<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, 2000 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 31, 2000 was 1,542,324.
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
--------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks-demand ................................................. $ 9,711 $ 5,789
Federal funds sold and securities purchased
under agreements to resell ................................................ 12,550 4,450
---------- ----------
Cash and cash equivalents .............................................. 22,261 10,239
Securities available-for-sale, at fair value;
aggregate amortized cost of $67,673 and $71,964
at September 30, 2000 and December 31, 1999, respectively ................. 66,062 69,489
FRB and other stock, at cost ................................................... 2,537 1,746
Loans receivable ............................................................... 101,188 73,843
Allowance for credit losses................................................ (2,585) (1,896)
---------- ----------
Net loans receivable ................................................... 98,603 71,947
Premises and equipment, net .................................................... 542 626
Other real estate owned, net ................................................... - 382
Accrued interest receivable and other assets ................................... 1,800 1,724
---------- ----------
Total assets ........................................................... $ 191,805 $ 156,153
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand ................................................ $ 56,922 $ 53,827
Interest-bearing demand ................................................... 6,925 8,669
Money market .............................................................. 40,707 25,376
Savings ................................................................... 1,066 3,079
Time certificates of deposit:
$100,000 or more ....................................................... 25,082 19,488
Under $100,000 ......................................................... 6,375 6,545
---------- ----------
Total deposits ...................................................... 137,077 116,984
Other borrowings ............................................................... 34,000 26,200
Accrued interest payable and other liabilities ................................. 1,904 1,382
---------- ----------
Total liabilities ...................................................... 172,981 144,566
Shareholders' equity:
Preferred stock: (10,000 shares undesignated)
Series A non-cumulative convertible perpetual preferred stock;
authorized 990,000 shares; issued and outstanding 770,423 shares and
900,000 shares at September 30, 2000 and December 31, 1999,
respectively ........................................................... 6,292 7,350
Common stock, no par value; authorized 10,000,000
shares; issued and outstanding 1,541,324 shares and 677,195 shares
at September 30, 2000 and December 31, 1999, respectively .............. 29,876 24,614
Accumulated deficit ....................................................... (15,733) (17,902)
Accumulated other comprehensive income .................................... (1,611) (2,475)
---------- ----------
Total shareholders' equity ............................................. 18,824 11,587
---------- ----------
Total liabilities and shareholders' equity ............................. $ 191,805 $ 156,153
========== ==========
</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,
2000 1999 2000 1999
------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees .................................... $ 2,468 $ 1,465 $ 6,317 $ 4,180
Securities available-for-sale ............................ 1,195 1,104 3,628 3,216
Federal funds sold and securities purchased under
agreements to resell ................................... 225 136 399 282
------------ ----------- ----------- ----------
Total interest income ................................. 3,888 2,705 10,344 7,678
Interest expense:
Interest-bearing demand .................................. 29 23 85 67
Money market and savings ................................. 321 237 852 578
Time certificate of deposits:
$100,000 or more ....................................... 289 320 778 715
Under $100,000 ......................................... 107 137 275 483
------------ ----------- ----------- ----------
Total interest expense on deposits .................... 746 717 1,990 1,843
Federal funds purchased and securities sold under
agreements to repurchase ............................... 61 22 62 35
Other borrowings ......................................... 655 236 1,520 742
------------ ----------- ----------- ----------
Total interest expense ................................ 1,462 975 3,572 2,620
------------ ----------- ----------- ----------
Net interest income before provision for credit
losses .............................................. 2,426 1,730 6,772 5,058
Provision for credit losses ............................... - - (576) -
------------ ----------- ----------- ----------
Net interest income after provision for credit losses .... 2,426 1,730 7,348 5,058
Other operating income:
Net gain (loss) on sale of securities available-for-sale.. - - 18 (1)
International services ................................... 29 46 86 72
Investment division ...................................... 23 15 65 43
Deposit-related and other customer services .............. 147 136 447 391
Gain on sale of other real estate owned .................. - - 69 -
------------ ----------- ----------- ----------
Total other operating income .......................... 199 197 685 505
Other operating expenses:
Salaries and related benefits ............................ 974 786 2,832 2,406
Net occupancy ............................................ 239 257 738 745
Furniture and equipment .................................. 86 51 255 160
Printing and communications .............................. 66 79 211 198
Insurance and regulatory assessments ..................... 76 74 217 223
Customer services ........................................ 210 148 621 514
Computer data processing ................................. 112 81 304 234
Legal services ........................................... 53 33 137 47
Other professional services .............................. 90 76 295 223
Other real estate owned expenses ......................... - 5 3 45
Promotion and other expenses ............................. 68 49 206 147
------------ ----------- ----------- ----------
Total other operating expenses ........................ 1,974 1,639 5,819 4,942
------------ ----------- ----------- ----------
Net income before provision for income taxes ............. 651 288 2,214 621
Provision for income taxes ................................ 19 8 45 20
------------ ----------- ----------- ----------
Net income ............................................... $ 632 $ 280 $ 2,169 $ 601
============ =========== =========== ==========
Earnings per share:
Basic .................................................. $ 0.64 $ 0.41 $ 2.41 $ 0.89
============ =========== =========== ==========
Diluted ................................................ $ 0.24 $ 0.11 $ 0.85 $ 0.24
============ =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE-MONTHS
