-----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, SwCbcVPXqqULm51tDn2ifYKYoCgNZH3Za4FjwqYiMacHBhH4G5IhWqRfFIHwCPth WynMpOX+ZlrkqX1yLgaEXg== 0000944209-97-001554.txt : 19971117 0000944209-97-001554.hdr.sgml : 19971117 ACCESSION NUMBER: 0000944209-97-001554 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL MERCANTILE BANCORP CENTRAL INDEX KEY: 0000714801 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953819685 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13015 FILM NUMBER: 97718038 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 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to ------ --------- COMMISSION FILE NUMBER: 0-15982 NATIONAL MERCANTILE BANCORP (EXACT NAME OF REGISTRANT 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 277-2265 NOT APPLICABLE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) Indicate by check mark whether the registrant (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. [X]Yes..[_]No APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of the registrant's Common Stock, no par value, as of November 10, 1997 was 338,244. FORM 10-Q TABLE OF CONTENTS AND CROSS REFERENCE SHEET
Page(s) in Form 10-Q - ------------------------------------------------------------- ---------- PART I-FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS................................. 3-8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 9-20 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................................... 21 PART II-OTHER INFORMATION Item 1. LEGAL PROCEEDINGS.................................... 22 Item 2. CHANGES IN SECURITIES................................ 22 Item 3. DEFAULTS UPON SENIOR SECURITIES...................... 22 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 22 Item 5. OTHER INFORMATION.................................... 22 Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 22 SIGNATURES................................................... 23
2 ITEM 1. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page - ----------------------------------------------------------- ---- Consolidated Balance Sheets................................ 4 Consolidated Statements of Operations...................... 5 Consolidated Statement of Changes in Shareholders' Equity.. 6 Consolidated Statements of Cash Flows...................... 7 Notes to Consolidated Financial Statements................. 8
3 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) (Dollars in thousands) ASSETS ------ Cash and due from banks-demand.................................................. $ 6,325 $ 5,113 Federal funds sold.............................................................. 8,200 23,000 Cash and cash equivalents................................................... 14,525 28,113 -------- -------- Interest-bearing deposits with other financial institutions 19 -- Securities available-for-sale, at fair value; aggregate amortized cost of $24,891 at September 30, 1997 and $4,078 at December 31, 1996................. 24,874 4,002 Securities held-to-maturity, at amortized cost; aggregate market value of $17,908 at September 30, 1997 and $14,355 at December 31, 1996....... 17,923 14,395 Federal Reserve Bank and other stock............................................ 338 233 Loans receivable................................................................ 56,669 62,547 Allowance for credit losses..................................................... (2,589) (2,969) -------- -------- Net loans receivable........................................................ 54,080 59,578 Premises and equipment, net..................................................... 818 943 Other real estate owned......................................................... 517 556 Accrued interest receivable and other assets.................................... 1,723 1,596 -------- -------- $114,817 $109,416 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits: Noninterest-bearing demand............................................... $ 34,593 $ 34,752 Interest-bearing demand.................................................. 6,108 7,292 Money market accounts.................................................... 17,929 15,512 Savings.................................................................. 5,250 5,650 Time certificates of deposit: $100,000 and over..................................................... 9,252 9,214 Under $100,000........................................................ 23,287 31,434 -------- -------- Total deposits..................................................... 96,419 103,854 Securities sold under agreements to repurchase............................... 5,057 -- Accrued interest payable and other liabilities............................... 1,207 717 -------- -------- Total liabilities.................................................. 102,683 104,571 Shareholders' equity: 6.5% noncumulative convertible preferred stock, $10 stated value, authorized 1,000,000 shares, issued and outstanding 900,000 and 0 at September 30, 1997 and December 31, 1996, respectively......................................................... 7,350 -- Common stock, no par value; authorized 10,000,000 shares; issued and outstanding 338,525 and 338,630 at September 30, 1997 and December 31, 1996, respectively............................. 24,612 24,614 Accumulated deficit......................................................... (19,811) (19,693) Net unrealized loss on securities available-for-sale........................ (17) (76) -------- -------- Total shareholders' equity........................................ 12,134 4,845 -------- -------- $114,817 $109,416 ======== ========
See accompanying notes to consolidated financial statements. 4 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- (dollars in thousands, except per share data) Interest income: Loans, including fees................................................... $1,485 $1,649 $4,435 $ 5,179 Securities held-to-maturity............................................. 306 -- 916 -- Securities available-for-sale........................................... 217 235 348 795 Federal funds sold...................................................... 220 237 540 720 ------ ------ ------ ------- Total interest income............................................ 2,228 2,121 6,239 6,694 Interest expense: Interest-bearing demand................................................. 24 24 70 59 Money market and savings................................................ 172 147 444 476 Time certificates of deposit: $100,000 and over................................................ 114 95 297 320 Under $100,000................................................... 384 446 1,234 1,513 ------ ------ ------ ------- Total interest expense on deposits............................... 694 712 2,045 2,368 Securities sold under agreements to repurchase.......................... 10 6 24 23 ------ ------ ------ ------- Total interest expense........................................... 704 718 2,069 2,391 ------ ------ ------ ------- Net interest income.............................................. 1,524 1,403 4,170 4,303 Provision for credit losses................................................ -- -- -- -- ------ ------ ------ ------- Net interest income after provision for credit losses............ 1,524 1,403 4,170 4,303 Other operating income: Loss on sale of securities available-for-sale.......................... (12) -- (12) (1) International services................................................. 30 34 82 97 Investment services.................................................... 4 13 14 68 Deposit-related and other customer services............................ 85 77 251 244 ------ ------ ------ ------- Total other operating income..................................... 107 124 335 408 Other operating expenses: Salaries and related benefits.......................................... 723 749 2,181 1,998 Net occupancy.......................................................... 200 207 615 587 Furniture and equipment................................................ 