0000950148-95-000572.txt : 19950824 0000950148-95-000572.hdr.sgml : 19950824 ACCESSION NUMBER: 0000950148-95-000572 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950823 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: 1934 Act SEC FILE NUMBER: 000-15982 FILM NUMBER: 95566274 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, QUARTERLY ENDING 6/30/95 1 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 June 30, 1995 ------------- 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 July 31, 1995 was 3,078,146. This document contains 31 pages. 2 FORM 10-Q TABLE OF CONTENTS AND CROSS REFERENCE SHEET
Page(s) in Form 10-Q ---------- PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 3-13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 14-28 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 29 Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . 29 Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . 29 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 29 Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . 29 Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . 30 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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 4 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 1995 and December 31, 1994
June 30, December 31, 1995 1994 (Unaudited) --------- ----------- (dollars in thousands) ASSETS Cash and due from banks-demand .......................................... $ 13,923 $ 22,210 Federal funds sold and securities purchased under agreements to resell ........................................... 24,010 24,500 --------- --------- Cash and cash equivalents ...................................... 37,933 46,710 Interest-bearing deposits with other financial institutions ................................................ 198 195 Securities available-for-sale, at fair value; aggregate amortized cost of $20,788 at June 30, 1995 and $65,113 at December 31, 1994 ...................................... 20,477 62,056 Loans receivable held for sale, at fair value ........................... -- 6,599 Loans receivable ........................................................ 97,579 115,284 Allowance for credit losses ........................................... (3,370) (3,063) --------- --------- Net loans receivable ........................................... 94,209 112,221 Premises and equipment, net ............................................. 1,569 1,684 Other real estate owned ................................................. 1,369 1,529 Accrued interest receivable and other assets ............................ 1,681 1,985 --------- --------- $ 157,436 $ 232,979 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand ............................................ $ 63,300 $ 87,430 Interest-bearing demand ............................................... 9,868 13,844 Money market accounts ................................................. 24,003 28,823 Savings ............................................................... 2,810 1,696 Time certificates of deposit: $100,000 and over ................................................... 9,347 12,261 Under $100,000 ...................................................... 32,286 63,761 --------- --------- Total deposits ................................................. 141,614 207,815 Securities sold under agreements to repurchase .......................... 4,382 12,572 Accrued interest payable and other liabilities .......................... 1,839 2,284 --------- --------- Total liabilities .............................................. 147,835 222,671 Shareholders' equity: Preferred stock, no par value; authorized 1,000,000 shares .............................................................. -- -- Common stock, no par value; authorized 10,000,000 shares; issued and outstanding 3,078,146 at June 30, 1995 and December 31, 1994 ................................. 24,614 24,614 Accumulated deficit ................................................... (14,702) (11,249) Net unrealized loss on securities available- for-sale ............................................................ (311) (3,057) --------- --------- Total shareholders' equity ..................................... 9,601 10,308 --------- --------- $ 157,436 $ 232,979 ========= =========
See accompanying notes to condensed consolidated financial statements 4 5 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Three- and six-month periods ended June 30, 1995 and 1994 (Unaudited)
Three months ended Six months ended June 30, June 30, 1995 1994 1995 1994 ------- ------- ------- --------- (dollars in thousands, except per share data) Interest income: Loans receivable ............................. $ 2,422 $ 4,576 $ 5,037 $ 9,176 Investment securities ........................ 369 1,113 989 2,225 Federal funds sold and securities purchased under agreements to resell ................. 273 85 496 131 ------- ------- ------- -------- Total interest income ................. 3,064 5,774 6,522 11,532 Interest expense: Deposits ..................................... 964 1,176 2,119 2,413 Borrowings ................................... 24 89 59 150 ------- ------- ------- -------- Total interest expense ................ 988 1,265 2,178 2,563 ------- ------- ------- -------- Net interest income ................... 2,076 4,509 4,344 8,969 Provision for credit losses .................... 381 1,567 527 3,185 ------- ------- ------- -------- Net interest income after provision for credit losses ....................... 1,695 2,942 3,817 5,784 Other operating income: Gain (loss) on sale of trading securities .... -- (39) -- (123) Gain (loss) on sale of securities available- for-sale ................................... (1,341) (30) (2,495) (61) Fee income ................................... 421 467 790 913 Loss on other real estate owned .............. (169) (133) (178) (192) Other income - shareholders' insurance claims 730 -- 730 -- ------- ------- ------- -------- Total other operating income .......... (359) 265 (1,153) 537 Other operating expenses: Compensation ................................. 955 1,289 1,948 2,616 Office occupancy ............................. 540 601 1,072 1,217 Other general and administrative ............. 1,594 1,404 3,097 2,733 ------- ------- ------- -------- Total other operating expenses ........ 3,089 3,294 6,117 6,566 ------- ------- ------- -------- Income (loss) before income taxes ..... (1,753) (87) (3,453) (245) Provision for income taxes ..................... -- -- -- -- ------- ------- ------- -------- Net income (loss) ..................... $(1,753) $ (87) $(3,453) $ (245) ======= ======= ======= ======== Net income (loss) per share ........... $ (0.57) $ (0.03) $ (1.12) $ (0.08) ======= ======= ======= ========
See accompanying notes to condensed consolidated financial statements. 5 6 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Six-month period ended June 30, 1995 (Unaudited)
Net Unrealized Gain (loss) on Common Stock Securities Preferred ---------------------- Accumulated Available- Stock Shares Amount Deficit for-Sale Total ----------- --------- ------- ----------- ----------- -------- (dollars in thousands) Balance at December 31, 1994 ... -- 3,078,146 $24,614 $(11,249) $(3,057) $ 10,308 Decrease in net unrealized loss on securities available for sale ................... -- -- -- -- 2,746 2,746 Net loss ..................... -- -- -- (3,453) -- (3,453) ----------- --------- ------- -------- ------- -------- Balance at June 30, 1995 ....... -- 3,078,146 $24,614 $(14,702) $ (311) $ 9,601 =========== ========= ======= ======== ======= ========
See accompanying notes to condensed consolidated financial statements. 6 7 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Six-month periods ended June 30, 1995 and 1994 (Unaudited)
1995 1994 -------- -------- (dollars in thousands) Net cash flows from operating activities: Net income (loss) .................................. $ (3,453) $ (245) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Accretion of sublease loss ....................... (192) (193) Depreciation and amortization .................... 188 249 Provision for credit losses ...................... 527 3,185 Loss (gain) on sale of securities available- for-sale ....................................... 1,219 61 Net amortization of premiums on securities held-to-maturity ............................... -- 23 Net amortization of premiums (accretion of discounts) on securities available-for-sale .... 26 122 Net accretion of discounts on loans purchased .... (133) (2,675) Accretion of deferred gains, net of amortization of premiums on interest rate hedging contracts terminated ..................................... -- (588) Net loss (gain) on other real estate owned ....... 160 148 Net decrease (increase) in trading securities .... -- 6,978 Decrease (increase) in accrued interest receivable and other assets ............................... 301 (451) Increase (decrease) in accrued interest payable and other liabilities .......................... (253) (384) -------- -------- Net cash provided by (used in) operating activities ................................... (1,610) 6,230 Cash flows from investing activities: Purchase of securities held-to-maturity ............ -- (4,987) Proceeds from sales of securities held to maturity ......................................... -- 6,000 Purchase of debt securities available-for-sale ..... -- (13,013) Proceeds from sales of securities available- for-sale ......................................... 41,768 -- Proceeds from repayments and maturities of securities available-for-sale .................... 1,312 6,113 Proceeds from sales of loans ....................... 6,599 -- Purchases of loans ................................. -- (3,085) Net decrease in loans .............................. 17,618 30,970 Other, net ......................................... (73) 54 -------- -------- Net cash provided by investing activities ...... 67,224 22,052 Cash flows from financing activities: Net decrease in deposits ........................... (66,201) (67,880) Net increase (decrease) in securities sold under agreements to repurchase ......................... (8,190) 1,384 Net proceeds from exercise of stock options ........ -- 1 -------- -------- Net cash used in financing activities .......... (74,391) (66,495) -------- -------- Net decrease in cash and cash equivalents ............ (8,777) (38,213) Cash and cash equivalents, beginning ................. 46,710 53,355 -------- -------- Cash and cash equivalents, ending .................... $ 37,933 $ 15,142 ======== ======== Supplemental cash flow information: Cash paid for: Interest ........................................ $ 2,334 $ 2,667 Income taxes .................................... $ -- $ 35 Loans foreclosed and transferred to other real estate owned and other assets ............... $ -- $ 2,959 Increase (decrease) in unrealized loss on securities available-for-sale .................... $ (2,746) $ 2,578
