<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 September 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 October 29, 1999 was 677,195.
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks-demand ....................................... $ 7,031 $ 5,405
Federal funds sold and securities purchased under agreements to resell 8,300 6,800
--------- ---------
Cash and cash equivalents ....................................... 15,331 12,205
Securities available-for-sale, at fair value;
aggregate amortized cost of $69,046 and $70,247
at September 30, 1999 and December 31, 1998, respectively .......... 67,532 70,458
FRB and other stock, at cost ......................................... 1,643 1,391
Loans receivable ..................................................... 69,793 56,972
Allowance for credit losses ....................................... (2,162) (2,144)
--------- ---------
Net loans receivable ............................................ 67,631 54,828
Premises and equipment, net .......................................... 651 726
Other real estate owned, net ......................................... 382 593
Accrued interest receivable and other assets ......................... 1,685 1,422
--------- ---------
Total assets .................................................... $ 154,855 $ 141,623
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ......................................... $ 44,113 $ 47,375
Interest-bearing demand ............................................ 7,129 6,835
Money market ....................................................... 31,077 21,652
Savings ............................................................ 1,066 2,063
Time certificates of deposit:
$100,000 or more ................................................ 27,619 14,966
Under $100,000 .................................................. 8,673 14,081
--------- ---------
Total deposits ............................................... 119,677 106,972
Federal funds purchased and securities sold
under agreements to repurchase ..................................... 2,021 1,000
Other borrowings ..................................................... 19,500 19,300
Accrued interest payable and other liabilities ....................... 1,522 1,093
--------- ---------
Total liabilities ............................................ 142,720 128,365
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 September 30, 1999 and December 31, 1998, respectively ........ 24,614 24,613
Accumulated deficit ................................................ (18,315) (18,916)
Accumulated other comprehensive income ............................. (1,514) 211
--------- ---------
Total shareholders' equity ................................... 12,135 13,258
--------- ---------
Total liabilities and shareholders' equity ................... $ 154,855 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees .................................................... $ 1,465 $ 1,461 $ 4,180 $ 4,399
Securities held-to-maturity .............................................. - - - 134
Securities available-for-sale ............................................ 1,104 918 3,216 2,169
Federal funds sold and securities purchased under agreements to resell ... 136 196 282 595
Interest-bearing deposits with other financial institutions .............. - 3 - 11
------- ------- ------- -------
Total interest income ............................................... 2,705 2,578 7,678 7,308
Interest expense:
Interest-bearing demand .................................................. 23 26 67 71
Money market and savings ................................................. 237 215 578 627
Time certificate of deposits:
$100,000 or more ....................................................... 320 212 715 570
Under $100,000 ......................................................... 137 289 483 861
------- ------- ------- -------
Total interest expense on deposits ................................... 717 742 1,843 2,129
Federal funds purchased and securities sold under agreements to repurchase 22 32 35 135
Other borrowed funds ..................................................... 236 165 742 276
------- ------- ------- -------
Total interest expense ............................................... 975 939 2,620 2,540
------- ------- ------- -------
Net interest income before provision for credit losses ............... 1,730 1,639 5,058 4,768
Provision for credit losses ................................................. - - - -
------- ------- ------- -------
Net interest income after provision for credit losses .................... 1,730 1,639 5,058 4,768
Other operating income:
Net (loss) gain on sale of securities available-for-sale ................. - 1 (1) 39
International services ................................................... 46 19 72 68
Investment division ...................................................... 15 12 43 31
Deposit-related and other customer services .............................. 136 123 391 395
Gain on sale of other real estate owned and fixed assets ................. - - - 68
------- ------- ------- -------
Total other operating income ......................................... 197 155 505 601
Other operating expenses:
Salaries and related benefits ............................................ 786 792 2,406 2,332
Net occupancy ............................................................ 257 211 745 624
Furniture and equipment .................................................. 51 76 160 210
Printing and communications .............................................. 79 57 198 174
Insurance and regulatory assessments ..................................... 74 74 223 230
Customer services ........................................................ 148 213 514 600
Computer data processing ................................................. 81 75 234 213
Legal services ........................................................... 33 56 47 140
Other professional services .............................................. 76 73 223 214
Other real estate owned expenses ......................................... 5 6 45 15
Promotion and other expenses ............................................. 49 53 147 168
------- ------- ------- -------