ENDED SEPTEMBER 30,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash flow from operating activities:
Net income ............................................................. $ 2,169 $ 601
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 146 144
Gain on sale of other real estate owned ................................ (69) -
Provision for credit losses ............................................ (576) -
Provision for loss on other real estate owned .......................... - 35
Net (gain) loss on sale of securities
available-for-sale ..................................................... (18) 1
Net (accretion) amortization of (discount) premiums on securities ...... (22) 63
Net accretion of discounts on loans purchased .......................... (27) (25)
Increase in accrued interest receivable and other assets ............... (85) (87)
Increase in accrued interest payable and other liabilities ............. 522 429
---------- ----------
Net cash provided by operating activities ........................... 2,040 1,161
Cash flows from investing activities:
Purchase of securities available-for-sale .............................. (2,703) (11,040)
Proceeds from sales of securities available-for-sale ................... 1,891 1,016
Proceeds from repayments and maturities of securities
available-for-sale .................................................... 4,352 10,909
Loan originations and principal collections, net ....................... (26,288) (12,778)
Proceeds from sale of other real estate owned .......................... 486 -
Proceeds from sale of other assets-SBA guaranteed loans ................ 209 -
Net purchases of premises and equipment ................................ (62) (69)
---------- ----------
Net cash used in investing activities ............................... (22,115) (11,962)
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts ..... 14,669 5,460
Net increase in time certificates of deposit ........................... 5,424 7,245
Net increase in securities sold under agreements to repurchase
and federal funds purchased ........................................... - 1,021
Net increase in other borrowings ....................................... 7,800 200
Net proceeds from issuance of common stock ............................. 4,190 -
Net proceeds from exercise of stock options ............................ 14 1
----------- ----------
Net cash provided by financing activities ........................... 32,097 13,927
----------- ----------
Net increase in cash and cash equivalents ............................... 12,022 3,126
Cash and cash equivalents, January 1 .................................... 10,239 12,205
----------- ----------
Cash and cash equivalents, September 30 ................................. $ 22,261 $ 15,331
=========== ==========
Supplemental cash flow information:
Cash paid for interest ................................................. $ 3,578 $ 2,756
Decrease in unrealized loss on securities
available-for-sale .................................................... $ 864 $ 1,725
Transfer to OREO from loans receivable, net ............................ $ 35 $ -
Cash paid for income taxes ............................................. $ 10 $ 22
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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
consolidated results of its operations and cash flows for such interim periods.
The results for the three and nine month periods ended September 30, 2000 are
not necessarily indicative of the results expected for any subsequent period or
for the year ending December 31, 2000. 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, 1999 ("1999 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 number of
common shares outstanding used in computing basic earnings per share for the
three months ended September 30, 2000 and 1999 was 989,823 and 677,195,
respectively, and 898,573 and 677,117, respectively, for the nine months ended
September 30, 2000 and 1999. The weighted average number of common shares and
common share equivalents outstanding used in computing diluted earnings per
share for the three months ended September 30, 2000 and 1999 was 2,656,737 and
2,478,897, respectively, and 2,556,196 and 2,477,753, respectively, for the nine
months ended September 30, 2000 and 1999.
5
<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 SEPTEMBER 30, 2000:
Basic EPS ............................... $ 632 989,823 $ 0.64
===========
Effect of dilutive securities:
Options and warrants ................ 126,068
Convertible preferred stock .......... 1,540,846
------------ -----------
Diluted EPS ............................. $ 632 2,656,737 $ 0.24
============ =========== ===========
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 NINE MONTHS ENDED SEPTEMBER 30, 2000:
Basic EPS ............................... $ 2,169 898,573 $ 2.41
===========
Effect of dilutive securities:
Options and warrants ................. 116,777
Convertible preferred stock .......... 1,540,846
----------- -----------
Diluted EPS ............................. $ 2,169 2,556,196 $ 0.85
=========== =========== ===========
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
=========== =========== ===========
</TABLE>
NOTE 3--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.
NOTE 4--INCOME TAXES
No income tax provision was recorded during the three and nine months ended
September 30, 2000 and 1999 (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, 1999, the Company had: (i) federal net
operating loss carry forwards of $20.3 million, which begin to expire in the
year 2007; (ii) California net operating loss carry forwards of $4.7 million, of
which $3.2 million
6
<PAGE>
will expire in 2000, $1.2 million will expire in 2001, and
$300,000 will expire in 2002; and (iii) an Alternative Minimum Tax credit at
December 31, 1999 of $254,000 which may be carried forward indefinitely.
NOTE 5--RECLASSIFICATIONS
Certain prior year data have been reclassified to conform with current year
presentation.
7
<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 $632,000, or $0.24 diluted earnings per
share, during the third quarter of 2000, compared to net income of $280,000, or
$0.11 diluted earnings per share, during the third quarter of 1999. Net income
per basic share was $0.64 and $0.41 during the third quarter of 2000 and 1999,
respectively. The improvement in earnings during the third quarter of 2000
compared to 1999 resulted primarily from an increase of $696,000 or 40.2% in net
interest income, partially offset by an increase of $335,000 or 20.4% in other
operating expense.
Net income during the first nine months of 2000 was $2.2 million, or $0.85
diluted earnings per share, compared to net income of $601,000, or $0.24 diluted
earnings per share, during the first nine months of 1999. Net income per basic
share was $2.41 and $0.89 during the first nine months of 2000 and 1999,
respectively. The core components accounting for this improvement between the
first nine months of 2000 compared to the first nine months of 1999 were: (i)
increases of $1.7 million or 33.9% in net interest income and $180,000 or 35.6%
in other operating income, partially offset by a $877,000 or 17.7% increase in
other operating expense; and (ii) a $576,000 negative provision for credit
losses.
