<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, 1999 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, 1999 was 677,195.
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks-demand . . . . . . . . . . . . . . . . . . . . . . . $ 7,552 $ 5,405
Federal funds sold and securities purchased
under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . 17,600 6,800
--------- ---------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . 25,152 12,205
Interest-bearing deposits with other financial institutions . . . . . . . . . - -
Securities available-for-sale, at fair value;
aggregate amortized cost of $65,841 and $70,247
at June 30, 1999 and December 31, 1998, respectively . . . . . . . . . . 64,522 70,458
FRB and other stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . 1,715 1,391
Loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,804 56,972
Allowance for credit losses. . . . . . . . . . . . . . . . . . . . . . . (2,056) (2,144)
--------- ---------
Net loans receivable . . . . . . . . . . . . . . . . . . . . . . . . 58,748 54,828
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 692 726
Other real estate owned, net. . . . . . . . . . . . . . . . . . . . . . . . . 382 593
Accrued interest receivable and other assets. . . . . . . . . . . . . . . . . 1,502 1,422
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 152,713 $ 141,623
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . $ 48,160 $ 47,375
Interest-bearing demand. . . . . . . . . . . . . . . . . . . . . . . . . 7,494 6,835
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,705 21,652
Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132 2,063
Time certificates of deposit:
$100,000 or more . . . . . . . . . . . . . . . . . . . . . . . . . . 18,404 14,966
Under $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,163 14,081
--------- ---------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . 120,058 106,972
Federal funds purchased and securities sold
under agreements to repurchase. . . . . . . . . . . . . . . . . . . . . 2,000 1,000
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500 19,300
Accrued interest payable and other liabilities . . . . . . . . . . . . . . . 1,105 1,093
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 140,663 128,365
Shareholders' equity:
Preferred stock: (10,000 shares undesignated)
Series A non-cumulative convertible perpetual preferred stock;
authorized 990,000 shares; issued and outstanding 900,000 shares. . 7,350 7,350
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 677,195 shares and 677,048 shares
at June 30, 1999 and December 31, 1998, respectively. . . . . . . . 24,614 24,613
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (18,595) (18,916)
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . (1,319) 211
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 12,050 13,258
--------- ---------
Total liabilities and shareholders' equity . . . . . . . . . . . $ 152,713 $ 141,623
--------- ---------
--------- ---------
</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,
---------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees. . . . . . . . . . . . . . . . . . . . . $ 1,398 $ 1,434 $ 2,715 $ 2,938
Securities held-to-maturity. . . . . . . . . . . . . . . . . . - - - 134
Securities available-for-sale. . . . . . . . . . . . . . . . . 1,042 727 2,112 1,251
Federal funds sold and securities purchased under
agreements to resell . . . . . . . . . . . . . . . . . . . . 104 212 146 399
Interest-bearing deposits with other financial institutions. . - 4 - 8
------- -------- --------- --------
Total interest income. . . . . . . . . . . . . . . . . . 2,544 2,377 4,973 4,730
Interest expense:
Interest-bearing demand. . . . . . . . . . . . . . . . . . . . 23 24 44 45
Money market and savings . . . . . . . . . . . . . . . . . . . 189 202 341 412
Time certificate of deposits:
$100,000 or more . . . . . . . . . . . . . . . . . . . . . . 208 179 395 358
Under $100,000 . . . . . . . . . . . . . . . . . . . . . . . 161 293 346 572
------- -------- --------- --------
Total interest expense on deposits . . . . . . . . . . . 581 698 1,126 1,387
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . . . 12 44 13 103
Other borrowed funds. . . . . . . . . . . . . . . . . . . . . . . 237 61 506 111
------- -------- --------- --------
Total interest expense . . . . . . . . . . . . . . . . . 830 803 1,645 1,601
------- -------- --------- --------
Net interest income before provision for credit losses . 1,714 1,574 3,328 3,129
Provision for credit losses . . . . . . . . . . . . . . . . . . . - - - -
------- -------- --------- --------
Net interest income after provision for credit losses. . . . 1,714 1,574 3,328 3,129
Other operating income:
Net (loss) gain on sale of securities available-for-sale. . . (1) 21 (1) 38
International services . . . . . . . . . . . . . . . . . . . . 9 23 26 49
Investment division. . . . . . . . . . . . . . . . . . . . . . 14 12 28 19
Deposit-related and other customer services. . . . . . . . . . 127 150 255 272
Gain on sale of other real estate owned and fixed assets.. . . - 9 - 68
------- -------- --------- --------
Total other operating income . . . . . . . . . . . . . . 149 215 308 446
Other operating expenses:
Salaries and related benefits. . . . . . . . . . . . . . . . . 782 777 1,620 1,540
Net occupancy. . . . . . . . . . . . . . . . . . . . . . . . . 238 218 488 413
Furniture and equipment. . . . . . . . . . . . . . . . . . . . 54 74 109 134
Printing and communications. . . . . . . . . . . . . . . . . . 57 62 119 117
Insurance and regulatory assessments . . . . . . . . . . . . . 74 77 149 156
Customer services. . . . . . . . . . . . . . . . . . . . . . . 190 198 366 387
Computer data processing . . . . . . . . . . . . . . . . . . . 75 64 153 138
Legal services . . . . . . . . . . . . . . . . . . . . . . . . (26) 46 14 84
Other professional services. . . . . . . . . . . . . . . . . . 75 69 147 141
Other real estate owned expenses . . . . . . . . . . . . . . . 40 4 40 9
Promotion and other expenses . . . . . . . . . . . . . . . . . 52 54 98 115
------- -------- --------- --------
Total other operating expenses . . . . . . . . . . . . . 1,611 1,643 3,303 3,234
------- -------- --------- --------
Net income before provision for income taxes . . . . . . . . 252 146 333 341
Provision for income taxes. . . . . . . . . . . . . . . . . . . . 7 2 12 2
------- -------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245 $ 144 $ 321 $ 339
------- -------- --------- --------
------- -------- --------- --------
Earnings per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.36 $ 0.21 $ 0.47 $ 0.50
------- -------- --------- --------
------- -------- --------- --------
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.06 $ 0.13 $ 0.13
------- -------- --------- --------