Total other operating expenses ....................................... 1,639 1,686 4,942 4,920
------- ------- ------- -------
Net income before provision for income taxes ........................... 288 108 621 449
Provision for income taxes .................................................. 8 6 20 8
------- ------- ------- -------
Net income ............................................................. $ 280 $ 102 $ 601 $ 441
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic ................................................................ $ 0.41 $ 0.15 $ 0.89 $ 0.65
------- ------- ------- -------
------- ------- ------- -------
Diluted .............................................................. $ 0.11 $ 0.04 $ 0.24 $ 0.17
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash flow from operating activities:
Net income ............................................................. $ 601 $ 441
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 144 183
Gain on sale of fixed assets .......................................... - (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 (39)
Net amortization of premiums on securities ............................ 63 66
Net accretion of discounts on loans purchased ......................... (25) (24)
Increase in accrued interest receivable and other assets .............. (87) (124)
Increase in accrued interest payable and other liabilities ............ 429 239
-------- --------
Net cash provided by operating activities .......................... 1,161 674
Cash flows from investing activities:
Purchase of securities available-for-sale .............................. (11,040) (62,290)
Proceeds from sales of securities available-for-sale ................... 1,016 6,102
Proceeds from repayments and maturities of securities available-for-sale 10,909 16,471
Proceeds from repayments and maturities of securities-held-to-maturity . - 14,000
Loan originations and principal collections, net ....................... (12,778) (515)
Proceeds from sale of other real estate owned .......................... - 319
Net purchases of premises and equipment ................................ (69) (176)
-------- --------
Net cash used in investing activities .............................. (11,962) (26,089)
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts ..... 5,460 15,595
Net increase in time certificates of deposit ........................... 7,245 4,194
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase ................................... 1,021 (5,050)
Net increase in other borrowed funds ................................... 200 8,000
Net proceeds from exercise of stock options ............................ 1 -
-------- --------
Net cash provided by financing activities .......................... 13,927 22,739
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... 3,126 (2,676)
Cash and cash equivalents, January 1 ...................................... 12,205 16,086
-------- --------
Cash and cash equivalents, September 30 ................................... $ 15,331 $ 13,410
-------- --------
-------- --------
Supplemental cash flow information:
Cash paid for interest ................................................. $ 2,756 $ 2,416
(Decrease) increase in unrealized gain on securities
available-for-sale ................................................... $ (1,725) $ 756
</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 ........................ (1,726) (1,726)
Add: Reclassification adjustment for
losses included in net income ..... 1 1
Net income ......................... 601 601
--------
Comprehensive income ........... (1,124)
------- -------- ------- -------- -------- -------- --------
Balance at September 30, 1999 ............ 900,000 $ 7,350 677,195 $ 24,614 $(18,315) $ (1,514) $ 12,135
------- -------- ------- -------- -------- -------- --------
------- -------- ------- -------- -------- -------- --------
</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 consolidated
results of operations and cash flows for such interim periods. The results for
the three and nine months ended September 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
Earnings 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 nine months ended September 30, 1999 and 1998 was
677,195, 677,117, 677,048 and 677,065, respectively. The weighted average number
of common shares and common share equivalents outstanding used in computing
earnings per diluted common share for the three and nine months ended September
30, 1999 and 1998 was 2,478,897, 2,477,753, 2,537,127 and 2,553,863,
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 (loss) 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 SEPTEMBER 30, 1999:
Basic EPS ........................... $ 280 677,195 $0.41
-----
-----
Effect of dilutive securities:
Options and warrants ............ 1,702
Convertible preferred stock ..... 1,800,000
---------- ---------
Diluted EPS ......................... $ 280 2,478,897 $0.11
---------- --------- -----
---------- --------- -----
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998:
Basic EPS ........................... $ 102 677,048 $0.15
-----
-----
Effect of dilutive securities:
Options and warrants ........... 60,079
Convertible preferred stock .... 1,800,000
---------- ---------
Diluted EPS ......................... $ 102 2,537,127 $0.04
---------- --------- -----
---------- --------- -----
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
Basic EPS ........................... $ 601 677,117 $0.89
-----
-----
Effect of dilutive securities:
Options and warrants .......... 636
Convertible preferred stock ... 1,800,000
---------- ---------
Diluted EPS ......................... $ 601 2,477,753 $0.24
---------- --------- -----
---------- --------- -----
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
Basic EPS ........................... $ 441 677,065 $0.65
-----
-----
Effect of dilutive securities:
Options and warrants .......... 76,798
Convertible preferred stock ... 1,800,000
---------- ---------
Diluted EPS ......................... $ 441 2,553,863 $0.17
---------- --------- -----
---------- --------- -----
</TABLE>
NOTE 3--INVESTMENT 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.