47 70 152 237 Printing and communications............................................ 55 40 173 151 Insurance and regulatory assessments................................... 126 165 396 492 Customer services...................................................... 164 144 394 446 Computer data processing............................................... 65 90 222 272 Legal services and settlements......................................... 34 122 158 1,379 Other professional services............................................ 53 74 160 552 Promotion.............................................................. 46 26 97 90 Other real estate owned expenses....................................... 5 6 16 26 Other expenses......................................................... 19 16 59 75 ------ ------ ------ ------- Total other operating expenses................................... 1,537 1,709 4,623 6,305 ------ ------ ------ ------- Income (loss) before provision for income taxes (benefit)........ 94 (182) (118) (1,594) Provision for income taxes (benefit)....................................... -- -- -- (579) ------ ------ ------ ------- Net earnings (loss).............................................. $ 94 $ (182) $ (118) $(1,015) ====== ====== ====== ======= Earnings (loss) per common share and common equivalent share..... $ 0.08 $(0.54) $(0.35) $ (3.00) ====== ====== ====== =======
See accompanying notes to consolidated financial statements. 5 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
NET UNREALIZED LOSS ON PREFERRED STOCK COMMON STOCK SECURITIES --------------- ------------ ACCUMULATED AVAILABLE- SHARES AMOUNT SHARES AMOUNT DEFICIT FOR-SALE TOTAL -------- -------- -------- -------- ------------ ------------ ------- (DOLLARS IN THOUSANDS EXCEPT NUMBER OF SHARES) Balance at January 1, 1997.......... -- $ -- 338,630 $24,614 $(19,693) $(76) $ 4,845 Decrease in net unrealized loss on securities available for sale.......................... -- -- -- -- -- 59 59 Net loss........................ -- -- -- -- (118) -- (118) Issuance of 6.5% noncumulative convertible preferred stock, $10 stated value, net 900,000 7,350 -- -- -- -- 7,350 Return of fractional shares of common stock due to reverse stock split................... -- -- (105) (2) (2) ------- ------ ------- ------- -------- ---- ------- Balance at September 30, 1997....... 900,000 $7,350 338,525 $24,612 $(19,811) $(17) $12,134 ======= ====== ======= ======= ======== ==== =======
See accompanying notes to consolidated financial statements. 6 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
1997 1996 ---------- ---------- (Dollars in thousands) Net cash flows from operating activities: Net loss......................................................................... $ (118) $ (1,015) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............................................... 134 147 Net loss on securities available-for-sale................................... 12 1 Net accretion of discountson securities held-to-maturity.................... (30) -- Net amortization of premiums (accretion of discounts) on securities available-for-sale......................................................... -- 50 Net amortization of premiums (accretion of discounts) on loans purchased.... (27) 18 (Increase) decrease in accrued interest receivable and other assets......... (88) 158 Increase in accrued interest payable and other liabilities.................. 490 433 -------- -------- Net cash provided by (used in) operating activities.................... 373 (208) Cash flows from investing activities: Increase in interest-bearing deposits............................................ (19) -- Purchase of securities held-to-maturity.......................................... (6,972) -- Purchase of securities available for sale........................................ (23,119) (1,000) Proceeds from sales of securities available-for-sale............................. 1,865 114 Proceeds from repayments and maturities of securities held-to-maturity........... 3,475 -- Proceeds from repayments and maturities of securities available-for-sale......... 323 5,377 Net decrease in loans receivable................................................. 5,525 16,370 Purchase of other real estate owned.............................................. (43) Proceeds from the sale of other real estate owned................................ 62 Net purchases of premises and equipment.......................................... (9) (9) -------- -------- Net cash provided by (used in) investing activities.................... (18,931) 20,871 Cash flows from financing activities: Net increase (decrease) in emand deposits, money market and savings accounts..... 674 (13,354) Net decrease in time certificates of deposits.................................... (8,109) (13,649) Net increase (decrease) in securities sold under agreement to repurchase and federal funds purchased........................................................ 5,057 (4,063) Return of fractional shares of common stock due to reverse stock split........... (2) -- Net proceeds from issuance of 900,000 shares of preferred stock.................. 7,350 -- -------- -------- Net cash used in financing activities.................................. 4,970 (31,066) -------- -------- Net decrease in cash and cash equivalents............................................... (13,588) (10,403) Cash and cash equivalents, January 1.................................................... 28,113 30,272 -------- -------- Cash and cash equivalents, September 30................................................. $ 14,525 $ 19,869 ======== ======== Supplemental cash flow information: Cash paid for interest........................................................... $ 2,048 $ 2,451 Increase (decrease) in unrealized loss on securities available-for-sale.......... $ (59) 43
See accompanying notes to consolidated financial statements. 7 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO 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") both sometimes referred to as "Company". These unaudited consolidated financial statements reflect, in management's opinion, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Company's consolidated financial position and the results of its operations and cash flows for the periods presented. The results for the quarter and nine months ended September 30, 1997 are not necessarily indicative of the results expected for any subsequent period or for the full year ending December 31, 1997. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the 1996 Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K"). NOTE 2--EARNINGS PER SHARE Earnings per share is computed using the weighted average number of common shares outstanding during the period. The weighted average number of common shares and common share equivalents outstanding for the quarter ended September 30, 1997 was 1,241,973. The weighted average number of common shares outstanding for the quarter ended September 30, 1996 was 338,630. All periods presented were restated for the 9.09 to 1 reverse stock split effective June 20, 1997. Loss per share computations where applicable exclude common share equivalents since the effect would be to reduce the loss per share amount. Common share equivalents include the number of shares issuable upon the exercise of stock options less the number of shares that could have been purchased with the proceeds from the exercise of the options based upon the higher of the average price of common shares during the period or the price at the balance sheet date. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. SFAS No. 128 eliminates both "primary" and "fully diluted" EPS, and requires the computation and disclosures of "basic" EPS and "diluted" EPS. SFAS No. 128 shall be effective for financial statements for both interim and annual periods ending after December 15, 1997, and earlier application is not permitted. The Company's analysis of SFAS No. 128 concluded that its adoption would have the following impact on the EPS disclosures contained herein:
