<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 28, 2000 was 906,593.
<PAGE>
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and due from banks-demand.......................................................... $ 12,472 $ 5,789
Federal funds sold and securities purchased
Under agreements to resell........................................................... 2,015 4,450
------------- -------------
Cash and cash equivalents......................................................... 14,487 10,239
Securities available-for-sale, at fair value;
Aggregate amortized cost of $69,510 and $71,964
at June 30, 2000 and December 31, 1999, respectively................................. 67,037 69,489
FRB and other stock, at cost............................................................ 2,509 1,746
Loans receivable........................................................................ 93,956 73,843
Allowance for credit losses.......................................................... (2,546) (1,896)
------------- -------------
Net loans receivable.............................................................. 91,410 71,947
Premises and equipment, net............................................................. 563 626
Other real estate owned, net............................................................ - 382
Accrued interest receivable and other assets............................................ 1,774 1,724
------------- -------------
Total assets...................................................................... $ 177,780 $ 156,153
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing demand........................................................... $ 52,883 $ 53,827
Interest bearing demand.............................................................. 9,779 8,669
Money market......................................................................... 33,022 25,376
Savings.............................................................................. 1,320 3,079
Time certificates of deposit:
$100,000 or more.................................................................. 18,060 19,488
Under $100,000.................................................................... 6,248 6,545
------------- -------------
Total deposits................................................................ 121,312 116,984
Other borrowings........................................................................ 41,800 26,200
Accrued interest payable and other liabilities.......................................... 1,541 1,382
------------- -------------
Total liabilities................................................................. 164,653 144,566
Shareholders' equity:
Preferred stock: (10,000 shares undesignated)
Series A noncumulative convertible perpetual preferred stock;
Authorized 990,000 shares; issued and outstanding 785,425 shares and
900,000 shares at June 30, 2000 and December 31, 1999,
respectively...................................................................... 6,415 7,350
Common stock, no par value; authorized 10,000,000 Shares; issued and
outstanding 906,593 shares and 677,195 shares
At June 30, 2000 and December 31, 1999, respectively.............................. 25,550 24,614
Accumulated deficit.................................................................. (16,365) (17,902)
Accumulated other comprehensive income............................................... (2,473) (2,475)
------------- -------------
Total shareholders' equity........................................................ 13,127 11,587
------------- -------------
Total liabilities and shareholders' equity........................................ $ 177,780 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees...................................... $ 2,049 $ 1,398 $ 3,849 $ 2,715
Securities available-for-sale.............................. 1,224 1,042 2,433 2,112
Federal funds sold and securities purchased under
agreements to resell..................................... 92 104 174 146
------------ ----------- ----------- -----------
Total interest income................................... 3,365 2,544 6,456 4,973
Interest expense:
Interest bearing demand.................................... 29 23 56 44
Money market and savings................................... 300 189 531 341
Time certificate of deposits:
$100,000 or more......................................... 244 208 489 395
Under $100,000........................................... 80 161 168 346
------------ ----------- ----------- -----------
Total interest expense on deposits ..................... 653 581 1,244 1,126
Federal funds purchased and securities sold under
agreements to repurchase................................. - 12 1 13
Other borrowings........................................... 410 237 865 506
------------ ----------- ----------- -----------
Total interest expense.................................. 1,063 830 2,110 1,645
------------ ----------- ----------- -----------
Net interest income before provision for credit
losses................................................ 2,302 1,714 4,346 3,328
Provision for credit losses................................. (576) - (576) -
------------ ----------- ----------- -----------
Net interest income after provision for credit
losses................................................... 2,878 1,714 4,922 3,328
Other operating income:
Net gain (loss) on sale of securities
available-for-sale....................................... 18 (1) 18 (1)
International services..................................... 29 9 57 26
Investment division........................................ 22 14 42 28
Deposit related and other customer services................ 164 127 300 255
Gain on sale of other real estate owned.................... 59 - 69 -
------------ ----------- ----------- -----------
Total other operating income............................ 292 149 486 308
Other operating expenses:
Salaries and related benefits.............................. 948 782 1,858 1,620
Net occupancy.............................................. 250 238 499 488
Furniture and equipment.................................... 115 54 169 109