See accompanying notes to condensed consolidated financial statements. 7 8 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". All significant intercompany transactions and balances have been eliminated. The accounting and reporting policies of the Company conform with generally accepted accounting principles and general practice within the banking industry. The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all footnotes normally required for complete financial statement disclosure. While management believes that the disclosures presented are sufficient to make the information not misleading, reference may be made to the consolidated financial statements and notes thereto included at "Item 8. Financial Statements" of the Company's Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K"). The accompanying consolidated balance sheets and statements of operations, changes in shareholders' equity and cash flows reflect, in the opinion of management, all material adjustments necessary for a fair presentation of the Company's financial position as of June 30, 1995 and December 31, 1994 and results of operations and cash flows for the six-month periods ended June 30, 1995 and 1994. The results of operations for the three and six-month periods ended June 30, 1995 are not necessarily indicative of the results of operations for the full year ending December 31, 1995. Certain items in the 1994 financial statements have been reclassified to conform to the 1995 presentation. NOTE 2 - INCOME (LOSS) PER SHARE Income (loss) per share is computed using the weighted average number of common shares and common share equivalents outstanding during the period. The weighted average number of common shares and common share equivalents outstanding for the three-month periods ended June 30, 1995 and 1994 were 3,078,146 and 3,044,896, respectively. The weighted average number of common shares and common share equivalents outstanding for the six-month periods ended June 30, 1995 and 1994 were 3,078,146 and 3,044,836, respectively. 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 8 9 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) NOTE 2 - INCOME (LOSS) PER SHARE (CONTINUED) balance sheet date. Loss per share computations exclude common share equivalents since the effect would be to reduce the loss per share amount. NOTE 3 - LOANS AND INTEREST INCOME In May, 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This statement prescribes the recognition criteria for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings ("TDRs"). SFAS No. 114 states that a loan is impaired when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contracted terms of the loan agreement. A creditor is required to measure impairment by discounting expected future cash flows at the loan's effective interest rate, or by reference to an observable market price, or by determining the fair value of the collateral for a collateral dependent asset. Regardless of the measurement method, a creditor shall measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The statement also clarified the existing accounting for in-substance foreclosures ("ISFs") by stating that a collateral dependent real estate loan would be reported as real estate owned ("REO") only if the lender had taken possession of the collateral. The statement is effective for financial statements issued for fiscal years beginning after December 15, 1994. The Bank adopted SFAS No. 114 on January 1, 1995. The adoption of SFAS No. 114 had no material impact on the Bank. In October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures." This statement amends the disclosure requirements in SFAS No. 114 to require information about the recorded investment in certain impaired loans and how a creditor recognizes interest income related to those impaired loans. Interest on loans, including impaired loans, is credited to income as earned and is accrued only if deemed collectible, using the interest method. Unpaid interest income is reversed when a loan becomes over 90 days contractually delinquent and on other loans, if management determines it is warranted, prior to being 90 days delinquent. At June 30, 1995, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $11.2 million, for which the related allowance for credit losses was $1.6 million. The average recorded investment in, and the amount of interest income recognized on those impaired loans during the six months ended June 30, 1995 was $14.8 million and $710,000, respectively, and for the three months ended June 30, 1995, $10.8 million and $475,000, respectively. 9 10 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL The Federal Reserve Board ("FRB") and the Office of the Comptroller of the Currency (the "OCC") have issued guidelines (the "guidelines") regarding risk-based capital requirements. The guidelines provide detailed definitions of regulatory capital and assign different weights to various assets and credit equivalent amounts of off-balance sheet financial instruments, depending upon the perceived degree of credit risk to which they expose such entities. Each banking organization is required to maintain a specified minimum ratio of capital to the total of such risk-adjusted assets and off-balance sheet financial instruments. The risk-based capital ratios of the Company and the Bank are calculated under the guidelines by dividing their respective qualifying total capital by their respective total risk-weighted assets. The Company's qualifying total capital and total risk-weighted assets are determined on a fully consolidated basis. Total qualifying capital is comprised of the sum of core capital elements ("Tier 1 capital") and supplementary capital elements ("Tier 2 capital"). At June 30, 1995 and December 31, 1994, Tier 1 capital of the Company and the Bank consisted of their respective amounts of common shareholders equity. Tier 1 capital excludes any net unrealized gains or losses resulting from the implementation of SFAS No. 115. Tier 2 capital consisted of the allowance for credit losses, subject to limitations. Under the guidelines, total risk-weighted assets of the Company and the Bank are determined by assigning balance sheet assets and credit equivalent amounts of off-balance sheet financial instruments to one of four broad risk categories having risk weights ranging from zero% to 100% (see Note 7 in the Notes to Consolidated Financial Statements in the Company's 1994 Annual Report on Form 10-K). The aggregate dollar amount of each category is multiplied by the risk weight associated with that category and the resulting weighted values from each category are summed to determine total risk-weighted assets. Each bank holding company and national bank must maintain (i) a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and (ii) a minimum ratio of total qualifying capital to total qualifying assets ("total risk-based capital ratio") of 8.0%, with the amount of the allowance for credit losses that may be included in Tier 2 capital limited to 1.25% of total risk- weighted assets. 10 11 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued) The FRB and OCC have adopted minimum Tier 1 capital leverage ratio standards applicable to bank holding companies and national banks, respectively. The capital leverage ratio standards operate in tandem with the guidelines and require a minimum ratio of Tier 1 capital to adjusted total assets ("capital leverage ratio") of 3%. The leverage ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles will be expected to maintain capital well above the minimum levels. In July 1991, the Bank entered into a formal agreement with the OCC (the "Formal Agreement"), pursuant to which the Bank was required to maintain (i) a capital leverage ratio equal to at least 6.5% and (ii) a total risk-based capital ratio equal to at least 10.0%. As set forth below, the Bank's capital leverage ratio at June 30, 1995 was 6.39%, which was not in compliance with the Formal Agreement, and the total risk-based capital ratio was 10.48%. Accordingly, the Bank may be subject to further regulatory enforcement action by the OCC. Information about the regulatory capital of the Company and the Bank at June 30, 1995 and December 31, 1994 is set forth below. 11 12 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4 - Shareholders' Equity and Regulatory Capital (continued) Information about the regulatory capital of the Company and the Bank at June 30, 1995 and December 31, 1994 is set forth below.
