-----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, BBVfLBsQmzwwuMQx79ywwcw/YSzh23Jy5tvWZlZlCwiHen6G5oQ0KBA0PaKd0EDq FcHtESqI80+xnlikASDTcA== 0000902789-97-000020.txt : 19971117 0000902789-97-000020.hdr.sgml : 19971117 ACCESSION NUMBER: 0000902789-97-000020 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 033-76832 FILM NUMBER: 97719961 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 September 30, 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: November 10, 1997 Class Common stock, no par value 1,027,540 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 ASSETS (Unaudited) Cash and due from banks $ 8,317,916 $ 9,609,584 Federal funds sold 5,800,000 770,000 Total cash and cash equivalents 14,117,916 10,379,584 Interest-bearing deposits with banks 286,000 384,000 Investment securities available for sale at fair value 11,415,029 9,339,550 Investment securities held to maturity; fair values of $26,682,890 in 1997 and $25,533,850 in 1996 26,741,271 25,739,588 Mortgage loans sold pending settlement 647,600 Loans held for investment (net of allowance for possible credit losses of $1,001,015 in 1997 and $944,105 in 1996 85,931,076 80,121,693 Premises and equipment - net 2,431,882 2,278,163 Accrued interest receivable 939,881 1,003,016 Deferred income taxes 661,051 621,191 Other assets 1,035,843 989,921 Total assets $ 143,559,949 $ 31,504,306 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 29,849,952 $ 26,265,743 Interest-bearing: Transaction accounts 79,884,106 73,532,399 Time certificates, $100,000 and over 10,869,935 9,483,134 Savings and other time deposits 9,703,156 10,577,186 Total interest-bearing deposits 100,457,197 93,592,719 Total deposits 130,307,149 119,858,462 Other borrowings 736,096 446,776 Accrued interest payable and other liabilities 1,034,196 1,013,939 Total liabilities 132,077,441 121,319,177 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 1,030,460 shares in 1997 and 954,422 shares in 1996, outstanding 1,018,880 shares in 1997 and 942,842 in 1996 10,238,029 9,398,574 Unrealized loss on investment securities available For sale-net (18,182) (45,378) Retained earnings 1,262,661 831,933 Total shareholders' equity 11,482,508 10,185,129 Total liabilities and shareholders' equity $ 143,559,949$131,504,306 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended For the Nine Months September 30, Ended September 30, 1997 1996 1997 1996 (Unaudited) (Unaudited) INTEREST INCOME: Loans, including fees $ 2,234,858 $ 2,095,254 $ 6,339,870 $ 5,589,186 Federal funds sold 79,567 32,487 249,619 190,665 Investment securities 687,358 609,622 1,895,154 1,857,321 Total 3,001,783 2,737,363 8,484,643 7,637,172 INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 947,743 879,456 2,742,023 2,614,568 Time certificates, $100,000 and over 142,704 122,819 392,129 368,705 Other interest 5,858 9,088 20,983 23,747 Total 1,096,305 1,011,363 3,155,135 3,007,020 NET INTEREST INCOME 1,905,478 1,726,000 5,329,508 4,630,152 PROVISION FOR POSSIBLE CREDIT LOSSES 20,000 35,000 60,000 175,000 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 1,885,478 1,691,000 5,269,508 4,455,152 OTHER INCOME: Gain on sale of loans 26,046 88,994 116,174 347,607 Service fees on deposit accounts 124,566 96,645 360,446 286,058 Loan servicing fees 7,808 6,083 23,249 17,453 Recovery of litigation expenses 1,824,689 Other 56,215 29,857 125,013 104,980 Total 214,635 221,579 624,882 2,580,787 OTHER EXPENSES: Salaries and employee benefits 708,979 720,889 2,254,733 2,449,634 Occupancy expense 200,764 180,828 583,212 529,594 Furniture and equipment expense 74,405 96,386 247,939 292,692 Professional services 165,485 75,946 267,604 137,808 Supplies 49,009 52,971 151,324 172,734 Promotional expenses 47,423 67,105 151,528 157,515 Data processing fees 105,961 69,004 253,266 200,935 Regulatory assessments 15,544 11,516 45,021 34,143 Other 86,938 86,392 275,041 252,108 Total 1,454,508 1,361,037 4,229,668 4,227,163 INCOME BEFORE INCOME TAXES 645,605 551,542 1,664,722 2,808,776 INCOME