-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AZGWHnn4ylYMjPgkV0tgqHidHNR8xk1nESrMKcOS4tTgmw3pnjsRRy5td1SZ7E+3 vo0dfpbV3QJsJTF6RvY9oQ== 0000950148-96-000887.txt : 19960517 0000950148-96-000887.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950148-96-000887 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96566227 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 FOR THE QUARTERLY PERIOD ENDED 3/31/96 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 March 31, 1996 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 April 30, 1996 was 3,078,146. This document contains 32 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 .................................................... 30 Item 2. CHANGES IN SECURITIES ................................................ 30 Item 3. DEFAULTS UPON SENIOR SECURITIES....................................... 30 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................... 30 Item 5. OTHER INFORMATION .................................................... 30 Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................... 30 SIGNATURES ...................................................................... 32
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets ................................................. 4 Condensed Consolidated Statements of Operations ....................................... 5 Condensed Consolidated Statement of Changes in Shareholders' Equity .................................................................. 6 Condensed Consolidated Statements of Cash Flows ....................................... 7 Notes to Condensed Consolidated Financial Statements................................... 8
3 4 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 1996 and December 31, 1995
March 31, December 31, 1996 1995 (Unaudited) ----------- ------------ (dollars in thousands) ASSETS Cash and due from banks-demand......................................................... $ 7,522 $ 9,272 Federal funds sold and securities purchased under agreements to resell................. 20,500 21,000 --------- ------------ Cash and cash equivalents...................................................... 28,052 30,272 Securities available-for-sale, at fair value; aggregate amortized cost of $19,685 at March 31, 1996 and $20,256 at December 31, 1995.................................. 19,463 20,102 FRB stock.............................................................................. 315 315 Loans.................................................................................. 75,790 82,012 Allowance for loan losses........................................................... (3,837) (3,805) --------- ------------ Net loans...................................................................... 71,953 78,207 Premises and equipment, net............................................................ 1,075 1,126 Other real estate owned................................................................ 581 581 Accrued interest receivable and other assets........................................... 1,266 1,389 --------- ------------ $ 122,705 $ 131,992 ========= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand.......................................................... $ 41,019 $ 44,579 Interest-bearing demand............................................................. 5,276 7,737 Money market accounts............................................................... 19,490 18,901 Savings............................................................................. 3,661 1,927 Time certificates of deposits: $100,000 and over................................................................ 8,502 8,551 Under $100,000................................................................... 36,290 38,548 --------- ------------ Total deposits................................................................. 114,238 120,243 Securities sold under agreements to repurchase......................................... 1,056 4,497 Accrued interest payable and other liabilities......................................... 1,604 1,241 --------- ------------ Total liabilities.............................................................. 116,898 125,981 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 March 31, 1996 and December 31, 1995..................... 24,614 24,614 Accumulated deficit................................................................. (18,585) (18,449) Net unrealized loss on securities available-for-sale................................ (222) (154) --------- ------------ Total shareholders' equity..................................................... 5,807 6,011 --------- ------------ $ 122,705 $ 131,992 ========= ============
See accompanying notes to consolidated financial statements. 5 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Three-month periods ended March 31, 1996 and 1995 (Unaudited)