7
<PAGE>
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 and securities purchased
under agreements to resell.
NOTE 5--INCOME TAXES
No income tax provision was recorded during the third 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 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 $280,000, or $0.11 diluted earnings per
share, during the third quarter of 1999, compared to $102,000, or $0.04 diluted
earnings per share, during the third quarter of 1998. Net income per basic share
was $0.41 and $0.15 during the third quarters of 1999 and 1998, respectively.
The improvement between the third quarter of 1999 compared to the third quarter
of 1998 resulted primarily from an increase in net interest income of $91,000 or
5.6% and an increase in other operating income of $42,000 or 27.1%, complemented
by a $47,000 or 2.8% decrease in other operating expenses.
Net income during the first nine months of 1999 was $601,000, or $0.24
diluted earnings per share, compared to $441,000, or $0.17 diluted earnings per
share, during the first nine months of 1998. Net income per basic share was
$0.89 and $0.65 during the first nine months of 1999 and 1998, respectively. The
improvement between the first nine months of 1999 compared to the first nine
months of 1998 resulted largely from a $290,000, or 6.1% increase in net
interest income, offset by a decrease of $96,000 or 16.0% in other operating
income and a $22,000 or 0.4% increase in other operating expenses.
Return on average assets during the third quarter and first nine months of
1999 was 0.74% and 0.56%, respectively, compared with 0.28% and 0.45% during the
third quarter and first nine months of 1998, respectively. Return on average
equity during the third quarter and first nine months of 1999 was 9.44% and
6.31%, respectively, compared with 3.09% and 4.61% during the third quarter and
first nine months of 1998, respectively.
The increase in net interest income during the three and nine months ended
September 30, 1999 compared to the corresponding periods in 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 $968,000 and $5.2 million, respectively. Growth in average
interest-earning assets occurred primarily through the purchase of securities.
The Company funded this growth with liquidity provided by increased deposits and
other borrowings.
During the three and nine months ended September 30, 1999 and 1998 the
Company experienced a compressed net interest margin as a result of a higher
proportion of average interest-earning assets consisting of lower yielding
securities and
9
<PAGE>
federal funds sold and a decline in the market interest rates, which had a
greater impact on the Company's interest-earning assets than on its
interest-bearing liabilities. 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 comprised of fixed rate mortgage-backed securities ("MBS"),
collateralized mortgage obligations ("CMO") and real estate mortgage investment
conduits ("REMIC"). In addition, during the latter part of 1998 through the
first quarter of 1999, the Company invested approximately $19.5 million in
securities that bear interest at rates which adjust monthly and quarterly based
on 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. At September 30, 1999, the Company did not hold
investment securities with a call option feature other than the embedded
prepayment option associated with mortgage securities.
During the third quarter and first nine months of 1999, the Company
experienced a decrease in the weighted average yield on loans receivable
compared to the same periods in 1998, primarily due to repricing, refinancing
and new funding of loans at lower interest rates as a result of lower market
interest rates in 1999 compared to 1998. The weighted average yield on loans
receivable decreased from 9.34% and 9.75% during the third quarter and first
nine months of 1998, respectively, to 9.04% and 9.42% during the third quarter
and first nine months of 1999, respectively.
The weighted average yield on securities decreased during the third quarter
and first nine months of 1999 to 6.26% and 6.18%, respectively, compared from
6.32% and 6.43% during the third quarter and first nine months of 1998,
respectively. These decreases reflected the overall downward trend in market
interest rates, which had a greater impact on securities yielding variable
rates. Additionally, lower market rates, particularly during the fourth quarter
of 1998, induced the issuers of securities with an optional principal redemption
feature to exercise such "call" options, the proceeds of which was reinvested
into lower yielding securities.
The weighted average cost of interest-bearing liabilities decreased during
the third quarter and first nine months of 1999 to 4.09% and 4.10%,
respectively, from 4.41% during both the third quarter and first nine months of
1998. These decreases were due primarily to a decrease in cost of borrowings
with variable rates resulting from a decrease in market interest rates, and a
decrease in cost of certificate of deposits as result of Company's continued
effort to replace the maturing high yielding wholesale deposits with lower
yielding retail deposits.
Average loans receivable increased $2.2 million, or 3.6%, to $64.3 million
during the quarter ended September 30, 1999 compared to $62.0 million during the
quarter ended September 30, 1998. Average securities available-for-sale
increased by
10
<PAGE>
$12.4 million to $70.0 million during the quarter ended September 30, 1999
compared to $57.6 million during the quarter ended September 30, 1998. These
increases in the loan and securities portfolios were funded by the liquidity
provided by the growth in deposits and other borrowings.