THREE-MONTHS ENDED NINE-MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Basic earnings per share.................. $ .28 $(.54) $(.35) $(3.00) Dilluted earnings per share............... $ .08 $(.54) $(.35) $(3.00)
8 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"). Because 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. FINANCIAL CONDITION The Company's consolidated assets increased during the third quarter of 1997. At September 30, 1997, the Company's consolidated assets increased by $7.8 million or 7.3% to $114.8 million from $107.0 million at June 30, 1997. This increase was reflected by an increase in investment securities of $20.6 million partially offset by a decrease of $10.1 million in cash and cash equivalents, and was primarily the result of an increase in deposits of $3.1 million and an increase in securities sold under agreements to repurchase of $5.0 million. At September 30, 1997, the Company's consolidated assets increased by $5.4 million or 4.9% to $114.8 million from $109.4 million at December 31, 1996. This increase was due primarily to a $20.9 million increase in securities available-for-sale and a $3.5 million increase in securities held-to-maturity partially offset by a $13.6 million decrease in cash and cash equivalents and a $5.5 million decrease in net loans receivable. Customer deposits decreased by 7.2%, or $7.5 million to $96.4 million at September 30, 1997 from $103.9 million at December 31, 1996, while securities sold under agreements to repurchase increased $5.1 million during the same period. Securities increased to $43.1 million at September 30, 1997 from $18.6 million at December 31, 1996. This increase was primarily due to the purchase of $30.0 million of U.S. government-sponsored agency and Treasury securities partially offset by sales and maturities of $5.3 million. Net unrealized losses on securities available-for-sale at September 30, 1997 was $17,000, compared with $76,000 at December 31, 1996. At September 30, 1997, loans receivable outstanding decreased $5.9 million or 9.4%, to $56.7 million from $62.6 million at December 31, 1996. Loans secured by real estate comprised 64% of loans receivable at September 30, 1997 and December 31, 1996. The allowance for loan losses as a percentage of loans receivable decreased to 4.6% at September 30, 1997 from 4.8% at December 31, 1996. This decrease is the result of loans charged-off of $380,000, net of recoveries of loans previously charged-off of $315,000, during the first nine months of 1997. OPERATING RESULTS The Company recorded net income for the three months ended September 30, 1997 of $94,000 or $0.08 per share, compared with a net loss for the three months ended September 30, 1996 of $182,000 or $0.54 loss per share. The improvement in earnings during the third quarter of 1997 compared to the corresponding period in 1996 was primarily the result of the investment of net proceeds of $7.35 million raised from the capital offerings completed on June 30, 1997. During the nine months ended September 30, 1997, the Company recorded a net loss of $118,000 or $0.35 loss per share compared to a net loss of $1.0 million or $3.00 loss per share during the nine months ended September 30, 1996. Total interest income for the three and nine month periods ended September 30, 1997 was $2.2 million and $6.2 million, respectively, compared with total interest income for the corresponding periods of 1996 of $2.1 million and $6.7 million, respectively. Total interest expense for the three and nine month periods ended September 30, 1997 was $704,000 and $2.1 million, respectively, compared with total interest expense for the corresponding periods in 1996 of $718,000 and $2.4 million, respectively. 9 Net interest income for the three and nine month periods ended September 30, 1997 was $1.5 million and $4.2 million, respectively, compared with net interest income for the corresponding periods of 1996 of $1.4 million and $4.3 million, respectively. Reduced levels of interest income, interest expense and net interest income were the direct result of lower volumes of average interest earning assets and average interest bearing liabilities during the nine month period ended September 30, 1997 compared to the corresponding period in 1996. No provision was made for loan losses for the nine month periods ended September 30, 1997 and 1996. Loans charged-off during the three and nine month periods ended September 30, 1997 were $45,000 and $695,000, respectively, compared with $66,000 and $1,190,000, respectively, during the corresponding periods in 1996. Recoveries of loans previously charged-off totaled $88,000 and $315,000, respectively, during the three and nine month periods ended September 30, 1997, compared with $54,000 and $437,000, respectively, during the corresponding periods in 1996. Each month the Company reviews the allowance for loan losses and makes provision as needed. As of September 30, 1997, the Company believes, based on its periodic analysis, the allowance for credit losses is adequate to absorb known and inherent risk in the loan portfolio. Other operating income decreased during the three and nine month period ended September 30, 1997 to $107,000 and $335,000, respectively, from $124,000 and $408,000, respectively, during the corresponding periods in 1996. The decrease was primarily due to volume reduction in investment and international services. Other operating expense decreased during the three and nine month periods ended September 30, 1997 by $172,000 or 10.1%, and $682,000 or 12.9%, respectively, to $1.5 million and $4.6 million, respectively, from $1.7 million and $5.3 million, respectively, during the corresponding periods in 1996, excluding the legal settlement of $1.0 million recorded during the second quarter of 1996. The reduction of $682,000 or 12.9% for the nine month period ended September 30, 1997 was primarily due to decreases in insurance and regulatory assessments of $96,000, legal services of $221,000 and other professional services of $392,000, partially offset by an increase in salaries and related benefits of $183,000. These reductions are the result of management's continued effort to reduce the utilization of outside consultants through the addition of executive management and the streamlining of operating functions. The Company has recognized losses for financial statement purposes which have not yet been recognized on an income tax return. No deferred income tax benefit was recorded for these losses since all available income tax benefits were recognized in prior years. As a result of existing net operating loss carryforwards ("NOL") for financial statement purposes (discussed in the 1996 Form 10-K), the Company's 1997 and 1996 net losses did not give rise to additional income tax benefits. At December 31, 1996, the Company had $22.3 million and $11.8 million of income tax NOL for federal and state income tax purposes, respectively. The federal NOL expires beginning in 2007 through 2011 and the state NOL expires beginning in 1997 through 2001. 10 NET INTEREST INCOME AND INTEREST RATE RISK NET INTEREST INCOME The Company's earnings depend largely upon net interest income, representing the amount by which interest generated from earning assets exceeds interest expense on interest-bearing liabilities. A primary factor affecting the level of net interest income is the Bank's net interest margin representing the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities. The net interest margin is affected by the change in the relative amounts of average interest-earning assets and average interest-bearing liabilities. In addition, the Company's ability to generate profitable levels of net interest income is dependent on its ability to maintain sound asset quality and appropriate levels of capital and liquidity. The following table presents average balance sheet information for the Company, together with interest income and yields earned on average interest- earning assets and interest expense and rates paid on average interest-bearing liabilities for periods indicated.
