<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 Commission File Number: 0-15982
NATIONAL MERCANTILE BANCORP
- --------------------------------------------------------------------------------
(Exact name of small business issuer 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)
Issuer's telephone number, including area code (310) 277-2265
Indicate by check mark whether the issuer (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.
YES X NO
------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's Common Stock, no par value, as
of August 1, 1998 was 677,048.
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks-demand................... $ 7,083 $ 4,186
Federal funds sold............................... 14,500 11,900
-------- --------
Cash and cash equivalents.................. 21,583 16,086
Interest-bearing deposits with other financial
institutions.................................... 250 250
Securities available-for-sale, at fair value;
aggregate amortized cost of $47,931 and
$25,794 at June 30, 1998 and December 31,
1997, respectively........................... 47,973 25,832
Securities held-to-maturity, at amortized cost;
aggregate market value of $14,010 at
December 31, 1997............................ - 14,000
FRB and other stock.............................. 933 646
Loans receivable................................. 60,294 61,252
Allowance for credit losses.................. (2,089) (2,023)
-------- --------
Net loans receivable......................... 58,205 59,229
Premises and equipment, net...................... 840 785
Other real estate owned, net..................... 517 777
Accrued interest receivable and other assets..... 1,869 1,80
-------- --------
Total assets............................... $132,170 $119,405
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................... $ 45,192 $ 35,399
Interest-bearing demand...................... 7,205 7,431
Money market................................. 20,652 19,646
Savings...................................... 4,454 3,524
Time certificates of deposit:
$100,000 or more........................... 15,237 12,402
Under $100,000............................. 19,195 18,986
-------- --------
Total deposits......................... 111,935 97,388
Securities sold under agreements to repurchase... 3,000 5,050
Other borrowed funds............................. 3,500 3,500
Accrued interest payable and other liabilities... 952 1,027
-------- --------
Total liabilities.......................... 119,387 106,965
Shareholders' equity:
Preferred stock, 6.5% noncumulative
convertible preferred stock; $10.00 stated
value, authorized 1,000,000 shares; issued
and outstanding 900,000 shares............. 7,350 7,350
Common stock, no par value; authorized
10,000,000 shares; issued and outstanding
677,048 shares and 677,144 shares
at June 30, 1998 and December 31, 1997,
respectively............................... 24,613 24,613
Accumulated deficit.......................... (19,222) (19,561)
Accumulated other comprehensive income....... 42 38
-------- --------
Total shareholders' equity................. 12,783 12,440
-------- --------
Total liabilities and shareholders'
equity..................................... $132,170 $119,405
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees.................................... $1,434 $1,477 $2,938 $2,950
Securities held-to-maturity.............................. - 323 134 610
Securities available-for-sale............................ 727 46 1,251 131
Federal funds sold....................................... 212 150 399 320
Interest-bearing deposits with other financial
institutions............................................ 4 - 8 -
------ ------ ------ ------
Total interest income.............................. 2,377 1,996 4,730 4,011
Interest expense:
Interest-bearing demand................................. 24 27 45 46
Money market and savings................................ 202 133 412 272
Time certificate of deposits:
$100,000 or more...................................... 179 74 358 183
Under $100,000........................................ 293 413 572 850
------ ------ ------ ------
Total interest expense on deposits................. 698 647 1,387 1,351
Securities sold under agreements to repurchase.......... 44 7 103 8
Other borrowed funds.................................... 61 - 111 6
------ ------ ------ ------
Total interest expense............................. 803 654 1,601 1,365
------ ------ ------ ------
Net interest income before provision for credit
losses........................................... 1,574 1,342 3,129 2,646
Provision for credit losses.............................. - - - -
------ ------ ------ ------
Net interest income after provision for credit
losses................................................ 1,574 1,342 3,129 2,646
Other operating income:
Net gain on sale of securities available-for-sale....... 21 - 38 -
International services.................................. 23 29 49 52
Investment division..................................... 12 5 19 10
Deposit-related and other customer services............. 150 76 272 166
Gain on sale of other real estate owned and fixed
assets................................................ 9 - 68 -
------ ------ ------ ------
Total other operating income....................... 215 110 446 228
Other operating expenses:
Salaries and related benefits........................... 777 733 1,540 1,458
Net occupancy........................................... 218 206 413 415
Furniture and equipment................................. 74 47 134 105
Printing and communications............................. 62 54 117 118
Insurance and regulatory assessments.................... 77 139 156 270
Customer services....................................... 198 105 387 230
Computer data processing................................ 64 73 138 157
Legal services.......................................... 46 59 84 124
Other professional services............................. 69 57 141 107
Other real estate owned expenses........................ 4 5 9 11
Promotion and other expenses............................ 54 51 115 91
------ ------ ------ ------
Total other operating expenses..................... 1,643 1,529 3,234 3,086
------ ------ ------ ------
Net income (loss) before provision for income
taxes................................................. 146 (77) 341 (212)
Provision for income taxes............................... 2 - 2 -
------ ------ ------ ------
Net income (loss)....................................... $ 144 $ (77) $ 339 $ (212)
------ ------ ------ ------
------ ------ ------ ------
Earnings (loss) per share:
Basic................................................. $ 0.21 $(0.11) $ 0.50 $(0.31)
------ ------ ------ ------
------ ------ ------ ------
Diluted............................................... $ 0.06 $(0.11) $ 0.13 $(0.31)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTHS
ENDED JUNE 30,