June 30, 1995 (Unaudited) December 31, 1994 ------------------------------------------- --------------------------------------------- Company Bank Company Bank ------------------- ---------------------- ---------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- -------- ----- (dollar amounts in thousands) Risk-based capital (3): Tier 1 capital $ 9,912 9.26% $ 9,850 9.21% $ 13,365 9.84% $ 13,304 9.80% Tier 1 capital minimum requirement 4,280 4.00% 4,280 4.00% 5,431 4.00% 5,431 4.00% -------- ------ -------- ----- -------- ----- -------- ----- Excess $ 5,632 5.26% $ 5,570 5.21% $ 7,934 5.84% $ 7,873 5.80% ======== ====== ======== ===== ======== ===== ======== ===== Total capital $ 11,275 10.54% $ 11,213 10.48% $ 15,079 11.11% $ 15,018 11.06% Total capital minimum requirement 8,560 8.00% 10,700 10.00% (1) 10,862 8.00% 13,578 10.00% (1) -------- ------ -------- ----- -------- ----- -------- ----- Excess $ 2,715 2.54% $ 513 0.48% $ 4,217 3.11% $ 1,440 1.06% ======== ====== ======== ===== ======== ===== ======== ===== Total risk-weighted assets $106,998 $106,998 $135,777 $135,777 Capital Leverage Ratio Standard (2) (3): Tier 1 capital $ 9,912 6.43% $ 9,850 6.39% $ 13,365 5.65% $ 13,304 5.62% Tier 1 capital minimum requirement (1) 6,166 4.00% 10,021 6.50% (1) 9,461 4.00% 15,374 6.50% (1) -------- ------ -------- ----- -------- ----- -------- ----- Excess $ 3,746 2.43% $ (171) -0.11% $ 3,904 1.65% $ (2,070) -0.88% ======== ====== ======== ===== ======== ===== ======== ===== Average total assets, as adjusted, during three-month periods ended June 30, 1995 and December 31, 1994 $154,162 $154,162 $236,526 $236,526
_____________________________ (1) The Bank's minimum total risk-based capital and Tier 1 capital leverage requirements are based on the provisions of the Formal Agreement, which became effective on October 31, 1991. (2) The regulatory capital leverage ratio represents the ratio of Tier 1 capital at June 30, 1995 and December 31, 1994 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 as a result of implementing Statement of Financial Accounting Standards No. 115. 12 13 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - INCOME TAXES As discussed in the 1994 Form 10-K, the Company has recognized losses for financial statement purposes which have not yet been recognized on an income tax return. No benefit was recorded for these losses since all available income tax benefits were recognized in prior years. Future losses will not result in additional tax benefits until the Company generates sufficient taxable income to utilize the present net operating loss carryforwards. The Company's 1995 year-to-date net loss did not result in additional tax benefits. NOTE 6 - ALLOWANCE FOR CREDIT LOSSES The Company's allowance for credit losses is maintained at a level considered by management to be adequate to absorb estimated losses in the existing portfolio. The allowance for credit losses is increased by the provision for credit losses and decreased by the amount of loan charge-offs, net of recoveries. In the third quarter of 1994, the OCC reviewed the Bank's treatment of recording discounts on loans purchased in the fourth quarter of 1993 and the second quarter of 1994. The OCC determined that previously recorded allowance amounts related to the purchased loans, amounting to $3.9 million for the 1993 purchases and $.2 million for the 1994 purchases, should have been recorded as discounts on the purchased loans and recognized in interest income over the term of the loans using a method which generally produces a level yield on the net investment in the loans. In addition, an allowance for credit losses related to the purchased loans should have been established in a manner consistent with that used by the Company for the loans it originates and a charge against earnings made during 1994 to reflect the additional provision amounts required. Adjustments to reflect the accounting treatment discussed above were made by the Company in 1994 resulting in additional loan interest income for the six month period ended June 30, 1994 of $2.4 million, and an increase to the provision for loan losses during the same period of $2.6 million. For the three month period ended June 30, 1994 the effect of the adjustment was to increase loan interest income by $1.3 million and to increase the provision for loan loss by $1.3 million. The accompanying financial statements for the three month and six month periods ended June 30, 1994 have been restated for these adjustments. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section presents management's discussion and analysis of the consolidated financial condition and operating results of National Mercantile Bancorp (the "Company") and its subsidiary, Mercantile National Bank (the "Bank"), for the three and six-month periods ended June 30, 1995 and 1994 and updates the discussion provided at "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K"). The discussion should be read in conjunction with the Company's consolidated financial statements and accompanying notes to the consolidated financial statements (see "Item 1. Financial Statements"). FINANCIAL CONDITION At June 30, 1995, the Company's consolidated assets decreased by $75.5 million, or 32.4%, to $157.4 million from $233 million at December 31, 1994. This decrease was due primarily to an $8.8 million decrease in cash and cash equivalents, a $41.6 million decrease in securities, the sale of $6.6 million of loans and a decrease in net loans of $18.0 million. The decrease in consolidated assets from March 31, 1995 was $3.1 million, consisting primarily of an $8.0 million decrease in securities and a $3.9 million decrease in loans, net of a $9.5 million increase in cash and cash equivalents. Customer deposits decreased by $66.2 million or 31.9% to $141.6 million at June 30, 1995, from $207.8 million at December 31, 1994. Securities sold under agreements to repurchase decreased by $8.2 million to $4.4 million at June 30, 1995, from $12.6 million at December 31, 1994. The decrease in customer deposits from March 31, 1995 was $4.9 million. Securities sold under agreements to repurchase increased by $2.6 million from March 31, 1995. The decrease in the liabilities, accompanied by a decrease in assets is consistent with the Company's planned restructuring to improve the Company's capital ratios. OPERATING RESULTS OVERVIEW As set forth in the accompanying consolidated statements of operations, the Company recorded a net loss for the three and six-month periods ended June 30, 1995 of $1.8 million or $(.57) per share, and $3.5 million or ($1.12) per share, respectively as compared to a net loss for the three and six-month periods ended June 30, 1994 of $87,000 or $(.03) per share and $245,000 or $(.08) per share, respectively. 14 15 Declining loan balances continued to negatively impact the Company's loan interest income, while sales of securities resulted in decreased interest income from securities in 1995. Total interest income for the three month and six month periods ended June 30, 1995 was $3.1 million and $6.5 million, respectively, compared with total interest income for the corresponding periods of 1994 of $5.8 million and $11.5 million, respectively. Total interest expense for the three month and six month periods ended June 30, 1995 was $1 million and $2.2 million, respectively, compared with total interest expense for the corresponding periods of 1994 of $1.3 million and $2.6 million, respectively. While the decrease in interest earning loans and securities caused a significant decrease in interest income, the impact of the decrease in deposits was less on interest expense, as $24.1 million (36%) of the decrease in deposits was attributable to non-interest bearing demand deposits. Net interest income for the three month and six month periods ended June 30, 1995 was $2.1 million and $4.3 million, respectively, compared with net interest income for the corresponding periods of 1994 of $4.5 million and $9.0 million, respectively. The provision for credit losses for the three month and six month periods ended June 30, 1995 was $381 thousand and $527 thousand, respectively, compared with the corresponding amounts for 1994 of $1.6 million and $3.2 million. Loss on sale of securities available for sale for the three month and six month periods ended June 30, 1995 was $1.3 million and $2.5 million, respectively, while the net unrealized loss on securities available for sale decreased for the same periods by $1.3 million and $2.7 million, respectively. Loss on sale of securities available for sale for the three month and six month periods ended June 30, 1994 was $30 thousand and $61 thousand, respectively, while the net unrealized loss on securities available for sale increased for the same periods by $1.2 million and $2.6 million, respectively. Net loss for the three month and six month periods ended June 30, 1995, including realized losses on the sale of securities available for sale was $1.8 million and $3.5 million, respectively. The losses on sale of securities were realized as a part of the Company's planned restructuring of the securities portfolio to minimize future interest rate risk. In order to improve asset quality and future profitability, the Bank sold, in February 1995, criticized and/or nonperforming loans and loans that were previously charged off, in the amount of $6.6 million which represented 14% of the decrease of loans. Loan interest income included $557,000 of interest income received in the first quarter of 1994, from the Company's prime rate-based interest rate floor contract, which became effective in June 1992 and expired in June 1994. Also included was $1.1 million in discount accretion associated with the loan portfolio purchased in 1993 (see "Net Interest Income and Interest Rate Risk"). The allowance for credit losses decreased $4.1 million at June 30, 1995 from June 30, 1994. The decrease is primarily attributed to the overall decrease in loan balances, 15 16 the decrease in non-performing loans, and the sale of loans previously written down. The allowance for credit losses totaled $3.4 million at June 30, 1995, compared with $3.4 million at March 31, 1995, and $3.1 million at December 31, 1994. However, the Bank's allowance for credit losses as a percentage of nonperforming assets increased to 40.9% at June 30, 1995, and 38.9% at March 31, 1995 from 25.4% at December 31, 1994 as a result of the 31.6% decrease in nonperforming assets during the first six months of 1995. Non-performing assets decreased by 5.0% from March 31, 1995. Other operating income decreased $1.7 million in the first six months of 1995 from the first six months of 1994 as a result of the sale of $41.8 million of investment securities available-for-sale at a net realized loss of $2.5 million. Realized loss on sale of securities for the three month period ended June 30, 1995 was $1.3 million. Other operating income decreased by $600 thousand for the three month period ended June 30, 1995, compared with the corresponding period in 1994. Fee income also decreased in 1995 from the same periods in 1994 due to reduced loan and deposit acitivity in 1995 as a result of the smaller loan and deposit bases. Other income in 1995 included $730 thousand in income from insurance proceeds, included in the three month period ended June 30, 1995. Other operating expenses decreased 6.2% and 6.8% for the three and six month periods ended June 30, 1995 as compared to the same periods in the prior year. The decrease was due primarily to management's efforts to continue to reduce operating expenses. Compensation expense decreased $668 thousand or 25.5%, for the first six months of 1995, compared with the same period in the prior year. Total assets of the Company at June 30, 1995 have continued to decrease. As discussed in the 1994 Form 10-K, and as part of the Company's capital plan for the Bank and its restructuring of the organization, the Company had reduced the Bank's asset size through sales of securities available-for-sale which were funded by high cost deposits, reduced classified assets through the sale of loans and reduced operating expenses through consolidating functions and reduction of personnel. The restructuring of the Bank began during the third quarter of 1994 and the Bank continues to improve the quality of its assets, minimize its interest rate risk, generate fee income and reduce overhead expenses in efforts to return to profitability. However, should a reduction in asset size continue to occur without corresponding reductions in operating expenses, interest income from the reduced earning asset base may not cover operating expenses. 