Return on average assets during the third quarter and first nine months of
2000 was 1.33% and 1.67%, respectively, compared to 0.74% and 0.56% during the
third quarter and first nine months of 1999, respectively. Return on average
equity during the third quarter and first nine months of 2000 was 17.49% and
22.92%, respectively, compared to 9.44% and 6.31% during the third quarter and
first nine months of 1999, respectively.
NET INTEREST INCOME
The increase in net interest income during the three and nine months ended
September 30, 2000 compared to the corresponding periods during 1999 resulted
primarily from an increase in net average interest earning assets (the
difference between average interest earning assets and average interest bearing
liabilities) of $15.1 million and $12.4 million, respectively. This increase in
net average interest earning assets during the three and nine months ended
September 30, 2000 compared to corresponding periods during 1999 was
attributable primarily to an increase in average loans receivable of 50.8% and
44.9%, respectively. This growth in average loans receivable during the three
and nine months ended September 30, 2000 was funded by an increase in average
deposits of 9.7% and 15.6%, respectively, and an increase in average borrowed
funds
8
<PAGE>
(represented collectively by federal funds purchased, securities sold
under agreements to repurchase and other borrowings) of 122.4% and 61.8%,
respectively. The growth in both average loans receivable and average deposits
was a result of the Company's effort toward expanding and building new customer
relationships within existing market niches of business and entertainment
banking, and to a lesser extent within the newly formed target niches of
healthcare and community based nonprofit organizations.
Average loans receivable increased 50.8% to $97.0 million during the
quarter ended September 30, 2000 compared to $64.3 million during the quarter
ended September 30, 1999. The weighted average yield on loans receivable during
the quarter ended September 30, 2000 increased to 10.13% compared to 9.04%
during the quarter ended September 30, 1999, reflecting increasing market
interest rates offset by competitive pressure from other commercial banks.
Average securities increased 1.8% to $71.3 million during the quarter
ended September 30, 2000 compared to $70.0 million during the quarter ended
September 30, 1999. The weighted average yield on securities increased to
6.67% during the third quarter of 2000 compared to 6.26% during the third
quarter of 1999, primarily due to increased market interest rates which
affected the Company's portfolio of variable rate securities.
Average interest bearing liabilities increased 23.2% to $116.5 million
during the quarter ended September 30, 2000 compared to $94.5 million during
the quarter ended September 30, 1999 primarily due to increased average
borrowed funds. Average interest bearing deposits decreased 2.6% to $73.1
million during the quarter ended September 30, 2000 from $75.1 million during
the quarter ended September 30, 1999, primarily due to decreased average
certificates of deposit offset by increased average money market and saving
deposits. Average borrowed funds during the third quarter of 2000 increased
122.4% to $43.3 million from $19.5 million during the same period in 1999
resulting from the need to fund the increase in average interest earning
assets.
The weighted average cost of interest bearing liabilities increased to
4.99% during the third quarter of 2000 from 4.09% during the same period of
1999 as the weighted average cost of deposits and other borrowings both
increased. The weighted average cost of borrowed funds increased to 6.56%
during the third quarter of 2000 from 5.36% during the same period in 1999
caused by increased market interest rates. The weighted average cost of
interest bearing deposits increased to 4.06% during the third quarter of 2000
from 3.79% during the same period of 1999, primarily due to increased market
rates and competitive pressure. However, the increase was less than market
rates because of a shift towards a greater percentage of lower cost money
market and savings accounts than time certificates of deposits.
9
<PAGE>
Average total deposits increased 9.7% to $129.5 million during the third
quarter of 2000 compared to $118.0 million during the third quarter of 1999 due
primarily to a $13.4 million or 31.3% increase in average noninterest bearing
demand deposits and a $5.2 million or 16.0% increase in average money market and
savings deposits, partially offset by a $7.9 million or 21.9% decrease in
average certificates of deposit.
PROVISION FOR CREDIT LOSSES
The Company did not record a provision for credit losses during the three
months ended September 30, 2000 or 1999, nor during the nine months ended
September 30, 1999. The Company realized a net recovery of $1.3 million related
to a previously charged off loan during the second quarter of 2000. The entire
recovery was accounted for as an increase to the allowance for credit losses.
Based on the resulting level of the allowance for credit losses after giving
effect for this recovery, management recognized $576,000 as a negative provision
for credit losses during the nine months ended September 30, 3000. Management
determined that an increase in the allowance for credit losses was warranted due
to: (i) an increasing portion of the Bank's loan portfolio currently represented
by larger loans (loans with balances greater than $1.0 million) as compared to
prior periods; and (ii) the recent growth in loans receivable, in general.
OTHER OPERATING INCOME
Other operating income, excluding gains and losses on the sale of
securities and assets, totaled $199,000 during the third quarter of 2000, an
increase of 1.0% from $197,000 during the third quarter of 1999. During the nine
months ended September 30, 2000, other operating income, excluding gains and
losses on the sale of securities and assets, totaled $598,000, an increase of
18.2% from $506,000 during the comparable period of 1999. Service charges on
deposit accounts accounted for the majority of this improvement by increasing
$56,000 or 14.3% during the nine months ended September 30, 2000, compared to
corresponding period in 1999. This increase is reflective of the growth of
average "transaction type" deposit accounts (demand, money market and savings)
during the first nine months of 2000 compared to the same period of 1999.
The Company did not record a net gain or loss on sale of securities and
other real estate owned during nine months ended September 30, 2000 or 1999. The
Company realized a net gain of $18,000 on the sale of securities during the
first nine months of 2000, compared to a net loss of $1,000 during the
corresponding period in 1999. Additionally, the Company realized a net gain of
$69,000 on sale of other real estate owned during first nine months of 2000
compared to zero during the corresponding period of 1999.