Average deposits increased $3.6 million, or 3.1%, to $118.0 million during
the third quarter of 1999 compared to $114.4 million during the third quarter of
1998, due primarily to additional deposits generated by the Bank's business
banking and entertainment divisions. Average securities sold under agreements to
repurchase and other borrowed funds (collectively referred to as other
borrowings) increased $5.9 million to $19.5 million during the quarter ended
September 30, 1999 from $13.6 million during the quarter ended September 30,
1998. This increase in other borrowed funds was primarily the result of
borrowings from the Federal Home Loan Bank ("FHLB"), the majority of which bear
interest at rates that are adjusted monthly based on the London InterBank Offer
Rate ("LIBOR") interest rate index. The proceeds from these borrowings were used
to purchase investment securities that bear interest at rates adjusted monthly
based on LIBOR.
Average loans receivable decreased $1.0 million, or 1.7%, during the first
nine months of 1999 to $59.3 million compared to $60.3 million during the first
nine months of 1998. During these same periods, average securities
available-for-sale increased $24.4 million to $69.6 million compared to $45.2
million, and average securities held-to-maturity decreased $2.7 million to zero.
Average deposits during the nine months ended September 30, 1999 increased $2.3
million, or 2.1%, rising to $109.2 million compared to $106.9 million during the
comparable period of 1998.
The Company made no provision for credit losses during the nine months
ended September 30, 1999 and 1998. Loans charged off during the third quarter
and first nine months of 1999 were $11,000 and $211,000, respectively, compared
to $121,000 and $346,000 during the third quarter and first nine months of 1998,
respectively. Recoveries were $117,000 and $229,000 during the third quarter and
first nine months of 1999, respectively, compared to $92,000 and $383,000 during
the third quarter and first nine months of 1998, respectively.
Other operating income, excluding gains and losses on the sale of
securities and assets, totaled $197,000 during the third quarter of 1999, up
27.9%, from $154,000 during the third quarter of 1998, due primarily to an
increase of $27,000 in foreign exchange income. During the nine months ended
September 30, 1999, other operating income, excluding gains and losses on the
sale of securities and assets, totaled $506,000, an increase of 2.4%, from
$494,000 during the comparable period in 1998.
The Company recorded no net gain or loss on sale of securities during the
third quarter of 1999 compared to a net gain of $1,000 during same period in
1998. During the first nine months of 1999, the Company recorded a net loss of
$1,000 on sale of securities compared to net gain of $39,000 during
corresponding period of 1998. The Company incurred neither gain nor
11
<PAGE>
loss on sale of other real estate owned and fixed assets during the third
quarter and first nine months of 1999 compared to zero and a gain of $68,000
during the third quarter and first nine months of 1998, respectively.
Other operating expenses decreased to $1.6 million during the third quarter
of 1999 compared to $1.7 million during the third quarter of 1998. Customer
services expense decreased $65,000 during the quarter ended September 30, 1999
compared to the corresponding quarter in 1998 as a result of decreased volume of
escrow deposits. Net occupancy expense increased $46,000 during the quarter
ended September 30, 1999 compared to the third quarter of 1998, due primarily to
increased escalation and operating cost associated with the Company's corporate
and retail premises lease.
Other operating expenses increased to $4.94 million during the nine months
ended September 30, 1999 compared to $4.92 million during the same period of
1998. Salaries and related benefits increased $74,000 during the first nine
months of 1999 compared to the same period in 1998 due to Company's continued
expansion of the business banking and entertainment loan production staff to
facilitate growth. Net occupancy expense increased $121,000 during the first
nine months of 1999 compared to the same period in 1998 due to same factor that
caused the increase between the third quarters of 1999 compared to 1998
discussed above. Customer service related expense decreased $86,000 during the
first nine months of 1999 compared to the same period in 1998 due to decreased
volume of escrow deposits. Legal expense decreased $93,000 during the first nine
months of 1999 compared to the same period in 1998, primarily as a result of
expense recoveries associated with the collection of nonperforming loans.