------------------------
1998 1997
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash flow from operating activities:
Net income (loss) ..................................................... $ 339 $ (212)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ......................................... 117 89
Gain on sale of fixed assets .......................................... (10) -
Gain on sale of other real estate owned ............................... (59) -
Net gain on sale of securities available-for-sale ..................... (38) -
Net amortization of premiums (discounts) on securities ................ 38 (28)
Net accretion of discounts on loans purchased ......................... (16) (18)
(Increase) decrease in accrued interest receivable and other
assets .............................................................. (69) 270
(Decrease) increase in accrued interest payable and other
liabilities ......................................................... (75) 902
-------- -------
Net cash provided by operating activities ........................ 227 1,003
Cash flows from investing activities:
Purchase of securities held-to-maturity ............................... - (4,971)
Purchase of securities available-for-sale ............................. (34,932) (105)
Proceeds from sales of securities available-for-sale .................. 6,102 1,000
Proceeds from repayments and maturities of securities
available-for-sale .................................................. 6,406 153
Proceeds from repayments and maturities of
secutiries-held-to-maturity14,000 ................................... - -
Loan originations and principal collections, net ...................... 1,040 2,582
Proceeds from sale of other real estate owned ......................... 319 -
Net purchases of premises and equipment ............................... (162) (7)
-------- -------
Net cash used in investing activities ............................ (7,227) (1,348)
Cash flows from financing activities:
Net increase (decrease) in demand deposits, money market and savings
accounts............................................................. 11,503 (2,816)
Net increase (decrease) in time certificates of deposit ............... 3,044 (7,738)
Net (decrease) increase in securities sold under agreements to
repurchase .......................................................... (2,050) 61
Net proceeds from issuance of 900,000 shares of preferred stock ....... - 7,350
-------- -------
Net cash provided by (used in) financing activities .............. 12,497 (3,143)
-------- -------
Net increase (decrease) in cash and cash equivalents ................... 5,497 (3,488)
Cash and cash equivalents, January 1 ................................... 16,086 28,113
-------- -------
Cash and cash equivalents, June 30 ..................................... $ 21,583 $24,625
-------- -------
-------- -------
Supplemental cash flow information:
Cash paid for interest ................................................ $ 1,598 $ 1,347
Increase in unrealized (gain) loss on securities
available-for-sale .................................................. $ (4) $ 1
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
----------------------- -------------------- ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT DEFICIT INCOME TOTAL
---------- ------------ ---------- ---------- ------------ -------------- --------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ............. - $ - 3,078,146 $24,614 $(19,693) $(76) $ 4,845
9.09 to 1 reverse stock split
effective June 20, 1997 ............. (2,739,516)
Return of fractional common
shares due to reverse stock
split ............................ (58) (1) (1)
Issuance of 6.5% noncumulative
convertible preferred stock,
$10.00 stated value, net ............ 900,000 7,350 7,350
100 % stock dividend declared on
January 8, 1998 ..................... 338,572
Comprehensive income:
Other comprehensive income:
Unrealized holding gain during
the period ....................... 77 77
Add: Reclassification adjustment
for losses icluded in net income . 37 37
Net income .......................... 132 132
-------
Comprehensive income ............. 246
------- ------ ------- ------- -------- ---- -------
Balance at December 31, 1997 ........... 900,000 7,350 677,144 24,613 (19,561) 38 12,440
Return of fractional common
shares due to reverse stock
split ............................ (96) -
Comprehensive income:
Other comprehensive income:
Unrealized holding gains during
the period ..................... 42 42
Less: Reclassification adjustment
for gains included in net income (38) (38)
Net income ....................... 339 339
------
Comprehensive income ........... 343
------- ------ ------- ------- -------- ---- -------
Balance at June 30, 1998 ............... 900,000 $7,350 677,048 $24,613 $(19,222) $ 42 $12,783
------- ------ ------- ------- -------- ---- -------
------- ------ ------- ------- -------- ---- -------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements include the accounts
of National Mercantile Bancorp (the "Company") and its wholly owned
subsidiary, Mercantile National Bank (the "Bank"). The unaudited consolidated
financial statements reflect the interim adjustments, all of which are of a
normal recurring nature and which, in management's opinion, are necessary for
the fair presentation of the Company's consolidated financial position and the
results of its operations and cash flows for such interim periods. The results
for the three and six month periods ended June 30, 1998 are not necessarily
indicative of the results expected for any subsequent period or for the full
year ending December 31, 1998. The unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 ("1997 Form 10-K").
NOTE 2--EARNINGS (LOSS) PER SHARE
Earnings (loss) per basic common share is computed using the weighted
average number of common shares outstanding during the period. The weighted
average number of common shares outstanding used in computing earnings per basic
common share for the three and six month periods ended June 30, 1998 was 677,048
and 677,074, respectively. The weighted average number of common shares
outstanding used in computing loss per common share for the three and six month
periods ended June 30, 1997 was 677,260. The weighted average number of common
shares and potential common shares outstanding used in computing earnings per
diluted common share for the three and six month periods ended June 30, 1998 was
2,577,224 and 2,566,555, respectively. Loss per share computations, for the
three and six month periods ended June 30, 1997, exclude potential common
shares, since the effect would be to reduce the loss per share amount. All
periods presented were restated to reflect the 9.09 to 1 reverse stock split
effective June 20, 1997 and the 100% common stock dividend declared January 8,
1998 and paid February 13, 1998. The 100% stock dividend was accounted for as a
2 for 1 stock split.