Printing and communications................................ 75 57 145 119
Insurance and regulatory assessments....................... 71 74 141 149
Customer services.......................................... 214 190 411 366
Computer data processing................................... 116 75 192 153
Legal services............................................. 35 (26) 84 14
Other professional services................................ 91 75 205 147
Other real estate owned expenses........................... - 40 3 40
Promotion and other expenses............................... 74 52 138 98
------------ ----------- ----------- -----------
Total other operating expenses.......................... 1,989 1,611 3,845 3,303
------------ ----------- ----------- -----------
Net income before provision for income taxes............... 1,181 252 1,563 333
Provision for income taxes.................................. 19 7 26 12
------------ ----------- ----------- -----------
Net income................................................. $ 1,162 $ 245 $ 1,537 $ 321
============ =========== =========== ===========
Earnings per share:
Basic.................................................... $ 1.28 $ 0.36 $ 1.80 $ 0.47
============ =========== =========== ===========
Diluted.................................................. $ 0.45 $ 0.10 $ 0.61 $ 0.13
============ =========== =========== ===========
</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 SIX-MONTHS
ENDED JUNE 30,
------------------------------
2000 1999
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash flow from operating activities:
Net income............................................................... $ 1,537 $ 321
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................................ 96 96
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........ (14) 55
Net accretion of discounts on loans purchased............................ (18) (17)
(Increase) decrease in accrued interest receivable and other assets...... (59) 96
Increase in accrued interest payable and other liabilities............... 159 12
-------- -------
Net cash provided by operating activities............................. 1,038 599
Cash flows from investing activities:
Purchase of securities available-for-sale................................ (2,675) (4,217)
Proceeds from sales of securities available-for-sale..................... 1,891 1,016
Proceeds from repayments and maturities of securities
available-for-sale..................................................... 2,507 7,227
Loan originations and principal collections, net......................... (19,104) (3,903)
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.................................. (33) (62)
-------- -------
Net cash (used in) provided by investing activities................... (16,719) 61
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts....... 6,053 12,566
Net (decrease) increase in time certificates of deposit.................. (1,725) 520
Net increase in securities sold under agreements to repurchase
and federal funds purchased............................................. - 1,000
Net increase (decrease) in other borrowings............................. 15,600 (1,800)
Net proceeds from exercise of stock options.............................. 1 1
-------- -------
Net cash provided by financing activities............................. 19,929 12,287
-------- -------
Net increase in cash and cash equivalents................................. 4,248 12,947
Cash and cash equivalents, January 1...................................... 10,239 12,205
-------- -------
Cash and cash equivalents, June 30........................................ $ 14,487 $25,152
======== =======
Supplemental cash flow information:
Cash paid for interest................................................... $ 2,163 $ 1,632
(Decrease) increase in unrealized loss on securities
available-for-sale...................................................... $ (2) $ 1,530
Transfer to OREO from loans receivable, net............................... $ 35 -
Cash Paid for Income Taxes................................................ $ 5 $ 12
</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 six month periods ended June 30, 2000 are not
necessarily indicative of the results expected for any subsequent period or for
the full 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 June 30, 2000 and 1999 was 906,576 and 677,108,
respectively, and 852,447 and 677,078, respectively, for the six months ended
June 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 June 30, 2000 and 1999 was 2,588,451 and
2,477,313, respectively, and 2,535,429 and 2,477,181, respectively, for the
six months ended June 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 JUNE 30, 2000:
Basic EPS........................... $ 1,162 906,576 $ 1.28
==========
Effect of dilutive securities:
Options and warrants............. 111,025
Convertible preferred stock...... 1,570,850
---------- ----------
Diluted EPS......................... $ 1,162 2,588,451 $ 0.45
========== ========== ==========
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Basic EPS........................... $ 245 677,108 $ 0.36
==========
Effect of dilutive securities:
Options and warrants............. 205
Convertible preferred stock...... 1,800,000
---------- ----------
Diluted EPS......................... $ 245 2,477,313 $ 0.10
========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
Basic EPS........................... $ 1,537 852,447 $ 1.80
==========
Effect of dilutive securities:
Options and warrants............. 112,132
Convertible preferred stock...... 1,570,850
---------- ----------
Diluted EPS......................... $ 1,537 2,535,429 $ 0.61
========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Basic EPS........................... $ 321 677,078 $ 0.47
==========
Effect of dilutive securities:
Options and warrants............. 103
Convertible preferred stock...... 1,800,000
---------- ----------
Diluted EPS......................... $ 321 2,477,181 $ 0.13
========== ========== ==========
</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.