OTHER OPERATING EXPENSES
Other operating expenses increased 20.4% to $2.0 million during the third
quarter of 2000 compared to $1.6 million during the third quarter of 1999. This
increase was primarily due to increases in salaries and related benefits of
$188,000,
10
<PAGE>
customer services of $62,000, furniture and equipment of $35,000, computer
data processing of $31,000 and legal services of $20,000. The increase in
salaries and related benefits was due to Company's expansion of banking
services, staff and related costs in order to service new market niches of
healthcare and community based nonprofit organizations.
Other operating expenses increased 17.7% to $5.8 million during the nine
months ended September 30, 2000 compared to $4.9 million during the same period
of 1999. This increase resulted from increases of $426,000 in salaries and
related benefits, $107,000 in customer services, $95,000 in furniture and
equipment, $90,000 in legal services, $72,000 in other professional services and
$70,000 in computer data processing. The increase in salaries and related
benefits was due primarily to the cost associated with the Company's expansion
of banking services mentioned above.
11
<PAGE>
The following table presents the components of net interest income for the
quarters ended September 30, 2000 and 1999.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------------------- -----------------------------------
WEIGHTED WEIGHTED
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
AMOUNT EXPENSE RATE AMOUNT EXPENSE RATE
----------- --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold and securities purchased under
agreement to resell ................................. $ 13,605 $ 225 6.58% $ 10,503 $ 136 5.14%
Securities available-for-resale ...................... 71,275 1,195 6.67% 69,996 1,104 6.26%
Loans receivable (1)(2) .............................. 96,950 2,468 10.13% 64,271 1,465 9.04%
---------- ---------- --------- ----------
Total interest earning assets ....................... 181,830 $ 3,888 8.51% 144,770 $ 2,705 7.41%
---------- ----------
Noninterest earning assets:
Cash and due from banks - demand .................... 9,228 6,634
Other assets ........................................ 2,582 2,857
Allowance for credit losses and net unrealized loss
on securities available-for-sale ................... (4,776) (3,903)
---------- ---------
Total assets ......................................... $ 188,864 $ 150,358
========== =========
Liabilities and shareholders' equity:
Interest bearing deposits:
Demand .............................................. $ 7,556 $ 29 1.53% $ 6,798 $ 23 1.34%
Money market and savings ............................ 37,521 321 3.40% 32,344 237 2.91%
Time certificates of deposit:
$100,000 or more .................................. 20,399 289 5.64% 25,899 320 4.90%
Under $100,000 .................................... 7,665 107 5.55% 10,026 137 5.42%
---------- ---------- ---------- ----------
Total time certificates of deposit .................. 28,064 396 5.61% 35,925 457 5.05%
---------- ---------- ---------- ----------
Total interest bearing deposits ..................... 73,141 746 4.06% 75,067 717 3.79%
Federal funds purchased and securities sold under
agreement to repurchase ............................. 3,596 61 6.75% 2,013 22 4.34%
Other borrowings ..................................... 39,732 655 6.56% 17,467 236 5.36%
---------- ---------- ---------- ----------
Total interest bearing liabilities .................. 116,469 $ 1,462 4.99% 94,547 $ 975 4.09%
---------- ----------
Noninterest bearing liabilities:
Noninterest bearing demand deposits ................. 56,320 42,907
Other liabilities ................................... 1,699 1,134
Shareholders' equity ................................. 14,376 11,770
---------- ----------
Total liabilities and shareholders' equity ........... $ 188,864 $ 150,358
========== ==========
Net interest income (spread) ......................... $ 2,426 3.51% $ 1,730 3.32%
========= ==========
Net yield on earning assets (2) ...................... 5.31% 4.74%
</TABLE>
------------
(1) Includes average balance of nonperforming loans of $715,000 and $900,000 for
2000 and 1999, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $56,000
and $14,000 for the three months ended September 30, 2000 and 1999,
respectively.
12
<PAGE>
The following table presents the components of net interest income for
the nine months ended September 30, 2000 and 1999.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
---------------------------------- -------------------------------
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
agreement to resell ......................................... $ 8,449 $ 399 6.31% $ 7,600 $ 282 4.96%
Securities available-for-resale .............................. 72,421 3,628 6.69% 69,569 3,216 6.18%
Loans receivable (1)(2) ...................................... 85,942 6,317 9.82% 59,306 4,180 9.42%
---------- ---------- -------- ---------
Total interest earning assets ............................... 166,812 $ 10,344 8.28% 136,475 $ 7,678 7.52%
---------- ---------
Noninterest earning assects:
Cash and due from banks - demand ............................ 9,233 6,939
Other assets ................................................ 2,624 2,817
Allowance for credit losses and net unrealized loss on
securities available-for-sale ............................. ( 5,026) (2,720)
---------- ---------
Total assets ................................................ $173,643 $143,511
========== =========
Liabilities and shareholders' equity:
Interest bearing deposits:
Demand ...................................................... $ 8,140 $ 85 1.39% $ 6,776 $ 67 1.32%
Money market and savings .................................... 35,721 852 3.19% 27,648 578 2.80%
Time certificates of deposit:
$100,000 or more .......................................... 19,374 778 5.36% 18,749 715 5.10%
Under $100,000 ............................................ 6,976 275 5.27% 11,767 483 5.49%
---------- ---------- -------- ---------
Total time certificates of deposit .......................... 26,350 1,053 5.34% 30,516 1,198 5.25%
---------- ---------- -------- ---------
Total interest bearing deposits ............................. 70,211 1,990 3.79% 64,940 1,843 3.79%
Federal funds purchased and securities sold under agreements
to repurchased .............................................. 1,223 62 6.77% 1,076 35 4.35%
Other borrowings ............................................. 32,015 1,520 6.34% 19,468 742 5.10%
---------- ---------- -------- ---------
Total interest bearing liabilities .......................... 103,449 $ 3,572 4.61% 85,484 $ 2,620 4.10%
---------- ---------
Noninterest bearing liabilities:
Noninterest bearing demand deposits ......................... 56,046 44,253
Other liabilities ........................................... 1,506 1,041
Shareholders' equity ......................................... 12,642 12,733
---------- ---------
Total liabilities and shareholders' equity ................... $173,643 $143,511
========== =========
Net interest income (spread) ................................. $ 6,772 3.67% $ 5,058 3.42%
========= =========
Net yield on earning assets (2) ............................. 5.42% 4.96%
</TABLE>
--------------
(1) Includes average balance of nonperforming loans of $715,000 and $1.1 million
for 2000 and 1999, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $115,000
and $116,000 for the nine months ended September 30, 2000 and 1999,
respectively.