------- -------- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
--------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash flow from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321 $ 339
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 96 117
Gain on sale of premises and equipment. . . . . . . . . . . . . . . . . . . . - (9)
Gain on sale of other real estate owned . . . . . . . . . . . . . . . . . . . - (59)
Provision for loss on other real estate owned . . . . . . . . . . . . . . . . 35 -
Net loss (gain) on sale of securities available-for-sale. . . . . . . . . . . 1 (38)
Net amortization of premiums on securities. . . . . . . . . . . . . . . . . . 55 38
Net accretion of discounts on loans purchased . . . . . . . . . . . . . . . . (17) (16)
Decrease (increase) in accrued interest receivable and other assets . . . . . 96 (70)
Increase (decrease) in accrued interest payable and other liabilities . . . . 12 (75)
-------- ---------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . 599 227
Cash flows from investing activities:
Purchase of securities available-for-sale . . . . . . . . . . . . . . . . . . (4,217) (34,932)
Proceeds from sales of securities available-for-sale. . . . . . . . . . . . . 1,016 6,102
Proceeds from repayments and maturities of securities available-for-sale. . . 7,227 6,406
Proceeds from repayments and maturities of secutiries-held-to-maturity. . . . - 14,000
Loan originations and principal collections, net. . . . . . . . . . . . . . . (3,903) 1,040
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . . . - 319
Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . (62) (162)
-------- ---------
Net cash provided by (used in) investing activities. . . . . . . . . . . . 61 (7,227)
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts. . . . . . 12,566 11,503
Net increase in time certificates of deposit. . . . . . . . . . . . . . . . . 520 3,044
Net increase (decrease) in securities sold under agreements to repurchase
and federal funds purchased. . . . . . . . . . . . . . . . . . . . . . . . 1,000 (2,050)
Net decrease in other borrowings . . . . . . . . . . . . . . . . . . . . . . (1,800) -
Net proceeds from exercise of stock options . . . . . . . . . . . . . . . . . 1 -
-------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . 12,287 12,497
-------- ---------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . 12,947 5,497
Cash and cash equivalents, January 1 . . . . . . . . . . . . . . . . . . . . . . 12,205 16,086
-------- ---------
Cash and cash equivalents, June 30 . . . . . . . . . . . . . . . . . . . . . . . $ 25,152 $ 21,583
-------- ---------
-------- ---------
Supplemental cash flow information:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,632 $ 1,598
(Decrease) increase in unrealized gain on securities
available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,530) $ 4
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(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, 1999. . . . . . . . . . 900,000 $ 7,350 677,048 $ 24,613 $ (18,916) $ 211 $ 13,258
Stock options exercised. . . . . . . . . . 147 1 1
Comprehensive income:
Other comprehensive income:
Unrealized holding losses during
the period . . . . . . . . . . . . . (1,531) (1,531)
Add: Reclassification adjustment for
losses included in net income. . . . 1 1
Net income. . . . . . . . . . . . . . . 321 321
---------
Comprehensive income . . . . . . . . (1,209)
-------- -------- -------- ---------- ---------- --------- ----------
Balance at June 30, 1999. . . . . . . . . . . 900,000 $ 7,350 677,195 $ 24,614 $ (18,595) $ (1,319) $ 12,050
-------- -------- -------- ---------- ---------- --------- ----------
-------- -------- -------- ---------- ---------- --------- ----------
</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
consolidated results for the three and six month periods ended June 30, 1999
are not necessarily indicative of the results expected for any subsequent
period or for the full year ending December 31, 1999. 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-KSB for the year ended December 31, 1998 ("1998 Form
10-KSB").
NOTE 2--EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. The weighted average numbers
of common shares outstanding used in computing basic earnings per share for
the three and six month periods ended June 30, 1999 and 1998 were 677,108,
677,078, 677,048 and 677,074, respectively. The weighted average numbers of
common shares and common share equivalents outstanding used in computing
diluted earnings per share for the three and six month periods ended June 30,
1999 and 1998 were 2,477,313, 2,477,181, 2,577,224 and 2,566,555,
respectively. All periods presented were restated to reflect the 100% common
stock dividend in February 1998, which was accounted for as a 2 for 1 stock
split.
6
<PAGE>
The following table is a reconciliation of net income and shares used in
the computation of earnings per basic and diluted common share:
<TABLE>
<CAPTION>
PER SHARE
NET INCOME SHARES AMOUNT
------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245 677,108 $ 0.36
--------
--------
Effect of dilutive securities:
Options and warrants. . . . . . . . . . . . . . . . . . . . 205
Convertible preferred stock . . . . . . . . . . . . . . . . 1,800,000
------ ---------
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245 2,477,313 $ 0.10
------ ---------- --------
------ ---------- --------
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 SIX MONTHS ENDED JUNE 30, 1999:
Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321 677,078 $ 0.47
--------
--------
Effect of dilutive securities:
Options and warrants. . . . . . . . . . . . . . . . . . . . 103
Convertible preferred stock . . . . . . . . . . . . . . . . 1,800,000
------ ---------
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321 2,477,181 $ 0.13
------ ---------- --------
------ ---------- --------
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
------ ---------- --------
------ ---------- --------
</TABLE>
NOTE 3--SECURITIES
Securities available-for-sale are carried at estimated fair value.
Unrealized gains or losses on available-for-sale securities are excluded from
earnings and reported as accumulated other comprehensive income in a separate
component of shareholders' equity until realized. Because the Company has net
operating loss carryforwards, no tax expense (benefit) has been recorded from
unrealized gains (losses). Premiums or discounts on securities are amortized or
accreted into income using the effective interest method. Realized gains or
losses on sales of securities are recorded using the specific identification
method.
NOTE 4--CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks - demand, federal funds sold and securities sold under
agreements to resell.