6
<PAGE>
NOTE 4--INCOME TAXES
No income tax provision was recorded during the three and six months
ended June 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 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 $1.2 million or $0.45 diluted
earnings per share, during the second quarter of 2000, compared to net income
of $245,000 or $0.10 diluted earnings per share, during the second quarter of
1999. Net income per basic share was $1.28 and $0.36 during the second
quarter of 2000 and 1999, respectively. The core components accounting for
this improvement in earnings during the second quarter of 2000 compared to
1999 were: (i) increases of $588,000 or 34.3% in net interest income and
$143,000 or 96% in other operating income, partially offset by an increase of
$378,000 or 23.5% in other operating expense; and (ii) a $576,000 negative
provision for credit losses recognized during the second quarter of 2000.
Net income during the first six months of 2000 was $1.5 million, or
$0.61 diluted earnings per share, compared to net income of $321,000, or
$0.13 diluted earnings per share, during the first six months of 1999. Net
income per basic share was $1.80 and $0.47 during the first six months of
2000 and 1999, respectively. The core components accounting for this
improvement between the first half of 2000 compared to the first half of 1999
were: (i) increases of $1.0 million or 30.6% in net interest income and
$178,000 or 57.8% in other operating income, partially offset by a $542,000
or 16.4% increase in other operating expense; and (ii) a $576,000 negative
provision for credit losses.
Return on average assets during the second quarter and first half of 2000
was 2.77% and 1.86%, respectively, compared to 0.69% and 0.46% during the second
quarter and first half of 1999, respectively. Return on average equity during
the second quarter and first half of 2000 was 38.74% and 26.27%, respectively,
compared to 7.48% and 4.90% during the second quarter and first half of 1999,
respectively.
NET INTEREST INCOME
The increase in net interest income during the three and six months
ended June 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 $13.0 million and $11.0 million,
respectively. This increase in net average interest earning assets during the
three and six months ended June 30, 2000
8
<PAGE>
compared to corresponding periods during 1999 was attributable primarily to
an increase in average loans receivable of 45.1% and 41.6%, respectively. This
growth in average loans receivable during the three and six months ended June
30, 2000 was funded by an increase in average deposits of 20.2% and 19.0%,
respectively, and an increase in average borrowed funds (represented
collectively by federal funds purchased, securities sold under agreements to
repurchase and other borrowings) of 24.1% and 33.5%, 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 relationship
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.
During the quarter ended June 30, 2000 average loans receivable increased
45.1% to $83.8 million compared to $57.8 million during the quarter ended June
30, 1999. The weighted average yield on loans receivable during the quarter
ended June 30, 2000 increased to 9.83% compared to 9.70% during the quarter
ended June 30, 1999, reflecting increasing market interest rates offset by
competitive pressure from other commercial banks.
Average securities increased 6.0% to $72.4 million during the quarter
ended June 30, 2000 compared to $68.3 million during the quarter ended June
30, 1999 as a result of additional purchases of securities, primarily during
the last quarter of 1999. The weighted average yield on securities increased
to 6.80% during the second quarter of 2000 compared to 6.12% during the
second quarter 1999, primarily due to increased market interest rates which
affected the Company's portfolio of variable rate securities, and to a lesser
extent securities purchased during this rising rate environment.
Average interest bearing liabilities increased 17.4% to $96.9 million
during the quarter ended June 30, 2000 compared to $82.5 million during the
quarter ended June 30, 1999 due to increased average interest bearing deposits
and average borrowed funds. Average interest bearing deposits increased 15.2% to
$71.7 million during the quarter ended June 30, 2000 from $62.3 million during
the quarter ended June 30, 1999, due primarily to the growth of money market
deposits. Average borrowed funds during the second quarter of 2000 increased
24.1% to $25.2 million from $20.3 million during the same period in 1999.