13
<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,
2000 VS 1999
------------------------------------------
NET
INCREASE (DECREASE) DUE TO(1) INCREASE
----------------------------- (DECREASE)
VOLUME RATE
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income:
Federal funds sold and securities purchased under agreements to
resell ........................................................ $ 34 $ 83 $ 117
Securities available-for-sale ................................. 174 238 412
Loans receivable (2) .......................................... 1,949 188 2,137
---------- ---------- ----------
Total interest earning assets .............................. $ 2,157 $ 509 $ 2,666
---------- ---------- ----------
Interest Expense:
Interest bearing deposits:
Demand ..................................................... $ 14 $ 4 $ 18
Money market and savings ................................... 187 87 274
Time certificates of deposit:
$100,000 or more ........................................ 24 39 63
Under $100,000 .......................................... (189) (19) (208)
---------- ---------- ----------
Total time certificates of deposit ......................... (165) 20 (145)
---------- ---------- ----------
Total interest bearing deposits ............................ 36 111 147
Federal funds purchased and securities sold under agreements to
repurchase .................................................... 5 22 27
Other borrowings .............................................. 563 215 778
---------- ---------- ----------
Total interest bearing liabilities ...................... $ 604 $ 348 $ 952
---------- ---------- ----------
Net interest income ........................................ $ 1,553 $ 161 $ 1,714
========== ========== ==========
</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.
14
<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, 2000 DECEMBER 31, 1999
----------------------------------------------------------------------------------------
TOTAL GROSS GROSS ESTIMATED TOTAL GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE COST GAINS LOSS VALUE
--------- ---------- ---------- --------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities ........... $ 2,010 $ - $ 8 $ 2,002 $ 2,015 $ - $ 13 $ 2,002
GNMA-issued/guaranteed mortgage
pass through certificates ....... 5,392 - 32 5,360 7,646 15 126 7,535
Other U.S. government and federal
agency securities ............... 1,948 15 - 1,963 1,937 3 - 1,940
FHLMC/FNMA-issued mortgage
pass through certificates ....... 15,782 25 250 15,557 15,185 - 448 14,737
CMO's and REMIC's issued by U.S.
government-sponsored agencies .. 37,539 - 1,261 36,278 40,174 - 1,827 38,347
Privately issued Corporate bonds,
CMO's and REMIC's securities .... 5,002 - 100 4,902 5,007 - 79 4,928
FRB and other equity stocks ........ 2,537 - - 2,537 1,746 - - 1,746
--------- ---------- ---------- --------- ---------- ----------- ---------- ---------
$ 70,210 $ 40 $ 1,651 $68,599 $73,710 $ 18 $ 2,493 $71,235
========= ========== ========== ========= ========== =========== ========== =========
</TABLE>
The $3.5 million decrease in total amortized cost of investment
securities to $70.2 million at September 30, 2000 from $73.7 million at
December 31, 1999 was due primarily to paydowns on principal amortizing
securities, partially offset by the purchase of additional Federal Home Loan
Bank ("FHLB") stock to support the growth of other borrowings from FHLB. The
Company had net unrealized losses of $1.6 million and $2.5 million at
September 30, 2000 and December 31, 1999, respectively, on its investment
securities portfolio primarily due to rising market interest rates since the
purchase of these investment securities.
As of September 30, 2000 the Company held $2.0 million, representing
aggregate amortized cost and estimated fair value, of an investment security
issued by Structured Asset Mortgage Investments, Inc. This represented the only
security from any issuer other than by the U.S. government and U.S. government
agencies and corporations in which the aggregate book value exceeded 10% of the
Company's shareholders' equity.