NINE-MONTH PERIODS ENDED ---------------------------------------------------------------------------- SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 -------------------------------------- ------------------------------------ AVERAGE AVERAGE BALANCES INTEREST AVERAGE BALANCES INTEREST AVERAGE -------- INCOME/ YIELD/ -------- INCOME/ YIELD/ AMOUNT EXPENSE RATE AMOUNT EXPENSE RATE -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Federal funds sold and securities purchased under agreements to resell................... $ 13,122 $ 540 5.50% $ 18,466 $ 720 5.21% Interest-bearing deposits with other financial institutions........................... 3 -- -- -- -- -- Securities held-to-maturity: U.S. Treasury and agency, corporate and other securities........................... 18,365 916 6.67% -- -- -- Securities available-for-sale: U.S. Treasury and agency, corporate and other securities........................... 7,590 348 6.13% 18,815 795 5.64% Loans(1)(2)............................. 59,439 4,435 9.98% 72,181 5,179 9.58% -------- ------ -------- ------ Total earning assets.................. 98,519 6,239 8.47% 109,462 6,694 8.17% Nonearning assets: Cash and due from banks-demand........ 4,778 6,096 Other assets.......................... 3,465 2,894 Allowance for credit losses........... (2,940) (3,741) -------- -------- Total assets.......................... $103,822 $114,711 ======== ======== Liabilities and shareholder's equity: Interest-bearing deposits: Demand................................ $ 7,464 $ 70 1.25% $ 6,177 $ 59 1.28% Money market and savings.............. 20,245 444 2.93% 21,594 476 2.94% Time certificates of deposit: $100,000 or more.................... 7,258 297 5.47% 7,814 320 5.47% Under $100,000...................... 27,906 1,234 5.91% 34,058 1,513 5.93% -------- ------ -------- ------ Total time certificates of deposit......................... 35,164 1,531 5.82% 41,872 1,833 5.85% -------- ------ -------- ------ Total interest-bearing deposits............................. 62,873 2,045 4.35% 69,643 2,368 4.54% Federal funds purchased and securities sold under agreement to repurchase................ 484 18 4.97% 1,402 23 2.19% Other short-term borrowings............. 173 6 4.64% -- -- -- -------- ------ -------- ------ Total interest-bearing liabilities.......................... 63,530 2,069 4.35% 71,045 2,391 4.50% Noninterest-bearing liabilities: Noninterest-bearing demand deposits............................. 32,236 36,489 Other liabilities..................... 1,039 1,507 Shareholders' equity.................... 7,017 5,670 -------- -------- Total liabilities and shareholders' equity................. $103,822 $114,711 ======== ------ ======== ------ Net interest income (spread............. $4,170 4.11% $4,303 3.67% ====== ==== ====== ==== Excess of earning assets over interest-bearing liabilities........... $ 34,989 $ 38,417 ======== ======== Net yield on earning assets(3).......... 5.66% 5.25% ==== ====
- ------------- (1) Average balances of loans outstanding include all nonperforming loans. (2) Included in interest income on loans are net loan origination fees (costs), representing an adjustment to yield, amounting to $88,000 and $17,000 for the nine-month periods ended September 30, 1997, September 30, 1996, respectively. (3) Computed on a tax equivalent basis. If customer service expense was classified as interest expense and deducted in computing net interest income, net yield on interest-earning assets would have been 5.37% and 4.95%, respectively, for the nine months ended September 30, 1997 and 1996. 11 The weighted average yield on loans receivable was 9.98% for the nine month period ended September 30, 1997, compared with 9.58% for the corresponding period in 1996. This increase was primarily attributable to the increase in the prime interest rate and the renewal and corresponding increase of the interest rate on the Company's largest loan during 1997. The weighted average yield on investment securities was 6.49% during the nine month period ended September 30, 1997 compared with 5.64% for the corresponding period in 1996. This improvement was a result of the purchase of higher yielding investment securities combined with the sale of lower yielding investment securities. The weighted average yield on total earning assets was 8.47% for the nine month period ended September 30, 1997, compared with 8.17% for the corresponding period in 1996. The weighted average rate on interest-bearing deposits was 4.35% for the nine month period ended September 30, 1997, compared with 4.54% for the corresponding period in 1996. This decrease in the weighted average rate was due primarily to the reduction in volume of time certificates of deposit during 1997. The Company analyzes its earnings performance using, among other measures, the interest rate spread (the difference between the yield earned on assets and rates paid on liabilities) and net yield on earning assets (net interest income expressed as a percentage of average total interest-earnings assets). During the nine month period ended September 30, 1997, the Company's asset base increased, however, average assets decreased to $103.8 million compared to $114.7 million during the corresponding period in 1996. Average interest-earning assets for the nine month period ended September 30, 1997 decreased to $98.5 million, compared with $109.5 million during the corresponding period in 1996. Average interest-earning assets as a percentage of total average assets for the nine month periods ended September 30, 1997 and 1996 was 95%. Average interest-bearing liabilities for the nine month period ended September 30, 1997 decreased to $63.5 million, compared with $71.0 million during the corresponding period in 1996. Average interest-bearing liabilities as a percentage of total average assets for each of the nine month periods ended September 30, 1997 and 1996 was 61% and 62%, respectively. The average balance of noninterest-bearing deposits for the nine month period ended September 30, 1997 decreased to $32.2 million from $36.5 million for the corresponding period in 1996. The average balance of noninterest-bearing deposits as a percentage of total deposits was 34% at September 30, 1997 and September 30, 1996. Foregone interest income attributable to nonperforming loans amounted to $48,000 for the quarter ended September 30, 1997, compared with $44,000 for the corresponding period in 1996. (See "Credit Portfolio Composition and Credit Risk" for a discussion of the Company's asset credit quality experience and the effects of nonperforming loans on the provision and allowance for credit losses.) The Company's net yield on interest-earning assets remains high in comparison with the interest rate spread due to the continued significance of noninterest-bearing demand deposits relative to total funding sources. While these deposits are noninterest-bearing, they are not cost-free funds. The Company incurs substantial other operating expense to provide accounting, data processing and other banking-related services to real estate title and escrow clients to the extent that certain average noninterest-bearing deposits are maintained by such depositors. Client service expense related to these deposits is classified as other operating expense. If client service expenses related to real estate title and escrow clients were classified as interest expense, the Company's reported interest expense would increase and other operating expense would decrease by $79,000 and $81,000 for the quarters ended September 30, 1997 and 1996, respectively, and $193,000 and $257,000 for the nine month period ended September 30, 1997 and 1996, respectively. 12 CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK The following table sets forth certain information concerning the composition of the loan portfolio and the allocation of the allowance for credit losses at the dates indicated.
DECEMBER 31, ---------------------------------------------- PERCENT PERCENT PERCENT SEPTEMBER 30, OF GROSS OF GROSS OF GROSS 1997 LOANS 1996 LOANS 1995 LOANS ------------- -------- ------- -------- ------- -------- Loan Portfolio Composition: Real estate construction and land development........................ $ 3,249 6% $ 3,441 5% $ 4,185 5% Commercial loans: Secured by one to four family residential properties................ 6,117 11% 6,233 11% 9,637 12% Secured by multifamily residential properties................ 2,506 4% 2,879 5% 2,876 3% Secured by commercial real properties............................ 23,951 42% 26,629 42% 28,734 35% Other--secured and unsecured........... 15,480 27% 16,508 26% 27,393 33% Home equity lines of credit.............. 357 1% 581 1% 3,983 5% Consumer installment and unsecured loans to individuals.................... 5,325 9% 6,545 10% 5,435 7% ------- --- ------- --- ------- --- Gross loans outstanding.................... 56,985 100% 62,816 100% $82,243 100% Deferred net loan origination fees and purchased loan discount........ (316) (269) (231) ------- ------- ------- Loans receivable......................... $56,669 $62,547 $82,012 ======= ======= ======= Allocation of the allowance for credit losses: Real estate construction and land development........................ $ 47 $ 42 $ 11 Commercial loans: Secured by one to four family residential properties................ 255 479 205 Secured by multifamily residential properties................ 36 41 25 Secured by commercial real properties............................ 661 590 454 Other--secured and unsecured........... 1,282 1,642 2,521 Home equity lines of credit.............. 2 13 64 Consumer installment and unsecured loans to individuals.................... 305 161 523 ------- ------- ------- Allowance allocable to loans receivable............................ 2,588 2,968 3,803 Commitments to extend credit under standby and commercial letters of credit....................... 1 1 2 ------- ------- ------- Total allowance for credit losses........ $ 2,589 $ 2,969 $ 3,805 ======= ======= ======= Allowance for credit losses allocable as a percent of loans receivable.......... 4.57% 4.75% 4.64% ======= ======= =======
The Bank's real estate construction and land development loans are primarily short-term interim loans made to finance construction of commercial and single family residential property. Commercial loans secured by real estate consist primarily of loans made based on the borrower's cash flow and which are secured by deeds of trust on commercial and residential property to provide another source of repayment in the event of default. Other secured and unsecured commercial loans include revolving lines of credit, term loans for equipment and short-term working capital lines of credit. 13 NONPERFORMING ASSETS The following table sets forth certain information concerning nonperforming assets at the dates indicated.
