,190
Recoveries of loans previously charged-off
Real estate construction and
land development............................ -- -- -- --
Commercial loans
Secured by one to four
family residential
properties............................. 71 24 71 26
Secured by multifamily
residential properties................. -- -- -- --
Secured by commercial real
properties............................. -- -- -- --
Other-secured and unsecured............. 10 28 167 376
Home equity lines of credit.................. -- -- -- --
Consumer installment and
unsecured loans to individuals.............. 7 2 77 35
------ ------ ------ ------
Total recoveries of loans
previously charged-off................. 88 54 315 437
------ ------ ------ ------
Net loan charge-offs (recoveries)................... (43) 12 380 753
Provision for loan losses........................... -- -- -- --
------ ------ ------ ------
Balance at end of period............................ $2,589 $3,052 $2,589 $3,052
====== ====== ====== ======
</TABLE>
Loans charged-off were $45,000 for the third quarter, as compared with
$66,000 for the corresponding period in 1996. Recoveries of loans previously
charged-off totaled $88,000 for the third quarter, as compared with $54,000
during the third quarter of 1996. Loan charge-offs were $695,000 and $1,190,000
for the nine month periods ended September 30, 1997 and 1996, respectively,
while recoveries for the same period in 1997 and 1996 were $315,000 and
$437,000, respectively.
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 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 September 30, 1997 and December 31, 1996, the Bank had classified $6.9
million and $7.2 million of its loans as impaired under SFAS No. 114,
respectively, of which specific reserves of $768,000 and $710,000, respectively
were allocated to such loans. The average recorded investment in impaired loans
during the quarters ended September 30, 1997 and December 31, 1996 was $6.6
million and $7.8 million, respectively. Impaired loans as of September 30, 1997
included nonaccrual loans of $1.4 million. Interest income on impaired loans
which are performing is recognized on an accrual basis and interest income on
such loans totaled $140,000 and 174,000 for the third quarters of 1997 and 1996,
respectively. Interest income recognized on impaired loans during the nine month
periods ended September 30, 1997 and 1996 was $399,000 and $567,000,
respectively.
15
<PAGE>
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.
The following table shows interest rate sensitivity gaps for different
intervals as of September 30, 1997.
<TABLE>
<CAPTION>
1997
AMOUNTS MATURING OR REPRICING IN
---------------------------------------------------------------------------------
AFTER
LESS THREE AFTER ONE
THAN MONTHS YEAR
THREE BUT WITHIN BUT WITHIN AFTER NOT RATE
MONTHS ONE YEAR 5 YEARS 5 YEARS SENSITIVE TOTAL
---------- ----------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
- ------
Interest-bearing deposits with
other financial institutions................ $ 19 $ -- $ -- $ -- $ -- $ 19
Federal Funds sold and securities
purchased under agreements to resell........ 8,200 -- -- -- -- 8,200
Securities held-to-maturity.................. -- 2,000 15,923 -- -- 17,923
Securities held-for-sale..................... -- -- 10,943 13,931 -- 24,874
Federal Reserve Bank and other stock......... -- -- -- 338 -- 338
Loans receivable............................. 24,630 19,739 10,122 2,178 -- 56,669
-------- ------- ------- ------- -------- --------
Total earning assets.................. 32,849 21,739 36,988 16,447 -- 108,023
Non-earning assets:
Cash and due from banks................... -- -- -- -- 6,325 6,325
Other real estate owned................... -- -- -- -- 517 517
All other assets.......................... -- -- -- -- 2,541 2,541
Allowance for credit losses............... -- -- -- -- (2,589) (2,589)
-------- ------- ------- ------- -------- --------
Total assets.......................... 32,849 21,739 36,988 16,447 6,794 114,817
LIABILITIES AND SHAREHOLDERS' EQUITY:
- ------------------------------------
Interest-bearing Deposits:
Interest-bearing demand, money market
and savings.............................. 29,287 -- -- -- -- 29,287
Time certificates of deposit.............. 19,364 6,172 7,003 -- -- 32,539
Federal funds purchased and securities
sold under agreements to repurchase......... 57 5,000 -- -- -- 5,057
-------- ------- ------- ------- -------- --------
Total Interest-bearing liabilities.... 48,708 11,172 7,003 -- -- 68,883
-------- ------- ------- ------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing deposits.............. -- -- -- -- 34,593 34,593
Other liabilities......................... -- -- -- -- 1,207 1,207
Shareholders' equity...................... -- -- -- -- 12,134 12,134
Total liabilities and shareholders' equity... 48,708 11,172 7,003 -- 47,934 114,817
-------- ------- ------- ------- -------- --------
Interest rate-sensitivity gap................ (15,859 10,567 29,985 16,447 (41,140) --
======== ======= ======= ======= ======== ========
Cumulative interest rate-sensitivity gap..... $(15,859) $(5,292) $24,693 $41,140 -- --
======== ======= ======= ======= ======== ========
Cumulative rate sensitivity gap as a percent
of cumulative earning assets................ (48%) (10%) 27% 38%
======== ======= ======= =======
</TABLE>
16
<PAGE>
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.
