-----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, ImSR8FrTsLR0ohJortqMrLI97tc0pUUzL6gXv7HPsNnBHJTHtATBA9eJMZE6T7mm inThfmw48SQHK7BkxI5ESw== 0000902789-97-000012.txt : 19970520 0000902789-97-000012.hdr.sgml : 19970520 ACCESSION NUMBER: 0000902789-97-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCB FINANCIAL CORP CENTRAL INDEX KEY: 0000902789 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 680300300 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-76832 FILM NUMBER: 97606282 BUSINESS ADDRESS: STREET 1: 1248 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4154592265 MAIL ADDRESS: STREET 1: 1248 FIFTH AVENUE CITY: SAN RAFAEL STATE: CA ZIP: 94901 10QSB 1 FORM 10-QSB U.S. Securities and Exchange Commission Washington, D.C. 20549 (Mark One) [X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ________ to_____________ Commission file number: 033-76832 MCB FINANCIAL CORPORATION (exact name of small business issuer) California 68-0300300 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1248 Fifth Avenue, San Rafael, California 94901 (Address of principal executive offices) (415) 459-2265 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: May 13, 1997 Class Common stock, no par value 957,542 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 1997 1996 ASSETS (Unaudited) Cash and due from banks $5,659,113 $ 9,609,584 Federal funds sold 7,780,000 770,000 Total cash and cash equivalents 13,439,113 10,379,584 Interest-bearing deposits with banks 384,000 384,000 Investment securities available for sale at fair value 13,008,970 9,339,550 Investment securities held to maturity; fair values of $24,159,695 in 1997 and $25,533,850 in 1996 24,740,150 25,739,588 Mortgage loans sold pending settlement 647,600 Loans held for investment (net of allowance for possible credit losses of $928,680 in 1997 and $944,105 in 1996 78,345,854 80,121,693 Premises and equipment - net 2,204,977 2,278,163 Accrued interest receivable 890,847 1,003,016 Deferred income taxes 735,139 621,191 Other assets 1,195,583 989,921 Total assets $ 134,944,633 $ 131,504,306 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 26,228,198 $ 26,265,743 Interest-bearing: Transaction accounts 76,970,630 73,532,399 Time certificates, $100,000 and over 9,369,537 9,483,134 Savings and other time deposits 10,067,070 10,577,186 Total interest-bearing deposits 96,407,237 93,592,719 Total deposits 122,635,435 119,858,462 Other borrowings 743,913 446,776 Accrued interest payable and other liabilities 1,174,300 1,013,939 Total liabilities 124,553,648 121,319,177 SHAREHOLDERS' EQUITY Preferred stock, no par value: authorized 20,000,000 shares; none issued or outstanding Common stock, no par value: authorized 20,000,000 shares; issued and outstanding 947,042 shares in 1997 and 942,842 in 1996 9,434,568 9,398,574 Unrealized loss on investment securities available for sale - net (122,446) (45,378) Retained earnings 1,078,863 831,933 Total shareholders' equity 10,390,985 10,185,129 Total liabilities and shareholders' equity $ 134,944,633 $ 131,504,306 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1997 1996 (Unaudited) INTEREST INCOME: Loans, including fees $ 1,997,909 $ 1,611,547 Federal funds sold 72,030 123,393 Investment securities 565,798 577,750 Total 2,635,737 2,312,690 INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 864,351 875,763 Time certificates, $100,000 and over 122,818 127,196 Other interest 8,231 5,821 Total 995,400 1,008,780 NET INTEREST INCOME 1,640,337 1,303,910 PROVISION FOR POSSIBLE CREDIT LOSSES 20,000 140,000 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 1,620,337 1,163,910 OTHER INCOME: Gain on sale of loans 53,133 110,052 Service fees on deposit accounts 113,986 90,982 Recovery of litigation expenses 1,800,000 Other 39,420 108,470 Total 206,539 2,109,504 OTHER EXPENSES: Salaries and employee benefits 789,525 965,166 Occupancy expense 191,689 174,317 Furniture and equipment expense 88,685 94,030 Professional services 60,793 52,021 Supplies 53,459 52,336 Promotional expenses 50,643 37,653 Data processing fees 71,296 65,260 Regulatory assessments 14,456 11,314 Other 88,996 82,618 Total 1,409,542 1,534,715 INCOME BEFORE INCOME TAXES 417,334 1,738,699 INCOME TAX EXPENSE 170,404 723,073 NET INCOME $ 246,930 $1,015,626 NET INCOME PER COMMON SHARE: Primary and fully diluted $0.25 $ 1.08 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1997 1996 OPERATING ACTIVITIES: (Unaudited) Net income $ 246,930 $ 1,015,626 Adjustments to reconcile net income to net cash provided (used) by operating activities: Originations of loans for sale (9,531,000) Settlement of mortgage loans sold 647,600 11,408,620 Provision for possible credit losses 20,000 140,000 Depreciation and amortization 87,707 137,247 Recovery of litigation expenses (1,800,000) Change in deferred income taxes (59,186) 1,016,881 Decrease in