1996 1995 ------- ------- (dollars in thousands, except per share data) Interest income: Loans, including fees......................... $ 1,800 $ 2,615 Securities available-for-sale: Tax-exempt.................................. -- 6 Taxable..................................... 282 612 Federal funds sold and securities purchased under agreements to resell.................. 263 223 Interest-bearing deposits with other financial institutions................................ -- 2 -------- -------- Total interest income................... 2,345 3,458 Interest expense: Interest-bearing demand....................... 19 40 Money market and savings...................... 174 289 Time certificates of deposits: $100,000 and over.......................... 128 142 Under $100,000............................. 563 684 -------- -------- Total interest expense on deposits 884 1,155 Federal funds purchased and securities sold under agreements to repurchase.............. 8 35 -------- -------- Total interest expense.................. 892 1,190 -------- -------- Net interest income..................... 1,453 2,268 Provisions for loan losses...................... -- 146 -------- -------- Net interest income after provision for loan losses........................... 1,453 2,122 Other operating income (loss): Loss on sales of securities available-for-sale.......................... (1) (1,156) International services........................ 42 66 Investment services........................... 29 72 Deposit-related and other customer services... 98 233 -------- -------- Total other operating income (loss)..... 168 (785) Other operating expenses: Salaries and related benefits................. 692 993 Net occupancy................................. 192 435 Furniture and equipment....................... 85 97 Printing and communications................... 62 75 Insurance and regulatory assessments.......... 166 280 Customer services............................. 140 211 Computer data processing...................... 95 85 Legal services................................ 77 109 Other professional services................... 191 477 Promotion..................................... 23 35 Other real estate owned expenses.............. 7 9 Other expenses................................ 27 231 -------- -------- Total other operating expenses.......... 1,757 3,037 -------- -------- Loss before provision for income taxes.. (136) (1,700) Provision for income taxes.................... -- -- -------- -------- Net loss................................ $ (136) $ (1,700) ======== ======== Net loss per share...................... $ (0.04) $ (0.55) ======== ========
See accompanying notes to consolidated financial statements. 6 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Three-month period ended March 31, 1996 (Unaudited)
Net Unrealized Loss on Common Stock Securities -------------------- Accumulated Available- Shares Amount Deficit for-Sale Total --------- ------- -------- ----- ------ Balance at January 1, 1996............. 3,078,146 $24,614 $(18,449) $(154) $6,011 Net unrealized loss on securities available for sale...... -- -- -- (68) (68) Net loss............................. -- -- (136) -- (136) --------- ------- -------- ----- ------ Balance at March 31, 1996.............. 3,078,146 $24,614 $(18,585) $(222) $5,807 ========= ======= ======== ===== ======
See accompanying notes to consolidated financial statements. 7 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Three-month periods ended March 31, 1996 and 1995 (Unaudited)
1996 1995 ------- -------- (dollars in thousands) Net cash flows from operating activities: Net loss .................................................. $ (136) $ (1,700) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Accretion of sublease loss .............................. (16) (96) Depreciation and amortization ........................... 60 98 Provision for loan losses ............................... -- 146 Net loss on securities available-for-sale ............... 1 1,156 Net amortization of premiums (accretion of discounts) on securities available-for-sale ...................... 18 16 Net amortization of premiums (accretion of discounts) on loans purchased .................................... 13 (89) Decrease (increase) in accrued interest receivable and other assets ...................................... 123 (190) Increase in accrued interest payable and other liabilities ........................................... 379 50 ------- -------- Net cash provided by (used in) operating activities ........................................ 442 (609) Cash flows from investing activities: Purchase of debt securities available-for-sale ............ (1,000) -- Proceeds from sales of securities available-for-sale ...... 114 33,006 Proceeds from repayments and maturities of securities available-for-sale ...................................... 1,438 792 Proceeds from sales of loans .............................. -- 6,599 Net decrease in loans ..................................... 6,241 14,066 Net purchases of premises and equipment ................... (9) (42) ------- -------- Net cash provided by investing activities ........... 6,784 54,421 Cash flows from financing activities: Net decrease in demand deposits, money market and savings accounts .................................... (3,698) (41,245) Net decrease in time certificates of deposits ............. (2,307) (20,081) Net decrease in securities sold under agreements to repurchase and federal funds purchased .................. (3,441) (10,807) ------- -------- Net cash used in financing activities ............... (9,446) (72,133) ------- -------- Net decrease in cash and cash equivalents ................... (2,220) (18,321) Cash and cash equivalents, January 1 ........................ 30,272 46,710 ------- -------- Cash and cash equivalents, March 31 ......................... $28,052 $ 28,389 ======= ======== Supplemental cash flow information: Cash paid for: Interest ................................................ $ 901 $ 1,324 Income taxes ............................................ $ -- $ 30 Unrealized loss on securities available-for-sale .......... $ 68 $ 1,619
