-----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, DTB0mtx2UMcSsiizOwia4gJGH93H8FHM8fsVgZhPU3avOylOL1Zj4O6as3lIsOTL aTA7lceaCQG+q+P8paNo9w== 0000902789-98-000007.txt : 19980518 0000902789-98-000007.hdr.sgml : 19980518 ACCESSION NUMBER: 0000902789-98-000007 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98625108 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, 1998 [ ] 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 8, 1998 Class Common stock, no par value 1,382,202 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS Dollar amounts in thousands March 31, December 31, 1998 1997 ASSETS (Unaudited) Cash and due from banks $ 7,602 $ 6,557 Federal funds sold 7,000 4,900 Total cash and cash equivalents 14,602 11,457 Interest-bearing deposits with banks 286 286 Investment securities available for sale at fair value 14,211 10,314 Investment securities held to maturity; fair values of $17,976 in 1998 and $25,197 in 1997 17,993 25,242 Loans held for investment (net of allowance for possible credit losses of $998 in 1998 and $1,007 in 1997 91,935 87,179 Premises and equipment - net 2,626 2,586 Accrued interest receivable 985 1,070 Deferred income taxes 591 568 Other assets 1,101 1,175 Total assets $ 144,330 $ 139,877 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 29,190 $ 29,151 Interest-bearing: Transaction accounts 79,316 75,488 Time certificates, $100,000 and over 12,327 11,565 Savings and other time deposits 9,526 9,928 Total interest-bearing deposits 101,169 96,981 Total deposits 130,359 126,132 Other borrowings 545 750 Accrued interest payable and other liabilities 1,077 1,028 Total liabilities 131,981 127,910 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 1,399,224 shares in 1998 and 1,386,876 shares in 1997, outstanding 1,382,202 shares in 1998 and 1,369,854 in 1997 10,385 10,310 Accumulated other comprehensive income (33) 1 Retained earnings 1,997 1,656 Total shareholders' equity 12,349 11,967 Total liabilities and shareholders' equity $ 144,330 $ 139,877 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, In thousands, except per share amounts 1998 1997 (Unaudited) INTEREST INCOME: Loans, including fees $ 2,353 $ 1,998 Federal funds sold 78 72 Investment securities 567 566 Total interest income 2,998 2,636 INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 891 864 Time certificates, $100,000 and over 156 123 Other interest 6 8 Total interest expense 1,053 995 NET INTEREST INCOME 1,945 1,641 PROVISION FOR POSSIBLE CREDIT LOSSES 0 20 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 1,945 1,621 OTHER INCOME: Gain on sale of loans 70 53 Service fees on deposit accounts 124 114 Loan servicing fees 9 7 Other 72 32 Total other income 275 206 OTHER EXPENSES: Salaries and employee benefits 884 790 Occupancy expense 216 192 Furniture and equipment expense 110 89 Professional services 47 61 Supplies 70 53 Promotional expenses 116 51 Data processing fees 87 71 Regulatory assessments 16 14 Other 128 89 Total other expenses 1,674 1,410 INCOME BEFORE INCOME TAXES 546 417 INCOME TAX PROVISION 223 170 NET INCOME $ 323 $ 247 BASIC EARNINGS PER SHARE $ 0.23 $ 0.19 DILUTED EARNINGS PER SHARE $ 0.22 $ 0.18 See notes to condensed consolidated financial statements MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Dollar amounts in thousands March 31, 1998 1997 (Unaudited) Net income $ 323 $ 247 Other comprehensive income, net of tax: Unrealized gain (loss) on available for sale investments: Unrealized holding loss arising during period (34) (77) Other comprehensive income (34) (77) Comprehensive income $ 289 $ 170 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Dollar amounts in thousands Ended March 31, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) Net income $ 323 $ 247 Adjustments to reconcile net income to net cash provided by operating activities: Settlement of mortgage loans sold 647 Provision for possible credit losses 20 Depreciation and amortization 117 88 Change in deferred income taxes (59) Decrease in accrued interest receivable 85 112 Decrease (increase) in other assets 70 (209) Increase in accrued interest payable and other liabilities 71 165 Net cash provided by operating activities 666 1,011 CASH FLOWS FROM INVESTING ACTIVITIES: Held to maturity securities: Calls 7,250 1,000 Available for sale securities: Maturities 1,240 1,199 Calls 1,000 Purchases (6,201) (5,000) Net (increase) decrease in loans held for investment (4,756) 