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, 1997 1997 1997 1996 ------------- -------- --------- ------------ (DOLLARS IN THOUSANDS) Nonaccrual loans..................................... $1,399 $1,271 $ 871 $ 928 Troubled debt restructurings......................... 5,480 5,487 5,004 5,016 Loans contractually past due 90 days or more with respect to either principal or interest and still accruing interest......................... -- 2 14 300 ------ ------ ------ ------ Nonperforming loans............................... 6,879 6,760 5,889 6,244 Other real estate owned.............................. 517 517 519 556 ------ ------ ------ ------ Total nonperforming assets........................... $7,396 $7,277 $6,408 $6,800 ====== ====== ====== ====== Allowance for loan losses as a percent of nonaccrual loans................................. 185.1% 200.3% 303.8% 319.9% ====== ====== ====== ====== Allowance for loan losses as a percent of nonperforming loans.............................. 37.6% 37.7% 44.9% 47.5% ====== ====== ====== ====== Total nonperforming assets as a percent of loans receivable................................. 13.7% 12.2% 10.7% 10.9% ====== ====== ====== ====== Total nonperforming assets as a percent of total shareholders' equity....................... 60.9% 60.7% 137.2% 140.4% ====== ====== ====== ======
The level of nonperforming assets, as presented above, increased $119,000 during the third quarter of 1997 to $7.4 million from $7.3 million at June 30, 1997. Included in nonperforming assets is other real estate owned of $517,000 at September 30,997 and June 30, 1997. Nonaccrual loans increased $128,000 during the third quarter of 1997 to $1.4 million as compared with $1.3 million at June 30, 1997. (See "Net Interest Income and Interest Rate Risk" for a discussion of the effects on operating results of nonaccrual loans.) Troubled debt restructurings ("TDR") represent loans for which the Company has modified the terms of loans to borrowers by reductions in interest rates or extensions of maturity dates at below-market rates for loans with similar credit risk characteristics. TDRs totaled $5.5 million at September 30, 1997 and June 30, 1997. Included in TDRs is one loan with a balance of $5.4 million that is secured by a first deed of trust on a single family residence which, as of December 31, 1996, had an appraised value of $10 million. All TDRs are currently performing in accordance with their modified terms. Loan delinquencies greater than 30 days past due decreased to $1.1 million or 2.0% of loans receivable at September 30, 1997 from $1.7 million or 2.8% of loans receivable at June 30, 1997. Loans contractually past due 90 days or more and still accruing interest decreased to zero at Septmeber 30, 1997 from $2,000 at June 30, 1997. Other real estate owned ("OREO") at September 30, 1997 consisted of two properties totaling $517,000 representing two undeveloped commercially zoned parcels and one residential parcel. The Bank is currently marketing these properties for sale. 14 ALLOWANCE FOR CREDIT LOSSES The following table sets forth information concerning the Company's allowance for credit losses at the dates and for the periods indicated.
THREE-MONTH NINE-MONTH PERIODS ENDED PERIODS ENDED -------------------------------- ------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 --------------- -------------- --------------- ------------- (DOLLARS IN THOUSANDS) Balance at beginning of period...................... $2,546 $3,064 $2,969 $3,805 Loans charged-off Real estate construction and land development............................ -- -- -- -- Commercial loans Secured by one to four family residential properties............................. -- 9 204 9 Secured by multifamily residential properties................. -- -- -- -- Secured by commercial real properties............................. -- -- 56 -- Other-secured and unsecured............. 21 48 365 1,167 Home equity lines of credit.................. -- -- -- -- Consumer installment and unsecured loans to individuals.............. 24 9 70 14 ------ ------ ------ ------ Total loan charge-offs.................. 45 66 695 1,190 Recoveries of loans previously charged-off Real estate construction and land development............................ -- -- -- -- Commercial loans Secured by one to four family residential properties............................. 71 24 71 26 Secured by multifamily residential properties................. -- -- -- -- Secured by commercial real properties............................. -- -- -- -- Other-secured and unsecured............. 10 28 167 376 Home equity lines of credit.................. -- -- -- -- Consumer installment and unsecured loans to individuals.............. 7 2 77 35 ------ ------ ------ ------ Total recoveries of loans previously charged-off................. 88 54 315 437 ------ ------ ------ ------ Net loan charge-offs (recoveries)................... (43) 12 380 753 Provision for loan losses........................... -- -- -- -- ------ ------ ------ ------ Balance at end of period............................ $2,589 $3,052 $2,589 $3,052 ====== ====== ====== ======
Loans charged-off were $45,000 for the third quarter, as compared with $66,000 for the corresponding period in 1996. Recoveries of loans previously charged-off totaled $88,000 for the third quarter, as compared with $54,000 during the third quarter of 1996. Loan charge-offs were $695,000 and $1,190,000 for the nine month periods ended September 30, 1997 and 1996, respectively, while recoveries for the same period in 1997 and 1996 were $315,000 and $437,000, respectively. The Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") considers a loan impaired when, based on current information and events, it is probable a creditor will be unable to collect all amounts contractually due under a loan agreement. Due to the size and nature of the Bank's loan portfolio, impaired loans are determined by a periodic evaluation on an individual loan basis. At September 30, 1997 and December 31, 1996, the Bank had classified $6.9 million and $7.2 million of its loans as impaired under SFAS No. 114, respectively, of which specific reserves of $768,000 and $710,000, respectively were allocated to such loans. The average recorded investment in impaired loans during the quarters ended September 30, 1997 and December 31, 1996 was $6.6 million and $7.8 million, respectively. Impaired loans as of September 30, 1997 included nonaccrual loans of $1.4 million. Interest income on impaired loans which are performing is recognized on an accrual basis and interest income on such loans totaled $140,000 and 174,000 for the third quarters of 1997 and 1996, respectively. Interest income recognized on impaired loans during the nine month periods ended September 30, 1997 and 1996 was $399,000 and $567,000, respectively. 15 INTEREST RATE RISK MANAGEMENT Interest rate risk management focuses on controlling changes in net interest income that result from fluctuating market interest rates as they impact the rates earned and paid on interest-earning assets and interest-bearing liabilities whose interest rates are subject to change prior to their maturity. Net interest income is subject to fluctuations arising from changes in market interest rates to the extent that the yields on various categories of earning assets respond differently to such changes from the costs of interest rate- sensitive funding sources. The following table shows interest rate sensitivity gaps for different intervals as of September 30, 1997.