CAPITAL RESOURCES
On June 30, 1997, Company completed the sale of 900,000 shares of
PREFERRED STOCK through a private offering and rights offering in which the
Company raised net proceeds of $7.35 million. The primary purpose of the
offerings was to enable the Company to downstream capital into the Bank in order
to comply with the requirements of the Formal Agreement (discussed below) and
the MOU (discussed below) entered into between the Bank and the Office of the
Comptroller of the Currency (the "OCC") and the Company and the Federal
Reserve Bank of San Francisco (the "FRB"), respectively. The Company
contributed $2.5 million in capital to the Bank on June 30, 1997. The remaining
portion of the net proceeds have been retained for general corporate purposes to
facilitate the implementation of the business strategies of the Company.
As a result of the offerings, the total shareholders' equity of the
Company increased to $12.1 million at September 30, 1997 from $4.8 million at
December 31, 1996. The following table sets forth the minimum capital ratios
required by federal regulations with respect to the Company and by federal
regulations and the Formal Agreement with respect to the Bank and the Company's
and the Bank's actual ratios as of September 30, 1997 and December 31, 1996,
respectively.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------------------------------- -------------------------------------------
COMPANY BANK COMPANY BANK
------------------- ------------------ -------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------ --------- ------- -------- ------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk-based capital(1)(3):
Tier 1 capital.................. $ 12,151 17.90% $ 7,219 10.80% $ 4,921 6.96% $ 4,911 6.95%
Tier 1 capital minimum
requirement.................... 2,716 4.00% 6,686 10.00% 2,828 4.00% 7,071 10.00%
-------- ----- -------- ----- -------- ---- -------- -----
Excess (Deficiency)........... $ 9,435 13.90% $ 533 0.80% $ 2,093 2.96% $ (2,160) (3.05%)
======== ===== ======== ===== ======== ==== ======== =====
Total capital................... $ 13,022 19.18% $ 8,077 12.08% $ 5,831 8.25% $ 5,820 8.24%
Total capital minimum
requirement.................... 5,432 8.00% 5,349 8.00% 5,657 8.00% 5,657 8.00%
-------- ----- -------- ----- -------- ---- -------- -----
Excess........................ $ 7,590 11.18% $ 2,728 4.08% $ 174 0.25% $ 163 0.24%
======== ===== ======== ===== ======== ==== ======== =====
Total risk-weighted assets........ $ 67,899 $ 66,863 $ 70,170 $ 70,170
Capital Leverage Ratio(1)(2)(3):
Tier 1 capital.................. $ 12,151 10.99% $ 7,219 6.83% $ 4,921 4.68% $ 4,911 4.67%
Tier 1 capital minimum
requirement.................... 4,422 4.00% 6,870 6.50% $ 4,210 4.00% $ 6,841 6.50%
-------- ----- -------- ----- -------- ---- -------- -----
Excess (Deficiency)........... $ 7,729 6.99% $ 349 0.33% $ 711 0.68% $ (1,930) (1.83%)
======== ===== ======== ===== ======== ==== ======== =====
Average total assets, as adjusted
during three-month periods ended
September 30, 1997 and December
31, 1996......................... $110,556 $105,690 $105,249 $105,249
</TABLE>
17
<PAGE>
(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 September 30, 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.