7
<PAGE>
NOTE 5--INCOME TAXES
No income tax provision was recorded during the second quarters of 1999 and
1998 (other than alternative minimum tax) due to the utilization of previously
unrecognized tax benefits to offset the current period tax liability.
For tax purposes at December 31, 1998, the Company had: (i) federal net
operating loss carryforwards of $21.2 million, which begin to expire in the year
2007; (ii) California net operating loss carryforwards of $9.8 million, of which
$5.0 million will expire in 1999, $3.2 million will expire in 2000, $1.3
million will expire in 2001, and $300,000 will expire in 2002; and (iii) an
Alternative Minimum Tax credit at December 31, 1998 of $230,000 which may be
carried forward indefinitely.
NOTE 6--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"). In light of the fact that 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 net income of $245,000, or $0.10 diluted earnings
per share, during the second quarter of 1999, compared to net income of
$144,000, or $0.06 diluted earnings per share, during the second quarter of
1998. Net income per basic share was $0.36 and $0.21 during the second
quarter of 1999 and 1998, respectively. The improvement in earnings during
the second quarter of 1999 compared to 1998 resulted primarily from a
$140,000 or 8.9% increase in net interest income and a $32,000 or 1.9%
decrease in other operating expense, partially offset by a $66,000 or 30.7%
decrease in other operating income. The changes in net interest income and
other operating expense were affected by the recovery of $61,000 of interest
income and $90,000 of legal expenses from the full collection of one
nonaccrual loan, with a principal balance of $616,000, during the second
quarter of 1999.
Net income during the first six months of 1999 was $321,000 or $0.13
diluted earnings per share, compared to net income of $339,000 or $0.13
diluted earnings per share, during the first six months of 1998. Net income
per basic share was $0.47 and $0.50 during the first six months of 1999 and
1998, respectively. The decrease between the first half of 1999 compared to
the first half of 1998 resulted largely from a $138,000 or 30.9% decrease in
other operating income and a $69,000 or 2.1% increase in other operating
expense, partially offset by a $199,000 or 6.4% increase in net interest
income.
Return on average assets during the second quarter and first half of 1999
was 0.69% and 0.46%, respectively, compared to 0.45% and 0.55% during the
second quarter and first half of 1998, respectively. Return on average equity
during the second quarter and first half of 1999 was 7.48% and 4.90%,
respectively, compared to 4.55% and 5.41% during the second quarter and first
half of 1998, respectively.
The increase in net interest income during the three and six month periods
ended June 30, 1999 compared to the corresponding periods during 1998, 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 $5.3 million and $7.3 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 occurred primarily through the
9
<PAGE>
purchase of U.S. Treasury and Agency securities using the excess liquidity
provided by the recapitalization and resulting increase in deposits and
borrowings.
During the three and six month periods ended June 30, 1999, the Company
experienced a compressed net interest margin compared to the same periods
during 1998, resulting primarily from (i) investment securities, which
typically yield less than Company's loans, representing a higher proportion
of the Company's interest earning assets; (ii) a decline in the market
interest rates, which had a greater short-term impact on the Company's
interest earning assets than on its interest bearing liabilities; and (iii)
the replacement of investment securities redeemed by the issuers due to
declining market interest rates with investment securities with lower yields
reflecting then-current market conditions. During the latter part of 1998,
the composition of the Company's investment securities portfolio shifted from
one which was primarily comprised of fixed-rate callable federal agency
securities to a portfolio primarily comprised of fixed-rate mortgage-backed
securities ("MBS"), collateralized mortgage obligations ("CMO") and real
estate mortgage investment conduits ("REMIC"). At June 30, 1999 the Company
held no investment securities with a call option feature other than the
embedded prepayment option associated with mortgage-related securities.
Further, during the latter part of 1998 and the first quarter of 1999, the
Company invested approximately $19.5 million in securities that bear interest
at rates which adjust monthly or quarterly based on the London Inter-Bank
Offer Rate ("LIBOR") interest rate index, which were funded primarily by
variable rate borrowings totaling $14.5 million which adjust monthly based on
LIBOR.
The weighted average yield on securities decreased during the second
quarter and the first half of 1999 to 6.12% and 6.14%, respectively compared
from 6.41% and 6.51% during the same periods of 1998, respectively. The decrease
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 decreased to
4.03% during the second quarter of 1999 compared with 4.41% during the same
period of 1998, due primarily to a lower average balance of higher cost time
certificates of deposit ($27.9 million as compared to $32.4 million) and a
decrease in rates paid on deposits and other borrowed funds reflecting the
overall downward trend in market interest rates.
Average loans receivable decreased 1.8% to $57.8 million during the
quarter ended June 30, 1999 compared to $58.9 million during the quarter
ended June 30, 1998. This decrease reflected a higher than normal loan
payoffs resulting from the payoff of $6.3 million of nonperforming loans
during the fourth quarter of 1998 and a $616,000 nonperforming loan during
the second quarter of 1999.
10
<PAGE>
Total average securities increased by $22.8 million to $68.3 million
during the quarter ended June 30, 1999 compared to $45.5 million during the
quarter ended June 30, 1998. This increase in the overall securities
portfolio, primarily mortgage-backed securities, was funded by the growth of
deposits and borrowings made possible by the 1997 recapitalization.
Total average deposits increased 1.7% to $108.2 million during the
second quarter of 1999 compared to $106.5 million during the second quarter
of 1998 due primarily to 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 to $20.3
million during the quarter ended June 30, 1999 from $7.2 million during the
quarter ended June 30, 1998 in order to substantially fund the purchases of
$19.5 million of securities with variable rates.
Average loans receivable was $2.7 million or 4.5% lower during the first
half of 1999 as compared to the first half of 1998 ($56.8 million compared to
$59.5 million). During the same periods, average securities was $26.4 million
or 61.6% greater ($69.3 million compared to $42.9 million). Total average
deposits during the six months ended June 30, 1999 was $1.6 million or 1.6%
greater than the comparable 1998 period ($104.7 million compared to $103.1
million).