16 17 CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DECLINING REAL ESTATE VALUES As previously discussed in the 1994 Form 10-K, while economic conditions nationally and elsewhere in California are improving, southern California's economy remained weak. Commercial and residential real estate market values in southern California continue to remain depressed, adversely impacting the financial condition and liquidity of many of the Company's borrowers. Net loan charge-offs were at an historic high for 1994. Nonperforming assets at June 30, 1995 totaled $8.2 million and included $1.4 million of other real estate owned, compared with $12.0 million in Non-performing assets at December 31, 1994, and $8.7 million at March 31, 1995. Other real estate owned was $1.5 million at December 31, 1994 and March 31, 1995. NONPERFORMING ASSETS The level of nonperforming assets, as presented in Table 1 and defined in the 1994 Form 10-K, decreased $3.8 million during the first six months of 1995 from the level at December 31, 1994, and decreased $400 thousand from March 31, 1995. The decrease was primarily the result of the sale of classified assets in February, 1995. The amount of nonperforming loans for which the Company does not hold substantial collateral amounted to $2.0 million at June 30, 1995, or 29.1% of all nonperforming loans at that date, compared to $2.9 million, or 24.1% at December 31, 1994, and $1.2 million or 13.9% at March 31, 1995. NONACCRUAL LOANS. Nonaccrual loans are defined and the accounting for such loans is discussed in the 1994 Form 10-K. Nonaccrual loans decreased $2.1 million during the first six months of 1995 to $1.3 million as compared to $3.4 million at December 31, 1994. Nonaccrual loans were $800 thousand at March 31, 1995. Loans reported as nonaccrual at December 31, 1994 of $2.7 million were sold in the first six months of 1995. $70 thousand of loans reported as nonaccrual at December 31, 1994 were charged-off by the Company during the first six months of 1995. (See "Net Interest Income and Interest Rate Risk" for a discussion of the effects on operating results of nonaccruing loans.) TROUBLED DEBT RESTRUCTURINGS. Included within nonperforming loans presented in Table 1 are troubled debt restructurings ("TDR"), as defined in the 1994 Form 10-K. TDRs 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. At June 30, and March 31, 1995 TDRs totaled $4.9 million compared to $5.6 million at December 31, 1994. The decrease in troubled debt restructurings at June 30, and March 31, 1995 from December 31, 1994 represents the sale of loans totaling $620 thousand and the migration of one 17 18 loan totaling $60 thousand to loans contractually past due ninety or more days and still accruing interest. LOANS CONTRACTUALLY PAST DUE NINETY OR MORE DAYS. Loans contractually past due ninety or more days are defined in the 1994 Form 10-K. Loans in this category decreased to $700 thousand at June 30, 1995 from $1.5 million at March 31, 1995 and at December 31, 1994. LOAN DELINQUENCIES. Loan delinquencies decreased to $3.1 million or 3.2% of net loans outstanding at June 30, 1995 from $9.7 million, or 9.9% of net loans outstanding at March 31, 1995 and $6.4 million or, 5.1% of net loans outstanding at December 31, 1994. LOAN CHARGE-OFFS. As reflected in Table 3, the Company charged-off loans amounting to $700 thousand and $900 thousand during the three and six month periods ended June 30, 1995 respectively, as compared to $3.9 million and $4.8 million during the corresponding periods in 1994. Recoveries of loans previously charged-off totaled $300 thousand and $700 thousand for the three and six month periods ended June 30, 1995 as compared to $500 thousand and $900 thousand during the same periods in 1994. FUTURE EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DEPRESSED REAL ESTATE VALUES ON THE ALLOWANCE FOR CREDIT LOSSES. As discussed in the 1994 Form 10-K and indicated in Table 2, 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 attendant 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. As discussed in the 1994 Form 10-K, loan losses are fully or partially charged against the allowance when, in management's judgment, the full collectibility of a loan's principal is in doubt. However, there is no precise method of predicting specific losses which ultimately may be charged against the allowance and, as such, management is unable to reasonably estimate the amount of loans to be charged-off in future periods. 18 19 Table 1 Nonperforming Assets (dollar amounts in thousands)
December 31, June 30, March 31 -------------------- 1995 1995 1994 1993 --------- ----- -------- -------- Nonaccrual loans $ 1,303 765 $ 3,426 $ 7,780 Troubled debt restructurings 4,897 4,902 5,582 5,584 Loans contractually past due ninety or more days with respect to either principal or interest and continuing to accrue interest 664 1,466 1,507 2,502 ------------------- -------- -------- Nonperforming loans 6,864 7,133 10,515 15,866 Other real estate owned 1,369 1,529 1,529 6,175 ------------------- -------- -------- Total nonperforming assets $ 8,233 8,662 $ 12,044 $ 22,041 =================== ======== ======== Allowance for credit losses as a percent of nonaccrual loans 258.6% 440.1% 89.4% 86.1% =================== ======== ======== Allowance for credit losses as a percent of nonperforming loans 49.1% 47.2% 29.1% 42.2% =================== ======== ======== Total nonperforming assets as a percent of total loans outstanding 8.4% 8.5% 10.4% 13.6% =================== ======== ======== Total nonperforming assets as a percent of total shareholders' equity 85.8% 86.2% 116.8% 99.3% =================== ======== ========
19 20 Table 2 Loan Portfolio Composition and Allocation of the Allowance for Credit Losses (dollar amounts in thousands)
December 31, June 30, March 31, -------------------------------- 1995 1995 1994 1993 ------------- -------------- -------------- Loan Portfolio Composition: Real estate construction and land development $ 925 1% 947 1% 948 1% $ 1,676 1% Commercial loans: Secured by one-to-four family residential properties 11,813 12% 12,407 12% 18,398 16% 20,098 12% Secured by multifamily residential properties 3,457 4% 3,427 3% 2,368 2% 4,985 3% Secured by commercial real properties 33,812 35% 33,819 33% 32,061 28% 40,330 25% Other - secured and unsecured 34,533 35% 38,058 37% 43,385 37% 66,665 41% Home equity lines of credit 7,159 7% 8,699 9% 2,867 2% 7,122 4% Consumer instalment and unsecured loans to individuals 6,162 6% 4,434 5% 15,691 14% 22,073 14% -------- --- ------- --- --------- --- $ 97,861 100% 101,791 100% 115,718 100% $ 162,949 100% Deferred net loan origination fees, purchased loan discount and gains on termination of interest rate hedging contracts (282) (326) (434) (1,158) -------- --------- --------- --------- Gross loans outstanding $ 97,579 101,465 115,284 $ 161,791 ======== ========= ========= ========= Allocation of the Allowance for Credit Losses: Real estate construction and land development $ 14 6 17 $ 30 Commercial loans: Secured by one-to-four family residential properties 343 74 77 499 Secured by multifamily residential properties 7 20 51 472 Secured by commercial real properties 790 499 674 1,422 Other - secured and unsecured 1,934 2,357 1,645 2,181 Home equity lines of credit 116 115 18 149 Consumer instalment and unsecured loans to individuals 162 291 578 1,937 -------- --------- --------- --------- Allowance allocable to gross loans outstanding 3,366 3,362 3,060 6,690 Commitments to extend credit under standby and commercial letters of credit 4 5 3 7 -------- --------- --------- --------- Total allowance for credit losses $ 3,370 3,367 3,063 $ 6,697 ======== ========= ========= ========= Allowance for credit losses allocable to gross loans outstanding as a percent of gross loans outstanding 3.45% 3.31% 2.66% 4.14% ======== ========= ========= =========
20 21 Table 3 Analysis of Changes in the Allowance for Credit Losses (dollar amounts in thousands)
Three-month periods ended ---------------------------------------- June 30, March 31, December 31, 1995 1995 1994 ------------ ------------ ------------ Balance at beginning of period $ 3,367 $ 3,063 $ 6,047 Loans charged off: Real estate construction and land development -- -- -- Commercial loans: Secured by one-to-four family residential properties 50 70 788 Secured by multifamily residential properties -- -- -- Secured by commercial real properties 191 -- 1,407 Other - secured and unsecured -- 92 3,129 Home equity lines of credit -- -- 257 Consumer instalment and unsecured loans to individuals 466 49 1,024 ------- ------- ------- Total loan charge-offs 707 211 6,605 Recoveries of loans previously charged off: Real estate construction and land development -- -- -- Commercial loans: Secured by one-to-four family residential properties 59 1 17 Secured by multifamily residential properties -- -- -- Secured by commercial real properties -- -- -- Other - secured and unsecured 89 342 929 Home equity lines of credit -- -- -- Consumer instalment and unsecured loans to individuals 181 26 498 ------- ------- ------- Total recoveries of loans previously charged off 329 369 1,444 ------- ------- ------- Net loan charge-offs 378 (158) 5,161 Provision for credit losses 381 146 2,177 Allowance for purchased loans ------- ------- ------- Balance at end of period $ 3,370 $ 3,367 $ 3,063 ======= ======= =======