6
<PAGE>
The following table is a reconciliation of income (loss) and shares
used in the computation of earnings per basic and diluted common share:
<TABLE>
<CAPTION>
NET INCOME PER SHARE
(LOSS) SHARES AMOUNT
-------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1998:
Basic EPS................................. $ 144 677,048 $ 0.21
----------
----------
Effect of dilutive securities:
Options and warrants................... 100,176
Convertible preferred stock............ 1,800,000
---------- ---------
Diluted EPS............................... $ 144 2,577,224 $ 0.06
---------- --------- ----------
---------- --------- ----------
FOR THE THREE MONTHS ENDED JUNE 30, 1997:
Basic and diluted EPS..................... $ (77) 677,260 $ (0.11)
---------- --------- ----------
---------- --------- ----------
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
Basic EPS................................. $ 339 677,074 $ 0.50
----------
----------
Effect of dilutive securities:
Options and warrants................... 89,481
Convertible preferred stock............ 1,800,000
---------- ---------
Diluted EPS............................... $ 339 2,566,555 $ 0.13
---------- --------- ----------
---------- --------- ----------
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
Basic and diluted EPS..................... $ (212) 677,260 $ (0.31)
---------- --------- ----------
---------- --------- ----------
</TABLE>
NOTE 3--INVESTMENT SECURITIES
Securities held for investment are classified as securities
held-to-maturity. Because the Company has the ability and management has the
intent to hold investment securities until maturity, securities
held-to-maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts. Investments classified as securities
available-for-sale are recorded at fair value. Unrealized holding gains or
losses for securities available-for-sale are excluded from earnings, and
reported as a separate component of shareholders' equity, until realized.
See "Note 5 - Comprehensive Income".
NOTE 4--CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks and federal funds sold.
NOTE 5--COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. All items that are required to be recognized
under accounting standards as components of comprehensive income
7
<PAGE>
are to be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is defined as
the change in equity during a period from transactions and other events and
circumstances from nonowner sources. The accumulated balance of other
comprehensive income is not required to be displayed separately from retained
earnings and additional paid in capital in the consolidated balance sheet.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
The components of other comprehensive income together with total
comprehensive income are reported in the consolidated statement of changes in
shareholders' equity. The accumulated balance of other comprehensive income is
not reported as a net amount after taxes due to the size and availability of the
Company's net operating loss carry forwards. See "Note 6 - Income Taxes".
NOTE 6--INCOME TAXES
No income tax provision, other than alternative minimum tax, was recorded
during the three and six month periods ended June 30, 1998, due to the
utilization of previously unrecognized tax benefits to offset the current period
tax liability. No income tax benefit was recorded during the corresponding
periods of 1997, due to the uncertainty with respect to the ultimate realization
of such benefit.
For tax purposes at December 31, 1997, the Company had federal net
operating loss carryforwards of $22.3 million, which begin to expire in the year
2007. The Company has California net operating loss carryforwards of $11.1
million, of which $686,000 expire in 1998, $5.5 million expire in 1999 and the
remaining expire thereafter. In addition, the Company has an Alternate Minimum
Tax credit at December 31, 1997 of $218,000, which may be carried forward
indefinitely.
NOTE 7--RECLASSIFICATIONS
Certain prior year data have been reclassified to conform with current year
presentation.
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.
RESULTS OF OPERATIONS
The Company recorded consolidated net income of $144,000, or $0.06 per
diluted common share, during the second quarter of 1998, compared to a net loss
of $77,000, or $0.11 loss per common share, during the second quarter of 1997.
Earnings per basic common share were $0.21 during the second quarter of 1998.
The improvement between the second quarter of 1998 compared to the second
quarter of 1997 resulted primarily from an increase in net interest income of
$232,000 or 17.3%, and an increase in other operating income of $105,000 or
95.5%, partially offset by a $114,000 or 7.5% increase in other operating
expense.
Net income for the first six months of 1998 was $339,000 or $0.13 per
diluted common share, compared with a loss of $212,000 or $0.31 loss per common
share. Earnings per basic common share were $0.50 during the first six months
of 1998. The improvement between the first half of 1998 compared to the first
half of 1997 resulted largely from a $483,000 or 18.3% increase in net interest
income and a $218,000 or 95.6% increase in other operating income, partially
offset by a $148,000 or 4.8% increase in other operating expense.
Return on average assets during the second quarter and first half of 1998
was 0.45% and 0.55%, respectively, compared with a loss of 0.31% and 0.42%
during the second quarter and first half of 1997, respectively. Return on
average equity during the second quarter and first half of 1998 was 4.55% and
5.41%, respectively, compared to a loss of 6.46% and 8.86% during the second
quarter and first half of 1997, respectively.
The increase in net interest income during the three and six month periods
ended June 30, 1998 compared to the corresponding periods during 1997, resulted
primarily from an increase in the net average interest earning assets (the
difference between average interest earning assets and average interest bearing
liabilities) of $15.0 million and $11.3 million, respectively. Average interest
earning assets and average interest bearing liabilities increased as a result of
the Company's plan to grow following its recapitalization in 1997, which raised
net proceeds of $7.35 million. Growth in average interest earning assets
occurred primarily through the purchase of securities. The Company was able to
fund a significant part of this growth with liquidity provided by the
recapitalization and increased deposits and borrowings.
9
<PAGE>
During the three and six month periods ended June 30, 1998 the Company
experienced a compressed net interest margin compared to the same periods
during 1997 primarily as a result of a higher proportion of average interest
earning assets held as lower yielding securities and federal funds. In
addition, during the second quarter of 1998, the Company experienced a
decrease in the weighted average yield on loans receivable which was caused
primarily by a downward repricing trend caused by refinancings, payoffs and
reduced overall interest rates on new fundings, reflecting a decrease in
overall market interest rates.
The weighted average yield on securities decreased during the second
quarter of 1998 compared to 1997 from 6.55% to 6.41%, and increased from
6.48% to 6.51% during the first half of 1998 compared to the first half of
1997. The decrease between the second quarters was reflective of the overall
interest rate market, which triggered the issuers of securities with an
optional principal redemption feature to exercise such "call" option on
certain investment securities. The Company reinvested the proceeds into
lower market yielding securities.