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 September 30, 1997 were 7.83% and 10.80%,
respectively. At September 30, 1997, the Bank was 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 in February
1996 to the OCC which was amended and resubmitted to the OCC in June 1997. In
addition, the Company filed its strategic plan with the OCC in March 1996, which
the Company is currently updating. As a result of the foregoing actions and the
recently completed offerings, management believes it is currently in compliance
with the requirements of the Formal Agreement. However the OCC will make the
final determination as to compliance and the Bank may be subject to further
regulatory enforcement action by the OCC until the Formal Agreement is lifted.
The Company entered into a Memorandum of Understanding ("MOU") on
October 26, 1995 with the FRB. Effective September 4, 1997 the MOU was
terminated by the FRB. Prior to its termination, the MOU prohibited the Company
from paying dividends without prior approval of the FRB, required the submission
of a plan to increase the Bank's capital ratios, required the Company to conduct
a review of the senior and executive management of the Company and the Bank,
prohibited the incurrence or renewal of debt without the FRB's approval,
restricted cash expenditures in excess of $10,000 in any month and prohibited
the Company from making acquisitions or divestitures or engaging in new lines of
business without the FRB's approval.
RESTRICTIONS ON DIVIDENDS
As a result of the offerings and the contribution of $2.5 million in
capital into the Bank, the Company (parent company only) had cash and liquid
assets of approximately $4.9 million. Despite this fact, the Company is
currently prohibited from paying cash dividends by state law.
As a California corporation, the Company may not make a distribution to
its shareholders (which includes a payment of dividends but not stock dividends)
unless the Company has sufficient retained earnings under the Retained Earnings
Test. The Retained Earnings Test is defined as the Company's retained earnings
(determined on a consolidated basis according to generally accepted accounting
principles) or if, immediately after giving effect to the distribution, all of
the Company's assets equal 1.25 times the Company's liabilities (the "Retained
Earnings Test"). The Company's accumulated deficit of $19.8 million as of
September 30, 1997 requires the Company to record cumulative net earnings in
excess of $19.8 million before a dividend can be paid under the Retained
Earnings Test. If assets equal 1.25 times liabilities subsequent to a
distribution, the Company may pay a dividend prior to recording cumulative
earnings of $19.8 million. At the present time, the Company does not meet the
Retained Earnings Test and no assurance can be made as to when, if ever, such
test will be met. The terms of the Preferred Stock provide that dividends on the
PREFERRED STOCK may be paid commencing June 30, 1999. Notwithstanding the
foregoing, the Company may not pay dividends unless the Bank is in full
compliance with federal regulatory capital requirements, the Company is
permitted by the FRB to pay dividends and the Company meets the Retained
Earnings Test. Dividends on the PREFERRED STOCK will not accumulate. The Company
cannot assess at this time its ability to pay dividends in the immediate future.
18
<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, (iii) unused borrowings
available under federal funds lines, repurchase agreements and other
arrangements and (iv) a credit accommodation facility at a correspondent bank,
the Federal Reserve Bank and the Federal Home Loan Bank. An additional 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. 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 (parent company only) has limited expenses and funding
requirements at the present time. Management believes that the $4.8 million in
cash and liquid assets available at the Company (parent company only) at
September 30, 1997 will be sufficient to meet its cash flow requirements for the
foreseeable future. Pursuant to the terms of the federal banking law and the
requirements of the Formal Agreement, the Bank is currently prohibited from
paying any cash dividends to the Company, and management does not anticipate
that the dividends from the Bank will be a source of liquidity to the Company
for the foreseeable future.