21 22 NET INTEREST INCOME AND INTEREST RATE RISK NET INTEREST INCOME Net interest income (the amount by which interest generated from earning assets exceeds interest expense on interest-bearing liabilities) represents the Company's most significant source of earnings. A primary factor affecting the level of net interest income is the Bank's net interest margin or the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as the change in the relative amounts of average interest-earning assets and interest-bearing liabilities. As discussed in the 1994 Form 10-K, the Company's ability to generate profitable levels of net interest income is largely dependent on its ability to maintain sound asset credit quality and appropriate levels of capital and liquidity (see "Credit Portfolio Composition and Credit Risk," "Capital Resources," and "Liquidity"). The Company analyzes its earnings performance using, among other measures, the interest rate spread and net yield on earning assets, as defined in the 1994 Form 10-K. Interest earning assets at June 30, 1995 decreased to $142.3 million, compared with $150.5 million at March 31, 1995 and $208.6 million at December 31, 1994. Interest earning assets as a percentage of total assets was 90.4% at June 30, 1995, compared with 93.7% at March 31, 1995 and 89.6% at December 31, 1994. Interest bearing liabilities at June 30, 1995 decreased to $82.7 million, compared with $97.0 million at March 31, 1995 and $133.0 million at December 31, 1994. Interest bearing liabilities as a percentage of total assets was 52.5% at June 30, 1995, compared with 60.4% at March 31, 1995 and 57.1% at December 31, 1994. Total loans receivable at June 30, 1995 decreased to $97.6 million, compared with $101.5 million at March 31, 1995 and $115.3 million at December 31, 1994. Loans receivable as a percentage of total assets was 62.0% at June 30, 1995, compared with 63.2% at March 31, 1995 and 52.3% at December 31, 1994. Total deposits at June 30, 1995 decreased to $141.6 million, compared with $146.5 million at March 31, 1995 and $207.8 million at December 31, 1994, while interest bearing deposits at June 30, 1995 decreased to $78.3 million, compared with $95.2 million at March 31, 1995 and $120.4 million at December 31, 1994. Total deposits as a percentage of total assets was 90.0% at June 30, 1995, compared with 91.2% at March 31, 1995 and 89.2% at December 31, 1994. Interest bearing deposits as a percentage of total deposits was 55.3% at June 30, 1995, compared with 65.0% at March 31, 1995 and 57.9% at December 31, 1994, while interest bearing deposits as a percentage of loans receivable was 80.3% at June 30, 1995, compared with 93.8% at March 31, 1995 and 98.8% at December 31, 1994. EFFECTS OF NONPERFORMING LOANS ON NET INTEREST INCOME. Foregone interest income attributable to nonperforming loans amounted to $54 thousand and $99 thousand for the three and six month periods ended June 30, 1995, compared with $400 thousand 22 23 and $700 thousand for the corresponding periods in 1994. Although the Bank sold a large portion of the nonperforming loans in February 1995, to the extent that additional loans are identified as nonperforming in future periods, operating results will continue to be adversely affected. (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.) COMPARISON OF NET YIELD AND INTEREST RATE SPREAD. The Company's net yield on 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, as the Company incurs substantial other operating expense to provide accounting, data processing and other banking-related services to these customers to the extent that certain average noninterest-bearing deposits are maintained by such depositors, and such deposit relationships are deemed to be profitable. Customer service expense related to these deposits is classified as noninterest expense. If customer service expenses related to real estate title and escrow customers were classified as interest expense, the Company's reported net interest income and noninterest expense would be reduced correspondingly. INTEREST RATE RISK MANAGEMENT As discussed in the 1994 Form 10-K, 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 can be vulnerable 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 1994 10-K also discusses the means employed by management to measure and control this source of risk. The Company's management of interest rate risk currently makes limited use of off-balance sheet hedging techniques, including interest rate swap agreements. These techniques are utilized only after obtaining Board of Directors approval for the transaction. HEDGING CONTRACTS. In December 1994, the Bank entered into an interest rate swap contract. Under the terms of the agreement, the Bank received a floating U.S. libor rate, initial rate of 6.8%, and paid an 8.2% fixed rate. Payments were calculated on a $30 million notional amount based on a three year term to be paid semi annually. The original expiration of the contract was March 31, 1995, and was subsequently extended to July 31, 1995. The swap was terminated in the second quarter of 1995, with a realized loss of $1.3 million. 23 24 In October, 1993, the Bank entered into an interest rate swap contract. Under the terms of the agreement, the Bank received 6.0% fixed and paid floating-rate prime for 21 months on a $10 million notional amount. The swap is intended to bring the Bank's interest rate sensitivity "gap" back within policy guidelines for interest rate risk exposure. The Bank had moved slightly outside of these guidelines during the third quarter of 1993, primarily due to the September 7, 1993, $20.8 million loan purchase which consisted of almost all floating-rate prime based loans. The swap matured on August 2, 1995. 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". As discussed in the 1994 Form 10-K, 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. Weighted average yield on loans receivable was 8.79% in June, 1995, compared with 9.60% in March, 1995 and 9.38% in December, 1994. Weighted average yield on total earning assets was 7.93% in June, 1995, compared with 8.65% in March, 1995 and 7.43% in December, 1994. Weighted average rate on all deposits was 2.7% in June, 1995, compared with 3.05% in March, 1995 and 2.73% in December, 1994. INVESTMENT SECURITIES Investment securities decreased to $20.4 million at June 30, 1995, from $28.5 million at March 31, 1995 and $62.1 million at December 31, 1994. The decrease was due to sales of securities available for sale, resulting in realized losses during the first and second quarters of 1995. Net unrealized losses on securities available for sale at June 30, 1995 decreased to $311 thousand from $1.6 million at March 31, 1995 and $3.1 million at December 31, 1994. 24 25 OTHER OPERATING INCOME As set forth in the accompanying consolidated statements of operations and discussed in the 1994 Form 10-K, the Company's principal sources of recurring other operating income continue to be international services, foreign exchange services, investment services, and deposit-related and other customer services. Fee income decreased $46 thousand or 9.9% in the second quarter of 1995, from the second quarter of 1994, and decreased $123 thousand or 13.5% for the first six months of 1995 from the same period in 1994, resulting primarily from decreases in international services and investment services. Management anticipates that fee income from international services and investment services and the origination and sale of Small Business Administration loans will continue to represent important sources of other operating income. OTHER OPERATING EXPENSES As indicated in the accompanying consolidated statements of operations, the Company reduced total operating expenses by $205 thousand, or 6.2%, during the second quarter of 1995 from the second quarter of 1994, and $449 thousand or 6.8% for the first six months of 1995 from the same period in 1994. The reductions result, in part, from management's efforts to continue to reduce operating expenses. The reduction is mainly attributable to a $334 thousand or 25.9% and $668 thousand or 25.5% reduction in salaries and related expenses for the three and six month periods ended June 30, 1995. Management continues to explore measures to further reduce the level of other operating costs. Further reductions in operating expenses will be required as the Bank's assets are reduced along with corresponding net interest income. The Company is in a dialogue with its landlord in an effort to obtain some relief from the present terms of the lease for the Bank's premises. Achieving some form of relief from the present leases's rental rates is important to the Bank's future. The company has recently been advised by its independent accountants that it should consider the disclosure requirements of recently issued AICPA Statement of Position 94-6, "Disclosure of Certain Significant Risks and Uncertainties," which may apply to the Company's lease negotiation activities and which is effective for fiscal years beginning after December 15, 1995. INCOME TAXES The Company has recognized losses for financial statement purposes which have not yet been recognized on an income tax return. As a result of existing net operating loss carryforwards for financial statement purposes (discussed in the 1994 Form 10- K), the Company's 1995 first and second quarter net losses did not give rise to additional income tax benefits. 25 26 CAPITAL RESOURCES REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS RISK-BASED CAPITAL GUIDELINES The 1994 Form 10-K and Note 3 of the accompanying notes to consolidated financial statements discuss the risk-based capital guidelines of the Federal Reserve Board ("FRB") and the OCC, which are applicable to the Company and the Bank, respectively, (together, the "guidelines"). The 1994 Form 10-K and Note 3 also discuss the minimum Tier 1 capital leverage ratio standards of the FRB and OCC which are applicable to the Company and the Bank, respectively (together, the "leverage ratio standards"). FORMAL AGREEMENT As discussed in the 1994 Form 10-K and Note 3 of the accompanying notes to consolidated financial statements, the Bank entered into a formal agreement with the OCC in July 1991 (the "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) total qualifying capital equal to at least 10.0 percent of the Bank's total risk-weighted assets ("total risk-based capital ratio"). As set forth in Note 3, the Bank's capital leverage ratio and total risk-based capital ratio at June 30, 1995 were 6.39% and 10.48%, respectively. At June 30, 1995, the Bank was not in compliance with maintaining a capital leverage ratio of 6.5% pursuant to the Formal Agreement. Accordingly, the Bank may be subject to further regulatory enforcement action by the OCC. FUTURE EFFECTS OF AGREEMENT ON DIVIDENDS. The 1994 Form 10-K describes statutory and regulatory limitations on the amount of cash dividends which may be distributed by a national bank. As a result of those limitations and reported net losses in 1990, 1991, 1992 and 1994, the Bank could not have declared dividends to the Company at June 30, 1995 without the prior approval of the OCC. In addition, management expects the Agreement will substantially impair the ability of the Bank to declare and pay dividends to the Company during the foreseeable future, since the Bank currently intends to retain any earnings in order to augment its regulatory capital. As dividends from the Bank are the principal source of income to the Company, it is unlikely that the Company will declare and pay dividends in the foreseeable future. As described in the 1994 Form 10-K, in accordance with a Memorandum of Understanding entered into with the Federal Reserve Bank of San Francisco (the "FRBSF") in 1991, the Company has agreed to refrain from paying dividends without the prior written approval of the FRBSF. 