The weighted average cost of interest bearing liabilities increased to
4.41% during the second quarter of 2000 from 4.03% during the same period of
1999, due primarily to increased weighted average cost of other borrowings as
result of increased market interest rates, offset by a slight reduction in
the weighted average cost of interest bearing deposits. The weighted average
cost of borrowed funds increased to 6.56% during the second quarter of 2000
from 4.93% during the same period in 1999 caused by increased market interest
rates, as a result of actions taken by the Board of Governors of the Federal
Reserve System. The weighted average cost of interest bearing deposits
decreased to 3.66% during the second quarter of 2000 from 3.74% during the
same period of 1999, primarily due to a change in the composition of deposits
reflected by a reduction of higher cost certificates of deposits to lower
costs money market and savings deposits.
9
<PAGE>
Average total deposits increased 20.2% to $130.1 million during the second
quarter of 2000 compared to $108.2 million during the second quarter of 1999 due
primarily to a $12.4 million or 26.9% increase in average noninterest bearing
demand deposits and a $11.1 million or 40.6% increase in average money market
and savings deposits.
During the six months ended June 30, 2000 average loans receivable
increased 41.6 % to $80.4 million compared to $56.8 million during the same
period in 1999. Average securities increased 5.3% to $73.0 million during the
six months ended June 30, 2000 compared to $69.3 million during the same
period in 1999. Average total deposits during the six months ended June 30,
2000 increased 19.0% to $124.6 million compared to 104.7 million during the
same period in 1999. The growth in both average loans receivable and average
deposits was a result of the Company's effort toward expanding and building
new client 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
borrowed funds increased 33.5% to $28.1 million during the six months ended
June 30, 2000 compared to $21.1 million during the same period in 1999,
primarily as a result of the growth of average interest earning assets
outpacing the growth of average deposits during the first half of 2000.
PROVISION FOR CREDIT LOSSES
During the second quarter of 2000 the Company realized a net recovery of
approximately $1.3 million related to a previously charged off loan. 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. 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 during the second quarter of 2000. The
Company did not record a provision for credit losses during the six months
ended June 30, 1999.
OTHER OPERATING INCOME
Other operating income, excluding gains and losses on the sale of
securities and assets, totaled $215,000 during the second quarter of 2000, an
increase of 43.3% from $150,000 during the second quarter of 1999. During the
six months ended June 30, 2000, other operating income, excluding gains and
losses on the sale of securities and assets, totaled $399,000, an increase of
29.1% from $309,000 during the comparable period of 1999. Service charges on
deposit accounts accounted for the majority of this improvement by increasing
$37,000 or 29.1% and $45,000 or 17.6% during the three and six months ended
June 30, 2000, respectively, compared to corresponding periods in 1999. This
increase is reflective of the growth of average "transaction type" deposit
accounts (demand, money market and savings) during the first half of 2000
compared to the same period of 1999.
The Company realized a net gain of $18,000 on sale of securities during the
second quarter and first half of 2000, compared to net loss of $1,000 during the
corresponding periods in 1999. Additionally, the Company realized a net gain of
10
<PAGE>
$59,000 and $69,000 on sale of other real estate owned during the second quarter
and first half of 2000, respectively compared to zero during the corresponding
periods of 1999.
OTHER OPERATING EXPENSES
Other operating expenses increased 23.5% to $2.0 million during the second
quarter of 2000 compared to $1.6 million during the second quarter of 1999.
This increase was primarily due to increases in salaries and related benefits of
$166,000 , furniture and equipment of $61,000, legal services of $61,000,
computer data processing of $41,000 and promotion and other expense of $22,000.
The increase in salaries and related benefits was due to Company's expansion of
banking services and staff in order to service new market niches of healthcare
and community based nonprofit organizations.
Other operating expenses increased 16.4% to $3.8 million during the six
months ended June 30, 2000 compared to $3.3 million during the same period of
1999. This increase resulted from increases of $238,000 in salaries and related
benefits, $70,000 in legal services, $60,000 in furniture and equipment, $58,000
in other professional services, $45,000 in customer services and $39,000 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 and staff mentioned above.