See accompanying notes to condensed consolidated financial statements. 8 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS The unaudited condensed 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 condensed 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, 1995 ("1995 Form 10-K"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying condensed 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 March 31, 1996 and results of operations and cash flows for the three-month periods ended March 31, 1996 and 1995. The results of operations for the three month period ended March 31, 1996 are not necessarily indicative of the results of operations for the full year ending December 31, 1996. Certain items in the 1995 financial statements have been reclassified to conform to the 1996 presentation. NOTE 2 - LOSS PER SHARE Loss per share is computed using the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding for the three-month periods ended March 31, 1996 and 1995 was 3,078,146. 8 9 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) NOTE 2 - LOSS PER SHARE (CONTINUED) Loss per share computations exclude common share equivalents since the effect would be to reduce the loss per share amount. Common share equivalents include the number of shares issuable upon the exercise of stock options less the number of shares that could have been purchased with the proceeds from the exercise of the options based upon the higher of the average price of common shares during the period or the price at the balance sheet date. NOTE 3 - LOANS AND INTEREST INCOME At March 31, 1996, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $9.3 million, for which the related allowance for credit losses was $1.2 million. The average recorded investment in, and the amount of interest income recognized on those impaired loans during the three months ended March 31, 1996 were $9.4 million and $200,000, respectively. Of the investment in loans that are considered to be impaired, $4.9 million or 53% was represented by a loan which was collateralized by residential real estate appraised at $10.0 million. 9 10 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONDENSED 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 March 31, 1996 and December 31, 1995, 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 Tier 1 capital plus 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 0% to 100% (see Note 2 in the Notes to Consolidated Financial Statements in the Company's 1995 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued) The capital leverage ratio standards 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. On December 14, 1995, the Bank entered into a formal agreement with the OCC (the "Formal Agreement"), pursuant to which the Bank is required to maintain (i) a capital leverage ratio equal to at least 6.5% and (ii) a Tier 1 risk-based capital ratio equal to at least 10.0%. As set forth below, the Bank's capital leverage ratio at March 31, 1996 was 4.86%, and the Tier 1 risk-based capital ratio was 7.23%. As of March 31, 1996, both of these ratios were not in compliance with the Formal Agreement. The Company entered into a Memorandum of Understanding with the Federal Reserve Bank of San Francisco on October 26, 1995, which includes requiring the submission of a plan to increase the Bank's capital. The Bank's capital plan was submitted to the OCC on February 8, 1996. The Bank may be subject to further regulatory enforcement action by the OCC. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Capital Resources." Information about the regulatory capital of the Company and the Bank at March 31, 1996 and December 31, 1995 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 March 31, 1996 and December 31, 1995 is set forth below.
March 31, 1996 (Unaudited) December 31, 1995 ------------------------------- ------------------------------ Company Bank Company Bank ------ ----- ------ ----- ------ ----- ------ ----- Anount Ratio Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- ------ ----- (dollar amounts in thousands) Risk-based capital(1)(3): Tier 1 capital........................... $ 6,030 7.24% $ 6,019 7.23% $ 6,166 6.96% $ 6,157 6.95% Tier 1 capital minimum requirement....... 3,329 4.00% 8,323 10.00% 3,542 4.00% 8,856 10.00% ------- ----- -------- ----- ------- ----- -------- ------ Excess (Deficiency).............. $ 2,701 3.24% $ (2,304) (2.77%) $ 2,624 2.96% $ (2,699) (3.05%) ======= ===== ======== ====== ======= ===== ======== ====== Total capital............................ $ 7,105 8.54% $ 7,094 8.52% $ 7,306 8.25% $ 7,297 8.24% Total capital minimum requirement........ 6,658 8.00% 6,658 8.00% 7,085 8.00% 7,085 8.00% ------- ----- ------- ----- ------- ----- -------- ------ Excess........................... $ 447 0.54% $ 436 0.52% $ 221 0.25% $ 212 0.24% ======= ===== ======== ====== ======= ===== ======== ====== Total risk-weighted assets....................... $83,229 $ 83,229 $88,558 $ 88,558 Capital Leverage Ratio(1)(2)(3): Tier 1 capital........................... $ 6,030 4.86% $ 6,019 4.86% $ 6,166 4.68% $ 6,157 4.67% Tier 1 capital minimum requirement....... 4,959 4.00% 8,058 6.50% 5,271 4.00% 8,565 6.50% ------- ----- -------- ------ ------- ----- -------- ------ Excess (Deficiency).............. $ 1,071 0.86% $ (2,039) (1.64%) $ 895 0.68% $ (2,408) (1.83%) ======= ===== ======== ====== ======= ===== ======== ====== Average total assets, as adjusted, during three-month periods ended March 31, 1996 and December 31, 1995......................... $123,963 $123,963 $131,764 $131,764