The weighted average cost of interest-bearing liabilities increased
during the second quarter of 1998 compared to 1997 from 4.32% to 4.41%, due
primarily to a higher average amount of other borrowings, partially offset by
a higher average amount of low cost money market and savings accounts during
the second quarter 1998 compared to the second quarter 1997. In addition, the
weighted average cost of interest-bearing liabilities increased during the
first half of 1998 compared to 1997 from 4.39% to 4.42%, due primarily to a
higher average amount of other borrowings, partially offset by a higher
average amount of low cost money market and savings accounts during the first
half of 1998 compared to the first half of 1997 combined with a lower average
amount of higher cost time certificates of deposit
Average loans receivable decreased $368,000 or 0.6% to $58.9 million during
the quarter ended June 30, 1998 compared to $59.2 million during the quarter
ended June 30, 1997. This decrease reflected higher than normal loan payoffs
during the second quarter of 1998 of approximately $6.9 million which when
combined with principal reductions completely offset loan fundings of
approximately $8.8 million during the same period.
Total average securities available-for-sale increased by $42.3 million to
$45.5 million during the quarter ended June 30, 1998 compared to $3.2 million
during the quarter ended June 30, 1997, while securities held-to-maturity
decreased $19.4 million during the same period. This increase in the overall
securities portfolio, primarily mortgage-backed securities, was funded by the
liquidity provided by the net proceeds from the recapitalization along with the
growth of deposits and borrowings.
Total average deposits increased $14.2 million (including $8.5 million of
non-interest bearing deposits) or 15.4% to $106.5 million during the second
quarter of 1998 compared to $92.3 million during the second quarter of 1997 due
primarily to
10
<PAGE>
additional deposits generated by the Bank's business banking, entertainment
and escrow divisions. Total average securities sold under agreements to
repurchase and other borrowed funds increased $6.6 million to $7.2 million
during the quarter ended June 30, 1998 from $546,000 during the quarter
ended June 30, 1997.
Average loans receivable were $927,000 or 1.5% lower in the first half of
1998 as compared to the first half of 1997 ($59.5 million compared to $60.4
million). During the same periods, average securities available-for-sale were
$34.2 million or 743% greater ($38.8 million compared to $4.6 million). Total
average deposits during the six months ended June 30, 1998 were $8.6 million or
9.1% greater than the comparable 1997 period ($103.1 million compared to $94.5
million).
The provision for credit losses was zero for the three and six month
periods ended June 30, 1998 and 1997. Loan charge offs during the second
quarter and first half of 1998 were $137,000 and $225,000, respectively,
compared to $201,000 and $650,000 during the second quarter and first half of
1997, respectively. Recoveries were $273,000 and $291,000 during the second
quarter and first half of 1998, respectively, compared to $101,000 and $227,000
during the second quarter and first half of 1997, respectively.
Other operating income, excluding gains and losses on the sale of
securities and assets, totaled $185,000 during the second quarter of 1998, up
$75,000 or 68.2% from $110,000 during the second quarter of 1997. During the six
months ended June 30, 1998, other operating income, excluding gains and losses
on the sale of securities and assets, totaled $340,000, an increase of $112,000
or 49.1% from $228,000 during the comparable period of 1997. Service charges on
deposit accounts increased $74,000 or 97.4% and $106,000 or 63.9%, during the
second quarter and six months ended June 30, 1998, respectively, compared to
corresponding periods in 1997, due primarily to adjustments in fee pricing
effective December 1, 1997 and increased volume due to deposit growth.
The net gain on sale of securities totaled $21,000 and $38,000 during the
second quarter and first half of 1998, respectively, compared to zero during
corresponding periods in 1997. Additionally, the Bank recorded a net gain on
the sale of other real estate owned and fixed assets of $9,000 and $68,000
during the second quarter of 1998 and first six months of 1998, respectively,
compared to zero during corresponding periods of 1997.
Other operating expense increased $114,000 during the second quarter of
1998 compared to 1997, totaling $1.6 million during the1998 period. Salaries
and related benefits increased $44,000 or 6.0 % during the quarter ended June
30, 1998 compared to the second quarter of 1997, due primarily to the personnel
added to the business banking and entertainment divisions. Other operating
expense categories, other than salaries and related benefits, increased $70,000
or 8.8% for the quarter ended June 30, 1998 from the comparable period in 1997.
Increases in customer services expense of $93,000 resulting
11
<PAGE>
from increased escrow deposits, along with increases in furniture and
equipment expense of $27,000, were offset by reductions in insurance and
regulatory assessments of $62,000, primarily reduced FDIC Insurance premiums.
Other operating expenses increased $148,000 or 4.8% to $3.2 million during
the six months ended June 30, 1998 compared to $3.1 million during the same
period of 1997. This increase resulted from the same factors which caused the
increases between the second quarters of 1998 compared to 1997, specifically,
increases of $82,000 in salaries and related benefits and $157,000 in customer
services, which were offset by reductions of $114,000 in insurance and
regulatory costs.
12
<PAGE>
The following table presents the components of net interest income for the
quarters ended June 30, 1998 and 1997.