The Company made no provision for credit losses for the three and six
months ended June 30, 1999 and 1998. Loans charged off during the second
quarter and first half of 1999 were $25,000 and $200,000, respectively,
compared to $137,000 and $225,000 during the second quarter and first half of
1998, respectively. Recoveries of loans previously charged off were $60,000
and $112,000 during the second quarter and first half of 1998, respectively,
compared to $273,000 and $291,000 during the second quarter and first half of
1998, respectively.
Other operating income, excluding gains and losses on the sale of
securities and assets, totaled $150,000 during the second quarter of 1999,
down 18.9% from $185,000 during the second quarter of 1998. During the six
months ended June 30, 1999, other operating income, excluding gains and
losses on the sale of securities and assets, totaled $309,000, a decrease of
9.1% from $340,000 during the comparable period of 1998. Service charges on
deposit accounts decreased $23,000 or 15.3% and $17,000 or 6.3%, during the
second quarter and six months ended June 30, 1999, respectively, compared to
corresponding periods in 1998.
The Company incurred a net loss of $1,000 on sale of securities during
the second quarter and first half of 1999, compared to net gains of $21,000
and $38,000 during the corresponding periods in 1998. Additionally, there
was no net gain or loss on sale of other real estate owned and fixed assets
recorded during the second quarter and first half of 1999, compared to net
gains of $9,000 and $68,000 during the corresponding periods of 1998.
11
<PAGE>
Other operating expense decreased to $1.61 million during the second
quarter of 1999 compared to $1.64 million during the second quarter of 1998.
This decrease was primarily due to decrease in legal expense as a result of
$90,000 recovery from the full collection of one nonaccrual loan, with a
principal balance of $616,000, during the second quarter of 1999. The
increase in other real estate owned expense of $36,000 was due to an
additional $35,000 reserve valuation, and the increase in net occupancy
expense of $20,000 was primarily due to increased escalation and operating
costs associated with the Company's corporate and retail premises lease.
Other operating expenses increased to $3.30 million during the six
months ended June 30, 1999 compared to $3.23 million during the same period
of 1998. This increase resulted from increases of $80,000 in salaries and
related benefits due to Company's continued expansion of the business banking
and entertainment loan production staff to augment growth, $75,000 in net
occupancy expense resulting from escalation and costs associated with the
Company's corporate and retail premises lease and $31,000 in other real
estate owned expense due to an additional reserve valuation of $35,000,
partially offset by $70,000 decrease in legal expense resulting from $90,000
legal expense recovery described above.
12
<PAGE>
The following table presents the components of net interest income for the
quarters ended June 30, 1999 and 1998.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------------------------ ---------------------------
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 and securities purchased under agreements to
resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,706 $ 104 4.79% $ 15,387 $ 212 5.53%
Interest-bearing deposits with other financial institutions. . . . . - - - 250 4 6.42%
Securities held-to-maturity. . . . . . . . . . . . . . . . . . . . . - - - - - -
Securities available-for-sale. . . . . . . . . . . . . . . . . . . . 68,279 1,042 6.12% 45,494 727 6.41%
Loans receivable (1) (2) . . . . . . . . . . . . . . . . . . . . . . 57,786 1,398 9.70% 58,854 1,434 9.77%
--------- -------- --------- -------
Total interest earning assets . . . . . . . . . . . . . . . . . 134,771 $2,544 7.57% 119,985 $2,377 7.95%
-------- -------
-------- -------
Noninterest earning assets:
Cash and due from banks - demand. . . . . . . . . . . . . . . . 7,214 6,024
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 2,761 3,227
Allowance for credit losses . . . . . . . . . . . . . . . . . . (2,041) (1,908)
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $142,705 $127,328
--------- ---------
--------- ---------
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,950 $ 23 1.33% $ 7,402 $ 24 1.30%
Money market and savings. . . . . . . . . . . . . . . . . . . . 27,352 189 2.77% 26,060 202 3.11%
Time certificates of deposit:
$100,000 or more. . . . . . . . . . . . . . . . . . . . . . . 16,088 208 5.19% 12,255 179 5.86%
Under $100,000. . . . . . . . . . . . . . . . . . . . . . . . 11,861 161 5.44% 20,101 293 5.85%
--------- --------- --------- -------
Total time certificates of deposit. . . . . . . . . . . . . . . 27,949 369 5.30% 32,356 472 5.85%
--------- -------- --------- -------
Total interest-bearing deposits . . . . . . . . . . . . . . . . 62,251 581 3.74% 65,818 698 4.25%
Federal funds purchased and securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,143 12 4.21% 3,000 44 5.88%
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 19,132 237 4.97% 4,192 61 5.84%
-------- ---------- --------- -------
Total interest-bearing liabilities. . . . . . . . . . . . . . . 82,526 $ 830 4.03% 73,010 $ 803 4.41%
---------- -------
---------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits . . . . . . . . . . . . . . 45,974 40,647
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,063 989
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 13,142 12,682
-------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . $142,705 $127,328
-------- --------
-------- --------
Net interest income (spread) . . . . . . . . . . . . . . . . . . . . $1,714 3.54% $1,574 3.53%
---------- -------
---------- -------
Net yield on earning assets (2) . . . . . . . . . . . . . . . . 5.10% 5.26%
</TABLE>
- --------------------------
(1) Includes average balance of nonperforming loans of $1.1 million and $7.7
million for 1999 and 1998, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $43,000
and $37,000 for the three months ended June 30, 1999 and 1998,
respectively.