12
<PAGE>
The following table presents the components of net interest income for the
quarters ended September 30, 1999 and 1998.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 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 ..................................... $ 10,503 $ 136 5.14% $ 13,860 $ 196 5.61%
Interest-bearing deposits with other financial institutions. - - - 250 3 6.06%
Securities held-to-maturity ................................ - - - - - -
Securities available-for-sale .............................. 69,996 1,104 6.26% 57,590 918 6.32%
Loans receivable (1) (2) ................................... 64,271 1,465 9.04% 62,039 1,461 9.34%
------- --------- --------- ---------
Total interest earning assets .......................... 144,770 $ 2,705 7.41% 133,739 $ 2,578 7.65%
--------- ---------
--------- ---------
Noninterest earning assets:
Cash and due from banks - demand ....................... 6,634 6,904
Other assets ........................................... 2,857 3,332
Allowance for credit losses and net unrealized
(loss) gain on securities available-for-sale ......... (3,903) (1,890)
--------- ---------
Total assets ........................................... $ 150,358 $ 142,085
--------- ---------
--------- ---------
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand ................................................. $ 6,798 $ 23 1.34% $ 8,081 $ 26 1.28%
Money market and savings ............................... 32,344 237 2.91% 28,215 215 3.02%
Time certificates of deposit:
$100,000 or more ..................................... 25,899 320 4.90% 14,909 212 5.64%
Under $100,000 ....................................... 10,026 137 5.42% 19,679 289 5.83%
------- --------- ------- ---------
Total time certificates of deposit ..................... 35,925 457 5.05% 34,588 501 5.75%
------- --------- ------- ---------
Total interest-bearing deposits ........................ 75,067 717 3.79% 70,884 742 4.15%
Federal funds purchased and securities sold
under agreements to repurchase ........................... 2,013 22 4.34% 2,100 32 6.05%
Other borrowings ........................................... 17,467 236 5.36% 11,500 165 5.69%
------- --------- ------- ---------
Total interest-bearing liabilities ..................... 94,547 $ 975 4.09% 84,484 $ 939 4.41%
--------- ---------
--------- ---------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .................... 42,907 43,507
Other liabilities ...................................... 1,134 1,010
Shareholders' equity ....................................... 11,770 13,084
--------- ---------
Total liabilities and shareholders' equity ................. $ 150,358 $ 142,085
--------- ---------
--------- ---------
Net interest income (spread) ............................... $ 1,730 3.32% $ 1,639 3.24%
--------- ---------
--------- ---------
Net yield on earning assets (2) ........................ 4.74% 4.86%
</TABLE>
- --------------
(1) Includes average balance of nonperforming loans of $900,000 and $7.8 million
for 1999 and 1998, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $14,000
and $34,000 for the three months ended September 30, 1999 and 1998,
respectively.
13
<PAGE>
The following table presents the components of net interest income for the
nine months ended September 30, 1999 and 1998.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 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 ...................... $ 7,600 $ 282 4.96% $ 14,316 $ 595 5.56%
Interest-bearing deposits with other financial
institutions .................................... - - - 250 11 5.88%
Securities held-to-maturity ...................... - - - 2,699 134 6.64%
Securities available-for-sale .................... 69,569 3,216 6.18% 45,174 2,169 6.42%
Loans receivable (1) (2) ......................... 59,306 4,180 9.42% 60,340 4,399 9.75%
------- -------- ------- --------
Total interest earning assets ................ 136,475 $ 7,678 7.52% 122,779 $ 7,308 7.96%
-------- --------
-------- --------
Noninterest earning assets:
Cash and due from banks - demand ............. 6,939 6,047
Other assets ................................. 2,817 3,282
Allowance for credit losses and net unrealized
(loss) gain on securities available-for-sale (2,720) (1,959)
-------- --------
Total assets ................................. $143,511 $130,149
-------- --------
-------- --------
Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand ....................................... $ 6,776 $ 67 1.32% $ 7,423 $ 71 1.28%
Money market and savings ..................... 27,648 578 2.80% 27,081 627 3.10%
Time certificates of deposit:
$100,000 or more ........................... 18,749 715 5.10% 13,305 570 5.73%
Under $100,000 ............................. 11,767 483 5.49% 19,671 861 5.85%
------ -------- ------ --------
Total time certificates of deposit ........... 30,516 1,198 5.25% 32,976 1,431 5.80%
------ -------- ------ --------
Total interest-bearing deposits .............. 64,940 1,843 3.79% 67,480 2,129 4.22%
Federal funds purchased and securities sold