TAX EXPENSE 267,357 224,888 684,031 1,159,526 NET INCOME $ 378,248 $ 326,654 $ 980,691 $ 1,649,256 NET INCOME PER COMMON SHARE: Primary $ 0.36 $ 0.33 $ 0.94 $ 1.66 Fully diluted $ 0.35 $ 0.33 $ 0.93 $ 1.66 See notes to condensed consolidated financial statements MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: (Unaudited) Net income $ 980,691 $ 1,649,250 Adjustments to reconcile net income to net cash provided by operating activities: Originations of loans for sale (26,407,000) Settlement of mortgage loans sold 647,600 29,060,220 Provision for possible credit losses 60,000 175,000 Depreciation and amortization 241,852 400,063 Recovery of litigation expenses (1,800,000) Change in deferred income taxes (59,186) 1,435,503 Decrease in accrued interest receivable 63,135 116,503 (Increase) decrease in other assets (56,430) 1,915,664 Increase (decrease) in accrued interest payable and other liabilities 76,215 (1,992,765) Net cash provided by operating activities 1,953,877 4,552,438 INVESTING ACTIVITIES: Held to maturity securities: Maturities 3,000,000 Calls 2,000,000 6,000,000 Purchases (3,000,000) (16,238,750) Available for sale securities: Maturities 3,997,064 10,998,591 Calls 2,000,000 Purchases (8,016,758) (1,000,481) Decrease in interest-bearing deposits with banks 98,000 885,000 Net increase in loans held for investment (5,869,383) (19,556,295) Purchases of premises and equipment (409,109) (89,797) Net cash used by investing activities (9,200,186) (16,001,732) FINANCING ACTIVITIES: Net increase in noninterest-bearing demand deposits 3,584,209 2,624,322 Net increase in interest-bearing transaction, savings and other time deposits 6,864,478 5,269,058 Net increase in other borrowings 289,320 537,122 Cash dividends paid (2,122) Proceeds from the exercise of stock options 248,756 Net cash provided by financing activities 10,984,641 8,430,502 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,738,332 (3,018,792) CASH AND CASH EQUIVALENTS: Beginning of period 10,379,584 12,566,117 End of period $ 14,117,916 $ 9,547,325 CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 3,167,006 $ 3,155,374 Income taxes $ 720,000 $ 1,600 NONCASH INVESTING AND FINANCING ACTIVITIES: Stock dividends paid on common stock $ 590,699 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 nine months ended September 30, 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 Nine Months Months Ended Ended September 30, September 30, 1997 1996 1997 1996 Pro forma basic EPS. . . . . . . . . . . . $0.38 $0.33 $0.98 $1.67 Pro forma diluted EPS. . . . . . . . . . . $0.36 $0.33 $0.94 $1.66 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 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 $378,248, or $0.36 per share, for the third quarter of 1997. This compares to net income of $326,654, or $0.33 per share, for the same period in 1996. Improvement in net interest income, due to the growth in average loans, continued to positively impact the net interest margin. For the nine months ended September 30, 1997, the Company reported net income of $980,691 or $0.94 per share. This compares to net income of $1,649,250, or $1.66 per share, for the same period of 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 nine months ended September 30, 1996 would have been approximately $777,000 or $0.78 per share. Return on average assets and return on average equity for the third quarter of 1997 were 1.06% and 13.46%, respectively, as compared to 1.02% and 13.45%, respectively, for the same period of 1996. Return on average assets and return on average equity for the nine months ended September 30, 1997 were 0.95% and 12.12%, respectively, as compared to 1.76% and 23.98%, respectively, for the same period of 1996. FINANCIAL CONDITION Summary. Total assets of the Company increased by $12.1 million, or 9.2%, from the end of 1996 to reach $143.6 million at September 30, 1997. This increase resulted from growth in existing operations. Loans Held for Investment. Net loans held for investment increased