13
<PAGE>
The following table presents the components of net interest income for the six
months ended June 30, 1999 and 1998.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------------------------ ---------------------------
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 and securities purchased under
agreements to resell..................................... $ 6,124 $ 146 4.81% $ 14,548 $ 399 5.53%
Interest-bearing deposits with other financial institutions -- -- -- 250 8 6.45%
Securities held-to-maturity ............................... -- -- -- 4,072 134 6.64%
Securities available-for-sale ............................. 69,326 2,112 6.14% 38,816 1,251 6.50%
Loans receivable (1) (2) .................................. 56,782 2,715 9.64% 59,477 2,938 9.96%
-------- -------- -------- -------
Total interest earning assets .......................... 132,232 $ 4,973 7.58% 117,163 $ 4,730 8.14%
-------- -------
-------- -------
Noninterest earning assets:
Cash and due from banks - demand ....................... 7,093 5,611
Other assets ........................................... 2,795 3,258
Allowance for credit losses ............................ (2,090) (1,948)
-------- --------
Total assets ........................................... $140,030 $124,084
-------- --------
-------- --------
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand ................................................. $ 6,765 $ 44 1.31% $ 7,088 $ 45 1.28%
Money market and savings ............................... 25,262 341 2.72% 26,504 412 3.13%
Time certificates of deposit:
$100,000 or more ...................................... 15,116 395 5.27% 12,490 358 5.78%
Under $100,000 ........................................ 12,652 346 5.51% 19,667 572 5.87%
-------- -------- -------- -------
Total time certificates of deposit ..................... 27,768 741 5.38% 32,157 930 5.83%
-------- -------- -------- -------
Total interest-bearing deposits ........................ 59,795 1,126 3.80% 65,749 1,387 4.25%
Federal funds purchased and securities sold
under agreements to repurchase ......................... 599 13 4.38% 3,522 103 5.90%
Other borrowings .......................................... 20,486 506 4.98% 3,848 111 5.82%
-------- -------- -------- -------
Total interest-bearing liabilities ..................... 80,880 $ 1,645 4.10% 73,119 $ 1,601 4.42%
-------- -------
-------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .................... 44,938 37,374
Other liabilities ...................................... 994 961
Shareholders' equity ...................................... 13,218 12,630
-------- --------
Total liabilities and shareholders' equity ................ $140,030 $124,084
-------- --------
-------- --------
Net interest income (spread) .............................. $ 3,328 3.48% $ 3,129 3.73%
-------- -------
-------- -------
Net yield on earning assets (2) ........................ 5.08% 5.39%
</TABLE>
- ----------
(1) Includes average balance of nonperforming loans of $1.3 million and $7.4
million for 1999 and 1998, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $102,000
and $87,000 for the six months ended June 30, 1999 and 1998, respectively.
14
<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,
1999 VS 1998
----------------------------------------
INCREASE (DECREASE) DUE TO(1) NET
----------------------------- INCREASE
VOLUME RATE (DECREASE)
------------- ------------ -----------
<S> <C> <C> <C>
Interest Income:
Federal funds sold and securities purchased under
agreements to resell ..................................... $(204) $ (49) $(253)
Interest-bearing deposits with other financial institutions (8) -- (8)
Securities held-to-maturity ............................... (134) -- (134)
Securities available-for-sale ............................. 934 (73) 861
Loans receivable (2) ...................................... (130) (93) (223)
----- ----- -----
Total interest-earning assets .......................... $ 458 $(215) $ 243
----- ----- -----
----- ----- -----
Interest Expense:
Interest-bearing deposits:
Demand ................................................. $ (2) $ 1 $ (1)
Money market and savings ............................... (9) (62) (71)
Time certificates of deposit:
$100,000 or more .................................... 71 (34) 37
Under $100,000 ...................................... (194) (32) (226)
----- ----- -----
Total time certificates of deposit ..................... (123) (66) (189)
----- ----- -----
Total interest-bearing deposits ........................ (134) (127) (261)
Federal funds purchased and securities sold under
agreements to repurchase ................................. (66) (24) (90)
Other borrowings .......................................... 412 (17) 395
----- ----- -----
Total interest-bearing liabilities .................. $ 212 $(168) $ 44
----- ----- -----
----- ----- -----
Net interest income .................................... $ 246 $ (47) $ 199
----- ----- -----
----- ----- -----
</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.
15
<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,
1999 1998
---------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans:
Secured by one to four family
residential properties ............................................. $ 4,705 8% $ 5,005 9%
Secured by multifamily
residential properties ............................................. 3,081 5 3,111 5
Secured by commercial real
properties ......................................................... 21,852 36 20,839 36
Other - secured and
unsecured .......................................................... 28,675 47 24,337 43
Home equity lines of credit ........................................... 293 0 271 0
Consumer installment and
unsecured loans to individuals ....................................... 2,434 4 3,707 7
------- --- ------- ---
Total loans outstanding ............................................ 61,040 100% 57,270 100%
--- ---
--- ---
Deferred net loan origination
fees and purchased loan discount ..................................... (236) (298)
-------- --------
Loans receivable, net ................................................. $ 60,804 $ 56,972
-------- --------
-------- --------
</TABLE>
Total loans outstanding increased by $3.8 million to $61.0 million at
June 30, 1999 compared to $57.3 million at December 31, 1998. As indicated in
the table above, the composition of the loan portfolio has remained relatively
unchanged at June 30, 1999 compared to December 31, 1998, other than increases
of $4.3 million in other secured and unsecured commercial loans and $1.0 million
in secured by commercial real properties, offset by a $1.3 million decrease in
consumer installment and unsecured loans to individuals.
16
<PAGE>
The following comparative period-end table sets forth certain
information concerning nonperforming assets.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans ........................................... $ 789 $1,505
Troubled debt restructurings ............................... -- --
Loans contractually past due ninety or more
days with respect to either principal or
interest and still accruing interest ................... 88 --
------ ------
Nonperforming loans ........................................ 877 1,505
Other real estate owned .................................... 382 417
Other assets-SBA guaranteed loan ........................... 176 176
------ ------
Total nonperforming assets ................................. $1,435 $2,098
------ ------
------ ------
Allowance for credit losses as a percent of nonaccrual loans 260.6% 142.5%
Allowance for credit losses as a percent of
nonperforming loans ..................................... 234.4% 142.5%
Total nonperforming assets as a percent of loans receivable 2.4% 3.7%
Total nonperforming assets as a percent of total
shareholders' equity .................................... 11.9% 15.8%
</TABLE>
Nonaccrual loans decreased by $716,000 during the first half of 1999 to
$789,000 compared with $1.5 million at December 31, 1998, due to loans
charged off of $200,000 and full collection of a $616,000 loan during the
first half of 1999.