1,756 Purchases of premises and equipment (151) (16) Net cash used by investing activities (1,618) (1,061) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease)in noninterest-bearing demand deposits 39 (38) Net increase in interest-bearing transaction, savings and other time deposits 4,188 2,815 Net (decrease) increase in other borrowings (205) 297 Proceeds from the exercise of stock options 75 36 Net cash provided by financing activities 4,097 3,110 NET INCREASE IN CASH AND CASH EQUIVALENTS 3,145 3,060 CASH AND CASH EQUIVALENTS: Beginning of period 11,457 10,379 End of period $ 14,602 $ 13,439 CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 1,054 $ 1,019 Income taxes $ 250 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 1. Significant Accounting Policies 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, 1997. 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, 1998 may not be indicative of operating results for the year ended December 31, 1998. 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. Stock Split In February 1998, outstanding shares of common stock were split four-for-three. All shares and per share amounts have been restated. Recently Issued Accounting Pronouncements The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes standards for all entities for reporting comprehensive income and its components in financial statements. This statement requires that all items which are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is equal to net income plus the change in "other comprehensive income," as defined by SFAS No. 130. The only component of other comprehensive income currently applicable to the Company is the net unrealized gain or loss on available for sale investments. SFAS No. 130 requires that an entity: (a) classify items of other comprehensive income by their nature in a financial statement, and (b) report the accumulated balance of other comprehensive income separately from common stock and retained earnings in the equity section of the balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 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 this statement 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. This statement is effective with the year-end 1998 financial statements. 2. Earnings Per Share The following is a reconciliation of basic earnings per share (EPS) to diluted EPS for the three month periods ended March 31, 1998 and 1997. Three months ended March 31, 1998: Net Per Share Income Shares Amount In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited) Basic EPS: Income available to common shareholders $323 1,375 $0.23 Effect of Dilutive Securities: Stock options 88 Diluted EPS: Income available to common shareholders plus assumed conversions $323 1,463 $0.22 Three months ended March 31, 1997: Net Per Share Income Shares Amount In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited) Basic EPS: Income available to common shareholders $247 1,321 $0.19 Effect of Dilutive Securities: Stock options 50 Diluted EPS: Income available to common shareholders plus assumed conversions $247 1,371 $0.18 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 $323,000, or $0.23 per share basic and $0.22 per share diluted, for the first quarter of 1998. This compares to net income of $247,000, or $0.19 per share basic and $0.18 per share diluted, for the same period in 1997. Improvement in net interest income, due to growth in average loans, continued to positively impact the net interest margin. Return on average assets and return on average equity for the first quarter of 1998 were 0.91% and 10.59%, respectively, as compared to 0.75% and 9.54%, respectively, for the same period of 1997. FINANCIAL CONDITION Summary. Total assets of the Company increased by $4.5 million, or 3.2%, from the end of 1997 to reach $144.3 million at March 31, 1998. This increase resulted primarily from growth in existing operations. Loans Held for Investment. Net loans held for investment increased by $4.8 million, or 5.5%, during the first three months of 1998 as demand for commercial real estate and construction loans increased. The following table sets forth the amount of total loans outstanding by category as of the dates indicated (dollar amounts in thousands): Total Loans March 31, December 31, 1998 1997 Commercial $ 20,740 $ 21,217 Real estate: Commercial 60,883 57,385 Construction 5,533 3,757 Land 1,386 1,307 Home equity 2,145 2,314 Loans to consumers and individuals 2,338 2,331 Total 93,025 88,311 Deferred loan fees (92) (125) Allowance for possible credit losses (998) (1,007) Total net loans $ 91,935 $ 87,179 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 $75.2 million, or 80.8% of the total portfolio as of March 31, 1998. 