by $5.8 million, or 7.25%, during the first nine months of 1997. The following table sets forth the amount of total loans outstanding by category as of the dates indicated: Total Loans September 30, December 31, (dollar amounts in thousands) 1997 1996 Commercial $ 22,737 $ 16,851 Real estate: Commercial 53,974 49,856 Construction 4,470 7,348 Land 1,024 1,807 Home equity 2,316 2,809 Loans to consumers and individuals 2,521 2,458 Total 87,042 81,129 Deferred loan fees (110) (63) Allowance for possible credit losses (1,001) (944) Total net loans $ 85,931 $ 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 $69.3 million, or 79.7% of the total portfolio as of September 30, 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 declining real estate prices which may effect a borrower's ability to liquidate the property and repay the loan. 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 September 30, 1997, the two largest industry concentrations within the loan portfolio were real estate and related services at 23.7% and the business/personal service industry at 17.9% 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 September 30, 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 of 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 September 30, 1997, the Company had nonperforming assets in the amount of $176,000, of which $79,000 represented one nonaccrual loan. Had this nonaccrual loan performed under its contractual terms approximately $9,593 in additional interest income would have been recognized during 1997. The Company had loans 90 days or more past due and still accruing in the amount of $97,000. These loans are well secured and in the process of collection. The following table sets forth the balance of nonperforming assets as of the dates indicated. Nonperforming Assets September 30, December 31, (dollar amounts in thousands) 1997 1996 Nonaccrual loans $ 79 $ 79 Loans 90 days or more past due and still accruing 97 Other real estate owned $ 176 $ 79 As a percent of total loans 0.20% 0.10% As a percent of total assets 0.12% 0.06% At September 30, 1997, the Company had loans identified as impaired in the amount of $176,000. At September 30, 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 September 30, 1997, the APCL of $1,001,015, or 1.15% 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): September 30, December 31, 1997 1996 Balances: Average loans during period (includes mortgage loans held for sale) $ 80,441 $ 72,393 Loans at end of period (includes mortgage loans held for sale) 86,932 81,713 Allowance for Possible Credit Losses: Balance at beginning of period 944 752 Actual credit losses: Commercial loans 46 47 Loans to consumers and individuals 3 Total 49 47 Actual credit recoveries: Commercial loans 46 16 Loans to consumers and individuals 3 Total 46 19 Net credit losses 3 28 Provision charged to operating expenses 60 220 Balance at end of period $ 1,001 $ 944 Ratios: Net credit losses to average loans 0.00% 0.04% Allowance for possible credit losses to loans at end of period 1.15% 1.16% Net credit losses to beginning of period allowance for credit losses 0.32% 3.72 The Company provided $20,000 to the allowance for possible credit losses during the third quarter of 1997 as compared to $35,000 during the same period of 1996. For the nine months ended September 30, 1997, the Company provided $60,000 to the allowance for possible credit losses as compared to $175,000 during the same period of 1996. A provision of $140,000 was recorded during the first quarter of 1996 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): September 30, 1997 December 31, 1996 % of % of Category Category to Total to Total APCL Loans APCL Loans Commercial loans $ 553 44.33% $ 583 42.85% Real estate loans 230 49.94% 202 50.27% Consumer loans 44 5.73% 48 6.88% Not allocated 174 N/A 111 N/A Total $ 1,001 100.00% $ 944 100.00% 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 U.S. government agency securities. These securities offer above market yields, but