Loans contractually past due 90 days or more with respect to either
principal or interest and still accruing interest increased to $88,000 during
the first half of 1999 compared to zero at December 31, 1998.
Other real estate owned ("OREO") which included two undeveloped
commercially zoned parcels and a undeveloped multi-family zoned parcel,
decreased $35,000 to $382,000 at June 30, 1999 compared to $417,000 at
December 31, 1998 as a result of an additional valuation reserve recorded
during the second quarter of 1999. Other assets - SBA guaranteed loan is one
developed commercial retail property.
As a result of these changes, the amount of nonperforming assets at June
30, 1999 decreased 31.6% from the level at December 31, 1998.
Loan delinquencies greater than 30 days past due increased to $902,000
or 1.5% of loans outstanding at June 30, 1999 from $570,000 or 1.0 % of loans
outstanding at December 31, 1998. This increase in loan delinquencies during
the first half of 1999 was due to increases of $292,000 of loans past due
30-60 days and $83,000 of loans past due 90 days and over, offset by a
decrease of $43,000 of loans past due 60-90 days.
17
<PAGE>
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,
------------------- -----------------
1999 1998 1999 1998
--------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period ............................. $ 2,021 $ 1,953 $ 2,144 $ 2,023
Loans charged off:
Commercial loans:
Secured by one to four family residential properties . -- -- -- 4
Secured by commercial real properties ................ -- -- 128 --
Other - secured and unsecured ........................ -- 52 42 52
Consumer installment and unsecured loans to individuals 25 85 30 169
------- ------- ------- -------
Total loans charged off ............................... 25 137 200 225
Recoveries of loans previously charged off:
Commercial loans:
Secured by one to four family residential properties . 31 2 31 2
Secured by commercial real properties ................ 9 -- 9
Other - secured and unsecured ........................ 18 73 56 77
Consumer installment and unsecured loans to individuals 2 198 16 212
------- ------- ------- -------
Total recoveries of loans previously charged off ...... 60 273 112 291
------- ------- ------- -------
Net charge-offs (recoveries) .......................... (35) (136) 88 (66)
Provision for credit losses ........................... -- -- -- --
------- ------- ------- -------
Balance, end of period ................................ $ 2,056 $ 2,089 $ 2,056 $ 2,089
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. This statement is effective for fiscal years beginning after June
15, 1999. Subsequently, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB No. 133." This statement is an amendment to SFAS No. 133 and
modifies the effective date of the statement to fiscal years beginning after
June 15, 2000 and miscellaneous initial application procedures. The Company
currently does not own any derivative instruments. Therefore, management does
not believe that these statements will have a significant impact on the
Company.
18
<PAGE>
CAPITAL ADEQUACY REQUIREMENTS
At June 30, 1999 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. 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, 1999 and December 31, 1998.
On July 30, 1999 the Company contributed $2.4 million of capital to the
Bank to enable it to increase its legal lending limit and provide sufficient
capital for continued growth.
REGULATORY CAPITAL INFORMATION
OF THE COMPANY AND BANK
<TABLE>
<CAPTION>
WELL CAPITALIZED JUNE 30, DECEMBER 31,
STANDARDS 1999 1998
------------------- ----------- --------------
<S> <C> <C> <C>
COMPANY:
Tier 1 leverage ......... N/A 9.36% 8.78%
Tier 1 risk-based capital N/A 16.53% 17.38%
Total risk-based capital N/A 17.80% 18.65%
BANK:
Tier 1 leverage ......... 5.00% 7.10% 6.69%
Tier 1 risk-based capital 6.00% 12.73% 13.48%
Total risk-based capital 10.00% 14.00% 14.75%
</TABLE>
LIQUIDITY
The Company continues to manage its liquidity through a combination of
core 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. Average core deposits (excludes
money desk and escrow deposits) and shareholders' equity comprised 69.9% of
total funding in the second quarter of 1999, compared to 72.2% in the fourth
quarter of 1998.
ASSET LIABILITY MANAGEMENT
The following table shows that the Company's cumulative one year interest
rate sensitivity gap indicated a liability sensitive position of $4.0 million at
June 30, 1999, a decrease from a liability sensitive position of $7.6 million at
December 31, 1998. This decrease resulted from the Company's continuing effort
to minimize its exposure to changes in net interest income due to rapid
movements in interest rates. During the last six months, the Company has
decreased its available-for-sale investment securities portfolio that reprices
after one year to $39.3 million at June 30, 1999 from $53.2 million at December
19
<PAGE>
31, 1998, increased its portfolio of loans that reprices after one year to $20.5
million at June 30, 1999 from $17.0 million at December 31, 1998, and increased
its interest bearing transaction deposit accounts and borrowed funds to $61.8
million from $50.9 million during this same period. The Company's liability
sensitive position during a period of slowly rising or declining 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-bearing demand, savings
and money market deposit accounts historically have not increased
proportionately with changes in interest rates.
RATE-SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------------------------------------
MATURING OR REPRICING IN
----------------------------------------------------------
LESS AFTER THREE AFTER ONE
THAN MONTHS YEAR
THREE BUT WITHIN BUT WITHIN AFTER
MONTHS ONE YEAR 5 YEARS 5 YEARS TOTAL
------- ----------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Federal funds sold and securities
purchased under agreements to resell .... $ 17,600 $ -- $ -- $ -- $ 17,600
Securities available-for-sale .............. 18,640 6,542 32,329 7,011 64,522
FRB and other stock, at cost ............... -- -- -- 1,715 1,715
Loans receivable ........................... 23,936 16,343 10,457 10,068 60,804
-------- -------- -------- -------- --------
Total rate-sensitive assets ............. 60,176 22,885 42,786 18,794 144,641
Rate-Sensitive Liabilities: (1)
Interest bearing deposits:
Demand, money market and
savings .............................. 42,331 -- -- -- 42,331
Time certificates of deposit ............ 10,727 14,458 3,834 548 29,567
Federal funds purchased and securities
sold under agreements to repurchase ..... 2,000 -- -- -- 2,000
Other borrowings ........................... 17,500 -- -- -- 17,500
-------- -------- -------- -------- --------
Total rate-sensitive liabilities ........ 72,558 14,458 3,834 548 91,398
Interest rate-sensitivity gap .............. (12,382) 8,427 38,952 18,246 53,243
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative interest rate-sensitivity gap ... $(12,382) $ (3,955) $ 34,997 $ 53,243
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative ratio of rate sensitive assets to
rate-sensitive liabilities .............. 83% 95% 139% 158%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1)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.