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 March 31, 1998, the two largest industry concentrations within the loan portfolio were real estate and related services at 28.2% and the business/personal service industry at 18.9% 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. 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, 1998, the Company had nonperforming assets in the amount of $613,000, of which $69,000 represented two nonaccrual loans. Had these nonaccrual loans performed under their contractual terms approximately $1,300 in additional interest income would have been recognized during 1998. The Company had loans 90 days or more past due and still accruing in the amount of $544,000. 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 (dollar amounts in thousands): Nonperforming Assets March 31, December 31, 1998 1997 Nonaccrual loans $ 69 $ 69 Loans 90 days or more past due and still accruing 544 40 Other real estate owned $ 613 $ 109 As a percent of total loans 0.66% 0.12% As a percent of total assets 0.42% 0.08% At March 31, 1998, the Company had loans identified as impaired in the amount of $613,000. At March 31, 1998, no specific allowance for possible credit losses was required for these impaired loans since they were adequately collateralized. 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, 1998, the APCL of $998,000, or 1.07% 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, 1998 1997 Balances: Average loans during period (net of unearned income) $ 89,349 $ 82,893 Loans at end of period (net of unearned income) 92,933 88,186 Allowance for Possible Credit Losses: Balance at beginning of period 1,007 944 Actual credit losses: Commercial loans 9 105 Loans to consumers and individuals 3 Total 9 108 Actual credit recoveries: Commercial loans 51 Loans to consumers and individuals Total 0 51 Net credit losses 9 57 Provision charged to operating expenses 0 120 Balance at end of period $ 998 $ 1,007 Ratios: Net credit losses to average loans 0.01% 0.07% Allowance for possible credit losses to loans at end of period 1.07% 1.14% Net credit losses to beginning of period allowance for credit losses 0.89% 6.04 The Company provided no allowance for possible credit losses during the first quarter of 1998 as compared to $20,000 during the same period of 1997. The following table sets forth the allocation of the APCL as of the dates indicated (dollar amounts in thousands): March 31, 1998 December 31, 1997 % of % of Category Category to Total to Total APCL Loans APCL Loans Commercial loans $ 559 42.06% $ 570 41.79% Real estate loans 264 52.79% 245 52.39% Consumer loans 41 5.15% 43 5.82% Not allocated 134 N/A 149 N/A Total $ 998 100.00% $ 1,007 100.00% 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 tables set 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, 1998: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $17,993 $ 39 $ (56) $17,976 $17,993 Total held to maturity 17,993 39 (56) 17,976 17,993 Available for sale securities: U.S. Treasury 10,206 28 (73) 10,161 10,161 Mortgage-backed Securities 1,936 (19) 1,917 1,917 Corporate securities 1,987 5 1,992 1,992 Municipal bonds 140 1 141 141 Total available for sale 14,269 34 (92) 14,211 14,211 Total investment securities $32,262 $ 73 $ (148) $32,187 $32,204 Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying December 31, 1997: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $25,242 $ 44 $ (89) $25,197 $25,242 Total held to maturity 25,242 44 (89) 25,197 25,242 Available for sale securities: U.S. Treasury 5,004 29 5,033 5,033 U.S. Government agencies 1,000 (2) 998 998 Mortgage-backed Securities 2,176 (30) 2,146 2,146 Corporate securities 1.992 5 (1) 1,996 1,996 Municipal bonds 140 1 141 141 Total available for sale 10,312 35 (33) 10,314 10,314 Total investment securities $35,554 $ 79 $ (122) $35,511 $35,556 Deposits/Other Borrowings. Total consolidated deposits increased by $4.2 million, or 3.4%, during the three months ended March 31, 1998. This increase was primarily the result of growth in existing operations. Average noninterest-bearing demand deposits increased 9.0% during the three months ended March 31, 1998 contributing to the decrease in the cost of funds to 3.26% from 3.36% during 1997. 