may be called if interest rates fall below certain levels. If these securites are called, the Company may not be able to reinvest the proceeds to obtain the same yield. The following table sets forth the amortized cost and approximate market value of investment securities as of the dates indicated: Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying September 30, 1997: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $26,741,271 $51,062 $(109,443) $26,682,890 $26,741,271 Total held to maturity 26,741,271 51,062 (109,443) 26,682,890 26,741,271 Available for sale securities: U.S. Treasury 5,001,814 21,623 5,023,437 5,023,437 U.S. Government agencies 3,000,000 2,813 3,002,813 3,002,813 Mortgage-backed Securities 3,304,316 (56,181) 3,248,135 3,248,135 Municipal bonds 140,000 644 140,644 140,644 Total availalable for sale 11,446,130 25,080 (56,181) 11,415,029 11,415,029 Total investment securities $38,187,401 $76,142 $(165,624) $38,097,919 $38,156,300 Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Decemmber 31, 1997: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $25,739,588 $ 9,178 $(214,916) $25,533,850 $25,739,588 Total held to maturity 25,739,588 9,178 (214,916) 25,533,850 25,739,588 Available for sale securities: U.S. Treasury 4,976,871 21,550 (621) 4,997,800 4,997,800 Mortgage-backed Securities 4,275,304 (99,054) 4,176,250 4,176,250 Municipal bonds 165,000 500 165,500 165,000 Total availalable for sale 9,417,175 22,050 (99,675) 9,339,550 9,339,550 Total investment securities $35,156,763 $31,228 $(314,591) $34,873,400 $35,079,138 Deposits/Other Borrowings. Total consolidated deposits increased by $10.4 million, or 8.7%, during the nine months ended September 30, 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 nine months ended September 30, 1997 resulting in lower interest rates paid on deposits as compared to the year ended December 31, 1996. Average noninterest-bearing demand deposits increased 15.3% during the nine months ended September 30, 1997 contributing to the decrease in the cost of funds to 3.37% 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): Nine Months Ended Year Ended September 30, 1997 December 31, 1996 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing demand deposits $ 26,069 $ 22,607 Interest-bearing demand deposits (includes money market deposit accounts) 78,476 4.09% 70,533 4.11% Savings deposits 1,893 1.94% 2,363 1.95% Time deposits, $100,000 and over 9,692 5.39% 9,023 5.50% Other time deposits 8,148 5.10% 10,009 5.40% Total interest-bearing 98,209 4.26% 91,928 4.34% Total deposits $124,278 3.37% $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): September 30, December 31, Time remaining to maturity 1997 1996 Three months or less $ 2,988 $ 3,835 After three months to six months 3,088 1,934 After six months to one year 4,069 2,159 After twelve months 725 1,555 Total $ 10,870 $ 9,483 RESULTS OF OPERATIONS Net Interest Income/Net Interest Margin. Net interest income for the quarter ended September 30, 1997 was $1,905,478, an increase of 10.4% over the net interest income of $1,726,000 during the same period of 1996. Net interest income for the nine months ended September 30, 1997 was $5,329,508, an increase of 15.1% over the net interest income of $4,630,152 during the same period of 1996. The increases in both periods were primarily due to the growth in commercial lending. 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 September 30, 1997 1996 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 5,801 $ 80 5.52% $ 2,531 $ 32 5.06% Interest-bearing deposits with banks 338 5 5.92% 467 7 6.00% Investment securities 42,168 682 6.47% 38,247 603 6.32% Mortgage loans held for sale 964 21 8.71% Loans 83,380 2,235 10.72% 74,472 2,074 11.14% Total earning assets 131,687 3,002 9.12% 116,681 2,737 9.39% Total non-earning assets 11,051 11,238 Total assets $142,738 $127,919 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 27,957 $ 23,734 Interest-bearing transaction Accounts 81,569 836 4.10% 71,962 746 