1997 AMOUNTS MATURING OR REPRICING IN --------------------------------------------------------------------------------- AFTER LESS THREE AFTER ONE THAN MONTHS YEAR THREE BUT WITHIN BUT WITHIN AFTER NOT RATE MONTHS ONE YEAR 5 YEARS 5 YEARS SENSITIVE TOTAL ---------- ----------- ---------- --------- --------- --------- (DOLLARS IN THOUSANDS) ASSETS: - ------ Interest-bearing deposits with other financial institutions................ $ 19 $ -- $ -- $ -- $ -- $ 19 Federal Funds sold and securities purchased under agreements to resell........ 8,200 -- -- -- -- 8,200 Securities held-to-maturity.................. -- 2,000 15,923 -- -- 17,923 Securities held-for-sale..................... -- -- 10,943 13,931 -- 24,874 Federal Reserve Bank and other stock......... -- -- -- 338 -- 338 Loans receivable............................. 24,630 19,739 10,122 2,178 -- 56,669 -------- ------- ------- ------- -------- -------- Total earning assets.................. 32,849 21,739 36,988 16,447 -- 108,023 Non-earning assets: Cash and due from banks................... -- -- -- -- 6,325 6,325 Other real estate owned................... -- -- -- -- 517 517 All other assets.......................... -- -- -- -- 2,541 2,541 Allowance for credit losses............... -- -- -- -- (2,589) (2,589) -------- ------- ------- ------- -------- -------- Total assets.......................... 32,849 21,739 36,988 16,447 6,794 114,817 LIABILITIES AND SHAREHOLDERS' EQUITY: - ------------------------------------ Interest-bearing Deposits: Interest-bearing demand, money market and savings.............................. 29,287 -- -- -- -- 29,287 Time certificates of deposit.............. 19,364 6,172 7,003 -- -- 32,539 Federal funds purchased and securities sold under agreements to repurchase......... 57 5,000 -- -- -- 5,057 -------- ------- ------- ------- -------- -------- Total Interest-bearing liabilities.... 48,708 11,172 7,003 -- -- 68,883 -------- ------- ------- ------- -------- -------- Noninterest-bearing liabilities: Noninterest-bearing deposits.............. -- -- -- -- 34,593 34,593 Other liabilities......................... -- -- -- -- 1,207 1,207 Shareholders' equity...................... -- -- -- -- 12,134 12,134 Total liabilities and shareholders' equity... 48,708 11,172 7,003 -- 47,934 114,817 -------- ------- ------- ------- -------- -------- Interest rate-sensitivity gap................ (15,859 10,567 29,985 16,447 (41,140) -- ======== ======= ======= ======= ======== ======== Cumulative interest rate-sensitivity gap..... $(15,859) $(5,292) $24,693 $41,140 -- -- ======== ======= ======= ======= ======== ======== Cumulative rate sensitivity gap as a percent of cumulative earning assets................ (48%) (10%) 27% 38% ======== ======= ======= =======
16 Interest Rate Maturities of Assets and Funding Sources. Management also monitors the sensitivity of net interest income to potential interest rate changes by distributing the interest rate maturities of assets and supporting funding liabilities into interest rate-sensitivity periods, summarizing interest rate risk in terms of the resulting interest rate-sensitivity "gaps". The gap position is but one of several variables that affect net interest income. The gap measure is a static indicator and, as such, is not an appropriate means for forecasting changes in net interest income in a dynamic business and economic environment. Consequently, these measures are not used in isolation by management in forecasting short-term changes in net interest income. CAPITAL RESOURCES On June 30, 1997, Company completed the sale of 900,000 shares of PREFERRED STOCK through a private offering and rights offering in which the Company raised net proceeds of $7.35 million. The primary purpose of the offerings was to enable the Company to downstream capital into the Bank in order to comply with the requirements of the Formal Agreement (discussed below) and the MOU (discussed below) entered into between the Bank and the Office of the Comptroller of the Currency (the "OCC") and the Company and the Federal Reserve Bank of San Francisco (the "FRB"), respectively. The Company contributed $2.5 million in capital to the Bank on June 30, 1997. The remaining portion of the net proceeds have been retained for general corporate purposes to facilitate the implementation of the business strategies of the Company. As a result of the offerings, the total shareholders' equity of the Company increased to $12.1 million at September 30, 1997 from $4.8 million at December 31, 1996. The following table sets forth the minimum capital ratios required by federal regulations with respect to the Company and by federal regulations and the Formal Agreement with respect to the Bank and the Company's and the Bank's actual ratios as of September 30, 1997 and December 31, 1996, respectively.