13
<PAGE>
Average Balance Sheet and
Analysis of Net Interest Income
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
---------------------------------- --------------------------------
WEIGHTED WEIGHTED
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
AMOUNT EXPENSE RATE AMOUNT EXPENSE RATE
---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold................................ $ 15,387 $ 212 5.53% $ 10,889 $ 150 5.53%
Interest-bearing deposits with other financial
institutions..................................... 250 4 6.42% - - -
Securities held-to-maturity....................... - - - 19,386 323 6.68%
Securities available-for-sale..................... 45,494 727 6.41% 3,195 46 5.77%
Loans receivable (1)(2)........................... 58,854 1,434 9.77% 59,222 1,477 10.00%
---------- ---------- ---------- ----------
Total interest earning assets.................... 119,985 $ 2,377 7.95% 92,692 $ 1,996 8.64%
---------- ----------
---------- ----------
Noninterest earning assets:
Cash and due from banks - demand................. 6,024 4,170
Other assets..................................... 3,227 4,261
Allowance for credit losses...................... (1,908) (2,616)
---------- ----------
Total assets..................................... $ 127,328 $ 98,507
---------- ----------
---------- ----------
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand........................................... $ 7,402 $ 24 1.30% $ 8,638 $ 27 1.25%
Money market and savings......................... 26,060 202 3.11% 18,378 134 2.92%
Time certificates of deposit:
$100,000 or more................................ 12,255 179 5.86% 5,594 75 5.38%
Under $100,000.................................. 20,101 293 5.85% 27,533 412 6.00%
---------- ---------- ---------- ----------
Total time certificates of deposit............... 32,356 472 5.85% 33,127 487 5.90%
---------- ---------- ---------- ----------
Total interest-bearing deposits.................. 65,818 698 4.25% 60,143 648 4.32%
Securities sold under agreements to repurchase.... 3,000 44 5.88% 546 6 4.41%
Other borrowed funds.............................. 4,192 61 5.84% - - -
---------- ---------- ---------- ----------
Total interest-bearing liabilities............... 73,010 $ 803 4.41% 60,689 $ 654 4.32%
---------- ----------
---------- ----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits.............. 40,647 32,118
Other liabilities................................ 989 920
Shareholders' equity.............................. 12,682 4,780
---------- ----------
Total liabilities and shareholders' equity........ $ 127,328 $ 98,507
---------- ----------
---------- ----------
Net interest income (spread)...................... $ 1,574 3.53% $ 1,342 4.31%
---------- ----------
---------- ----------
Net yield on earning assets (2).................. 5.26% 5.81%
</TABLE>
- --------------
(1) Includes average balance of nonperforming loans of $7.7 million and $6.6
million for 1998 and 1997, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $37,000
and $21,000 for the three months ended June 30, 1998 and 1997,
respectively.
The following table presents the components of net interest income for the
six months ended June 30, 1998 and 1997.
14
<PAGE>
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
----------------------------- -----------------------------
WEIGHTED WEIGHTED
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
AMOUNT EXPENSE RATE AMOUNT EXPENSE RATE
-------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold................................ $ 14,548 $ 399 5.53% $ 11,941 $ 320 5.40%
Interest-bearing deposits with other
financial institutions............................ 250 8 6.45% - - -
Securities held-to-maturity........................ 4,072 134 6.64% 18,430 610 6.67%
Securities available-for-sale..................... 38,816 1,251 6.50% 4,625 131 5.71%
Loans receivable (1)(2)............................ 59,477 2,938 9.96% 60,404 2,950 9.85%
-------- -------- -------- --------
Total interest earning assets.................... 117,163 $4,730 8.14% 95,400 $4,011 8.48%
-------- --------
-------- --------
Noninterest earning assets:
Cash and due from banks - demand................ 5,611 4,452
Other assets.................................... 3,258 3,735
Allowance for credit losses..................... (1,948) (2,799)
-------- --------
Total assets.................................... $124,084 $100,788
-------- --------
-------- --------
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand........................................... $ 7,088 $45 1.28% $ 7,365 $46 1.26%
Money market and savings........................ 26,504 412 3.13% 18,917 272 2.90%
Time certificates of deposit:
$100,000 or more................................ 12,490 358 5.78% 6,965 183 5.30%
Under $100,000................................. 19,667 572 5.87% 28,801 850 5.95%
-------- -------- -------- --------
Total time certificates of deposit............... 32,157 930 5.83% 35,766 1,033 5.82%
-------- -------- -------- --------
Total interest-bearing deposits................. 65,749 1,387 4.25% 62,048 1,351 4.39%
Securities sold under agreements to
repurchase........................................ 3,522 103 5.90% 340 8 4.74%
Other borrowed funds............................... 3,848 111 5.82% 259 6 4.67%
-------- -------- -------- --------
Total interest-bearing liabilities............... 73,119 $1,601 4.42% 62,647 $1,365 4.39%
-------- --------
-------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits............. 37,374 32,479
Other liabilities................................ 961 838
Shareholders' equity............................... 12,630 4,824
-------- --------
Total liabilities and shareholders'
equity............................................ $124,084 $100,788
-------- --------
-------- --------
Net interest income (spread)....................... $3,129 3.73% $2,646 4.08%
-------- --------
-------- --------
Net yield on earning assets (2)................. 5.39% 5.59%
</TABLE>
- ----------
(1) Includes average balance of nonperforming loans of $7.4 million and $6.4
million for 1998 and 1997, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of
$87,000 and $42,000 for the six months ended June 30, 1998 and 1997,
respectively.
15
<PAGE>
The following tables set forth, for the periods indicated, the changes
in interest earned and interest paid resulting from changes in volume and
changes in rates. Average balances in all categories in each reported period
were used in the volume computations. Average yields and rates in each
reported period were used in rate computations.