4.15% Time deposits, $100,000 or more 10,292 143 5.56% 9,105 123 5.40% Savings and other time 9,780 111 4.54% 11,580 133 4.59% Total interest-bearing deposits 101,641 1,090 4.29% 92,647 1,002 4.33% Other borrowings 484 6 4.96% 799 9 4.51% Total interest-bearing Liabilities 102,125 1,096 4.29% 93,446 1,011 4.33% Other liabilities 1,414 1,026 Shareholders' equity 11,242 9,713 Total liabilities and shareholders' equity $142,738 $127,919 Net interest income $1,906 $1,726 Net interest margin 5.79% 5.92% For the nine months ended September 30, 1997 1996 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 6,214 $ 250 5.36% $ 4,878 $ 191 5.22% Interest-bearing deposits with banks 369 17 6.14% 747 35 6.25% Investment securities 39,059 1,878 6.42% 39,287 1,822 6.19% Mortgage loans held for sale 87 5 7.66% 1,660 103 8.27% Loans 80,354 6,335 10.51% 66,783 5,486 10.95% Total earning assets 126,083 8,485 8.98% 113,355 7,637 8.99% Total non-earning assets 10,840 11,856 Total assets $136,923 $125,211 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 26,069 $ 21,897 Interest-bearing transaction Accounts 78,476 2,403 4.08% 69,724 2,152 4.12% Time deposits, $100,000 or more 9,692 392 5.39% 8,911 369 5.52% Savings and other time 10,041 339 4.50% 12,905 462 4.77% Total interest-bearing deposits 98,209 3,134 4.25% 91,540 2,983 4.34% Other borrowings 597 21 4.69% 690 24 4.64% Total interest-bearing Liabilities 98,806 3,155 4.26% 92,230 3,007 4.35% Other liabilities 1,260 1,915 Shareholders' equity 10,788 9,169 Total liabilities and shareholders' equity $136,923 $125,211 Net interest income $5,330 $4,630 Net interest margin 5.64% 5.45% The net interest margin decreased to 5.79% during the third quarter of 1997 from 5.92% in the same quarter of 1996 as loan yields fell to 10.72% compared to 11.14%. For the nine months ended September 30, 1997, the net interest margin increased to 5.64% from 5.45% for the same period of 1996 as interest rates paid on deposits declined to 4.26% from 4.35%. 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 Nine Months Ended September 30, 1997 September 30, 1997 Compared to Compared to Quarter Ended Nine Months Ended September 30, 1996 September 30, 1996 Change in Change in Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total Interest Income: Federal funds sold $41 $3 $4 $48 $53 $5 $1 $59 Interest-bearing deposits with banks (2) 0 0 (2) (17) (1) 0 (18) Investment securities 64 14 1 79 (11) 67 0 56 Mortgage loans held for sale (21) 0 0 (21) (97) (8) 7 (98) Loans 248 (78) (9) 161 1,114 (220) (45) 849 Total Interest Income 330 (61) (4) 265 1,042 (157) (37) 848 Interest Expense: Interest-bearing Transaction accounts 100 (9) (1) 90 275 (21) (3) 251 Time deposits, $100,000 or more 16 4 0 20 33 (9) (1) 23 Savings and other time (21) (1) 0 (22) (103) (26) 6 (123) Other borrowings (4) 1 0 (3) (3) 0 0 (3) Total Interest Expense 91 (5) (1) 85 202 (56) 2 148 Net Interest Income $239 ($56) ($3) $180 $840 ($101) ($39) $700 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 Nine Months Ended September 30, September 30, Components of Noninterest Income 1997 1996 1997 1996 Gain on sale of loans $ 26 $ 89 $ 116 $ 348 Service fees on deposit accounts 125 97 361 286 Loan servicing fees 8 6 23 17 Recovery of litigation expenses 1,825 Other 56 30 125 105 Total $ 215 $ 222 $ 625 $2,581 As a Percentage of Average Assets (Annualized) Gain on sale of loans 0.07% 0.28% 0.11% 0.37% Service fees on deposit accounts 0.35% 0.30% 0.35% 0.30% Loan servicing fees 0.02% 0.02% 0.02% 0.02% Recovery of litigation expenses 1.94% Other 0.16% 0.09% 0.12% 0.11% Total 0.60% 0.69% 0.60% 2.74% 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 Nine Months Ended September 30, September 30, Components of Noninterest Expense 1997 1996 1997 1996 Salaries and employee benefits $ 709 $ 721 $2,255 $2,450 Occupancy expense 201 181 583 530 Furniture and equipment expense 74 96 248 292 Professional services 166 76 268 138 Supplies 49 53 151 173 Promotional expenses 47 67 152 157 Data processing