20
<PAGE>
RATE-SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------
MATURING OR REPRICING IN
------------------------------------------------------------
LESS AFTER THREE AFTER ONE
THAN MONTHS YEAR
THREE BUT WITHIN BUT WITHIN AFTER
MONTHS ONE YEAR 5 YEARS 5 YEARS TOTAL
--------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-bearing deposits with other
financial institutions .................. $ -- $ -- $ -- $ -- $ --
Federal funds sold and securities
purchased under agreements to resell .... 6,800 -- -- -- 6,800
Securities held-to-maturity ................ -- -- -- -- --
Securities available-for-sale .............. 15,881 1,414 2,183 50,980 70,458
FRB and other stock, at cost ............... -- -- -- 1,391 1,391
Loans receivable ........................... 23,562 16,391 11,738 5,281 56,972
-------- -------- -------- -------- --------
Total rate-sensitive assets ............. 46,243 17,805 13,921 57,652 135,621
Rate-Sensitive Liabilities:(1)
Interest bearing deposits:
Demand, money market and
savings .............................. 30,550 -- -- -- 30,550
Time certificates of deposit ............ 9,743 11,089 7,668 547 29,047
Federal funds purchased and securities
sold under agreements to repurchase ..... 1,000 -- -- -- 1,000
Other borrowings ........................... 15,800 3,500 -- -- 19,300
-------- -------- -------- -------- --------
Total rate-sensitive liabilities ........ 57,093 14,589 7,668 547 79,897
Interest rate-sensitivity gap .............. (10,850) 3,216 6,253 57,105 55,724
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative interest rate-sensitivity gap ... $(10,850) $ (7,634) $ (1,381) $ 55,724
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative ratio of rate sensitive assets to
rate-sensitive liabilities .............. 81% 89% 98% 170%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1)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.
21
<PAGE>
YEAR 2000 MATTERS
THE FOLLOWING CONSTITUTES A "YEAR 2000 READINESS" DISCLOSURE UNDER THE YEAR 2000
INFORMATION AND READINESS DISCLOSURE ACT.
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.
Addressing the risks posed by the Year 2000 problem is among the Company's
highest priorities. The Company has established a comprehensive program
comprised of numerous individual projects which address the following broad
areas: data processing systems, telecommunications and data networks, physical
facilities and security systems, vendor risk, customer risk, liquidity risk,
contingency planning, testing and communications. The goal of the Company's Year
2000 program is to assure that the Company will be able to conduct normal
business before, during and after the century date change.
During 1997, the Company formed a Year 2000 team, consisting of the senior
managers from each operational area of the Company. The team first evaluated the
overall issue and identified risks posed by the century date change and
established a plan to address these risks.
At June 30, 1999, the Company's plan on assessment, renovation,
validation and contingency planning to address the Year 2000 issue is
complete. The Company has obtained Year 2000 certifications from all mission
critical service bureaus, software providers and vendors or suppliers and
Year 2000 certifications from 90% of all non-mission critical service
bureaus, software providers, vendors or suppliers and/or other significant
third parties. An alternative vendor contingency plan has been completed for
non-mission critical vendors who have not yet certified compliance and
vendors with priority ranking as to catastrophic, severe and sustainable.
The Company's approach to evaluating potential Year 2000 issues
pertaining to its borrowers was first to determine the level of loans
dependent on borrower cash flow versus collateral such as real estate, and
second to make an assessment of loans, over a certain dollar volume, which
may have exposure to Year 2000 issues. The Company has determined that loans
representing approximately 43% of the dollar volume of its loan portfolio are
not collateralized by real estate. Further, the Company is not aware of any
pending issues that would have caused the Company not to extend credit to the
borrowers where loan repayment is more dependent on cash flows than on
possibly sale of collateral. The Company specifically reviewed
22
<PAGE>
approximately 80% of the dollar volume of its loan portfolio to assess the
potential Year 2000 issues by first determining whether the borrower was
exposed to Year 2000 date changes (e.g. individual versus commercial) and
second, completing an assessment of those borrowers it determined may have
potential exposure to Year 2000 issues. Based on this assessment the Company
is not aware of any pending issues that would cause it not to extend credit
to these borrowers. However, the Company's credit risk associated with loans
may increase as reliance on third party responses is subject to both the
borrowers' understanding of the potential Year 2000 issues and the borrowers'
determination of the impact on its ability to fulfill contractual loan
obligations. As a result, there may be increases in the Company's problem
loans and credit losses in future years. Although it is not possible to
quantify the complete potential impact of such losses at this time,
management has no current information which would lead it to believe that
these potential losses would be material.
The financial impact of making the required systems testing and enhancement
described above is expected to be approximately $85,000. Approximately $45,000
has been expended as of June 30, 1999.
The Company has developed contingency plans for implementation in the
event that mission critical service bureaus, software providers, vendors,
suppliers or other significant third parties fail to adequately address Year
2000 issues. While these plans have been tested and validated, there can be
no assurance that any such plans will fully mitigate any such failures or
problems. Furthermore, there may be certain mission critical third parties,
such as utilities or telecommunication companies, where alternative
arrangements or sources are limited or unavailable.
If Year 2000 issues are not adequately addressed by the Company and third
parties, the Company's business, results of operations and financial position
could be materially adversely affected.
