-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fy/G1uI2LJW0vR408pXsF9NNT3z63TZxP5KBv39cDlbdmBQ4mJW7qtkjN2/c81xQ LpHw5tjodj4w494A4fTcrQ== /in/edgar/work/0000912057-00-049164/0000912057-00-049164.txt : 20001114 0000912057-00-049164.hdr.sgml : 20001114 ACCESSION NUMBER: 0000912057-00-049164 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL MERCANTILE BANCORP CENTRAL INDEX KEY: 0000714801 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 953819685 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13015 FILM NUMBER: 761441 BUSINESS ADDRESS: STREET 1: 1840 CENTURY PARK EAST CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3102772265 MAIL ADDRESS: STREET 1: 1840 CENTURY PARK EAST CITY: LOS ANGELES STATE: CA ZIP: 90067 10QSB 1 a2030635z10qsb.txt FORM 10-QSB 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. NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31, (UNAUDITED) 1999 --------------- ------------- (DOLLARS IN THOUSANDS) 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 ========== ==========
See accompanying notes to consolidated financial statements. 2 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------ ------------ ------------ ----------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 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 ============ =========== =========== ==========
See accompanying notes to consolidated financial statements. 3 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2000 1999 ----------- ----------- (DOLLARS IN THOUSANDS) 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
See accompanying notes to consolidated financial statements. 4 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 The following table is a reconciliation of net income and shares used in the computation of earnings per basic and diluted common share:
PER SHARE NET INCOME SHARES AMOUNT -------------- ----------- ----------- (IN THOUSANDS) 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 =========== =========== ===========
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 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 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 (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 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 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 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
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) 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%
- ------------ (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 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
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) 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%
- -------------- (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 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
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS 1999 ------------------------------------------ NET INCREASE (DECREASE) DUE TO(1) INCREASE ----------------------------- (DECREASE) VOLUME RATE ---------- ---------- ---------- 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 ========== ========== ==========
- ---------------- (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 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
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) 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 ========= ========== ========== ========= ========== =========== ========== =========
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 LOAN PORTFOLIO The following comparative period-end table sets forth certain information concerning the composition of the loan portfolio. LOAN PORTFOLIO COMPOSITION
SEPTEMBER 30, DECEMBER 31, 2000 1999 ----------------------------- ---------------------------- AMOUNT PERCENT AMOUNT PERCENT ------------- ----------- ----------- --------- (DOLLARS IN THOUSANDS) 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 ============ ===========
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 The following comparative period-end table sets forth certain information concerning nonperforming assets. NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (DOLLARS IN THOUSANDS) 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%
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 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
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------ 2000 1999 2000 1999 -------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) 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 ======== ========= ========== ==========
18 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 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
WELL CAPITALIZED SEPTEMBER 30, DECEMBER 31, STANDARDS 2000 1999 ---------------- -------------- ------------- 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%
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 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
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) 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% =========== ============= ============= ============
(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 RATE SENSITIVE ASSETS AND LIABILITIES
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) 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% =========== ============== ============== ==========
(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 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 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 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 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 EX-27. 2 a2030635zex-27_.txt EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL MERCANTILE BANCORP'S SEPTEMBER 30, 2000 CONSOLIDATED FINANCIAL STATEMENTS AND RELATED SCHEDULES. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 9,711 0 12,550 0 68,599 0 0 101,188 2,585 191,805 137,077 31,500 1,904 2,500 0 6,292 29,876 (17,344) 191,805 6,317 3,628 399 10,344 1,990 3,572 6,772 (576) 18 5,819 2,214 0 0 0 2,169 2.41 0.85 5.42 683 0 0 52 1,896 114 1,379 2,585 1,544 0 1,041
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