26 27 FUTURE EFFECTS OF NONPERFORMING LOANS AND CREDIT LOSSES ON CAPITAL RESOURCES As discussed in the 1994 Form 10-K, the ability of the Company and the Bank to maintain appropriate levels of capital resources is ultimately dependent on their ability to support earning asset growth with continued earnings. The Company experienced net losses in 1990, 1991, 1992 and 1994, primarily as a result of increased provisions for credit losses, losses on the sale of investment securities, losses on OREO and other assets, and reductions in interest earning assets without a corresponding reduction in operating expenses. The Company experienced decreases in the level of nonperforming assets since December 31, 1993 (see "Credit Portfolio Composition and Credit Risk") with the June 30, 1995 level of $8.2 million representing a decrease of $429 thousand from March 31, 1995 and a decrease of $3.8 million over the level at December 31, 1994. This decrease was due primarily to the sale of loans in the first quarter of 1995. Increases in nonperforming assets may negatively affect the Company's ability to generate adequate earnings to the extent that such nonperforming assets result in increased provisions for credit losses and charge-offs or adversely affect the level of income from loans in those future periods (see "Net Interest Income and Interest Rate Risk"). For the immediate future, the Company and the Bank intend to maintain regulatory capital ratios in excess of those required by the Agreement primarily as a result of declining loan balances and earning asset levels since 1991 rather than increases in capital from retained earnings or other sources. At the same time, the Company is committed to pursuing all options regarding the future of the Bank, including working with investment banking advisors on efforts to find a strategic alliance. In the long term, absent a strategic alliance, additional capital will have to be raised to ensure the Bank's growth and prosperity. LIQUIDITY LIQUIDITY MANAGEMENT The 1994 Form 10-K discusses several aspects of the Company's liquidity management, including the importance of sound asset credit quality and appropriate levels of capital resources to maintaining access to adequate levels of liquidity (see "Credit Portfolio Composition and Credit Risk" and "Capital Resources"). The 1994 Form 10-K also discusses the Company's liquidity objectives and related liquidity measurement guidelines. The Company was in compliance with its guidelines during the second quarter of 1995. The accompanying consolidated statements of cash flows present certain information about cash flows from operating, investing and financing activities. The Company'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 27 28 Company's liquidity, as described in the 1994 Form 10-K, 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, and (iii) unused borrowings available under federal funds lines, repurchase agreements and other arrangements. As such, management believes that the measurements provided in the liquidity guidelines, discussed in the 1994 Form 10-K, are generally more indicative of the Company's overall liquidity position. A 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. While the Company no longer has a credit accommodation facility at a correspondent bank, an accommodation has been put in place at the Federal Reserve Bank. Management monitors the Bank's assets and liabilities on a daily basis to ensure that funding sources remain adequate to meet anticipated demand. LIQUIDITY TRENDS As discussed in the 1994 Form 10-K, the Company has experienced a decline, continuing through the second quarter of 1995, in total deposits. During the three months ended June 30, 1995, total deposits decreased, while demand deposits increased. Total deposits including demand deposits, decreased at June 30, 1995 as compared to December 31, 1994. Time certificates of deposit of $100,000 or more continued to represent a less significant source of funding during the three and six months ended June 30, 1995. This represents the continuation of a trend which began in 1991. 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 1994 Form 10-K describes the Company's wholesale institutional funds acquisition operation ("money desk"). This operation provided 18% of the Company's average total funding sources during the 1995 second quarter, as compared to 34% during the year-earlier second quarter, while noninterest-bearing demand deposits provided 43% of average total funding sources during the 1995 second quarter, compared to 36% during the comparable 1994 period. As discussed in the 1994 Form 10-K, management's plan to reduce asset size through the sale of securities which were funded by these types of deposits will eventually phase out the money desk operation where higher interest-rate-bearing, more volatile funds were obtained through outside brokers. On the other hand, 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. 28 29 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Due to the nature of their business, National Mercantile Bancorp (the "Company") and its wholly owned subsidiary, Mercantile National Bank (the "Bank") are parties to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel to the Company and the Bank as to the current status of various claims and proceedings to which the Company and/or the Bank is a party, management is of the opinion that the aggregate potential liability represented thereby will not have a material adverse effect upon the consolidated financial condition of the Company. All material pending legal matters requiring disclosure have been disclosed in the Company's 1994 Form 10-K. No material legal developments have occurred since filing the Form 10-K. 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 Charles N. Winner resigned as a director of the Company as of June 12, 1995. Robert E. Thomson, the Company's Vice Chair, assumed the position of President/CEO of the Bank on an interim basis on August 9, 1995 replacing Donald T. Thornburg, whose contract expired. Mr. Thornburg also resigned as a director of the Company as of that date. Efforts have begun to search for a permanent President/CEO for the Bank, as well as a permanent CFO. Mr. Howard Ladd, the Company's Chairman, is the acting President/CEO of the Company. Warner F. Wolfen resigned as a director of the Company as of August 18, 1995. 29 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits required by Item 601 of Regulation S-K. Item 10.1: Form of Severance Agreement between the Company, Mercantile National Bank and some of its officers. (b) Reports on Form 8-K. None. 30 31 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) August 22, 1995 /s/ Robert E. Thomson ------------------------------- Robert E. Thomson Vice-Chair of the Board August 22, 1995 /s/ Robert E. Thomson ------------------------------- Robert E. Thomson Acting Chief Financial Officer 31 EX-10.1 2 EXHIBIT 10.1, SEVERANCE AGREEMENT 1 1 EXHIBIT 10.1 MERCANTILE NATIONAL BANK SEVERANCE AGREEMENT May, 1995 Agreement made as of by and between National Mercantile Bancorp, with its principal office located at 1840 Century Park East, Los Angeles, California 90067 (the "Company"), Mercantile National Bank (the "Bank"), at the same location, and who resides at (The "Executive"). WITNESSETH: WHEREAS, the Executive has previously been employed by the Bank without an employment agreement; and WHEREAS, the Company, the Bank, and the Executive (individually a "Party" and together the "Parties") desire that the Executive's rights to compensation and benefits that have been granted to the Executive because of the Executive's services to the Bank shall be assured should certain events occur; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the Parties agree as follows: 2 2 1. Definitions. (a) "Base Salary" shall mean the Executive's highest annualized base salary in any 30-day period during the three years immediately preceding the commencement of the Term of Employment, or any increased salary thereafter granted to the Executive by the Bank. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" shall mean (i) the Executive has committed a felony involving moral turpitude, or (ii) the Executive in carrying out the Executive's duties under this Agreement is guilty of (A) willful gross neglect or (B) willful gross misconduct resulting, in the case of either (A) or (B), in material harm to the Company or the Bank, unless such act, or failure to act, under this clause (ii) was believed by the Executive in good faith to be in the best interests of the Company or the Bank. (e) A "Change in Control" shall mean the occurrence of any one of the following events, notwithstanding the prior occurrence of any other event constituting a "Change in Control": (i) any "person," as such term is used in Sections 3(a) (9) and 13(d) of the Securities Exchange Act of 1934 (the "1934 Act"), other than the Company, another corporation of which the Company owns more that 50% of its Voting Stock (a "subsidiary") or any employee Benefit plan sponsored by the Company or a Subsidiary, becomes a "beneficial owner," as such term is used in Rule 13d-3 promulgated under the 1934 Act, of 24.9% or more of the Voting Stock of the Company or the Bank; (ii) the majority of the Board consists of individuals other than the Incumbent Directors; (iii) the Company or Bank adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the business of the Company or the Bank is disposed of pursuant to a merger, consolidation or other transaction in which the Company or the Bank is not the surviving corporation, or is substantially or 3 3 completely liquidated (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company); or (v) the Company or the Bank, combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination (other than the shareholders who, immediately prior to the combination, were "affiliates" of such other company, as such term is defined in the rules of the Securities and Exchange Commission), do not beneficially own, directly or indirectly, more than 50% of the Voting Stock of the combined company; provided, however, that notwithstanding the occurrence of any events described in clauses (i), (iii), (iv) and (v) above, no "Change in Control" shall be deemed to have occurred if immediately following such event (A) members of the Board or employees of the Company and its Subsidiaries who file or are required to file (or immediately prior to such event, filed or were required to file), reports under Section 16(a) of the 1934 Act (the "Reporting Employees"), are beneficial owners, directly or indirectly, in the aggregate of 20% of the Voting Stock of the Company or its successor, as the case may be, and (B) no person, as defined above (other than a person (x) in which a Reporting Employee or Reporting Employees hold an interest of 10% or more and (y) through which such Reporting Employee or Reporting Employees beneficially own, in the aggregate, at least 5% of such Voting Stock), is the beneficial owner, directly or indirectly, as a result of such event, of a greater percentage of such Voting Stock than the percentage then held by the Reporting Employees as determined pursuant to clause (A) of this proviso; provided, however, that no "Change of Control" shall be deemed to have occurred as a result of regulatory takeover by the Company or the Bank, and in such event this agreement shall be of no force and effect what-so-ever. (f) "Confidential Information" shall mean all nonpublic information concerning the Company's or the Bank's business relating to its products, customer lists, financial information, marketing plans and strategies. Confidential Information 