(1) The Bank's minimum Tier 1 risk-based capital and Tier 1 capital leverage requirements are based on the provisions of the Formal Agreement, which became effective on December 14, 1995. (2) The regulatory capital leverage ratio represents the ratio of Tier 1 capital at March 31, 1996 and December 31, 1995 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. 13 NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - INCOME TAXES 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 1996 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. While management believes the level of the allowance as of March 31, 1996 is adequate to absorb losses inherent in the loan portfolio, additional deterioration in the economy of the Bank's lending area could result in levels of loan losses that could not be reasonably predicted at that date. 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 month periods ended March 31, 1996 and 1995. The discussion should be read in conjunction with the Company's condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements (see "Item 1. Financial Statements"). Except for the historical information contained herein, the matters addressed in this Item 2 constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 12E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed in this Report on Form 10-Q that could cause actual results to differ materially from those anticipated by the Company's management. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. FINANCIAL CONDITION At March 31, 1996, the Company's consolidated assets decreased by $9.3 million, or 7.0%, to $122.7 million from $132 million at December 31, 1995. This decrease was due primarily to a $2.2 million decrease in cash and cash equivalents and a decrease in net loans of $6.2 million. Customer deposits decreased by $6.0 million or 5.0% to $114.2 million at March 31, 1996, from $120.2 million at December 31, 1995. Securities sold under agreements to repurchase decreased by $3.4 million to $1.1 million at March 31, 1996, from $4.5 million at December 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 month period ended March 31, 1996 of $136,000 or $(.04) per share, as compared to a net loss for the three month period ended March 31, 1995 of $1.7 million or $(.55) per share. 14 15 Declining loan balances and sales of securities during 1995 resulted in decreased total interest income in 1996. Total interest income for the three month period ended March 31, 1996 was $2.3 million, compared with total interest income for the corresponding period of 1995 of $3.5 million. Total interest expense for the three month period ended March 31, 1996 was $892,000 compared with total interest expense for the corresponding period of 1995 of $1.2 million. While the decrease in interest earning loans and securities caused a $1.1 million decrease in interest income, the decrease in deposits had a $271,000 impact on interest expense, as a part of the decrease in deposits was attributable to non-interest bearing demand deposits. Net interest income for the three month period ended March 31, 1996 was $1.5 million compared with net interest income for the corresponding period of 1995 of $2.3 million. Although the decrease in loans and securities, as well as in customer deposits, caused a decrease in net interest income for the three month period ended March 31, 1996, compared with the corresponding period of 1995, the Company's planned restructuring which caused these decreases resulted in more positive results for the three month period in 1996 as compared with the corresponding period in 1995. There was no provision for loan losses required for the three month period in 1996, as compared with a provision of $146,000 for the corresponding period in 1995. The loss on sale of securities for the three month period in 1996 was $1,000 compared with $1.2 million during the corresponding period in 1995. While other operating income from services decreased to $169,000 for the three month period ended March 31, 1996 compared with $371,000 for the corresponding period in 1995, other operating expenses decreased to $1.8 million for the three months in 1996, compared with $3.0 million for the corresponding period in 1995, which amounts to a 42.1% decrease in expenses. Although no additional provision was made for loan losses for the three month period ended March 31, 1996, due to reduced loan balances and lower levels of nonperforming assets, the Bank's allowance for credit losses as a percentage of nonperforming assets increased to 50.9% at March 31, 1996, from 38.9% at March 31, 1995. Other operating expenses decreased $1.3 million or 42.1% for the three month period ended March 31, 1996 as compared to the same period in the prior year. The decrease was due primarily to management's efforts to continue to reduce operating expenses. Compensation expense decreased $301,000 or 30.3%, for the first three months of 1996, compared with the same period in the prior year. Total assets of the Company at March 31, 1996 have continued to decrease. As part of the Company's capital plan for the Bank and the Company's restructuring of its 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 15 16 to profitability. The Bank's restructuring process is near completion and the Bank is working towards its goal of returning 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 DEPRESSED REAL ESTATE VALUES 