fees 106 69 253 201 Regulatory assessments 16 12 45 34 Other 87 86 275 252 Total $1,455 $1,361 $4,230 $4,227 Average full-time equivalent employees 46 50 48 50 As a Percentage of Average Assets (Annualized) Salaries and employee benefits 1.99% 2.25% 2.20% 2.61% Occupancy expense 0.56% 0.57% 0.57% 0.56% Furniture and equipment expense 0.21% 0.30% 0.24% 0.31% Professional services 0.47% 0.24% 0.26% 0.15% Supplies 0.14% 0.17% 0.15% 0.18% Promotional expenses 0.13% 0.21% 0.15% 0.17% Data processing fees 0.30% 0.22% 0.25% 0.21% Regulatory assessments 0.04% 0.04% 0.04% 0.04% Other 0.24% 0.27% 0.27% 0.27% Total 4.08% 4.26% 4.13% 4.50% Noninterest expense increased to $1.5 million during the third quarter of 1997 from $1.4 million during the same period of the prior year. For the nine months ended September 30, 1997, noninterest expense remained consistent with the same period of the prior year. Professional services increased due to costs associated with a dispute regarding a former employee's employment agreement. Data processing fees included charges incurred in connection with making the Company's computer systems year 2000 compliant. The Company expects to continue incurring charges related to this project through the year 2000. Income Taxes. The Company's effective tax rate for the quarter ended September 30, 1997 was 41.4% as compared to 40.8% in the same period of the prior year. For the nine months ended September 30, 1997, the effective tax rate was 41.1% as compared to 41.3% 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 nine months ended September 30, 1997, federal funds sold averaged $6.2 million, or 4.5% 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 September 30, 1997, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $47.4 million, or 33.0% 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 September 30, 1997, the loan-to-deposit ratio was 66.7% 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 September 30, 1997, this ratio was 7.6% as compared to 5.1% at December 31, 1996. As of September 30, 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 September 30, 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): September 30, 1997 After One Over 90 Over 180 Year After 90 days days to days to to Five Five or less 180 days 365 days Years Years Total Earning Assets (Rate Sensitive): Federal funds sold $ 5,800 $ 5,800 Interest-bearing deposits With other banks 196 90 286 Investment securities 1,113 1,126 1,658 24,793 9,497 38,187 Mortgage loans held for sale 0 Loans, gross of allowance for possible losses 35,898 3,085 4,472 28,249 15,228 86,932 Total 43,007 4,301 6,130 53,042 24,725 131,205 Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 34,778 45,106 79,884 Time deposits, $100,000 or more 2,988 3,088 4,069 725 10,870 Savings and other time deposits 1,914 2,376 2,693 2,720 9,703 Other borrowings 736 736 Total 5,638 5,464 41,540 48,551 $101,193 Period GAP $37,369 $(1,163) $(35,410) $ 4,491 $24,725 Cumulative GAP $37,369 $36,206 $ 796 $ 5,287 $30,012 Interest Sensitivity GAP Ratio 86.89% (27.04%) (577.65%) 8.47% 100.00% Cumulative Interest Sensitivity 86.89% 76.53% 1.49% 4.97% 22.87% 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. Nine Months Ended Year Ended September 30, 1997 December 31, 1996 7.88% 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 September 30, 1997, the Company's qualifying capital was 12.28%, 11.28% 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 September 30, 1997, the Company's leverage ratio was 7.83%. 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: November 13, 1997 /s/ Patrick E. Phelan Patrick E. Phelan Chief Financial Officer (Principal Accounting Officer) 23 30 6 EX-27 2
9 1,000 9-MOS DEC-31-1997 SEP-30-1997 8,317 286 5,800 0 11,415 26,741 26,683 86,932 1,001 143,560 130,307 736 1,034 0 0 0 10,238 1,244 143,560 6,340 1,895 250 8,485 3,134 3,155 5,330 60 0 4,230 1,665 1,665 0 0 981 0.94 0.93 8.98 79 97 0 0 944 49 46 1,001 827 0 174
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