under agreements to repurchase ................. 1,076 35 4.35% 3,043 135 5.93%
Other borrowings ................................. 19,468 742 5.10% 6,427 276 5.74%
------ -------- ------ --------
Total interest-bearing liabilities ........... 85,484 $ 2,620 4.10% 76,950 $ 2,540 4.41%
-------- --------
-------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits .......... 44,253 39,441
Other liabilities ............................ 1,041 977
Shareholders' equity ............................. 12,733 12,781
-------- --------
Total liabilities and shareholders' equity ....... $143,511 $130,149
-------- --------
-------- --------
Net interest income (spread) ..................... $ 5,058 3.42% $ 4,768 3.54%
-------- --------
-------- --------
Net yield on earning assets (2) .............. 4.96% 5.19%
</TABLE>
- --------------
(1) Includes average balance of nonperforming loans of $1.1 million and $7.6
million for 1999 and 1998, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $116,000
and $121,000 for the nine months ended September 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>
NINE MONTHS ENDED SEPTEMBER 30,
1999 VS 1998
----------------------------------------
INCREASE (DECREASE) DUE TO(1) NET
------------------------------ INCREASE
VOLUME RATE (DECREASE)
------------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Federal funds sold and securities purchased under agreements to resell ... $ (254) $ (59) $ (313)
Interest-bearing deposits with other financial institutions .............. (11) - (11)
Securities held-to-maturity .............................................. (134) - (134)
Securities available-for-sale ............................................ 1,132 (85) 1,047
Loans receivable (2) ..................................................... (75) (144) (219)
------- ------- -------
Total interest-earning assets .................................... $ 658 $ (288) $ 370
------- ------- -------
------- ------- -------
Interest Expense:
Interest-bearing deposits:
Demand ............................................................... $ (6) $ 2 $ (4)
Money market and savings ............................................. 31 (80) (49)
Time certificates of deposit:
$100,000 or more ................................................. 214 (69) 145
Under $100,000 ................................................... (327) (51) (378)
------- ------- -------
Total time certificates of deposit ................................... (113) (120) (233)
------- ------- -------
Total interest-bearing deposits ...................................... (88) (198) (286)
Federal funds purchased and securities sold under agreements to repurchase (70) (30) (100)
Other borrowings ......................................................... 500 (34) 466
------- ------- -------
Total interest-bearing liabilities ............................... $ 342 $ (262) $ 80
------- ------- -------
------- ------- -------
Net interest income ...................................................... $ 316 $ (26) $ 290
------- ------- -------
------- ------- -------
</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
INVESTMENT SECURITIES
The following comparative period-end table sets forth certain information
concerning the estimated fair values and unrealized gains and losses of
investment securities portfolio, consisting of available-for-sale securities:
ESTIMATED FAIR VALUES OF AND UNREALIZED
GAINS AND LOSSES ON INVESTMENT SECURITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
----------------------------------------- -----------------------------------------
TOTAL GROSS GROSS ESTIMATED TOTAL GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE COST GAINS LOSS VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ........ $ 1,008 $ 4 $ - $ 1,012 $ 1,001 $ 7 $ - $ 1,008
GNMA-issued mortgage
pass through certificates ...... 5,844 46 29 5,861 - - - -
FHLMC/FNMA-issued mortgage
pass through certificates ...... 15,809 - 294 15,515 16,933 100 3 17,030
CMO's and REMIC's issued by U.S.
government and federal agencies 41,377 - 1,156 40,221 48,278 146 41 48,383
Privately issued Corporate bonds,
CMO's and REMIC's securities ... 5,008 - 85 4,923 4,035 2 - 4,037
------- ------- ------- ------- ------- ------- ------- -------
$69,046 $ 50 $ 1,564 $67,532 $70,247 $ 255 $ 44 $70,458
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Total amortized cost of investment securities decreased $1.2 million to
$69.0 million at September 30, 1999 from $70.2 million at December 31, 1998. As
indicated in the table above, GNMA-issued mortgage pass through certificates
increased $5.8 million and privately issued corporate bonds, CMO's and REMIC's
increased $1.0 million while CMO's and REMIC's issued by U.S. government and
federal agencies decreased $6.9 million due to principal paydowns, during the
period ended September 30, 1999 compared to December 31, 1998. The Company
incurred net unrealized loss of $1.5 million at September 30, 1999 compared from
net unrealized gain of $211,000 at December 31, 1998 primarily due to rising
market rates during the third quarter of 1999.