4 4 does not include information that is or becomes, available to the public, unless such availability occurs through an unauthorized act on the part of Executive. (g) "Disability" shall have the same meaning as is currently given that term under the Company's or Bank's long-term disability plan, except that it shall have the meaning given in any amendment to such plan to the extent that the meaning of such term is modified to the benefit of the Executive. (h) "Good Reason" shall mean the following: (i) without the Executive's express written consent, the assignment of any duties inconsistent with, or the diminution of, the Executive's positions, titles, offices, duties, responsibilities and status with the Bank as in effect immediately preceding the Reference Date or a change without good cause in the Executive's reporting responsibilities as in effect immediately preceding the Reference Date or any removal of the Executive from or any failure to re-elect the Executive to any titles, offices or positions held by the Executive immediately preceding the Reference Date except in connection with the termination of the Executive's employment either for Disability or by the Executive other than for Good Reason; (ii) a failure by the Company or the Bank to pay the Executive a salary at an annualized rate equal to the Base Salary in accordance with the Company's or Bank's standard payroll policies as provided in Section 4; (iii) a reduction by the Company or the Bank in the Executive's bonus opportunity, if any, below an amount equal to the product of the Executive's highest Bonus Percentage during the preceding three years multiplied by the Executive's Base Salary, or the failure by the Company or the Bank in determining the Executive's bonus to apply performance standards and other criteria that are comparable to and consistent with those applied in review of the Executive's performance in determining the Executive's annual bonuses in years prior to the Reference Date, if any, or to apply such standards and other criteria on a comparable basis; (iv) the failure by the Company or the Bank to continue in effect any benefit or compensation plan in which the Executive was participating immediately preceding the Reference Date (unless a plan providing substantially similar benefits is adopted and participation therein by the Executive is provided), the taking of any action by the 5 5 Company or the Bank, which would adversely affect the Executive's participation in or materially reduce the benefits under any such plan or deprive the Executive of any material fringe benefit then enjoyed by the Executive, or the failure by the Company, or the Bank to provide the Executive with the number of paid vacation days to which the Executive was entitled in accordance with the Company's or the Bank's normal vacation policies and practices as in effect immediately preceding the Reference Date; (v) transfer of the Executive out of the Company's or the Bank's principal office or the relocation of the Company's or the Bank's principal office (or the Executive's own office location within a radius of twenty miles from the location of the Executive's office immediately preceding the Reference Date), to a location more than twenty miles from such office or offices, except for required travel on the Company's or the Bank's business to an extent substantially consistent with the Executive's business travel obligations in carrying out the Executive's normal duties in the ordinary course of the Company's or the Bank's business immediately preceding the commencement of the Term of Employment, or, in the event the Executive consents to any such relocation, the failure by the Company or the Bank to pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive relating to a change of the Executive's principal residence in connection with such relocation in accordance with the Company's or Bank's relocation policies as in effect immediately preceding the commencement of the Term of Employment (including the tax gross-up, if any, of such payment), and to indemnify the Executive against any loss (defined as the difference between the actual sale price of such residence and the fair market value of such residence as determined by a reputable real estate appraiser designated by the Executive and reasonably satisfactory to the Company or the Bank) realized in the sale of the Executive's principal residence in connection with any such change of residence; or (vi) the failure of the Company or the Bank to obtain the assumption in writing of its obligation to perform this Agreement by any successor as contemplated in section 16 below not less than five days prior to a merger, consolidation or sale as contemplated in that section. 6 6 (i) "Incumbent Director(s)" shall mean the members of the Board on the date of this Agreement, provided that any person becoming a director subsequent to the date of this Agreement whose election or nomination for election was approved by two-thirds (but in no event less than two) of the directors who at the time of such election or nomination comprise the Incumbent Directors shall, for purposes of this Agreement, be considered to be an Incumbent Director. (j) "Reference Date" shall mean the later of the (i) date on which the Term of Employment commences or (ii) if one or more Changes in Control occur after the commencement of the Term of Employment, the date on which the latest Change in Control occurs. (k) "Term of Employment" shall mean the period commencing on the earlier of (i) the date of the first Change in Control following the date of this Agreement, provided that the Executive is employed by the Company or the Bank on the date of such Change in Control, and (ii) the date immediately preceding the date, if any, on which the Executive's employment is terminated by the Company or the Bank prior to the occurrence of such first Change in Control, if the Executive can reasonably demonstrate that the Executive's termination (A) was at the direction or request of a third party that had taken steps reasonably calculated to thereafter effect the Change in Control or (B) otherwise occurred in connection with or in anticipation of a change in control and in the case of either (i) or (ii) above, ending on the last day of any one-year period during which no Change in Control shall have occurred. (l) "Termination for Good Reason" shall mean a termination by the Executive of employment for Good Reason. A Termination for Good Reason shall not take effect unless (i) the Executive shall have delivered a written notice to the Company or the Bank within 90 days of the Executive having knowledge of one of the events constituting Good Reason stating that the Executive intends to terminate employment as a result of one of those events, which event shall be specified with particularity, and (ii) the Company or the Bank, shall have failed to correct the situation to the reasonable satisfaction of the Executive within 30 days after its receipt of the notice. 7 7 (m) "Termination Without Cause" shall mean a termination of the Executive's employment by the Company or the Bank, other than due to Disability or Cause. (n) "Voting Stock" of any corporation shall mean the capital stock of any class or classes having general voting power under ordinary circumstances, in the absences of contingencies, to elect the directors of such corporation. 2. Term of Agreement. This Agreement shall be effective as of the date first written above and shall terminate upon the later of (a) the first anniversary of the date either Party notifies the other that it or The Executive does not want the term of the Agreement to continue or (b) the end of the Term of Employment, if any. 3. Positions, Duties and Responsibilities. During the Term of Employment, the Company or the Bank shall employ the Executive in a position having responsibilities at least equivalent to those of the position held by the Executive on the date immediately preceding the Reference Date. During the Term of Employment and subject to the provisions of Section 3(b) below, the Executive shall devote full business time and attention to the business and affairs of the Company or the Bank, and shall use best efforts, skills and abilities to promote their interests. (b) Anything herein to the contrary notwithstanding, nothing shall preclude the Executive from (i) engaging in charitable and community affairs and managing personal investments, provided that such activities do not materially interfere with the performance of duties or responsibilities hereunder, or (ii) serving as an officer or director or any other corporation either (A) at the Executive's initiative with the permission of the Board or of the Bank or (B) at the request of the Board with the written approval of the Executive. 4. Salary. During the Term of Employment, the Company shall pay the Executive the Base Salary in accordance with the Company's standard payroll practices. The Base Salary shall be reviewed annually for increase at the discretion of the Company or the Bank. 8 8 5. Annual Bonus. During the Term of Employment, the Executive shall be paid an annual bonus at the discretion of the Company or the Bank. 6. Long Term Incentives. During the Term of Employment, the Executive shall be eligible to participate, in accordance with applicable terms and provisions, in the long-term incentive plans for senior executives of the Company, or the Bank, if any, including, without limitation, the Company's stock option plan or plans, share unit plan or plans, long-term incentive plan or plans, stock purchase and loan plan or plans and officers' and directors' deferred compensation plan or plans. The Executive's participation in these or other plans shall take into account the Executive's positions and responsibilities at the Company or the Bank. 7. Employee Benefit Plans. During the Term of Employment, the Executive shall be eligible to participate, in accordance with applicable plans and provisions, in all employee benefit plans and programs including, without limitation, hospital, dental, and major medical plans, pension, 401(k), savings and similar plans, group term life insurance, long and short term disability plans, travel, accident and accidental death and dismemberment plans and programs, and any supplements provided to such plans or programs, whether funded or unfunded, applicable generally to executives of the Company, or the Bank, at a level comparable to the level of the Executive. 8. Perquisites. During the Term of Employment, the Executive shall be entitled to all the perquisites generally available to senior executives of the Company, or the Bank, immediately preceding the commencement of the Term of Employment. 9. Expenses. During the Term of Employment, the Company or the Bank shall promptly reimburse the Executive for any reasonable, out-of-pocket business expenses the Executive incurs in performing duties and discharging responsibilities under this Agreement upon the submission by the Executive of appropriate documentation of such expenses in accordance with the Company's or the Bank's usual practices and policies. 