National Mercantile goes into restructuring mode.

Bank looks to return to profitability through layoffs, sales

National Mercantile Bancorp has begun implementing a restructuring plan which includes laying off staff, selling bad loans and selling securities which have slumped in value as a result of rising interest rates, according to Donald Thornburg, president of the Century City-based bank holding company.

Although these actions are "painful," they are intended to "enhance Mercantile's efforts to return to profitability," Thornburg told the Business Journal last week.

In its latest earnings report, for the three months ended Sept. 30, National Mercantile Bancorp posted a net loss of $3.04 million, or 99 cents a share, compared with net income of $145,000, or 5 cents a share, for the year-earlier period. The loss amounts to almost 20 percent of its capital.

The recently announced restructuring is expected to lower the risk of losses on loans and securities and reduce the cost of doing business, Thornburg said.

Thornburg said the bank is studying the "possibility" of raising additional capital in 1995 to pay for anticipated losses in the sale of bad and risky loans and securities.

The bank currently meets federal capital minimum standards and expects to continue to meet those standards when the restructuring is completed at the end of the first quarter of 1995, Thornburg said. But bank officials may want more capital to grow in the future, Thornburg said.

The company and its sole subsidiary Mercantile National Bank reduced staff and other expenses in the fourth quarter of 1994, Thornburg said.

He declined to say how many people were laid off, but said current employment is 80. According to the bank's annual financial statement filed with the Security and Exchange Commission, the bank had the equivalent of 91.5 full-time employees as of last March.

Operating outlays cut

These actions are expected to reduce the company's operating expenses by $3 million annually, or 23 percent.

The bank intends to sell $20 million in nonperforming loans and loans classified as being at risk of default in the future. The bank has increased its loan loss provision by $1.9 million in anticipation of that sale.

That action is expected to reduce the bank's nonperforming assets by 80 percent, to its lowest level since the recession began, Thornburg said.

During the fourth quarter, the bank sold $25 million in securities and will take a charge to fourth quarter earnings of $1.3 million in connection with losses as a result, according to a company statement.

The bank is considering selling an additional $30 million in securities in the current quarter, which may result in additional losses, Thornburg said.

The company's $82 million securities portfolio declined in value by $3 million in the first nine months of 1994 as a result of rising interest rates, Thornburg said.

The bank's securities portfolio consists of U.S. Treasury bonds, various government agency bonds and some mortgage-backed securities, Thornburg said. It does not contain any derivatives, he added.

Rising rates reduce value

Thornburg said many of the bonds were bought two or three years ago when interest rates were lower. With interest rates rising, the bonds' value has fallen, he said.

Fourth-quarter 1994 earnings have not yet been publicly released, and Thornburg declined to preview the results.

For the nine months ended Sept. 30, the bank posted a net loss of $3.06 million, or $1 a share, compared with net earnings of $234,000, or 7 cents a share, a year before.

Based on its third-quarter 1994 numbers, Mercantile National Bank is rated red, no stars, the lowest of eight financial safety and soundness ratings by Veribanc Inc., a Wakefield, Mass.-based bank rating agency. The bank had received the highest of Veribanc's ratings in the first quarter.

NATIONAL MERCANTILE BANCORP
(MBLA/NASDAQ)

Qtr. Sept. 30:          1994         1993

Net interest
income                 $5.36        $5.04
Net income           ($3.04)     $145,000
Average shares
outstanding              3.0          3.0
EPS                  ($0.99)        $0.05

Closing price Jan. 10

$2.62
Unchanged

52-week

High
$5.25

Low
$2.62

All figures except for EPS, 1994 net income and stock price in millions.

Warren Heller, Veribanc director of research, explained that the bank's rating was affected by the fact that its third-quarter loss amounted to almost 20 percent of its capital.