accrued interest receivable 112,169 37,994 (Increase) in other assets (209,165) (608,113) Increase (decrease) in accrued interest payable and other liabilities 164,728 (1,844,485) Net cash provided (used) by operating activities 1,010,783 (27,230) INVESTING ACTIVITIES: Held to maturity securities: Maturities 1,000,000 9,000,000 Purchases (14,238,750) Available for sale securities: Maturities 1,198,747 2,452,218 Purchases (5,000,000) Decrease in interest-bearing deposits with banks 491,000 Net decrease (increase) in loans held for investment 1,755,839 (2,717,423) Purchases of premises and equipment (15,944) (56,496) Net cash used by investing activities (1,061,358) (5,069,451) FINANCING ACTIVITIES: Net (decrease) increase in noninterest-bearing demand deposits (37,545) 656,100 Net increase in interest-bearing transaction, savings and other time deposits 2,814,518 4,149,140 Net increase in other borrowings 297,137 528,920 Proceeds from the exercise of stock options 35,994 Net cash provided by financing activities 3,110,104 5,334,160 NET INCREASE IN CASH AND CASH EQUIVALENTS 3,059,529 237,479 CASH AND CASH EQUIVALENTS: Beginning of period 10,379,584 12,566,117 End of period $ 13,439,113 $ 12,803,596 CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 1,019,264 $ 1,036,269 Income taxes 250,000 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 Item 1. Financial Statements Introduction and Basis of Presentation The unaudited consolidated financial information included herein has been prepared in conformity with the accounting principles and practices in MCB Financial Corporation's ("the Company") consolidated financial statements included in the Annual Report for the year ended December 31, 1996. The accompanying interim consolidated financial statements contained herein are unaudited. However, in the opinion of the Company, all adjustments, consisting of normal recurring items necessary for a fair presentation of the operating results for the periods shown, have been made. The results of operations for the three months ended March 31, 1997 may not be indicative of operating results for the year ended December 31, 1997. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications. Cash and cash equivalents consists of cash, due from banks, and federal funds sold. Recently Issued Accounting Pronouncements In June 1996, Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued. This Statement establishes standards for when transfers of financial assets, including those with continuing involvement by the transferor, should be considered a sale. SFAS No. 125 also establishes standards for when a liability should be considered extinguished. This statement is effective for transfers of assets and extinguishments of liabilities after December 31, 1996. In December 1996, the Financial Accounting Standards Board ("FASB") reconsidered certain provisions of SFAS No. 125 and issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" to defer for one year the effective date of implementation for transactions related to repurchase agreements, dollar-roll repurchase agreements, securities lending and similar transactions. Management determined that the effect of adoption of SFAS No. 125 on the Company's financial statements was not material and believes that the effect of adoption of SFAS No. 127 will also not be material. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This Statement simplifies the standards for computing earnings per share ("EPS") and makes them comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, all entities with complex capital structures are required to provide a dual disclosure of basic and diluted EPS on the face of the income statement and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. The following table provides pro forma disclosure of basic and diluted EPS in accordance with SFAS No. 128: Three Months Ended March 31, 1997 1996 Pro forma basic EPS........................ $0.25 $1.08 Pro forma diluted EPS...................... $0.25 $1.08 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion presents information pertaining to the financial condition and results of operations of MCB Financial Corporation and subsidiary ("Company") and should be read in conjunction with the financial statements and notes thereto presented in this 10-QSB. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances. This document may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those indicated. For a discussion of factors that could cause actual results to differ, please see the discussion contained herein and in the Company's publicly available Securities and Exchange Commission filings and press releases. OVERVIEW Earnings Summary. The Company reported net income of $246,930 or $0.25 per share, for the first quarter of 1997. This compares to net income of $1,015,626 or $1.08 per share, for the same period in 1996 (which includes a pre-tax recovery of approximately $1.8 million from the Company's litigation contingency reserve in conjunction with the settlement of its outstanding litigation). Excluding the litigation recovery, net income for the first quarter of 1996 would have been approximately $144,000, or $0.15 per share. Return on average assets and return on average equity for the first quarter of 1997 were 0.75% and 9.54%, respectively, as compared to 3.32% and 48.43%, respectively, for the same period of 1996. FINANCIAL CONDITION Summary. Total assets of the Company increased by $3.4 million, or 2.62%, from the end of 1996 to reach $134.9 million at March 31, 1997. This increase resulted from growth in existing operations. Loans Held for Investment. Net loans held for investment decreased by $1.8 million, or 2.2%, during the first quarter of 1997 as the construction loan portfolio experienced net paydowns of $2.5 million. The following table sets forth the amount of total loans outstanding by category as of the dates indicated: Total Loans March 31, December 31, (dollar amounts in thousands) 1997 1996 Commercial $ 17,290 $ 16,851 Real estate: Commercial 51,209 49,856 Construction 4,813 7,348 Land 960 1,807 Home equity 2,501 2,809 Loans to consumers and individuals 2,571 2,458 Total 79,344 81,129 Deferred loan fees (69) (63) Allowance for possible credit losses (929) (944) Total net loans $ 78,346 $ 80,122 In the normal practice of extending credit, the Company accepts real estate collateral on loans which have primary sources of repayment from commercial operations. The total amount of loans secured by real estate equaled $63.8 million, or 81.5% of the total portfolio as of March 31, 1997. Due to the Company's limited marketing area, its real estate collateral is primarily concentrated in the San Francisco Bay Area and Southern California. The Company believes that its prudent underwriting standards for real estate secured loans provides an adequate safeguard against decreasing real estate prices. The Company focuses its portfolio lending on commercial, commercial real estate, and construction loans. These loans generally carry a higher level of risk than conventional real estate loans, accordingly, yields on these loans are typically higher than those of other loans. The performance of commercial and construction loans is generally dependent upon future cash flows from business operations (including the sale of products, merchandise and services) and the successful completion or operation of large real estate projects. Risks attributable to such loans can be significantly increased, often to a greater extent than other loans, by regional economic factors, real estate prices, the demand for commercial and retail office space, and the demand for products and services of industries which are concentrated within the Company's loan portfolio. As of March 31, 1997, the two largest industry concentrations within the loan portfolio were real estate and related services at 24.2% and the business/personal service industry at 18.4% of the portfolio. Because credit concentrations increase portfolio risk, the Company places significant emphasis on the purpose of each loan and the related sources of repayment. The Company generally limits unsecured commercial loans to maturities of three years and secured commercial loans to maturities of five years. Mortgage Loans. No mortgage loans sold pending settlement existed at March 31, 1997 versus $647,600 at December 31, 1996. Due to production changes in the mortgage industry and the unfavorable prospects for future improvement, the Company decided to wind down its wholesale Mortgage Banking operations at the end 1996. The mortgage industry continues to shift away from the use of wholesalers in favor of direct lending. In addition, competitive pressures continue to reduce the gross margins earned by wholesalers. Nonperforming Assets. The Company carefully monitors the quality of its loan portfolio and the factors that effect it including regional economic conditions, employment stability, and real estate values. The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection. As of March 31, 1997, the Company had nonperforming assets in the amount of $626,000, of which $79,000 represented one nonaccrual loan. Had this nonaccrual loan performed under its contractual terms $3,114 in additional interest income would have been recognized during 1997. The following table sets forth the balance of nonperforming assets as of the dates indicated. Nonperforming Assets March 31, December 31, (dollar amounts in thousands) 1997 1996 Nonaccrual loans $ 79 $ 79 Loans 90 days or more past due and still accruing 547 Other real estate owned $ 626 $ 79 As a percent of total loans 0.79% 0.10% As a percent of total assets 0.46% 0.06% At March 31, 1997, the Company had loans identified