9 9 10. Termination Without Cause or for Good Reason During the Term of Employment. In the event of a Termination Without Cause or a Termination for Good Reason, in either case during the Term of Employment, the Executive shall be entitled to: (a) a lump sum payment equal to the sum of six months of the Executive's Base Salary if the Executive's Date of Termination is within twelve months of the Reference Date; and (b) any salary earned (i.e., accrued through the date of termination) but not yet paid; (c) any bonuses earned but not yet paid; (d) long-term incentives, if any, in accordance with the terms and conditions of the applicable long term incentive plan or program; (e) continued participation in all employee benefit plans or programs in which the Executive was participating on the date of the termination of the Executive's employment until the earlier of, (i) 6 months following termination of the Executive's employment, or (ii) the Executive's receipt of equivalent coverage and benefits under the plans and programs of a subsequent employer; (f) other benefits in accordance with the plans and programs of the Company or the Bank applicable generally to executives of the Company or the Bank at a level comparable to the level of the Executive. In the event that the Executive is precluded from continued participation in any employee benefit plan or program, as provided in subsection (e) above, the Executive shall be provided with the "after tax economic equivalent" thereof. For purposes of this paragraph, the "after tax economic equivalent" of the Executive's participation in any employee benefit plan or program shall be deemed to be the cost that would be incurred by the Executive in obtaining such benefit at the lowest available individual basis, assuming, if applicable, that the Executive is insurable. 10 10 The Company, or the Bank, shall pay the Executive any payments due under this Section 10 within five business days following the termination of the Executive's employment (except to the extent that the terms and provisions of any applicable plan or program preclude a payment within such period) or, if such payment is requested by the Executive pursuant to the preceding paragraph, within five business days after the Company's or the Bank's receipt of the Executive's notice. 11. Covenants of the Company and Bank. Prior to the commencement of the Term of Employment the Company or the Bank shall not take any action (a) at the direction or request of any third party that has taken steps reasonably calculated to thereafter effect a Change in Control or (b) otherwise in connection with or in anticipation of a Change in Control, and following the commencement of the Term of Employment neither the Company, or the Bank, nor any successor thereto shall take any action, without in either case the express prior written consent of the Executive, that would result in any changes adversely affecting the Executive under the Company's stock option plan, long-term incentive plan, share unit plan or any other compensation plan or program in which the Executive participates on the date of this Agreement or may participate from time to time hereafter, including, without limitation, any adverse change in any provision for acceleration of vesting in the event of a Change in Control. 12. Indemnifications. (a) If, after the date of commencement of the Term of Employment, the Executive is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that the Executive is or was a director or officer of the Company or the Bank, or is or was serving at the request of the Company or the Bank as a director, officer, member, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is an alleged act or failure to act in an official capacity as a director, officer, member, employee or 11 11 agent, the Executive shall be indemnified and held harmless by the Company or the Bank to the fullest extent authorized by California law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, including, without limitation, payment of expenses incurred in defending a Proceeding prior to final disposition of such Proceeding (subject to receipt of an undertaking by the Executive to repay such amount if it shall ultimately be determined that the Executive is not entitled to be indemnified by the Company or the Bank under California law), and such indemnification shall continue as to the Executive even if the Executive has ceased to be a director, officer, member, employee or agent of the Company or the Bank or other enterprise and shall inure to the benefit of the Executive's heirs, executors and administrators. (b) If a claim under section 12(a) above is not paid in full by the Company or the Bank within 30 days after a written claim has been received by the Company or the Bank, the Executive may at any time thereafter bring suit against the Company or the Bank to recover the unpaid amount of the claim and if successful in whole or in part, the Executive shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action that the Executive has not met the standards of conduct which make it permissible under California law for the Company or the Bank to indemnify the Executive for the amount claimed. Neither the failure of the Company (including the Board, independent legal counsel, or its stockholders) or the Bank to have made a determination prior to the commencement of such action that indemnification of the Executive is proper in the circumstances because the Executive had met the applicable standard of conduct set forth under California law, nor an actual determination by the Company (including the Board, independent legal counsel, or its stockholders) or the Bank, that the Executive has not met such applicable standard of conduct, shall create a presumption that the Executive has not met the applicable standard of conduct. 12 12 (c) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which the Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company or the Bank, agreement, vote of stockholders or disinterested directors or otherwise. 13. Confidentiality. The Executive shall not, without the prior written consent of the Company, or the Bank, divulge, disclose or make accessible to any other person, firm, partnership or corporation or other entity any Confidential Information pertaining to the business of the Company or the Bank, except (a) while employed by the Company or the Bank in the business of and for the benefit of the Company or the Bank (b) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company or the Bank, or by any administrative body or legislative body (including a committee thereof) with purported or apparent jurisdiction to order the Executive to divulge, disclose or make accessible such information. 14. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall, at the discretion of the Executive, be resolved by arbitration to be held in Los Angeles, California in accordance with the American Arbitration Association's Commercial Arbitration Rules then in effect. Costs of the arbitration or litigation, including, without limitation, attorney's fees of both Parties, shall be borne by the Company and the Bank, and pending the resolution of any arbitration or court proceeding, the Company or the Bank shall continue payment of all amounts due the Executive under this Agreement and all benefits to which the Executive is entitled at the time the dispute arises. 15. Effect of this Agreement on Other Benefits. Nothing in this Agreement shall curtain the Executive's entitlement to participate, in accordance with applicable terms and provisions, in the executive compensation, employee benefit and other plans or programs in which senior 13 13 executives of the Company or the Bank are eligible to participate. 16. Assignability: Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Company and the Bank under this Agreement may be assigned or transferred by the Company or the Bank, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company or the Bank is the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company or the Bank, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company or the Bank and such assignee or transferee assumes the liabilities, obligations, and duties of the Company or the Bank, as contained in this Agreement, either contractually or as a matter of law. The Company and the Bank further agree that in the event of a merger, consolidation, sale of assets or liquidation as described in the preceding sentence the Company or the Bank shall take whatever action each legally can in order to cause such assignee or transferee to assume the liabilities, obligations, and duties of the Company and the Bank, hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than the Executive's rights to compensation and benefits, which may be transferred only by will or operation of law. 17. Representation. The Company, the Bank, and the Executive each represent and warrant that each is fully authorized and empowered to enter into this Agreement and that the performance of its or the Executive's obligations under this Agreement will not violate any agreement between it or The Executive and any other person, form or organization. 18. Entire Agreement. This Agreement contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 14 14 19. Amendment or Waiver. No provision in this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing and signed by the Executive and a duly authorized officer of the Company or the Bank. No waiver by either party of any breach by the other Party of any condition or provision of this Agreement to be performed by the other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. 20. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the Parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations, including, but not limited to, the rights of the Executive under Sections 9, 10, 11, 12, and 14. 22. Beneficiaries References. The Executive shall be entitled to select (and change) a beneficiary or beneficiaries to receive any compensation or benefit payable following the Executive's death, and may change such election, in either case by giving the Company or the Bank written notice thereof. In the event of the Executive's death or a judicial determination of the Executive's incompetence, reference in this agreement to the Executive shall be deemed, where appropriate, to refer to the Executive's beneficiary, estate, committee, conservator or other legal representative. 23. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of California without reference to principles of conflict of laws. 15 15 24. Notices. Any notice given to either Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give notice of: If to the Company, the Bank or the Board; Mr. Howard P. Ladd Chairman of the Board Mercantile National Bank 1840 Century Park East Los Angeles, CA 90067 If to the Executive; 25. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning and construction of any provision of this Agreement. 26. Counterparts. This Agreement may be executed in two or more counterparts. 16 16 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. By: _______________________ Executive National Mercantile Bancorp, "Company" By: ________________________ Howard P. Ladd its Chairman Mercantile National Bank "Bank" By: _______________________ Howard P. Ladd its Chairman EX-27 3 FINANCIAL DATA SCHEDULE
9 1000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 13,923 198 24,010 0 20,477 0 0 97,579 3,370 157,436 141,614 4,382 1,839 0 24,614 0 0 (15,013) 157,436 5,037 989 496 6,522 2,119 2,178 4,344 527 (2,495) 6,117 (3,453) (3,453) 0 0 (3,453) (1.12) (1.12) 8.64 1,303 664 4,897 0 3,063 918 698 3,370 1,556 0 1,814