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. Nonperforming assets at March 31, 1996 totaled $7.5 million and included $581,000 of other real estate owned, compared with $6.5 million in non-performing assets at December 31, 1995. Other real estate owned was $581,000 at December 31, 1995. NONPERFORMING ASSETS The level of nonperforming assets, as presented in Table 1, increased $1.0 million during the first three months of 1996 from the level at December 31, 1995. The increase was primarily the result of an increase in non accrual loans. The amount of nonperforming loans for which the Company does not hold substantial collateral amounted to $1.4 million at March 31, 1996, or 20.2% of all nonperforming loans at that date, compared to $335,000, or 5.6% at December 31, 1995. The increase at March 31, 1996 was mainly due to two loans added to this category in March. NONACCRUAL LOANS. Nonaccrual loans increased $1.3 million during the first three months of 1996 to $1.9 million as compared to $573,000 at December 31, 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"). 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 March 31, 1996, TDRs totaled $5.1 million compared to $5.2 million at December 31, 1995. Included in these amounts is one loan with a balance of $4.9 million which is secured by a First Trust Deed on property with a current appraisal value of $10.0 million. LOANS CONTRACTUALLY PAST DUE NINETY OR MORE DAYS. Loans contractually past due ninety or more days decreased to $23,000 at March 31, 1996 from $221,000 at December 31, 1995. LOAN DELINQUENCIES. Loan delinquencies increased to $2.9 million or 3.8% of loans receivable at March 31, 1996 from $1.2 million or 1.5% of loans receivable at December 31, 1995, mainly due to the two nonaccrual loans discussed above. Also 17 18 included in the delinquencies at March 31, 1996 was a $600,000 loan secured by commercial real estate which has since been fully repaid. LOAN CHARGE-OFFS. As reflected in Table 3, the Company charged-off loans amounting to $54,000 during the three month period ended March 31, 1996, as compared to $92,000 during the corresponding period in 1995. Recoveries of loans previously charged-off totaled $86,000 for the three month period ended March 31, 1996 as compared to $369,000 during the same period in 1995. Recoveries since March 31, 1996 of loans previously charged-off were over $200,000. FUTURE EFFECTS OF THE PROLONGED ECONOMIC RECESSION AND DEPRESSED REAL ESTATE VALUES ON THE ALLOWANCE FOR CREDIT LOSSES. As 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. 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, March 31, ----------------------- 1996 1995 1994 --------- ------ ------- Nonaccrual loans $1,868 $ 573 $ 3,426 Troubled debt restructurings 5,059 5,167 5,582 Loans contractually past due ninety or more days with respect to either principal or interest and continuing to accrue interest 23 221 1,507 -------- ------ ------- Nonperforming loans 6,950 5,961 10,515 Other real estate owned 581 581 1,529 ------- ------ ------- Total nonperforming assets $7,531 $6,542 $12,044 ======= ====== ======= Allowance for loan losses as a percent of nonaccrual loans 205.4% 664.0% 89.4% ======= ====== ======= Allowance for loan losses as a percent of nonperforming loans 55.2% 63.8% 29.1% ======= ====== ======= Total nonperforming assets as a percent of total loans outstanding 9.9% 8.0% 10.4% ======= ====== ======= Total nonperforming assets as a percent of total shareholders' equity 129.7% 108.8% 116.8% ======= ====== =======
20
Table 2 Loan Portfolio Composition and Allocation of the Allowance for Loan Losses (dollar amounts in thousands) December 31, March 31, ---------------------------------- 1996 1995 1994 ------------- -------------- -------------- Loan Portfolio Composition: Real estate construction and land development $ 1,092 1% $ 1,093 1% $ 948 1% Commercial loans: Secured by one-to-four family residential properties 10,986 14% 11,012 13% 18,398 16% Secured by multifamily residential properties 2,226 3% 2,538 3% 2,368 2% Secured by commercial real properties 33,711 44% 33,556 41% 32,061 28% Other - secured and unsecured 17,734 23% 23,327 28% 43,385 37% Home equity lines of credit 5,589 6% 5,857 6% 2,867 1% Consumer instalment and unsecured loans to individuals 4,702 9% 4,860 8% 15,691 15% ------- --- ------- --- -------- --- $76,040 100% $82,243 100% $115,718 100% Deferred net loan origination fees, purchased loan discount and gains on termination of interest rate hedging contracts (250) (231) (434) ------- ------- -------- Gross loans outstanding $75,790 $82,012 $115,284 ======= ======= ======== Allocation of the Allowance for Loan Losses: Real estate construction and land development $ 11 $ 11 $ 17 Commercial loans: Secured by one-to-four family residential properties 205 205 77 Secured by multifamily residential properties 25 25 51 Secured by commercial real properties 454 454 674 Other - secured and unsecured 2,551 2,521 1,645 Home equity lines of credit 64 64 18 Consumer instalment and unsecured loans to individuals 523 523 578 ------- ------- -------- Allowance allocable to gross loans outstanding 3,833 3,803 3,060 Commitments to extend credit under standby and commercial letters of credit 4 2 3 ------- ------- -------- Total allowance for loan losses $ 3,837 $ 3,805 $ 3,063 ======= ======= ======== Allowance for loan losses allocable to gross loans outstanding as a percent of gross loans outstanding 5.06% 4.64% 2.66% ======= ======= ========