as impaired in the amount of $626,000. At March 31, 1997, no specific allowance for possible credit losses was required for these impaired loans. Allowance for Possible Credit Losses. The Company maintains an allowance for possible credit losses ("APCL") which is reduced by credit losses and increased by credit recoveries and provisions to the APCL charged against operations. Provisions to the APCL and the total of the APCL are based, among other factors, upon the Company's credit loss experience, current and projected economic conditions, the performance of loans within the portfolio, evaluation of loan collateral value, and the prospects or worth of respective borrowers and guarantors. In determining the adequacy of its APCL and after carefully analyzing each loan individually, the Company segments its loan portfolio into pools of homogeneous loans that share similar risk factors. Each pool is given a risk assessment factor which largely reflects the expected future losses from each category. These risk assessment factors change as economic conditions shift and actual loan losses are recorded. As of March 31, 1997, the APCL of $928,680, or 1.17% of total loans was determined to be adequate against foreseeable future losses. The following table summarizes, for the periods indicated, loan balances at the end of each period and average balances during the period, changes in the APCL arising from credit losses, recoveries of credit losses previously incurred, additions to the APCL charged to operating expense, and certain ratios relating to the APCL (dollar amounts in thousands): March 31, December 31, 1997 1996 Balances: Average loans during period (includes mortgage loans held for sale) $ 78,825 $ 72,393 Loans at end of period (includes mortgage loans held for sale) 79,275 81,713 Allowance for Possible Credit Losses: Balance at beginning of period 944 752 Actual credit losses: Commercial loans 45 47 Loans to consumers and individuals 1 Total 46 47 Actual credit recoveries: Commercial loans 11 16 Loans to consumers and individuals 3 Total 11 19 Net credit losses 35 28 Provision charged to operating expenses 20 220 Balance at end of period $ 929 $ 944 Ratios: Net credit losses to average loans 0.04% 0.04% Allowance for possible credit losses to loans at end of period 1.17% 1.16% Net credit losses to beginning of period allowance for credit losses 3.71% 3.72% The Company provided $20,000 to the allowance for possible credit losses during the first quarter of 1997 as compared to $140,000 during the same period of 1996. The $140,000 provision during the first quarter of 1996 was recorded as a prudent measure, based upon growth in the loan portfolio. The following table sets forth the allocation of the APCL as of the dates indicated (dollar amounts in thousands): March 31, December 31, 1997 1996 % of % of Category Category to Total to Total APCL Loans APCL Loans Commercial loans $ 567 40.06% $ 583 42.85% Real estate loans 207 53.02% 202 50.27% Consumer loans 60 6.92% 48 6.88% Not allocated 95 N/A 111 N/A Total $ 929 100% $ 944 100% The allowance is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories. The allocation of the allowance as shown above should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. In addition to the most recent analysis of individual loans and pools of loans, management's methodology also places emphasis on historical loss data, delinquency and nonaccrual trends by loan classification category and expected loan maturity. This analysis, management believes, identifies potential losses within the loan portfolio and therefore results in allocation of a large portion of the allowance to specific loan categories. Investments. The Company continues to invest in callable government agency debentures. These securities offer above market yields, but do not offer the same investment performance as non-callable bonds. Markets prices for callable bonds decrease when interest rates rise; however, they remain relatively unchanged when interest rates fall due to the increased probability of a call option being exercised. The following table sets forth the amortized cost and approximate market value of investment securities as of the dates indicated (dollar amounts in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying March 31, 1997: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $24,740 $(580) $24,160 $24,740 Total held to maturity 24,740 (580) 24,160 24,740 Available for sale securities: U.S. Treasury 3,977 $3 3,980 3,980 U.S. Government agencies 5,000 (53) 4,947 4,947 Mortgage-backed securities 4,077 (159) 3,918 3,918 Municipal bonds 165 165 165 Total available for sale 13,218 3 (213) 13,009 13,009 Total investment securities$37,959 $3 $(794) $37,169 $37,749 December 31, 1996: Held to maturity securities: U.S. Government agencies $25,739 $9 $(215) $25,534 $25,740 Total held to