The foregoing Year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
the Company expects to substantially complete programming changes, remediation
and testing of systems and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including continued availability of
certain resources, representations received from third party service providers
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but
23
<PAGE>
are not limited to, the availability and cost of personnel trained in this
area, the ability to identify and convert all relevant computer systems,
results of Year 2000 testing, adequate resolution of Year 2000 issues by
governmental agencies, business or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
system costs, the need to replace hardware, the adequacy of and ability to
implement contingency plans and similar uncertainties. The forward-looking
statements made in the foregoing Year 2000 discussion speak only as of the
date on which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect
the occurrence of unanticipated events.
FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
The Company's results of operations and financial condition are affected by
many factors, including the following.
CHANGING ECONOMIC CONDITIONS
The Company's results of operation and financial condition are strongly
influenced by economic conditions in its market area (principally the Los
Angeles metropolitan area) as well as regional and national economic conditions
and in its niche markets, including the entertainment industry in Southern
California. During the past several years economic conditions in these areas
have been favorable. A deterioration in these economic conditions could affect
the financial condition and cash flows of its borrowers, which could lead to
higher levels of loan defaults, a decline in the value of collateral for the
loans. In addition, an unfavorable economy could reduce the demand for the
Company's loans and other products and services.
INTEREST RATE RISK
The Company's operating results depend to a large extent on its net
interest income. Changes in market interest rates can affect the Company's net
interest income by affecting the spread between its interest-earning assets and
interest-bearing liabilities. This may be due to the different maturities of its
interest-earning assets and interest-bearing liabilities, as well as an increase
in the general level of interest rates. Changes in market interest rates also
affect, among other things:
- The Company's ability to originate loans;
- The ability of borrowers to make payments on loans;
- The value of its interest-earning assets and its ability to realize
gains from the sale of these assets;
- The average life of its interest-earning assets; and
- The Company's ability to obtain deposits instead of other available
investment alternatives.
Interest rates are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and political conditions
and other factors beyond its control.
24
<PAGE>
RISK OF DECLINES IN ASSET QUALITY
The Company's results of operations depend significantly on the quality of
its assets. While the Company has developed and implemented underwriting
policies and procedures in connection with the making of loans, compliance with
these policies and procedures in making loans does not guarantee repayment of
the loans. High levels of non-performing assets will adversely affect the
Company's results of operations and financial condition. A borrower's ability to
pay its loan in accordance with its terms can be adversely affected by a number
of factors, such as a decrease in the borrower's revenues and cash flows due to
adverse changes in economic conditions or a decline in the demand for the
borrower's products and/or services. The Company has devoted and continues to
devote substantial time and resources to the identification, collection and
workout of non-performing assets, which has resulted in a significant decrease
in its nonperforming assets from $12.0 million, or 5.2%, of total assets at
December 31, 1994 to 1.4 million, or 0.9%, of total assets at June 30, 1999.
However, no assurance can be given that the Company will not have material
additional non-performing assets in the future.
ADEQUACY OF ALLOWANCES FOR LOSSES
The Company establishes allowances for credit losses against each segment
of its loan portfolio. At June 30, 1999, its allowance for credit losses equaled
3.4% of loans receivable and 234.4% of nonperforming loans. Although the Company
believes that it had established adequate allowances for credit losses as of
June 30, 1999, credit quality is affected by many factors beyond the control of
the Company, including local and national economies, and facts may exist which
are not known to the Company which adversely affect the likelihood of repayment
of various loans in the loan portfolio and realization of the collateral upon a
default. Accordingly, no assurance can be given that the Company will not
sustain loan losses materially in excess of the allowance for credit losses. In
addition, the OCC, as an integral part of its examination process, periodically
reviews its allowance for credit losses and could require additional provisions
for credit losses. Material future additions to the allowance for loan losses
may also be necessary due to increases in the size of the loan portfolio.
Increases in the provisions for credit losses would adversely affect its results
of operations.
COMPETITION
The banking business is highly competitive. The Company's primary
service area is dominated by a relatively small number of major banks which
have many offices over a wide geographic area and much greater name
recognition. Increasing competition in the markets for the Company's products
and services can reduce the demand for the Company's products and services
and require the Company to originate those products and services on less
favorable terms.
25
<PAGE>
REGULATION
Both the Company, as a bank holding company, and the Bank, as a national
bank, are subject to significant governmental supervision and regulation, which
is intended primarily for the protection of depositors. Statutes and regulations
affecting it may be changed at any time, and the interpretation of these
statutes and regulations by examining authorities also may change. The Company
cannot assure you that future changes in applicable statutes and regulations or
in its interpretation will not adversely affect its business.
26
<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 ____, 1999 /s/ SCOTT A. MONTGOMERY
--------------------- ------------------------------------
SCOTT A. MONTGOMERY
Chief Executive Officer
DATE: August ___, 1999 /s/ JOSEPH W. KILEY III
--------------------- ------------------------------------
JOSEPH W. KILEY, III
Chief Financial Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS, STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY AND RELATED SCHEDULES AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,552
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,237
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 60,804
<ALLOWANCE> 2,056
<TOTAL-ASSETS> 152,713
<DEPOSITS> 120,058
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 1,105
<LONG-TERM> 14,500
0
7,350
<COMMON> 24,614
<OTHER-SE> (19,914)
<TOTAL-LIABILITIES-AND-EQUITY> 152,713
<INTEREST-LOAN> 2,715
<INTEREST-INVEST> 2,112
<INTEREST-OTHER> 146
<INTEREST-TOTAL> 4,973
<INTEREST-DEPOSIT> 1,126
<INTEREST-EXPENSE> 1,645
<INTEREST-INCOME-NET> 3,328
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 3,303
<INCOME-PRETAX> 333
<INCOME-PRE-EXTRAORDINARY> 333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 321
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 5.08
<LOANS-NON> 789
<LOANS-PAST> 88
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,144
<CHARGE-OFFS> 200
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 2,056
<ALLOWANCE-DOMESTIC> 2,056
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