21 Table 3 Analysis of Changes In the Allowance for Credit Losses (dollar amounts in thousands)
Three-month periods ended ---------------------------------------- March 31, December 31, March 31, 1996 1995 1995 --------- ------------ --------- Balance at beginning of period............................... $ 3,805 $ 3,459 $ 3,063 Loans charged off: Real estate construction and land development.............. -- -- -- Commercial loans: Secured by one-to-four family residential properties..... -- -- 70 Secured by multifamily residential properties............ -- -- -- Secured by commercial real properties.................... -- -- -- Other -- secured and unsecured........................... 54 72 92 Home equity lines of credit................................ -- -- -- Consumer instalment and unsecured loans to individuals........................................... -- -- 49 ------- ------- ------- Total loan charge-offs............................... 54 72 211 Recoveries of loans previously charged off; Real estate construction and land development.............. -- 140 -- Commercial loans: Secured by one-to-four family residential properties..... 1 10 1 Secured by multifamily residential properties............ -- -- -- Secured by commercial real properties.................... -- -- -- Other -- secured and unsecured........................... 75 153 342 Home equity lines of credit................................ -- -- -- Consumer instalment and unsecured loans to individuals........................................... 10 55 26 ------- ------- ------- Total recoveries of loans previously charged off..... 86 358 369 ------- ------- ------- Net loan charge-offs (recoveries)............................ (32) (286) (158) Provision for credit losses.................................. -- 60 146 ------- ------- ------- Balance at end of period..................................... $ 3,837 $ 3,805 $ 3,367 ======= ======= =======
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. 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. The Company's asset base continued to decrease, and as a result interest earning assets and interest bearing liabilities continued to decrease. Operating expenses decreased during this period. If this trend continues without a corresponding reduction in operating expenses, interest income from the reduced earning asset base may not cover operating expenses of the Bank. Interest earning assets at March 31, 1996 decreased to $115.8 million, compared with $123.1 million at December 31, 1995, and $150.5 million at March 31, 1995. Interest earning assets as a percentage of total assets was 94.3% at March 31, 1996, compared with 93.3% at December 31, 1995, and 93.7% at March 31, 1995. Interest bearing liabilities at March 31, 1996 decreased to $74.3 million, compared with $80.2 million at December 31, 1995, and $97.0 million at March 31, 1995. Interest bearing liabilities as a percentage of total assets was 60.5% at March 31, 1996, compared with 60.7% at December 31, 1995, and 60.4% at March 31, 1995. Total loans receivable at March 31, 1996 decreased to $75.8 million, compared with $82.0 million at December 31, 1995, and $101.5 million at March 31, 1995. Loans receivable as a percentage of total assets was 61.8% at March 31, 1996, compared with 62.1% at December 31, 1995, and 63.2% at March 31, 1995. Total deposits at March 31, 1996 decreased to $114.2 million, compared with $120.2 million at December 31, 1995, and $146.5 million at March 31, 1995, while interest bearing deposits at March 31, 1996 decreased to $73.2 million, compared with $75.7 million at December 31, 1995, and $95.2 million at March 31, 1995. Total deposits as a percentage of total assets was 93.1% at March 31, 1996, compared with 91.1% at December 31, 1995, and 91.2% at March 31, 1995. Interest bearing deposits as a percentage of total deposits was 64.1% at March 31, 1996, compared with 62.9% at December 31, 1995, and 65.0% at March 31, 1995, while interest bearing deposits as a percentage of loans receivable was 96.6% at March 31, 1996, compared with 92.3% at December 31, 1995, and 93.8% at March 31, 1995. 22 23 EFFECTS OF NONPERFORMING LOANS ON NET INTEREST INCOME. Foregone interest income attributable to nonperforming loans amounted to $56,000 for the three month period ended March 31, 1996, compared with $45,000 for the corresponding period in 1995. (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, by $82,000 and $118,000 for the three month periods ended March 31, 1996 and 1995, respectively. INTEREST RATE RISK MANAGEMENT Interest rate risk management focuses on controlling changes in net interest income that result from fluctuating market interest rates as they impact the rates earned and paid on interest-earning assets and interest-bearing liabilities whose interest rates are subject to change prior to their maturity. Net interest income 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. INTEREST RATE MATURITIES OF ASSETS AND FUNDING SOURCES. Management also monitors the sensitivity of net interest income to potential interest rate changes by distributing the interest rate maturities of assets and supporting funding liabilities into interest rate-sensitivity periods, summarizing interest rate risk in terms of the resulting interest rate-sensitivity "gaps". The gap position is but one of several variables that affect net interest income. The gap measure is a static indicator and, as such, is not an appropriate means for forecasting changes in net interest income in a dynamic business