INCREASE (DECREASE) IN INTEREST INCOME/EXPENSE DUE TO CHANGE IN
AVERAGE VOLUME AND AVERAGE RATE
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 VS 1997
----------------------------------------
INCREASE (DECREASED)
DUE TO (1) NET
------------------------- INCREASE
VOLUME RATE (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Federal funds sold........................................................ $ 71 $ 8 $ 79
Interest-bearing deposits with other financial institutions............... 8 - 8
Securities held-to-maturity............................................... (467) (9) (476)
Securities available-for-sale............................................. 1,099 21 1,120
Loans receivable (2)...................................................... (46) 34 (12)
---------- ---------- ----------
Total interest-earning assets........................................... $ 665 $ 54 $ 719
---------- ---------- ----------
---------- ---------- ----------
Interest Expense:
Interest-bearing deposits:
Demand.................................................................. $ (1) $ - $ (1)
Money market and savings................................................ 126 14 140
Time certificates of deposit:
$100,000 or more..................................................... 158 17 175
Under $100,000....................................................... (267) (11) (278)
---------- ---------- ----------
Total time certificates of deposit...................................... (109) 6 (103)
---------- ---------- ----------
Total interest-bearing deposits......................................... 16 20 36
Securities sold under agreements to repurchase and other borrowings..... 92 3 95
Other borrowed funds.................................................... 102 3 105
---------- ---------- ----------
Total interest-bearing liabilities................................... $210 $26 $236
---------- ---------- ----------
---------- ---------- ----------
Net interest income..................................................... $455 $28 $483
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ----------
(1) The change in interest income or interest expense that is attributable
to both changes in average volume and average rate has been allocated to
the changes due to (i) average volume and (ii) average rate in proportion
to the relationship of the absolute amounts of changes in each.
(2) Table does not include interest income that would have been earned on
nonaccrual loans.
16
<PAGE>
BALANCE SHEET ANALYSIS
LOAN PORTFOLIO
The following comparative period-end table sets forth-certain
information concerning the composition of the loan portfolio.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate construction and land
development................................................ $ 1,071 2% $ 3,148 5%
Commercial loans:
Secured by one to four family
residential properties.................................... 7,173 12% 6,545 11%
Secured by multifamily
residential properties.................................... 2,471 4% 2,494 4%
Secured by commercial real
properties................................................ 20,152 33% 22,324 36%
Other - secured and
unsecured................................................ 25,100 41% 21,264 35%
Home equity lines of credit................................. 66 0% 252 0%
Consumer installment and
unsecured loans to individuals............................ 4,540 8% 5,508 9%
--------- ------- --------- -------
Total loans outstanding................................... 60,573 100% 61,535 100%
Deferred net loan origination
fees and purchased loan discount........................... (279) (283)
--------- ---------
Loans receivable, net........................................ $60,294 $61,252
--------- ---------
--------- ---------
</TABLE>
Total loans outstanding decreased by $962,000 to $60.6 million at June
30, 1998 compared to $61.5 million at December 31, 1997. As indicated in the
table above, the composition of the loan portfolio has remained relatively
unchanged at June 30, 1998 compared to December 31, 1997, other than a
decrease of $2.1 million in real estate construction and land development
loans and a $2.2 million decrease in loans secured by commercial properties,
offset by a $3.8 million increase in other secured and unsecured commercial
loans.
17
<PAGE>
The following comparative period-end table sets forth certain
information concerning nonperforming assets.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans............................................................ $2,196 $1,201
Troubled debt restructurings................................................ 49 5,422
Loans contractually past due ninety or more days with respect
to either principal or interest and still accruing interest................ 5,351 -
---------- ------------
Nonperforming loans........................................................ 7,596 6,623
Other real estate owned.................................................... 517 777
---------- ------------
Total nonperforming assets................................................. $8,113 $7,400
---------- ------------
---------- ------------
Allowance for credit losses as a percent of nonaccrual loans................ 95.1% 168.4%
Allowance for credit losses as a percent of
nonperforming loans........................................................ 27.5% 30.5%
Total nonperforming assets as a percent of loans receivable................ 13.5% 12.1%
Total nonperforming assets as a percent of total
shareholders' equity....................................................... 63.5% 59.5%
</TABLE>
Nonaccrual loans increased $995,000 during the first half of 1998 to
$2.2 million compared with $1.2 million at December 31, 1997, due to
increased delinquencies in the SBA and commercial loan portfolios.
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 $49,000 at June
30, 1998 compared with $5.4 million at December 31, 1997. The reduction in
TDR loans during the first six months of 1998 is due to the reclassification
of one loan totaling $5.4 million discussed below. At June 30, 1998, all TDR
loans were performing in accordance with their modified terms.
Loans contractually past due 90 days or more with respect to either
principal or interest and still accruing interest increased to $5.4 million
at June 30, 1998 from zero at December 31, 1997. This increase is
represented by one loan, a $5.4 million loan that is secured by a first deed
of trust on a single family residence which, as of January 1998, had an
appraised value of $10 million (previously reported as a TDR loan). The bank
is in the process of collection with respect to this loan.
Other real estate owned ("OREO") at June 30, 1998 consisted of two
properties totaling $517,000 representing two undeveloped commercially zoned
parcels and one residential parcel. As a result of these changes, the amount
of non-performing assets at June 30, 1998 was 9.6% greater than the level at
December 31, 1997.
18
<PAGE>
Loan delinquencies greater than 30 days past due increased to $5.4
million or 8.9% of loans receivable at June 30, 1998 from $752,000 or 1.2% of
loans receivable at December 31, 1997. This increase in loan delinquencies
during the first quarter of 1998 was primarily the result of the $5.4 loan
discussed above, which at June 30, 1998 was greater than 180 days past due.
ALLOWANCE FOR CREDIT LOSSES
The following table sets forth information concerning the Company's
allowance for credit losses for the periods indicated.