SEPTEMBER 30, 1997 DECEMBER 31, 1996 --------------------------------------------- ------------------------------------------- COMPANY BANK COMPANY BANK ------------------- ------------------ -------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------- -------- ------ --------- ------- -------- ------ (UNAUDITED) (DOLLARS IN THOUSANDS) Risk-based capital(1)(3): Tier 1 capital.................. $ 12,151 17.90% $ 7,219 10.80% $ 4,921 6.96% $ 4,911 6.95% Tier 1 capital minimum requirement.................... 2,716 4.00% 6,686 10.00% 2,828 4.00% 7,071 10.00% -------- ----- -------- ----- -------- ---- -------- ----- Excess (Deficiency)........... $ 9,435 13.90% $ 533 0.80% $ 2,093 2.96% $ (2,160) (3.05%) ======== ===== ======== ===== ======== ==== ======== ===== Total capital................... $ 13,022 19.18% $ 8,077 12.08% $ 5,831 8.25% $ 5,820 8.24% Total capital minimum requirement.................... 5,432 8.00% 5,349 8.00% 5,657 8.00% 5,657 8.00% -------- ----- -------- ----- -------- ---- -------- ----- Excess........................ $ 7,590 11.18% $ 2,728 4.08% $ 174 0.25% $ 163 0.24% ======== ===== ======== ===== ======== ==== ======== ===== Total risk-weighted assets........ $ 67,899 $ 66,863 $ 70,170 $ 70,170 Capital Leverage Ratio(1)(2)(3): Tier 1 capital.................. $ 12,151 10.99% $ 7,219 6.83% $ 4,921 4.68% $ 4,911 4.67% Tier 1 capital minimum requirement.................... 4,422 4.00% 6,870 6.50% $ 4,210 4.00% $ 6,841 6.50% -------- ----- -------- ----- -------- ---- -------- ----- Excess (Deficiency)........... $ 7,729 6.99% $ 349 0.33% $ 711 0.68% $ (1,930) (1.83%) ======== ===== ======== ===== ======== ==== ======== ===== Average total assets, as adjusted during three-month periods ended September 30, 1997 and December 31, 1996......................... $110,556 $105,690 $105,249 $105,249
17 (1) The Bank's minimum Tier 1 risk-based capital and Tier 1 capital leverage requirements are based on the provisions of the Formal Agreement, which became effective on December 14, 1995. (2) The regulatory capital leverage ratio represents the ratio of Tier 1 capital at September 30, 1997 and December 31, 1996 to average total assets during the respective three-month periods then ended. (3) Tier 1 capital excludes any net unrealized gains or losses on securities available-for-sale recognized in the balance sheet. FORMAL AGREEMENT The Bank entered into a formal agreement with the OCC on December 14, 1995 (the "Formal Agreement"), pursuant to which the Bank is required to maintain (i) Tier 1 capital equal to at least 6.5 percent of the Bank's adjusted total assets ("capital leverage ratio") and (ii) Tier 1 qualifying capital equal to at least 10.0 percent of the Bank's total risk-weighted assets ("Tier 1 risk-based capital ratio"). The Bank's capital leverage ratio and Tier 1 risk-based capital ratio at September 30, 1997 were 7.83% and 10.80%, respectively. At September 30, 1997, the Bank was in compliance with the capital requirements required by the Formal Agreement. The Formal Agreement also requires the Bank to appoint a new chief financial officer (which the Bank had complied with in August, 1996), to make certain determinations as to the reasonableness of any salary, consulting fee, expense reimbursement or other type of compensation, to review the need for, and the reasonableness of, all existing consulting, employment and severance contracts, to prepare a written analysis of any new products or services, to maintain the Bank's liquidity at a level sufficient to sustain current and anticipated operations, to develop a three year capital plan and strategic plan, and to improve the Bank's loan administration. The Company submitted a capital plan for the Bank in February 1996 to the OCC which was amended and resubmitted to the OCC in June 1997. In addition, the Company filed its strategic plan with the OCC in March 1996, which the Company is currently updating. As a result of the foregoing actions and the recently completed offerings, management believes it is currently in compliance with the requirements of the Formal Agreement. However the OCC will make the final determination as to compliance and the Bank may be subject to further regulatory enforcement action by the OCC until the Formal Agreement is lifted. The Company entered into a Memorandum of Understanding ("MOU") on October 26, 1995 with the FRB. Effective September 4, 1997 the MOU was terminated by the FRB. Prior to its termination, the MOU prohibited the Company from paying dividends without prior approval of the FRB, required the submission of a plan to increase the Bank's capital ratios, required the Company to conduct a review of the senior and executive management of the Company and the Bank, prohibited the incurrence or renewal of debt without the FRB's approval, restricted cash expenditures in excess of $10,000 in any month and prohibited the Company from making acquisitions or divestitures or engaging in new lines of business without the FRB's approval. RESTRICTIONS ON DIVIDENDS As a result of the offerings and the contribution of $2.5 million in capital into the Bank, the Company (parent company only) had cash and liquid assets of approximately $4.9 million. Despite this fact, the Company is currently prohibited from paying cash dividends by state law. As a California corporation, the Company may not make a distribution to its shareholders (which includes a payment of dividends but not stock dividends) unless the Company has sufficient retained earnings under the Retained Earnings Test. The Retained Earnings Test is defined as the Company's retained earnings (determined on a consolidated basis according to generally accepted accounting principles) or if, immediately after giving effect to the distribution, all of the Company's assets equal 1.25 times the Company's liabilities (the "Retained Earnings Test"). The Company's accumulated deficit of $19.8 million as of September 30, 1997 requires the Company to record cumulative net earnings in excess of $19.8 million before a dividend can be paid under the Retained Earnings Test. If assets equal 1.25 times liabilities subsequent to a distribution, the Company may pay a dividend prior to recording cumulative earnings of $19.8 million. At the present time, the Company does not meet the Retained Earnings Test and no assurance can be made as to when, if ever, such test will be met. The terms of the Preferred Stock provide that dividends on the PREFERRED STOCK may be paid commencing June 30, 1999. Notwithstanding the foregoing, the Company may not pay dividends unless the Bank is in full compliance with federal regulatory capital requirements, the Company is permitted by the FRB to pay dividends and the Company meets the Retained Earnings Test. Dividends on the PREFERRED STOCK will not accumulate. The Company cannot assess at this time its ability to pay dividends in the immediate future. 18 LIQUIDITY LIQUIDITY MANAGEMENT The accompanying consolidated statements of cash flows present certain information about cash flows from operating, investing and financing activities. The Bank's principal cash flows relate to investing and financing activities, rather than operating activities. While the statements present the periods' net cash flows from lending and deposit activities, they do not reflect certain important aspects of the Bank's liquidity, including (i) anticipated liquidity requirements under outstanding credit commitments to customers (ii) intraperiod volatility of deposits, particularly fluctuations in the volume of commercial customers' noninterest-bearing demand deposits, (iii) unused borrowings available under federal funds lines, repurchase agreements and other arrangements and (iv) a credit accommodation facility at a correspondent bank, the Federal Reserve Bank and the Federal Home Loan Bank. An additional source of operating cash flows is net interest income. See "Net Interest Income and Interest Rate Risk" for a discussion of the impact of recent trends and events on this source of operating cash flows. Management monitors the Bank's assets and liabilities on a daily basis to ensure that funding sources remain adequate to meet anticipated demand. While management believes the Bank's funding sources are adequate to meet anticipated demand, no assurance can be made that demand on the Bank's resources will not exceed the Bank's funding sources. The Company (parent company only) has limited expenses and funding requirements at the present time. Management believes that the $4.8 million in cash and liquid assets available at the Company (parent company only) at September 30, 1997 will be sufficient to meet its cash flow requirements for the foreseeable future. Pursuant to the terms of the federal banking law and the requirements of the Formal Agreement, the Bank is currently prohibited from paying any cash dividends to the Company, and management does not anticipate that the dividends from the Bank will be a source of liquidity to the Company for the foreseeable future. 19 LIQUIDITY TRENDS Time certificates of deposit of $100,000 or more (excluding the money desk operation) were $6.5 million at September 30, 1997, compared with $5.5 million at December 31, 1996 and $4.9 million at September 30, 1996. In general, deposits of more than $100,000 are considered to be more volatile than fully- insured deposits in denominations of less than $100,000. The following table sets forth information concerning average balances concerning the Company's funding sources and liquidity trends for the periods indicated.