11
<PAGE>
The following table presents the components of net interest income for
the quarters ended June 30, 2000 and 1999.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
JUNE 30, 2000 JUNE 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 agreements to resell......... $ 5,975 $ 92 6.19% $ 8,706 $ 104 4.79%
Securities available-for-sale................... 72,376 1,224 6.80% 68,279 1,042 6.12%
Loans receivable (1) (2)........................ 83,833 2,049 9.83% 57,786 1,398 9.70%
------------ --------- ------------ ---------
Total interest earning assets.................. 162,184 $ 3,365 8.34% $ 134,771 2,544 7.57%
========= =========
Noninterest earning assets:
Cash and due from banks - demand............... 9,591 7,214
Other assets................................... 2,527 2,761
Allowance for credit losses and net unrealized
loss on securities available-for-sale........ (5,497) (2,041)
------------ ------------
Total assets................................... $ 168,805 $ 142,705
============ ============
Liabilities and shareholders' equity:
Interest bearing deposits:
Demand......................................... $ 8,270 $ 29 1.41% $ 6,950 $ 23 1.33%
Money market and savings....................... 38,452 300 3.14% 27,352 189 2.77%
Time certificates of deposit:
$100,000 or more............................. 18,742 244 5.24% 16,088 208 5.19%
Under $100,000............................... 6,269 80 5.13% 11,861 161 5.44%
------------ --------- ------------ ---------
Total time certificates of deposit............. 25,011 324 5.21% 27,949 369 5.30%
------------ --------- ------------ ---------
Total interest bearing deposits................ 71,733 653 3.66% 62,251 581 3.74%
Federal funds purchased and securities sold
under agreements to repurchase............... 13 - 0.00% 1,143 12 4.21%
Other borrowings................................ 25,155 410 6.56% 19,132 237 4.97%
------------ --------- ------------ ---------
Total interest bearing liabilities............. 96,901 $ 1,063 4.41% 82,526 $ 830 4.03%
========= =========
Noninterest bearing liabilities:
Noninterest bearing demand deposits............ 58,325 45,974
Other liabilities.............................. 1,514 1,063
Shareholders' equity............................ 12,065 13,142
------------ ------------
Total liabilities and shareholders' equity...... $ 168,805 $ 142,705
============ ============
Net interest income (spread).................... $ 2,302 3.93% $ 1,714 3.54%
========= =========
Net yield on earning assets (2)................ 5.71% 5.10%
</TABLE>
---------
(1) Includes average balance of nonperforming loans of $700,000 and $1.1
million for 2000 and 1999, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of
$35,000 and $43,000 for the three months ended June 30, 2000 and
1999, respectively.
12
<PAGE>
The following table presents the components of net interest income for
the six months ended June 30, 2000 and 1999.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, 2000 JUNE 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 agreements to resell ..... $ 5,842 $ 174 5.99% $ 6,124 $ 146 4.81%
Securities available-for-sale ............... 73,001 2,433 6.70% 69,326 2,112 6.14%
Loans receivable (1) (2) .................... 80,378 3,849 9.63% 56,782 2,715 9.64%
---------- ---------- ---------- ----------
Total interest earning assets ............ 159,221 $ 6,456 8.15% 132,232 $ 4,973 7.58%
========== ==========
Noninterest earning assets:
Cash and due from banks - demand ......... 9,235 7,093
Other assets ............................. 2,644 2,795
Allowance for credit losses and
net unrealized loss on
securities available-for-sale ......... (5,151) (2,090)
---------- ----------
Total assets ............................. $ 165,949 $ 140,030
========== ==========
Liabilities and shareholders' equity:
Interest bearing deposits:
Demand ................................... $ 8,435 $ 56 1.34% $ 6,765 $ 44 1.31%
Money market and savings ................. 34,812 531 3.07% 25,262 341 2.72%
Time certificates of deposit:
$100,000 or more ...................... 18,855 489 5.22% 15,116 395 5.27%
Under $100,000 ........................ 6,628 168 5.10% 12,652 346 5.51%
Total time certificates of deposit ....... 25,483 657 5.18% 27,768 741 5.38%
---------- ---------- ---------- ----------
Total interest bearing deposits .......... 68,730 1,244 3.64% 59,795 1,126 3.80%
---------- ---------- ---------- ----------
Federal funds purchased and securities
sold under agreements to repurchase ...... 23 1 7.17% 599 13 4.38%
Other borrowings ............................ 28,115 865 6.19% 20,486 506 4.98%
---------- ---------- ---------- ----------
Total interest bearing liabilities ....... 96,868 $ 2,110 4.38% 80,880 $ 1,645 4.10%
========== ==========
Noninterest bearing liabilities:
Noninterest bearing demand deposits ...... 55,907 44,938
Other liabilities ........................ 1,409 994
Shareholders' equity ........................ 11,765 13,218
---------- ----------
Total liabilities and
shareholders' equity ..................... $ 165,949 $ 140,030
========== ==========
Net interest income (spread) ................ $ 4,346 3.77% $ 3,328 3.48%
========== ==========
Net yield on earning assets (2) ......... 5.49% 5.08%
</TABLE>
--------------
(1) Includes average balance of nonperforming loans of $700,000 and $1.3
million for 2000 and 1999, respectively.