16
<PAGE>
LOAN PORTFOLIO
The following comparative period-end table sets forth certain information
concerning the composition of the loan portfolio.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
SEPTEMBER 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 ............... $ 4,610 7% $ 5,005 9%
Secured by multifamily
residential properties ............... 3,067 4 3,111 5
Secured by commercial real properties.. 25,946 37 20,839 36
Other - secured and unsecured ......... 33,642 48 24,337 43
Real estate construction and land
development .......................... 6 - - -
Home equity lines of credit ........... 350 - 271 -
Consumer installment and
unsecured loans to individuals ....... 2,410 4 3,707 7
------ --- ------ ---
Total loans outstanding ........... 70,031 100% 57,270 100%
--- ---
--- ---
Deferred net loan origination
fees and purchased loan discount ..... (238) (298)
-------- --------
Loans receivable, net ................. $ 69,793 $ 56,972
-------- --------
-------- --------
</TABLE>
Net loans receivable increased $12.8 million to $69.8 million at September
30, 1999 compared to $57.0 million at December 31, 1998. As indicated in the
table above, commercial loans secured by commercial real estate increased $5.1
million and other commercial loans-secured and unsecured increased $9.3 million,
while consumer installment and unsecured loans to individuals decreased $1.3
million during the period ended September 30, 1999 compared to December 31,
1998. These changes in the composition of the Company's loan portfolio are
consistent with efforts to emphasize the growth of commercial loans generated by
the business banking and entertainment divisions.
17
<PAGE>
The following comparative period-end table sets forth certain information
concerning nonperforming assets.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans ................................................. $ 967 $1,505
Troubled debt restructurings ..................................... - -
Loans contractually past due ninety or more days with respect
to either principal or interest and still accruing interest..... - -
------ ------
Nonperforming loans .............................................. 967 1,505
Other real estate owned .......................................... 382 417
Other assets-SBA guaranteed loan ................................. 176 176
------ ------
Total nonperforming assets ....................................... $1,525 $2,098
------ ------
------ ------
Allowance for credit losses as a percent of nonaccrual loans ..... 223.6% 142.5%
Allowance for credit losses as a percent of nonperforming loans .. 223.6% 142.5%
Total nonperforming assets as a percent of loans receivable ...... 2.2% 3.7%
Total nonperforming assets as a percent of total shareholders'
equity ......................................................... 12.6% 15.8%
</TABLE>
Nonaccrual loans decreased $538,000 at September 30, 1999 to $967,000
compared to $1.5 million at December 31, 1998, due to loans charged off of
$211,000 and full collection of a $616,000 loan during 1999.
Other real estate owned ("OREO"), which included two undeveloped
commercially zoned parcels and one undeveloped multi-family zoned parcel,
decreased $35,000 to $382,000 at September 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
September 30, 1999 decreased 27.3% or $573,000 from the level at December 31,
1998.
Loan delinquencies greater than 30 days past due decreased to $44,000 or
0.06% of loans outstanding at September 30, 1999 from $570,000 or 1.0% of loans
outstanding at December 31, 1998.
18
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1999 1998 1999 1998
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period ............................. $ 2,056 $ 2,089 $ 2,144 $ 2,023
Loans charged off:
Commercial loans:
Secured by one to four family residential properties - - - 4
Secured by commercial real properties .............. - - 128 31
Other - secured and unsecured ...................... - 94 42 115
Consumer installment and unsecured loans to individuals 11 27 41 196
------- ------- ------- -------
Total loans charged-off ............................... 11 121 211 346
Recoveries of loans previously charged off:
Commercial loans:
Secured by one to four family residential properties - - 31 2
Secured by commercial real properties .............. 87 - 96 -
Other - secured and unsecured ...................... 13 4 69 81
Consumer installment and unsecured loans to individuals 17 88 33 300
------- ------- ------- -------
Total recoveries of loans previously charged off ...... 117 92 229 383
------- ------- ------- -------
Net charge-offs (recoveries) .......................... (106) 29 (18) (37)
Provision for credit losses ........................... - - - -
------- ------- ------- -------
Balance, end of period ................................ $ 2,162 $ 2,060 $ 2,162 $ 2,060
------- ------- ------- -------
------- ------- ------- -------
</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
Statement 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.
19
<PAGE>
CAPITAL ADEQUACY REQUIREMENTS
At September 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. 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. 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 September 30, 1999 and December 31, 1998.