15
<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,
2000 1999
----------------------------- ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans:
Secured by one to four family
residential properties .......... $ 4,006 4% $ 4,405 6%
Secured by multifamily
residential properties .......... 5,006 5 5,355 7
Secured by commercial real
properties ...................... 37,630 37 28,233 38
Other - secured and
unsecured ....................... 49,755 49 33,221 45
Real estate construction and land
development ...................... 1,079 1 6 -
Home equity lines of credit ......... 242 - 367 1
Consumer installment and
unsecured loans to individuals ... 3,753 4 2,496 3
----------- - ------------ ----------- ---------
Total loans outstanding ......... 101,471 100% 74,083 100%
============ =========
Deferred net loan origination
fees and purchased loan discount.. (283) (240)
------------ -----------
Loans receivable .................... $ 101,188 $ 73,843
============ ===========
</TABLE>
Total loans outstanding increased by $27.4 million to $101.5 million at
September 30, 2000 compared to $74.1 million at December 31, 1999. As indicated
in the table above, commercial loans secured by commercial real estate
properties increased $9.4 million and other commercial loans secured and
unsecured increased $16.5 million. These changes are consistent with the
Company's effort to emphasize the growth of commercial loans generated by
business banking and entertainment divisions complemented, to a lesser extent,
by the creation of two additional departments during the early part of 2000
which focus on healthcare and community based nonprofit organizations.
16
<PAGE>
The following comparative period-end table sets forth certain
information concerning nonperforming assets.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans .................................................. $ 683 $ 932
Troubled debt restructurings ...................................... - -
Loans contractually past due ninety or more days with
respect to either principal or interest and still accruing
interest ......................................................... - -
--------- --------
Nonperforming loans ............................................... 683 932
Other real estate owned ........................................... - 382
Other assets - SBA guaranteed loan ................................ - 150
--------- --------
Total nonperforming assets ........................................ $ 683 $1,464
========= ========
Allowance for credit losses as a percent of nonaccrual loans ...... 378.5% 203.4%
Allowance for credit losses as a percent of
nonperforming loans .............................................. 378.5% 203.4%
Total nonperforming assets as a percent of loans receivable ....... 0.7% 2.0%
Total nonperforming assets as a percent of total
shareholders' equity ............................................ 3.6% 12.6%
</TABLE>
Nonaccrual loans decreased by $249,000 or 26.7% during the first nine
months of 2000 to $683,000 compared to $932,000 at December 31, 1999. During the
first nine months of 2000 the Company made a reclassification of $235,000 from
nonaccrual loans to other real estate owned and other assets-SBA guaranteed
loans, but subsequently sold the related assets during the second quarter of
2000.
Other real estate owned ("OREO") and other assets-SBA guaranteed loans
decreased to zero at September 30, 2000 compared to $382,000 and $150,000,
respectively, at December 31, 1999. As a result of the disposition of these
assets the Company realized a gain of $69,000 during the first nine months of
2000.
As a result of these changes, the amount of nonperforming assets at
September 30, 2000 decreased 53.3% from the level at December 31, 1999.
Loan delinquencies greater than 30 days past due increased to $347,000 or
0.3% of loans outstanding at September 30, 2000 from $184,000 or 0.2% of loans
outstanding at December 31, 1999.
17
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
Provisions for credit losses charged to operations reflect management's
judgment of the adequacy of the allowance for credit losses and are determined
through periodic analysis of the loan portfolio. This analysis includes a
detailed review of the classification and categorization of problem loans and
loans to be charged off; an assessment of the overall quality and collectibility
of the portfolio; and consideration of the loan loss experience, trends in
problem loan concentrations of credit risk, as well as current and expected
future economic conditions (particularly Southern California). Management, in
combination with an outside firm, periodically performs a risk and credit
analysis, the results of which are reported to the Board of Directors.
Loans charged off during the third quarter and first nine months of 2000
were $7,000 and $114,000, respectively, compared to $11,000 and $211,000 during
the third quarter and first nine months of 1999, respectively. Recoveries of
loans previously charged off were $46,000 and $1.4 million during the third
quarter and first nine months of 2000 compared to $117,000 and $229,000 during
the third quarter and first nine months of 1999, respectively. The increase in
recoveries during the first nine months of 2000 was the result of one large loan
recovery of approximately $1.3 million.
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,
------------------------- ------------------------
2000 1999 2000 1999
-------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period ........................ $ 2,546 $ 2,056 $ 1,896 $ 2,144
Loan charged off:
Commercial loans:
Secured by one to four family residential
properties ...................................... - - - -
Secured by commercial real properties ........... - - - 128
Other - secured and unsecured ................... 7 - 7 42
Consumer installment and unsecured loans to
individuals .................................... - 11 107 41
-------- --------- ---------- ----------
Total loan charge-offs ........................... 7 11 114 211
Recoveries of loans previously charged off:
Commercial loans:
Secured by one to four family residential
properties .................................... - - - 31
Secured by commercial real properties ........... - 87 - 96
Other - secured and unsecured ................... 12 13 1,336 69
Consumer installment and unsecured loans to
individuals .................................... 34 17 43 33
-------- --------- ---------- ----------
Total recoveries of loans previously charged off 46 117 1,379 229
-------- --------- ---------- ----------
Net charge-offs (recoveries) ..................... (39) (106) (1,265) (18)
Provision for credit losses ...................... - - (576) -
-------- --------- ---------- ----------
Balance, end of period ........................... $ 2,585 $ 2,162 $ 2,585 $ 2,162
======== ========= ========== ==========
</TABLE>
18
<PAGE>
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 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 Office of the Comptroller of the Currency ("OCC"), as an integral
part of its examination process, periodically reviews the allowance for credit
losses and could require additional provisions for credit losses.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." The Company is
required to and will implement the provision of this new standard on January 1,
2001. SFAS No. 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the Balance Sheet as either an asset
or as a liability measured at its fair value and that changes in the fair value
be recognized currently in the Statements of Operations. The Company does not
believe that SFAS No. 133 will have a material effect of the Company's financial
position or results of operations.