(2) Yields and amounts earned on loans receivable include loan fees of $59,000
and $102,000 for the six months ended June 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>
SIX MONTHS ENDED JUNE 30,
2000 VS 1999
-----------------------------------
INCREASE (DECREASE)
DUE TO(1) NET
--------------------- INCREASE
VOLUME RATE (DECREASE)
------- -------- ----------
<S> <C> <C> <C>
Interest Income:
Federal funds sold and securities purchased under agreements to resell .......... $ (8) $ 36 $ 28
Securities available-for-sale ................................................... 150 171 321
Loans receivable (2) ............................................................ 1,137 (3) 1,134
------- ------- -------
Total interest earning assets ................................................. $ 1,279 $ 204 $ 1,483
======= ======= =======
Interest Expense:
Interest bearing deposits:
Demand ........................................................................ $ 11 $ 1 $ 12
Money market and savings
150 40 190
Time certificates of deposit:
$100,000 or more ........................................................... 97 (3) 94
Under $100,000 ............................................................. (154) (24) (178)
------- ------- -------
Total time certificates of deposit ............................................ (57) (27) (84)
------- ------- -------
Total interest bearing deposits
104 14 118
Federal funds purchased and securities sold under agreements to repurchase ...... -- (12) (12)
Other borrowings ................................................................ 239 120 359
------- ------- -------
Total interest bearing liabilities ......................................... $ 343 $ 122 $ 465
======= ======= =======
Net interest income ........................................................... $ 936 $ 82 $ 1,018
======= ======= =======
</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>
JUNE 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........... $ 2,011 $ - $ 19 $ 1,992 $ 2,015 $ - $ 13 $ 2,002
GNMA-issued/guaranteed mortgage
pass through certificates....... 5,557 - 87 5,470 7,646 15 126 7,535
Other U.S. government and federal
agency securities............... 1,945 - 11 1,934 1,937 3 - 1,940
FHLMC/FNMA-issued mortgage
pass through certificates....... 16,275 - 489 15,786 15,185 - 448 14,737
CMO's and REMIC's issued by U.S.
government-sponsored
agencies........................ 38,718 - 1,776 36,942 40,174 - 1,827 38,347
Privately issued Corporate bonds,
CMO's and REMIC's
securities...................... 5,004 - 91 4,913 5,007 - 79 4,928
FRB and other equity stocks........ 2,509 - - 2,509 1,746 - - 1,746
--------- --------- --------- --------- --------- --------- --------- ---------
$ 72,019 $ - $ 2,473 $ 69,546 $ 73,710 $ 18 $ 2,493 $ 71,235
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
As indicated in the table above, total amortized cost of investment
securities decreased $1.7 million to $72.0 million at June 30, 2000 from $73.7
million at December 31, 1999. This change 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 recorded a net unrealized loss of $2.5 million at June
30, 2000 and December 31, 1999, primarily due to rising market interest rates.