and economic environment. Consequently, these measures are not used in isolation by management in forecasting short-term changes in net interest income. The weighted average yield on loans receivable was 9.31% for the three 23 24 month period ended March 31, 1996, compared with 9.6% for the corresponding period in 1995. Weighted average yield on total earning assets was 8.01% for the three month period ended March 31, 1996, compared with 8.43% for the corresponding period in 1995. Weighted average rate on all deposits was 4.64% for the three month period ended March 31, 1996, compared with 4.53% for the corresponding period in 1995. INVESTMENT SECURITIES Investment securities decreased to $19.5 million at March 31, 1996, from $20.1 million at December 31, 1995, and $28.5 million at March 31, 1995. The decrease from March 31, 1995 was due to sales of securities available for sale, resulting in realized losses during the first and second quarters of 1995. The decrease from December 31, 1995 was due to principal payments received. Net unrealized losses on securities available for sale at March 31, 1996 decreased to $222,000 from $1.6 million at March 31, 1995. 24 25 OTHER OPERATING INCOME As set forth in the accompanying condensed consolidated statements of operations and discussed in the 1995 Form 10-K, the Company's principal sources of recurring other operating income continue to be letters of credit, foreign exchange services, investment services, and deposit-related and other customer services. Fee income decreased $202,000 or 54.4% in the first quarter of 1996, from the first quarter of 1995, resulting primarily from decreases in investment services and deposit related and other customer services. The international services department was closed in December, 1995, while retaining the letter of credit and foreign exchange functions. The Bank seeks to provide a wide range of financial services to a limited number of niche markets. These niche markets include the entertainment industry, the technology market, the private banking market, business banking clients, Small Business Administration clients and escrow companies. Management anticipates that fee income from services to these niche markets 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 condensed consolidated statements of operations, the Company reduced total operating expenses by $1.3 million, or 42.1%, during the first quarter of 1996 from the first quarter of 1995. The reductions result, in part, from management's efforts to continue to reduce operating expenses. The reduction is mainly attributable to the reduction in salaries and related expenses, the reduction in occupancy expenses and the $286,000 reduction in other professional services. In 1995, the Company negotiated with its landlord a restructuring of its lease for the Bank's premises. The restructuring of the Bank's leases represents an annual savings of $852,000 over the next five years. Operations in 1996 and beyond will benefit from the substantial reductions in operating costs achieved so far. The reduction in rent expense as a result of the restructuring of the leases, the reduction in compensation expense as a result of the reduction in staff, and the reduction in other non-interest expense will contribute directly to the improved performance in future years. Expenses in each of these areas is expected to be at levels even lower than those in 1995. An 18.3% reduction in staff in December, 1995 represents an annual savings of $810,000. Management continues to explore measures to further reduce the level of other operating costs. 25 26 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 1995 Form 10-K), the Company's 1996 first quarter net losses did not give rise to additional income tax benefits. CAPITAL RESOURCES REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS CAPITAL GUIDELINES See Note 4 of the accompanying notes to condensed consolidated financial statements for a discussion of the capital requirements applicable to the Company and the Bank. FORMAL AGREEMENT The Bank entered into a formal agreement with the OCC on December 14, 1995 (the "Formal Agreement"), pursuant to which the Bank is required to maintain (i) Tier 1 capital equal to at least 6.5 percent of the Bank's adjusted total assets ("capital leverage ratio") and (ii) Tier 1 qualifying capital equal to at least 10.0 percent of the Bank's total risk-weighted assets ("Tier 1 risk-based capital ratio"). As set forth in Note 4, the Bank's capital leverage ratio and Tier 1 risk-based capital ratio at March 31, 1996 were 4.86% and 7.23%, respectively. At March 31, 1996, the Bank was not in compliance with the capital requirements required by the Formal Agreement. The Formal Agreement also requires the Bank to appoint a new chief financial officer (which the Bank has not yet done), to make certain determinations as to the reasonableness of any salary, consulting fee, expense reimbursement or other type of compensation, to review the need for, and the reasonableness of, all existing consulting, employment and severance contracts, to prepare a written analysis of any new products or services, to maintain the Bank's liquidity at a level sufficient to sustain current and anticipated operations, to develop a three year capital plan and strategic plan, and to improve the Bank's loan administration. The Company submitted a capital plan for the Bank on February 8, 1996 to the OCC and a copy to the FRB. As a result of the Bank's failure to comply with the