19
<PAGE>
CAPITAL ADEQUACY REQUIREMENTS
On September 15, 2000, the Company completed the sale of 602,081 shares of
its common stock at $7.25 per share through a public offering and raised a net
proceeds of approximately $4.2 million. The Company contributed $2.4 million of
capital to the Bank on September 29, 2000.
At September 30, 2000 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 OCC. 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, 2000 and December 31, 1999.
REGULATORY CAPITAL INFORMATION
OF THE COMPANY AND BANK
<TABLE>
<CAPTION>
WELL CAPITALIZED SEPTEMBER 30, DECEMBER 31,
STANDARDS 2000 1999
---------------- -------------- -------------
<S> <C> <C> <C>
COMPANY:
Tier 1 leverage ............... N/A 10.69% 8.98%
Tier 1 risk-based capital...... N/A 17.56% 16.21%
Total risk-based capital....... N/A 18.82% 17.47%
BANK:
Tier 1 leverage ............... 5.00% 9.20% 8.32%
Tier 1 risk-based capital...... 6.00% 15.15% 15.03%
Total risk-based capital....... 10.00% 16.41% 16.29%
</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 FHLB, 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 70.6% of total funding in the third quarter of 2000, compared to 77.7%
in the fourth quarter of 1999.
ASSET LIABILITY MANAGEMENT
The following table shows that the Company's cumulative one year interest
rate sensitivity gap indicated an asset sensitive position of $34.7 million at
September 30, 2000, an increase from an asset sensitive position of $12.7
million at December 31, 1999. This improvement resulted from the Company's
continuing effort to minimize its exposure to changes in
20
<PAGE>
net interest income due to rapid movements in interest rates. During the last
nine months, the Company has increased its portfolio of loans that reprice
within one year to $76.9 million at September 30, 2000 from $48.8 million at
December 31, 1999 and its available-for-sale investment securities portfolio
that reprice within one year to $24.3 million at September 30, 2000 from
$21.2 million at December 31, 1999. These changes were offset by increases in
interest bearing transaction deposit accounts that reprice within one year to
$47.6 million at September 30, 2000 from $38.1 million at December 31, 1999
and in other borrowings that reprice within one year to $31.5 million at
September 30, 2000 from $23.7 million at December 31, 1999. The Company's
asset sensitive position during a period of slowly rising interest rates is
not expected to have a significant negative impact on net interest income
since rates paid on the Company's large base of interest bearing demand,
savings and money market deposit accounts historically have not changed
proportionately with changes in interest rates.
RATE-SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
--------------------------------------------------------------------------
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 ...... $12,550 - - $ - $12,550
Securities available-for-sale, at amortized
cost ...................................... 17,379 6,920 26,661 16,713 67,673
FRB and other stock, at cost ............... - - - 2,537 2,537
Loans receivable ........................... 61,205 15,690 21,829 2,464 101,188
----------- ------------- ------------- ------------ ----------
Total rate-sensitive assets .............. 91,134 22,610 48,490 21,714 183,948
Rate-Sensitive Liabilities: (1)
Interest bearing deposits:
Demand, money market and
savings ................................ 5,488 12,348 16,511 14,351 48,698
Time certificates of deposit ............. 18,733 11,024 1,241 459 31,457
Other borrowings ........................... 31,500 - 2,500 - 34,000
----------- ------------- ------------- ------------ ----------
Total rate-sensitive liabilities ......... 55,721 23,372 20,252 14,810 114,155
Interest rate-sensitivity gap .............. 35,413 (762) 28,238 6,904 69,793
============================================================================
Cumulative interest rate-sensitivity gap ... $35,413 $34,651 $62,889 $69,793
=========== ============= ============= ============
Cumulative ratio of rate sensitive assets to
rate-sensitive liabilities ................ 164% 144% 163% 161%
=========== ============= ============= ============
</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, 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 ...... $ 4,450 $ - $ - $ - $ 4,450
Securities available-for-sale, at amortized
cost ...................................... 15,991 5,214 30,283 20,476 71,964
FRB and other stock, at cost ............... - - - 1,746 1,746
Loans receivable ........................... 40,617 8,197 13,018 12,011 73,843
----------- -------------- -------------- ----------- ---------
Total rate sensitive assets .............. 61,058 13,411 43,300 34,233 152,003
Rate Sensitive Liabilities: (1)
Interest bearing deposits:
Demand, money market and savings .......... 4,111 9,250 13,406 10,357 37,124
Time certificates of deposit .............. 11,299 13,425 1,309 - 26,033
Other borrowings ........................... 23,700 - 2,500 - 26,200
----------- -------------- -------------- ----------- ---------
Total rate sensitive liabilities ......... 39,110 22,675 17,215 10,357 89,357
Interest rate sensitivity gap .............. 21,948 (9,264) 26,085 23,876 62,646
===========================================================================
Cumulative interest rate sensitivity gap.... $21,948 $12,684 $38,770 $62,646
Cumulative ratio of rate sensitive assets to
rate sensitive liabilities ................ 156% 121% 149% 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>
FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
WE FACE RISK FROM CHANGES IN INTEREST RATES.
The success of our business depends, to a large extent, on our net
interest income. Changes in market interest rates can affect our net interest
income by affecting the spread between our interest earning assets and interest
bearing liabilities. This may be due to the different maturities of our 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:
- Our ability to originate loans;
- The ability of our borrowers to make payments on their loans;
- The value of our interest earning assets and our ability to realize gains
from the sale of these assets;
- The average life of our interest earning assets;
- Our ability to generate deposits instead of other available funding
alternatives; and
- Our ability to access the wholesale funding market.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control.