THREE-MONTH PERIOD ENDED --------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 30, SEPTEMBER 30, 1997 1997 1997 1996 1996 ------------- ------------- ------------- -------------- ------------- (DOLLARS IN THOUSANDS) Noninterest-bearing demand deposits: Real estate title and escrow company customers............................. $ 9,883 10% $ 9,062 10% $ 7,947 8% $ 8,419 9% $ 8,506 9% All other noninterest-bearing demand... 21,875 23% 23,056 25% 24,897 26% 28,181 29% 25,458 25% Interest-bearing demand, money market and savings............................. 30,516 31% 27,016 29% 25,541 26% 26,587 27% 27,326 27% Time certificates of deposit: Money desk operation................... 21,956 23% 24,114 26% 26,359 27% 22,729 23% 24,939 25% All other: $100,000 or more..................... 6,519 7% 3,516 4% 5,819 6% 5,487 6% 4,865 5% Under $100,000....................... 5,507 5% 5,497 5% 6,256 7% 6,726 7% 7,442 8% ------- --- ------- --- ------- --- ------- --- ------- --- Total time certificates of deposit............................ 33,982 35% 33,127 35% 38,434 40% 34,942 35% 37,246 38% ------- --- ------- --- ------- --- ------- --- ------- --- Total deposits.................... $96,256 99% 92,261 99% 96,819 100% 98,129 100% 98,536 99% Securities sold under agreements to repurchase.............................. 714 1% 546 1% 131 - 357 - 1,346 1% ------- --- ------- --- ------- --- ------- --- ------- --- Total funding liabilities......... $96,970 100% $92,807 100% $96,950 100% $98,486 100% $99,882 100% ======= === ======= === ======= === ======= === ======= === Average loan-to-deposit ratio............ 59.8% 64.2% 63.6% 64.6% 67.8% ======= ======= ======= ======= ======= Period-end pledged securities ratio...... 22.3% 47.6% 21.7% 21.5% 61.3% ======= ======= ======= ======= =======
The Bank maintains a wholesale institutional funds acquisition operation ("money desk"). This operation provided 23% of the Bank's average total funding sources during the third quarter of 1997, as compared with 25% during the third quarter of 1996, while noninterest-bearing demand deposits provided 33% of average total funding sources during the third quarter of 1997, compared with 34% during the comparable 1996 period. The Bank will enhance its efforts to obtain direct, non-brokered funds through its own marketing programs within its own market area, through direct solicitation, as well as by attracting traditional local market area deposits. However, the Bank's policy is to activate the money desk operation, as necessary, if the Bank's liquidity falls below specified levels. Brokered deposits will not be solicited through money desk activities. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain matters discussed in this Quarterly Report may constitute forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 as to which are not historical facts. The Company cautions readers that the following important factors could affect the Company's business and cause actual results to differ materially from those expressed in forward-looking statement made by, or on behalf of, the Company. 20 Economic conditions. The Company's results are strongly influenced by general economic conditions in its market area, Southern California, and a deterioration in these conditions could have a material adverse impact on the quality of the Bank's loan portfolio and the demand for its products and services. In particular, changes in economic conditions in the real estate and entertainment industries may affect the Company's performance. Although, a significant percentage of the Company's loan portfolio continues to be unsecured or collateralized by real property, the prolonged effects of the Southern California economic recession and depressed residential and commercial real estate values may continue to adversely impact the financial condition and liquidity of the Company's borrowing customers. As such, the Company may continue to experience high levels of, or further increases in, nonperforming loans, provisions for credit losses and charge-offs of nonperforming loans. Interest rates. Management anticipates that interest rate levels will remain generally constant for the balance of 1997, but if interest rates vary significantly from present levels, this may cause the Company's results to differ materially. Government regulation and monetary policy. All forward-looking statements presume a continuation of the existing regulatory environment and U.S. government monetary policies. The banking industry is subject to extensive federal and state regulation, and significant new laws or changes in, or repeals of, existing laws may cause results to differ materially. Competition. The Bank competes with numerous other financial institutions and non-depository financial intermediaries. If the circumstances affecting the nature or level of competition change, such as the merger of competing financial institutions or the acquisition of California institutions by out of state banks, the results may differ materially from the results currently anticipated. Credit quality. A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with terms of their loans. The Bank has implemented an enhanced process by which it reviews and manages the credit quality of the loan portfolio. The ongoing credit control process includes a stringent risk rating and monitoring system and a periodic (three times per year) review of loans by an independent outside loan review consultant. However, these policies and procedures may not prevent unexpected losses that could adversely affect the Company's results of operations and financial condition. While management believes that its assumptions regarding these and other factors on which forward-looking statements are based are reasonable, such assumptions are necessarily speculative in nature, and actual outcomes can be expected to differ to some degree. Consequently, there can be no assurance that the results described in such forward-looking statements will, in fact, be achieved. Item 3. Quantitative and Qualitative Disclosure about Market Risk Not applicable. 21 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. Ex27 Financial Data Schedule. (b) Reports on Form 8-K. None. 22 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) November 14, 1997 /s/ SCOTT A. MONTGOMERY --------------------------- Scott A. Montgomery Chief Executive Officer November 14, 1997 /s/ JOSEPH W. KILEY III --------------------------- Joseph W. Kiley Chief Financial Officer 23 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,325 19 8,200 0 25,212 17,923 17,908 56,669 2,589 114,817 96,419 5,057 1,207 0 0 7,350 24,612 (19,828) 114,817 4,435 1,264 540 6,239 2,045 2,069 4,170 0 (12) 4,623 (118) (118) 0 0 (118) (0.35) (0.35) 5.16 1,399 0 5,480 0 2,969 695 315 2,589 2,349 0 240
-----END PRIVACY-ENHANCED MESSAGE-----