19
<PAGE>
LIQUIDITY TRENDS
Time certificates of deposit of $100,000 or more (excluding the money
desk operation) were $6.5 million at September 30, 1997, compared with $5.5
million at December 31, 1996 and $4.9 million at September 30, 1996. In general,
deposits of more than $100,000 are considered to be more volatile than fully-
insured deposits in denominations of less than $100,000.
The following table sets forth information concerning average balances
concerning the Company's funding sources and liquidity trends for the periods
indicated.
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED
---------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 30, SEPTEMBER 30,
1997 1997 1997 1996 1996
------------- ------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits:
Real estate title and escrow company
customers............................. $ 9,883 10% $ 9,062 10% $ 7,947 8% $ 8,419 9% $ 8,506 9%
All other noninterest-bearing demand... 21,875 23% 23,056 25% 24,897 26% 28,181 29% 25,458 25%
Interest-bearing demand, money market
and savings............................. 30,516 31% 27,016 29% 25,541 26% 26,587 27% 27,326 27%
Time certificates of deposit:
Money desk operation................... 21,956 23% 24,114 26% 26,359 27% 22,729 23% 24,939 25%
All other:
$100,000 or more..................... 6,519 7% 3,516 4% 5,819 6% 5,487 6% 4,865 5%
Under $100,000....................... 5,507 5% 5,497 5% 6,256 7% 6,726 7% 7,442 8%
------- --- ------- --- ------- --- ------- --- ------- ---
Total time certificates of
deposit............................ 33,982 35% 33,127 35% 38,434 40% 34,942 35% 37,246 38%
------- --- ------- --- ------- --- ------- --- ------- ---
Total deposits.................... $96,256 99% 92,261 99% 96,819 100% 98,129 100% 98,536 99%
Securities sold under agreements to
repurchase.............................. 714 1% 546 1% 131 - 357 - 1,346 1%
------- --- ------- --- ------- --- ------- --- ------- ---
Total funding liabilities......... $96,970 100% $92,807 100% $96,950 100% $98,486 100% $99,882 100%
======= === ======= === ======= === ======= === ======= ===
Average loan-to-deposit ratio............ 59.8% 64.2% 63.6% 64.6% 67.8%
======= ======= ======= ======= =======
Period-end pledged securities ratio...... 22.3% 47.6% 21.7% 21.5% 61.3%
======= ======= ======= ======= =======
</TABLE>
The Bank maintains a wholesale institutional funds acquisition operation
("money desk"). This operation provided 23% of the Bank's average total
funding sources during the third quarter of 1997, as compared with 25% during
the third quarter of 1996, while noninterest-bearing demand deposits provided
33% of average total funding sources during the third quarter of 1997, compared
with 34% 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 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 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.
20
<PAGE>
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 for the balance of 1997, but if interest rates vary
significantly from present levels, this may cause 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 periodic (three times per
year) 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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
21
<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.
Ex27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
22
<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)
November 14, 1997 /s/ SCOTT A. MONTGOMERY
---------------------------
Scott A. Montgomery
Chief Executive Officer
November 14, 1997 /s/ JOSEPH W. KILEY III
---------------------------
Joseph W. Kiley
Chief Financial Officer
23
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<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,325
<INT-BEARING-DEPOSITS> 19
<FED-FUNDS-SOLD> 8,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,212
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<LOANS> 56,669
<ALLOWANCE> 2,589
<TOTAL-ASSETS> 114,817
<DEPOSITS> 96,419
<SHORT-TERM> 5,057
<LIABILITIES-OTHER> 1,207
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0
7,350
<COMMON> 24,612
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<INTEREST-OTHER> 540
<INTEREST-TOTAL> 6,239
<INTEREST-DEPOSIT> 2,045
<INTEREST-EXPENSE> 2,069
<INTEREST-INCOME-NET> 4,170
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<SECURITIES-GAINS> (12)
<EXPENSE-OTHER> 4,623
<INCOME-PRETAX> (118)
<INCOME-PRE-EXTRAORDINARY> (118)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
<YIELD-ACTUAL> 5.16
<LOANS-NON> 1,399
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,480
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