WE FACE RISK FROM POSSIBLE DECLINES IN THE QUALITY OF OUR ASSETS.
Our financial condition depends significantly on the quality of our
assets. While we have developed and implemented underwriting policies and
procedures to guide us in the making of loans, compliance with these policies
and procedures in making loans does not guarantee repayment of the loans. If the
level of our nonperforming assets rises, our results of operations and financial
condition will be affected. 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.
OUR ALLOWANCES FOR CREDIT LOSSES MAY BE INADEQUATE.
We establish allowances for credit losses against each segment of our
loan portfolio. At September 30, 2000, our allowance for credit losses equaled
2.6% of loans receivable and 378.5% of nonperforming loans. Although we believed
that we had established adequate allowances for credit losses as of September
30, 2000, the credit quality or our assets is affected by many factors beyond
our control, including local and national economic conditions, and the possible
existence of facts which are not known to us which adversely affect the
likelihood of repayment of various loans in our loan portfolio and
23
<PAGE>
realization of the collateral upon a default. Accordingly, we can give no
assurance that we 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 our allowance for credit losses and
could require additional provisions for credit losses. Material future
additions to the allowance for credit losses may also be necessary due to
increases in the size and changes in the composition of our loan portfolio.
Increases in our provisions for credit losses would adversely affect our
results of operations.
ECONOMIC CONDITIONS MAY WORSEN.
Our business is strongly influenced by economic conditions in our
market area (principally, the Greater Los Angeles metropolitan area) as well as
regional and national economic conditions and in our niche markets, including
the entertainment industry in Southern California. During the past several years
economic conditions in these areas have been favorable. Should the economic
condition in these areas deteriorate, the financial condition of our borrowers
could weaken, which could lead to higher levels of loan defaults or a decline in
the value of collateral for our loans. In addition, an unfavorable economy could
reduce the demand for our loans and other products and services.
BECAUSE A SIGNIFICANT AMOUNT OF THE LOANS WE MAKE ARE TO BORROWERS IN
CALIFORNIA, OUR OPERATIONS COULD SUFFER AS A RESULT OF LOCAL RECESSION OR
NATURAL DISASTERS IN CALIFORNIA.
At September 30, 2000, approximately 46% of our loans outstanding were
collateralized by properties located in California. Because of this
concentration in California, our financial position and results of operations
have been and are expected to continue to be influenced by general trends in the
California economy and its real estate market. Real estate market declines may
adversely affect the values of the properties collateralizing loans. If the
principal balances of our loans, together with any primary financing on the
mortgaged properties, equal or exceed the value of the mortgaged properties, we
could incur higher losses on sales of properties collateralizing foreclosed
loans. In addition, California historically has been vulnerable to certain
natural disaster risks, such as earthquakes and erosion-caused mudslides, which
are not typically covered by the standard hazard insurance policies maintained
by borrowers. Uninsured disasters may adversely impact our ability to recover
losses on properties affected by such disasters and adversely impact our results
of operations.
OUR BUSINESS IS VERY COMPETITIVE.
There is intense competition in Southern California and elsewhere in
the United States for banking customers. We experience competition for deposits
from many sources, including credit unions, insurance companies and money market
and other mutual funds, as well as other commercial banks and savings
institutions. We compete for loans and leases primarily with other commercial
banks, mortgage companies, commercial finance companies and savings
institutions. Recently, certain
24
<PAGE>
out-of-state financial institutions have entered the California market, which
has also increased competition. Many of our competitors have greater
financial strength, marketing capability and name recognition than we do, and
operate on a statewide or nationwide basis. In addition, recent developments
in technology and mass marketing have permitted larger companies to market
loans and deposits more aggressively to our small business customers. Such
advantages may give our competitors opportunities to realize greater
efficiencies and economies of scale than we can. We can provide no assurance
that we will be able to compete effectively against our competition.
OUR BUSINESS IS HEAVILY REGULATED.
Both National Mercantile Bancorp, as a bank holding company, and
Mercantile National 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 us may be changed
at any time, and the interpretation of these statutes and regulations by
examining authorities also may change. We cannot assure you that future changes
in applicable statutes and regulations or in their interpretation will not
adversely affect our business.
OUR ABILITY TO USE OUR NET OPERATING LOSSES MAY BE LIMITED.
During the past three years, although we have had taxable income, we
have not paid any income taxes other than alternative minimum taxes because of
our net operating loss carryforwards. As of December 31, 1999, we had net
operating loss carryforwards of $20.3 million and $4.7 million for federal and
state tax purposes, respectively. Our federal net operating loss carryforward is
available through 2012 and begins to expire in 2007. Our state net operating
loss carryforwards continue to expire but remain available in reducing amounts
through 2002. Our ability to use these carryforwards in the future would be
significantly limited if we experience an "ownership change" within the meaning
of Section 382 of the Internal Revenue Code. Future issuances of common stock
and transfers of our capital stock could have that effect. If our use of these
carryforwards is limited, we would be required to pay taxes on our taxable
income to the extent our taxable income exceeded the limited amounts which could
be offset, and our net income would be lower.
25
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
On July 11, 2000, the Company filed a report on Form 8-K Re: second
quarter result of operations.
(Item 5. "Other Events")
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 13, 2000 /s/ SCOTT A. MONTGOMERY
----------------------------- ---------------------------------------
SCOTT A. MONTGOMERY
Chief Executive Officer
DATE: November 13, 2000 /s/ JOSEPH W. KILEY III
----------------------------- ---------------------------------------
JOSEPH W. KILEY, III
Chief Financial Officer
26