maturity 25,739 9 (215) 25,534 25,740 Available for sale securities: U.S. Treasury 4,977 22 (1) 4,998 4,998 Mortgage-backed securities 4,275 (99) 4,176 4,176 Municipal bonds 165 1 166 166 Total available for sale 9,417 22 (100) 9,340 9,340 Total investment securities$35,157 $31 $(315) $34,873 $35,079 Deposits/Other Borrowings. Total consolidated deposits increased by $2.8 million, or 2.3%, during the first quarter of 1997. This increase was primarily the result of growth in existing operations. During 1996, Management made a decision to slow the Company's rate of growth in order to concentrate on improving profit margins. This policy included repositioning the Company's deposit rates in the marketplace so as to limit non-relationship deposit growth. This policy continued during the first quarter of 1997 resulting in lower interest rates paid on deposits during the first quarter of 1997. Average noninterest-bearing demand deposits increased 9.2% during the first quarter contributing to the decrease in the cost of funds to 3.32% from 3.48% during 1996. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated (dollar amounts in thousands): Three Months Ended Year Ended March 31, 1997 December 31, 1996 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing demand deposits $24,694 $22,607 Interest-bearing demand deposits (includes money market deposit accounts) 74,602 4.02% 70,533 4.11% Savings deposits 1,885 1.90% 2,363 1.95% Time deposits, $100,000 and over 9,260 5.31% 9,023 5.50% Other time deposits 8,523 4.98% 10,009 5.40% Total interest-bearing 94,270 4.19% 91,928 4.34% Total deposits $118,964 3.32% $114,535 3.48% The following table sets forth the time remaining to maturity of the Company's time deposits in amounts of $100,000 or more (dollar amounts in thousands): March 31, December 31, Time remaining to maturity 1997 1996 Three months or less $ 3,292 $3,835 After three months to six months 2,306 1,934 After six months to one year 2,733 2,159 After twelve months 1,039 1,555 Total $ 9,370 $9,483 RESULTS OF OPERATIONS Net Interest Income/Net Interest Margin. Net interest income for the quarter ended March 31, 1997 was $1,640,337 an increase of 25.8% over the net interest income of $1,303,910 during the same period of 1996. The increase was primarily due to growth in average earning assets. The following table sets forth average assets, liabilities, and shareholders' equity; the amount of interest income or interest expense; and the average yield or rate for each category of interest-bearing assets and interest-bearing liabilities and the net interest margin (net interest income divided by average earning assets) for the periods indicated (dollar amounts in thousands): For the quarter ended March 31, 1997 1996 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $5,614 $72 5.13% $9,401 $123 5.23% Interest-bearing deposits with banks 384 6 6.25% 1,108 18 6.50% Investment securities 35,499 560 6.32% 37,458 560 5.99% Mortgage loans held for sale 266 5 7.52% 2,066 44 8.52% Loans 78,825 1,992 10.11% 60,070 1,568 10.44% Total earning assets 120,588 2,635 8.74% 110,103 2,313 8.41% Total non-earning assets 10,546 12,242 Total assets $ 131,134 $ 122,345 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $24,694 $19,657 Interest-bearing transaction accounts 74,602 749 4.02% 66,533 691 4.15% Time deposits, $100,000 or more 9,260 123 5.31% 8,894 127 5.71% Savings and other time 10,408 115 4.42% 14,755 185 5.02% Total interest-bearing deposits 94,270 987 4.19% 90,182 1,003 4.45% Other borrowings 719 8 4.45% 513 6 4.68% Total interest-bearing liabilities 94,989 995 4.19% 90,695 1,009 4.45% Other liabilities 1,101 3,605 Shareholders' equity 10,350 8,388 Total liabilities and shareholders' equity$131,134 $122,345 Net interest income $ 1,640 $ 1,304 Net interest margin 5.44% 4.74% The net interest margin increased to 5.44% during the first quarter of 1997 from 4.74% in the same quarter of 1996. The increase was due to increased loans and lower deposit costs. The following table presents the dollar amount of changes in interest earned and interest paid for each major category of interest-earning asset and interest-bearing liability and the amount of change attributable to average balances (volume) fluctuations and average rate fluctuations. The variance attributable to both balance and rate fluctuations is allocated to a combined rate/volume variance (dollar amounts in thousands). Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996 Increase (decrease) due to Rate/ Volume Rate Volume Total Interest Income: Federal funds sold ($50) ($2) $1 ($51) Interest-bearing deposits with banks (12) (1) 1 (12) Investment securities (29) 31 (2) 0 Mortgage loans held for sale (38) (5) 4 (39) Loans 490 (50) (16) 424 Total Interest Income 361 (27) (12) 322 Interest Expense: Interest-bearing transaction accounts 84 (22) (4) 58 Time deposits, $100,000 or more 5 (9) 0 (4) Savings and other time (55) (22) 7 (70) Other borrowings 2 0 0 2 36 (53) 3 (14) Net Interest Income $325 $26 ($15) $336 Noninterest Income. The following table summarizes noninterest income for periods indicated and expresses the amounts as a percentage of average assets (dollar amounts in thousands). Quarter Ended March 31, Components of Noninterest Income 1997 1996 Gain on sale of loans $ 53 $ 110 Service fees on deposit accounts 114 91 Recovery of litigation expenses 1,800 Other 39 109 Total $ 206 $ 2,110 As a Percentage of Average Assets (Annualized) Gain on sale of loans 0.16% 0.36% Service fees on deposit accounts 0.35% 0.30% Recovery of litigation expenses 5.88% Other 0.12% 0.36% Total 0.63% 6.90% During the first quarter of 1996, the Company recovered approximately $1.8 million in litigation expenses in conjunction with the settlement and release of its litigation involving Chino Valley Bank. Noninterest Expenses. The following table summarizes noninterest expenses and the associated ratios to average assets for the periods indicated. Quarter Ended March 31, Components of Noninterest Expense 1997 1996 Salaries and employee benefits $ 790 $ 965 Occupancy expense 192 174 Furniture and equipment expense 89 94 Professional services 61 52 Supplies 53 53 Promotional expenses 51 38 Data processing fees 71 65 Regulatory assessments 14 11 Other 89 83 Total $ 1,410 $ 1,535 Average full-time equivalent employees 50 50 As a Percentage of Average Assets (Annualized) Salaries and employee benefits 2.41% 3.16% Occupancy expense 0.59% 0.57% Furniture and equipment expense 0.27% 0.31% Professional services 0.19% 0.17% Supplies 0.16% 0.17% Promotional expenses 0.16% 0.12% Data processing fees 0.22% 0.21% Regulatory assessments 0.04% 0.04% Other 0.27% 0.27% Total 4.30% 5.02% Noninterest expense decreased to $1.4 million during the first quarter of 1997 from $1.5 million during the same period of the prior year. Income Taxes. The Company's effective tax rate for the quarter ended March 31, 1997 was 40.8% as compared to 41.6% in the same period of the prior year. Liquidity and Asset/Liability Management. Liquidity is the Company's ability to absorb fluctuations in deposits while simultaneously providing for the credit needs of its borrowers. The objective in liquidity management is to balance the sources and uses of funds. Primary sources of liquidity for the Company include payments of principal and interest on loans and investments, proceeds from the sale or maturity of loans and investments, growth in deposits, and other borrowings. The Company holds overnight federal funds as a cushion for temporary liquidity needs. During the three months ended March 31, 1997, federal funds sold averaged $5.6 million, or 4.3% of total assets. In addition to its federal funds, the Company maintains various lines of credit with correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank. At March 31, 1997, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $49.2 million, or 36.5% of total assets. This represented all available liquid assets, excluding other assets. Several methods are used to measure liquidity. One method is to measure the balance between loans and deposits (gross loans divided by total deposits). In general, the closer this ratio is to 100%, the more reliant an institution becomes on its illiquid loan portfolio to absorb temporary fluctuations in deposit levels. At March 31, 1997, the loan-to-deposit ratio was 64.6% as compared to 68.1% at December 31, 1996. Another frequently used method is the relationship between short-term liquid assets (federal funds sold and investments maturing within one year) and short-term liabilities (total deposits and other borrowings) as measured by the liquidity ratio. The Company targets a minimum ratio of 5%. At March 31, 1997, this ratio was 10.6% as compared to 5.1% at December 31, 1996. As of March 31, 1997, the Company had no material commitments that were expected to adversely impact liquidity. Net interest income and the net interest margin are largely dependent on the Company's ability to closely match interest- earning assets with interest-bearing liabilities. As interest rates change, the Company must constantly balance maturing and repricing liabilities with maturing and repricing assets. This process is called asset/liability management and is commonly measured by the maturity/repricing gap. The maturity/repricing gap is the dollar difference between maturing or repricing assets and maturing or repricing liabilities at different intervals of time. The following tables sets forth rate sensitive interest- earning assets and interest-bearing liabilities as of March 31, 1997, the interest rate sensitivity gap (i.e. interest sensitive assets minus interest sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (interest sensitive assets divided by