As of June 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>
JUNE 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.................... $ 4,153 5% $ 4,405 6%
Secured by multifamily
residential properties.................... 5,310 6 5,355 7
Secured by commercial real
properties................................ 36,164 38 28,233 38
Other - secured and
unsecured................................. 44,694 47 33,221 45
Real estate construction and land
development................................. 715 1 6 -
Home equity lines of credit.................. 259 - 367 1
Consumer installment and
unsecured loans to individuals.............. 3,013 3 2,496 3
----------- ----------- ----------- -----------
Total loans outstanding 94,308 100% 74,083 100%
=========== ===========
Deferred net loan origination
fees and purchased loan
discount.................................... (352) (240)
----------- -----------
Loans receivable, net........................ $ 93,956 $ 73,843
=========== ===========
</TABLE>
Total loans outstanding increased by $20.2 million to $94.3 million at
June 30, 2000 compared to $74.1 million at December 31, 1999. As indicated in
the table above, commercial loans secured by real estate properties increased
$7.9 million and other commercial loans secured and unsecured increased $11.5
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>
JUNE 30, DECEMBER 31,
2000 1999
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans..................................... $ 484 $ 932
Troubled debt restructurings......................... - -
Loans contractually past due ninety or more days
with respect to either principal or interest and
still accruing interest............................. 262 -
------------- -------------
Nonperforming loans.................................. 746 932
Other real estate owned.............................. - 382
Other assets-SBA guaranteed loans.................... - 150
------------- -------------
Total nonperforming assets........................... $ 746 $ 1,464
============= =============
Allowance for credit losses as a percent of
nonaccrual loans.................................... 526.0% 203.4%
Allowance for credit losses as a percent of
nonperforming loans................................. 341.3% 203.4%
Total nonperforming assets as a percent of loans
receivable.......................................... 0.8% 2.0%
Total nonperforming assets as a percent of total
shareholders' equity................................ 5.7% 12.6%
</TABLE>
Nonaccrual loans decreased by $448,000 or 48.1% during the first half of
2000 to $484,000 compared to $932,000 at December 31, 1999. During the first
half 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.
Loans contractually past due 90 days or more with respect to either
principal or interest and still accruing interest increased to $262,000
during the first half of 2000 compared to zero at December 31, 1999. This
increase is represented by one commercial loan in the renewal process which
is currently not completed.
Other real estate owned ("OREO") and other assets-SBA guaranteed loans
decreased to zero at June 30, 2000 compared to $382,000 and $150,000 at
December 31, 1999. As a result of the disposition of these assets the Company
realized a gain of $69,000 during the first half of 2000.
As a result of these changes, the amount of nonperforming assets at June
30, 2000 decreased 49% from the level at December 31, 1999.
Loan delinquencies greater than 30 days past due increased to $538,000
or 0.6% of loans outstanding at June 30, 2000 from $184,000 or 0.2% of loans
outstanding at December 31, 1999. This increase is primarily represented by
one commercial loan in the renewal process which is currently not completed.
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,
performs a periodic risk and credit analysis, the results of which are
reported to the Board of Directors.
Loans charged off during the second quarter and first half of 2000 were
$77,000 and $107,000, respectively, compared to $25,000 and $200,000 during
the second quarter and first half of 1999, respectively. Recoveries of loans
previously charged off were $1.3 million during both the second quarter and
first half of 2000 compared to $60,000 and $112,000 during the second quarter
and first half of 1999, respectively. The increase in recoveries during the
second quarter and first half 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 SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 1,917 $ 2,021 $ 1,896 $ 2,144
Loan charge-offs:
Commercial loans:
Secured by one to four family residential
properties........................................... - - - -
Secured by commercial real properties................ - - - 128
Other - secured and unsecured........................ - - - 42
Consumer installment and unsecured loans to
individuals......................................... 77 25 107 30
---------- ----------- ---------- ----------
Total loan charge-offs................................ 77 25 107 200
Recoveries of loans previously charged off:
Commercial loans:
Secured by one to four family residential
properties........................................... - 31 - 31
Secured by commercial real properties................ - 9 - 9
Other - secured and unsecured........................ 1,279 18 1,324 56
Consumer installment and unsecured loans to
individuals......................................... 3 2 9 16
---------- ----------- ---------- ----------
Total recoveries of loans previously charged off...... 1,282 60 1,333 112
---------- ----------- ---------- ----------
Net (recoveries) charge-offs ......................... (1,205) (35) ( 1,226) 88
Provision for credit losses........................... (576) - (576) -
---------- ----------- ---------- ----------
Balance, end of period................................ $ 2,546 $ 2,056 $ 2,546 $ 2,056
========== =========== ========== ==========
</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.