ANALYSIS OF CHANGES IN ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ -----------------
JUNE 30, JUNE 30,
1998 1997 1998 1997
------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period..................................... $1,953 $2,646 $2,023 $2,969
Loan charged off:
Commercial loans:
Secured by one to four family residential properties........... - - 4 204
Secured by commercial real properties......................... - 4 - 56
Other - secured and unsecured................................. 52 185 52 344
Consumer installment and unsecured loans to individuals........ 85 12 169 46
------- -------- ------- -------
Total loan charge-offs......................................... 137 201 225 650
Recoveries of loans previously charged off:
Commercial loans:
Secured by one to four family residential properties........... 2 - 2 -
Other - secured and unsecured................................. 73 38 77 157
Consumer installment and unsecured loans to individuals........ 198 63 212 70
------- -------- ------- -------
Total recoveries of loans previously charged off................. 273 101 291 227
------- -------- ------- -------
Net charge-offs (recoveries)..................................... (136) 100 (66) 423
Provision for credit losses....................................... - - - -
------- -------- ------- -------
Balance, end of period............................................ $2,089 $2,546 $2,089 $2,546
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires that selected
information about those operating segments be reported in interim financial
statements. This statement supersedes SFAS 14 "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 requires that all public
enterprises report financial and descriptive information about its reportable
operating segments. Operating segments are defined as components regularly
evaluated by the chief operating decision-maker in
19
<PAGE>
deciding how to allocate resources and in assessing performance. This
statement is effective for fiscal years beginning after December 15, 1997.
The Company believes that this Statement will have no significant impact on
its financial position or results of operations for 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits (SFAS 132"). This Statement
standardizes the disclosure requirements for defined benefit plans and
recommends a parallel format for presenting information about pensions and
other postretirement benefits. This Statement is effective for fiscal years
beginning after December 15, 1997. The Company believes that this Statement
will have no significant impact on its financial position or results of
operations for 1998 since it has no defined benefit plans.
CAPITAL ADEQUACY REQUIREMENTS
At June 30, 1998 the Company and the Bank were in compliance with all
applicable regulatory capital requirements and the Bank was "well
capitalized" under the Prompt Corrective Action rules of the Office of the
Comptroller of the Currency. On June 30, 1998 the Company contributed $2.0
million of capital to the Bank to enable it to increase its legal lending
limit and provide sufficient capital for continued growth. The following
table sets forth the regulatory capital standards for well capitalized
institutions, and the capital ratios for the Company and the Bank as of June
30, 1998 and December 31, 1997.
REGULATORY CAPITAL INFORMATION
OF THE COMPANY AND BANK
<TABLE>
<CAPTION>
WELL CAPITALIZED JUNE 30, DECEMBER 31,
STANDARDS 1998 1997
---------------- -------- ------------
<S> <C> <C> <C>
COMPANY:
Tier 1 leverage....................... N/A 10.00% 10.43%
Tier 1 risk-based capital............. N/A 16.74% 16.98%
Total risk-based capital.............. N/A 18.01% 18.25%
BANK:
Tier 1 leverage....................... 5.00% 7.81% 6.48%
Tier 1 risk-based capital............. 6.00% 13.00% 10.36%
Total risk-based capital.............. 10.00% 14.27% 11.63%
</TABLE>
LIQUIDITY
The Company continues to manage its liquidity through a combination of
core deposits (total deposits excluding money desk and escrow deposits),
federal funds purchased, repurchase agreements, collateralized borrowing
lines at the Federal Home Loan Bank of San Francisco, and a portfolio of
securities available for sale. Liquidity is also provided by maturing
investment securities and loans.
20
<PAGE>
Average core deposits (excludes money desk and escrow deposits) and
shareholders' equity comprised 64.8% and 65.6% of total funding in the second
quarter and first six months of 1998, respectively, compared to 64.8% and
65.1% during the corresponding periods of 1997. The following table shows
that the Company's cumulative one year interest rate sensitivity gap
indicated a liability sensitive position of $5.4 million at June 30, 1998, a
change from the asset sensitive position of $100,000 at December 31, 1997.
This change resulted from the Company's effort to lower its exposure to
decreases in net interest income due to a rapid decline in interest rates.
During the last six months, the Company has increased its investment
securities portfolio that reprice after one year to $48.9 million at June 30,
1998 from $40.5 million at December 31, 1997, increased its portfolio of
loans that reprice after one year to $18.0 million at June 30, 1998 from
$15.5 million at December 31, 1997 and increased its time certificates of
deposit which reprice within one year to $23.6 million at June 30, 1998 from
$20.7 million at December 31, 1997. The Company's liability sensitive
position during a period of slowly rising interest rates is not expected to
have a significant negative impact on net interest income since rates paid on
the Company's large base of interest checking, savings and money market
deposit accounts historically have not increased proportionately with
increases in interest rates.
21
<PAGE>
RATE-SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------------------------
MATURING OR REPRICING IN
---------------------------------------------------------------------------
LESS AFTER 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>
Rate-sensitive assets:
Interest-bearing deposits with other
financial institutions............................. $ - $ 250 $ - $ - $ - $ 250
Federal Funds sold................................... 14,500 - - - - 14,500
Securities held-to-maturity.......................... - - - - - --
Securities available-for-sale........................ - - 9,849 38,124 - 47,973
Equity investment-FRB, FHLB & PCBB................... - - - 933 - 933
Loans receivable..................................... 26,860 15,430 16,310 1,694 - 60,294
------- -------- ------- ------- ------ --------
Total rate-sensitive assets........................ 41,360 15,680 26,159 40,751 - 123,950
Rate-sensitive liabilities:
Interest bearing deposits (1):
Interest-bearing demand, money
market and savings................................ 32,311 - - - - 32,311
Time certificates of deposit....................... 8,859 14,743 10,830 - - 34,432
Securities sold under agreements to
repurchase......................................... 3,000 - - - - 3,000
Other borrowed funds................................. - 3,500 - - - 3,500
------- -------- ------- ------- ------ --------
Total rate-sensitive liabilities................... 44,170 18,243 10,830 - - 73,243
Interest rate-sensitivity gap........................ (2,810) (2,563) 15,329 40,751 - 50,707
------- -------- ------- ------- ------ --------
------- -------- ------- ------- ------ --------
Cumulative interest rate-sensitivity gap............. $(2,810) $(5,373) $ 9,956 $50,707 50,707
------- -------- ------- ------- ------
------- -------- ------- ------- ------
Cumulative ratio of rate sensitive assets to
rate-sensitive liabilities......................... 94% 91% 114% 169%
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
(1) Customer deposits which are subject to immediate withdrawal are
presented as repricing within three months or less. The distribution of
other time deposits is based on scheduled maturities.