REGULATORY CAPITAL INFORMATION
OF THE COMPANY AND BANK
<TABLE>
<CAPTION>
WELL CAPITALIZED SEPTEMBER 30, DECEMBER 31,
STANDARDS 1999 1998
---------------- ------------- -------------
<S> <C> <C> <C>
COMPANY:
Tier 1 leverage ............. N/A 8.97% 8.78%
Tier 1 risk-based capital ... N/A 16.23% 17.38%
Total risk-based capital .... N/A 17.50% 18.65%
BANK:
Tier 1 leverage ............. 5.00% 8.35% 6.69%
Tier 1 risk-based capital ... 6.00% 15.07% 13.48%
Total risk-based capital .... 10.00% 16.34% 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 76.7% of total funding in
the third 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 $10.2 million
at September 30, 1999, an increase from a liability sensitive position of $7.6
million at December 31, 1998, as a result of increased deposits and other
borrowings that mature or reprice within one year. During the last nine months,
the Company has decreased its available-for-sale investment securities portfolio
that reprices after one year to
20
<PAGE>
$44.2 million at September 30, 1999 from $53.2 million at December 31, 1998,
increased its portfolio of loans that reprice after one year to $21.3 million at
September 30, 1999 from $17.0 million at December 31, 1998, and increased its
interest bearing transaction deposit accounts and borrowed funds that reprice
within one year to $58.3 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>
SEPTEMBER 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 .... $ 8,300 $ - $ - $ - $ 8,300
Securities available-for-sale .............. 16,809 6,571 33,958 10,194 67,532
FRB and other stock, at cost ............... - - - 1,643 1,643
Loans receivable ........................... 31,657 16,842 11,538 9,756 69,793
------ ------ ------ ------ -------
Total rate-sensitive assets ............. 56,766 23,413 45,496 21,593 147,268
Rate-Sensitive Liabilities: (1)
Interest bearing deposits:
Demand, money market and savings ........ 39,272 - - - 39,272
Time certificates of deposit ............ 18,920 13,190 3,635 547 36,292
Federal funds purchased and securities
sold under agreements to repurchase ....... 2,021 - - - 2,021
Other borrowings ........................... 17,000 - 2,500 - 19,500
------ ------ ------ ------ -------
Total rate-sensitive liabilities ........ 77,213 13,190 6,135 547 97,085
Interest rate-sensitivity gap .............. (20,447) 10,223 39,361 21,046 50,183
----------------------------------------------------------------
----------------------------------------------------------------
Cumulative interest rate-sensitivity gap ... $(20,447) $(10,224) $ 29,137 $ 50,183
------ ------ ------ ------
------ ------ ------ ------
Cumulative ratio of rate sensitive assets to
rate-sensitive liabilities .............. 74% 89% 130% 152%
------ ------ ------ ------
------ ------ ------ ------
</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>
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.
22
<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.
By June 30, 1999, the Company's plan on assessment, renovation, validation
and contingency planning to address the Year 2000 issue was complete. The
Company has obtained Year 2000 certifications from all mission critical service
bureaus, software providers and vendors or suppliers. Testing with non-mission
critical service bureaus, software providers, vendors or suppliers and/or other
significant third parties was substantially completed during the third quarter
of 1999. 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
Year 2000 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
23
<PAGE>
specifically reviewed 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 $65,000
has been expended as of September 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 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,
24
<PAGE>
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.
25
<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 $1.5 million, or 1%, of total assets at September 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 September 30, 1999, its allowance for credit losses
equaled 3.1% of loans receivable and 223.6% of nonperforming loans. Although the
Company believes that it had established adequate allowances for credit losses
as of September 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.
26
<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.
27
<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: NOVEMBER 15, 1999 /s/ SCOTT A. MONTGOMERY
-------------------- -------------------------------------
SCOTT A. MONTGOMERY
Chief Executive Officer
DATE: NOVEMBER 15, 1999 /s/ JOSEPH W. KILEY III
-------------------- --------------------------------------
JOSEPH W. KILEY, III
Chief Financial Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,031
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,175
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 69,793
<ALLOWANCE> 2,162
<TOTAL-ASSETS> 154,855
<DEPOSITS> 119,677
<SHORT-TERM> 4,521
<LIABILITIES-OTHER> 1,522
<LONG-TERM> 17,000
0
7,350
<COMMON> 24,614
<OTHER-SE> (19,829)
<TOTAL-LIABILITIES-AND-EQUITY> 154,855
<INTEREST-LOAN> 4,180
<INTEREST-INVEST> 3,216
<INTEREST-OTHER> 282
<INTEREST-TOTAL> 7,678
<INTEREST-DEPOSIT> 1,843
<INTEREST-EXPENSE> 2,620
<INTEREST-INCOME-NET> 5,058
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 4,942
<INCOME-PRETAX> 621
<INCOME-PRE-EXTRAORDINARY> 601
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 601
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 4.96
<LOANS-NON> 967
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,144
<CHARGE-OFFS> 211
<RECOVERIES> 229
<ALLOWANCE-CLOSE> 2,162
<ALLOWANCE-DOMESTIC> 2,162
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