Based on continued loan growth, the level of nonperforming loans and a
relatively constant level of charge-offs, it is anticipated that the level of
the allowance for credit losses will remain adequate through the remainder of
2000.
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 has not yet quantified the impact of adopting SFAS
No. 133 on its financial statements but does not believe it will have a
material effect of the Company's financial position or results of operations.
19
<PAGE>
CAPITAL ADEQUACY REQUIREMENTS
At June 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 June 30, 2000 and December
31, 1999.
REGULATORY CAPITAL INFORMATION
OF THE COMPANY AND BANK
<TABLE>
<CAPTION>
WELL CAPITALIZED JUNE 30, DECEMBER 31,
STANDARDS 2000 1999
------------------- ----------- -------------
<S> <C> <C> <C>
COMPANY:
Tier 1 leverage N/A 9.08% 8.98%
Tier 1 risk-based capital.... N/A 14.68% 16.21%
Total risk-based capital.... N/A 15.94% 17.47%
BANK:
Tier 1 leverage.............. 5.00% 8.46% 8.32%
Tier 1 risk-based capital.... 6.00% 13.70% 15.03%
Total risk-based capital..... 10.00% 14.96% 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 78.7% of total funding in the second 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 $17.8
million at June 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 net
interest income due to rapid movements in interest rates. During the last six
months, the Company has increased its portfolio of loans that reprice within
one year to $69.3 million at June 30, 2000 from $48.8 million at December 31,
1999, increased its available-for-sale investment securities portfolio that
reprice within one year to $23.5 million at June 30, 2000 from $21.2 million
at December 31, 1999, and decreased its interest bearing transaction deposit
accounts that reprice within one year to $37.7 million at June 30, 2000 from
$38.1 million at December 31, 1999. These changes were offset by an increase
in other borrowings that reprice within one year to $39.3 million at June 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.
20
<PAGE>
RATE SENSITIVE ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 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...... $ 2,015 $ - $ - $ - $ 2,015
Securities available-for-sale, at amortized
cost...................................... 15,977 7,506 27,208 18,819 69,510
FRB and other stock, at cost................. - - - 2,509 2,509
Loans receivable............................. 57,565 11,693 21,118 3,580 93,956
--------- --------- --------- --------- -----------
Total rate sensitive assets............... 75,557 19,199 48,326 24,908 167,990
Rate Sensitive Liabilities: (1)
Interest bearing deposits:
Demand, money market and savings.......... 4,656 10,476 16,180 12,809 44,121
Time certificates of deposit.............. 12,887 9,673 1,163 585 24,308
Other borrowings............................. 39,300 - 2,500 - 41,800
--------- --------- --------- --------- -----------
Total rate sensitive liabilities.......... 56,843 20,149 19,843 13,394 110,229
Interest rate sensitivity gap................ 18,714 (950) 28,483 11,514 57,761
========= ========= ========= =========
Cumulative interest rate sensitivity gap..... $ 18,714 $ 17,764 $ 46,247 $ 57,761
========= ========= ========= =========
Cumulative ratio of rate sensitive assets to
rate sensitive liabilities................ 133% 123% 148% 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, 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. Our borrower's ability to pay their
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 June 30, 2000, our allowance for credit losses equaled
2.7% of loans receivable and 341.3% of nonperforming loans. Although we
believed that we had established adequate allowances for credit losses as of
June 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
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
23
<PAGE>
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 June 30, 2000, approximately 49% 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 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.
24
<PAGE>
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.
OUT 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 Corporation filed a report on Form 8-K Re:
second quarter result of operations, reporting 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: July 28, 2000 /s/ SCOTT A. MONTGOMERY
-------------------------- -------------------------------------
SCOTT A. MONTGOMERY
Chief Executive Officer
DATE: July 28, 2000 /s/ JOSEPH W. KILEY III
-------------------------- -------------------------------------
JOSEPH W. KILEY, III
Chief Financial Officer
26