interest sensitive liabilities) and the cumulative interest rate sensitivity gap ratio. For the purposes of the following table, an asset or liability is considered rate sensitive within a specified period when it matures or can be repriced within that period pursuant to its original contractual terms (dollar amounts in thousands): March 31, 1997 Over 90 Over 180 After One After 90 days days to days to Year to Five or less 180 days 365 days Five Yrs Years Total Earning Assets (Rate Sensitive): Federal funds sold $7,780 $7,780 Interest-bearing deposits with other banks $98 $286 384 Investment securities 1,261 1,230 2,456 $21,515 $11,497 37,959 Loans, gross of allowance for possible losses 36,063 1,585 2,278 23,238 16,111 79,275 Total 45,104 2,913 5,020 44,753 27,608 125,398 Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 10,059 33,456 33,456 76,971 Time deposits, $100,000 or more 3,292 2,306 2,733 1,039 9,370 Savings and other time deposits 2,674 1,763 2,868 2,762 10,067 Other borrowings 744 744 Total 16,769 4,069 39,057 37,257 97,152 Period GAP $ 28,335 $(1,156)$(34,037) $7,496 $27,608 Cumulative GAP $ 28,335 $27,179 $ (6,858) $638 $28,246 Interest Sensitivity GAP Ratio62.82% (39.68%)(678.03%) 16.75% 100.00% Cumulative Interest Sensitivity 62.82% 56.60% (12.93%) 0.65% 22.53% The Company classifies its money market accounts and savings accounts into the over 180 days to 365 days time period as well as the after one year to five years time period. This is done to adjust for the insensitivity of these accounts to changes in interest rates. Although rates on these accounts can contractually be reset at the Company's discretion, historically these accounts have not demonstrated strong correlation to changes in the prime rate. Generally, a positive gap at one year indicates that net interest income and the net interest margin will increase if interest rates rise in the future. The Company neither currently utilizes financial derivatives to hedge its asset/liability position nor has any plans to employ such strategies in the near future. Capital Resources. The principal source of capital for the Company is and will continue to be the retention of operating profits. The ratios of average equity to average assets for the periods indicated are set forth below. Three Months Ended Year Ended March 31, 1997 December 31, 1996 7.89% 7.44% Regulatory authorities have issued guidelines to implement risk-based capital requirements. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Capital is classified into two components: Tier 1 (primarily shareholder's equity) and Tier 2 (supplementary capital including allowance for possible credit losses, certain preferred stock, eligible subordinated debt, and other qualifying instruments). The guidelines require that qualifying capital be 8% of risk-based assets, of which at least 4% must be Tier 1 capital. As of March 31, 1997, the Company's qualifying capital was 12.1%, 11.1% of which was Tier 1 capital. In addition, the Company, under the guidelines established for adequately capitalized institutions, must also maintain a minimum leverage ratio (Tier 1 capital divided by total assets) of 4%. As of March 31, 1997, the Company's leverage ratio was 7.8%. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) List of Exhibits: (3)(a) -- Articles of incorporation (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (3)(b) -- By-laws (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (10)(a)(1) -- Stock Option Plan (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (10)(a)(2) -- Deferred Compensation Plan for Executives (incorporated by reference to Exhibit (10)(a)(2) to the registrant's Annual Report on Form 10- KSB for its fiscal year ended December 31, 1994). (10)(b) -- Leases (10)(b)(1) -- San Rafael Office Lease (incorporated by reference to Exhibit (10)(b)(1) to the registrant's Annual Report on Form 10- KSB for its fiscal year ended December 31, 1994). (10)(b)(2) --South San Francisco Office Lease (incorporated by reference to Exhibit (10)(b)(2) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(b)(3) -- Hayward Office Lease (incorporated by reference to Exhibit (10)(b)(3) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (10)(b)(4) -- Upland Office Lease (incorporated by reference to Exhibit (10)(b)(4) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1994). (27) -- Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MCB FINANCIAL CORPORATION (Registrant) Date: May 14, 1997 /s/ Brian M. Riley Brian M. Riley Chief Financial Officer (Principal Accounting Officer) EX-27 2
9 1,000 3-MOS DEC-31-1997 MAR-31-1997 5,659 384 7,780 0 13,009 24,740 24,160 79,275 929 134,945 122,635 744 1,174 0 0 0 9,435 956 134,945 1,998 566 72 2,636 987 995 1,640 20 0 1,410 417 417 0 0 247 .25 .25 8.74 79 547 0 0 944 46 11 929 834 0 95
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