22
<PAGE>
RATE-SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------
MATURING OR REPRICING IN
---------------------------------------------------------------------------
LESS AFTER 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>
Rate-sensitive assets:
Interest-bearing deposits with other
financial institutions............................. $ - $ 250 $ - $ - $ - $ 250
Federal Funds sold................................... 11,900 - - - - 11,900
Securities held-to-maturity.......................... - 2,000 12,000 - - 14,000
Securities available-for-sale........................ - - 13,946 11,886 - 25,832
Equity investment-FRB,FHLB & PCBB.................... - - - 646 - 646
Loans receivable..................................... 26,258 19,520 13,325 2,149 - 61,252
------- ------- ------- ------- ------- --------
Total rate-sensitive assets........................ 38,158 21,770 39,271 14,681 - 113,880
Rate-sensitive liabilities: (1)
Interest bearing deposits:
Interest-bearing demand, money
market and savings................................. 30,601 - - - - 30,601
Time certificates of deposit....................... 8,112 12,555 10,721 - - 31,388
Securities sold under agreements to
repurchase......................................... 50 5,000 - - - 5,050
Other borrowed funds................................. - 3,500 - - - 3,500
------- ------- ------- ------- ------- --------
Total rate-sensitive liabilities................... 38,763 21,055 10,721 - - 70,539
Interest rate-sensitivity gap........................ (605) 715 28,550 14,681 - 43,341
------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- --------
Cumulative interest rate-sensitivity gap............. $ (605) $ 110 $28,660 $43,341 43,341
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Cumulative ratio of rate sensitive assets to
rate-sensitive liabilities......................... 98% 100% 141% 161%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(1) Customer deposits which are subject to immediate withdrawal are presented as
repricing within three months or less. The distribution of other time
deposits is based on scheduled maturities.
23
<PAGE>
YEAR 2000 MATTERS
As the year 2000 approaches, a critical issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. In brief, many existing application software products were
designed to only accommodate a two digit date position which represents the
year (e.g., '95' is stored on the system and represents the year 1995). As a
result, the year 1999 (i.e., '99') could be the maximum date value these
systems will be able to accurately process. Management is in the process of
working with its data processing vendors to assure that the Company is
prepared for the year 2000 and has developed a detailed project plan to
address the possible exposures related to the impact on its computer systems
as well as those of its vendors/partners and key clients. Critical financial
information and operational systems have been assessed and a time and action
plan has been developed to ensure testing of systems modifications by
December 31, 1998. The financial impact of making the required systems
changes is not expected to be material to the Company's consolidated
financial position, results of operation or cash flows.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company wishes to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 as to "forward looking"
statements in this Quarterly Report 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 any 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.
- - Interest rates. Management anticipates that short-term interest rate levels
will remain constant in 1998, but if interest rates vary substantially from
this expectation, the Company's results could 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 regulations, and significant new laws for changes in, or
repeal of, existing laws may cause results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal
Reserve System, significantly affects
24
<PAGE>
credit conditions for the Bank, primarily through open market operations in
U.S. government securities, the discount rate for member bank borrowing and
bank reserve requirements, and a material change in these conditions would
be likely to have an impact on results.
- - Competition. The Bank competes with numerous other financial institutions
and non-depository financial intermediaries. Results may differ if
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 companies.
- - 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 the terms of their loans. The
Bank has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Bank's credit portfolio, but such policies and procedures
may not prevent unexpected losses that could adversely affect the Company's
results.
- - Other risks. From time to time, the Company details other risks to its
businesses and/or its financial results in its filings with the Securities
and Exchange Commission.
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.
25
<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.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None.
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)
DATE: August 11, 1998 /s/ SCOTT A. MONTGOMERY
----------------------- ----------------------------------------
SCOTT A. MONTGOMERY
Chief Executive Officer
DATE: August 11, 1998 /s/ JOSEPH W. KILEY III
----------------------- ----------------------------------------
JOSEPH W. KILEY, III
Chief Financial Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND SCHEDULES ON
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME FOR SIX-MONTH PERIODS,
ANALYSIS ON CHANGES IN ALLOWANCE FOR CREDIT LOSSES AND NONPERFORMING ASSETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,083
<INT-BEARING-DEPOSITS> 250
<FED-FUNDS-SOLD> 14,500
<TRADING-ASSETS> 0
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<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,294
<ALLOWANCE> 2,089
<TOTAL-ASSETS> 132,170
<DEPOSITS> 111,935
<SHORT-TERM> 6,500
<LIABILITIES-OTHER> 952
<LONG-TERM> 0
0
7,350
<COMMON> 24,613
<OTHER-SE> (19,180)
<TOTAL-LIABILITIES-AND-EQUITY> 132,170
<INTEREST-LOAN> 2,938
<INTEREST-INVEST> 1,385
<INTEREST-OTHER> 407
<INTEREST-TOTAL> 4,730
<INTEREST-DEPOSIT> 1,387
<INTEREST-EXPENSE> 1,601
<INTEREST-INCOME-NET> 3,129
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 3,234
<INCOME-PRETAX> 341
<INCOME-PRE-EXTRAORDINARY> 339
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 339
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 5.39
<LOANS-NON> 2,196
<LOANS-PAST> 5,351
<LOANS-TROUBLED> 49
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,023
<CHARGE-OFFS> 225
<RECOVERIES> 291
<ALLOWANCE-CLOSE> 2,089
<ALLOWANCE-DOMESTIC> 2,089
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