requirements of the Formal Agreement, the Bank may be subject to further regulatory enforcement action by the OCC. The Company entered into a Memorandum of Understanding ("MOU") on October 26, 1995 with the Federal Reserve Bank of San Francisco ("FRBSF"). The MOU prohibits the Company from paying dividends without prior approval of the FRB, requires the 26 27 submission of a plan to increase the Bank's capital ratios, requires the Company to conduct a review of the senior and executive management of the Company and the Bank, prohibits the incurrence or renewal of debt without the FRB's approval, restricts cash expenditures in excess of $10,000 in any month and prohibits the Company from making acquisitions or divestitures or engaging in new lines of business without the FRB's approval. The Company may be subject to further regulatory enforcement action by the FRB. FUTURE EFFECTS OF AGREEMENT ON DIVIDENDS. There are 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, 1994, 1995 and the first quarter of 1996, the Bank could not have declared dividends to the Company at March 31, 1996 without the prior approval of the OCC. In addition, management expects the Formal 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. Moreover, the MOU prohibits the Company from paying dividends without the prior written approval of the FRB. FUTURE EFFECTS OF NONPERFORMING LOANS AND CREDIT LOSSES ON CAPITAL RESOURCES 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, 1994 , 1995 and the first quarter of 1996, 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 March 31, 1996 level of $7.5 million representing a decrease of $1.1 million from March 31, 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 raise its capital leverage ratio and its Tier 1 risk-based capital ratio in excess of those required by the Formal Agreement primarily through the declining loan balances and earning asset levels and from 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 and to raise additional capital to ensure the Bank's growth and prosperity. 27 28 LIQUIDITY LIQUIDITY MANAGEMENT The accompanying consolidated statements of cash flows present certain information about cash flows from operating, investing and financing activities. The Bank's principal cash flows relate to investing and financing activities, rather than operating activities. While the statements present the periods' net cash flows from lending and deposit activities, they do not reflect certain important aspects of the Bank's liquidity, including (i) anticipated liquidity requirements under outstanding credit commitments to customers (ii) intraperiod volatility of deposits, particularly fluctuations in the volume of commercial customers' noninterest-bearing demand deposits, and (iii) unused borrowings available under federal funds lines, repurchase agreements and other arrangements. The management believes that the liquidity guidelines are generally more indicative of the Bank'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 Bank 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. While management believes the Bank's funding sources are adequate to meet anticipated demand, no assurance can be made that demand on the Bank's resources will not exceed the Bank's funding sources. The Company has only limited expenses at the present time and has no ability to fund the Bank's cash needs. The Company is evaluating available methods to raise additional capital. LIQUIDITY TRENDS During 1995, the Bank has experienced a decline, continuing through the first quarter of 1996, in total deposits. During the three months ended March 31, 1996, total deposits decreased, while savings deposits and money market accounts increased. Time certificates of deposit of $100,000 or more were $8.5 million at March 31, 1996 and at December 31, 1995. Time certificates of deposit of $100,000 or more continued to represent a less significant source of funding. 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. 28 29 The Bank maintains a wholesale institutional funds acquisition operation ("money desk"). This operation provided 28% of the Bank's average total funding sources during the first quarter of 1996, as compared to 28% during the first quarter of 1995, while noninterest-bearing demand deposits provided 33% of average total funding sources during the first quarter of 1996, compared to 34% during the comparable 1995 period. The Bank will enhance its efforts to obtain direct, non-brokered funds through its own marketing programs within its own market area, through direct solicitation as well as by attracting traditional local market area deposits. However, the Bank's policy is to activate the money desk operation as necessary if the Bank's liquidity falls below specified levels. Brokered deposits will not be solicited through Money Desk activities. 29 30 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits required by Item 601 of Regulation S-K. (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) May 15, 1996 /s/ Howard P. Ladd ------------------ Howard P. Ladd Chief Executive Officer May 15, 1996 /s/ Howard P. Ladd ------------------ Howard P. Ladd Acting Chief Financial Officer 31 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 7,522 0 20,500 0 19,463 315 315 75,790 (3,837) 122,705 114,238 1,056 1,604 0 0 0 24,614 (18,807) 122,705 1,800 282 263 2,345 884 892 1,453 0 (1) 1,757 (136) (136) 0 0 (136) (.04) (.04) 4.96 1,868 23 5,059 219 3,805 54 86 3,837 3,837 0 0
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