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, 1998 December 31, 1997 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing demand deposits $ 29,448 $ 27,019 Interest-bearing demand deposits (includes money market deposit accounts) 77,413 4.04% 78,521 4.10% Savings deposits 1,918 1.80% 1,928 1.93% Time deposits, $100,000 and over 12,059 5.18% 10,214 5.42% Other time deposits 7,703 5.18% 8,080 5.13% Total interest-bearing 99,093 4.23% 98,743 4.28% Total deposits $128,541 3.26% $125,762 3.36% 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 1998 1997 Three months or less 3,060 4,359 After three months to six months 3,829 3,388 After six months to one year 4,808 3,388 After twelve months 630 430 Total 12,327 11,565 RESULTS OF OPERATIONS Net Interest Income/Net Interest Margin. Net interest income for the quarter ended March 31, 1998 was $1,945,000, an increase of 18.5% over the net interest income of $1,641,000 during the same period of 1997 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, 1998 1997 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 5,896 $ 78 5.29% $ 5,614 $ 72 5.13% Interest-bearing deposits with banks 286 4 5.59% 384 6 6.25% Investment securities 36,000 563 6.27% 35,499 560 6.32% Mortgage loans held for sale 266 5 7.52% Loans 88,346 2,353 10.65% 78,825 1,993 10.11% Total earning assets 130,528 2,998 9.19% 120,588 2,636 8.75% Total non-earning assets 11,661 10,546 Total assets $142,189 $131,134 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 29,448 $ 24,694 Interest-bearing transaction accounts 77,413 783 4.04% 74,602 749 4.02% Time deposits, $100,000 or more 12,059 156 5.18% 9,260 123 5.31% Savings and other time 9,621 108 4.49% 10,408 115 4.42% Total interest-bearing deposits 99,093 1,047 4.23% 94,270 987 4.19% Other borrowings 445 6 5.39% 719 8 4.45% Total interest-bearing Liabilities 99,538 1,053 4.23% 94,989 995 4.19% Other liabilities 1,002 1,101 Shareholders' equity 12,201 10,350 Total liabilities and shareholders' equity $142,189 $131,134 Net interest income $1,945 $1,641 Net interest margin 5.96% 5.44% The net interest margin increased to 5.96% during the first quarter of 1998 from 5.44% in the same quarter of 1997. The increase was primarily due to the increase in average loans. 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, 1998 Compared to Quarter Ended March 31, 1997 Change in Rate/ Volume Rate Volume Total Interest Income: Federal funds sold $ 4 $ 2 $ 0 $ 6 Interest-bearing deposits with banks (1) (1) 0 (2) Investment securities 8 (5) 0 3 Mortgage loans held for sale (5) (5) 5 (5) Loans 241 107 12 360 Total Interest Income 247 98 17 362 Interest Expense: Interest-bearing transaction accounts 28 6 0 34 Time deposits, $100,000 or more 37 (3) (1) 33 Savings and other time (9) 2 0 (7) Other borrowings (3) 2 (1) (2) Total Interest Expense 53 7 (2) 58 Net Interest Income $ 194 $ 91 $ 19 $ 304 Noninterest Income. The following table summarizes noninterest income for the periods indicated and expresses the amounts as a percentage of average assets (dollar amounts in thousands): Quarter Ended March 31, Components of Noninterest Income 1998 1997 Gain on sale of loans $ 70 $ 53 Service fees on deposit accounts 124 114 Loan servicing fees 9 7 Other 72 32 Total $ 275 $ 206 As a Percentage of Average Assets (Annualized) Gain on sale of loans 0.20% 0.16% Service fees on deposit accounts 0.35% 0.35% Loan servicing fees 0.02% 0.02% Other 0.20% 0.10% Total 0.77% 0.63% Noninterest Expenses. The following table summarizes noninterest expenses and the associated ratios to average assets for the periods indicated (dollar amounts in thousands): Quarter Ended March 31, Components of Noninterest Expense 1998 1997 Salaries and employee benefits $ 884 $ 790 Occupancy expense 216 192 Furniture and equipment expense 110 89 Professional services 47 61 Supplies 70 53 Promotional expenses 116 51 Data processing fees 87 71 Regulatory assessments 16 14 Other 128 89 Total $1,674 $1,410 Average full-time equivalent employees 55 50 As a Percentage of Average Assets (Annualized) Salaries and employee benefits 2.49% 2.41% Occupancy expense 0.61% 0.58% Furniture and equipment expense 0.31% 0.27% Professional services 0.13% 0.19% Supplies 0.20% 0.16% Promotional expenses 0.33% 0.16% Data processing fees 0.24% 0.22% Regulatory assessments 0.04% 0.04% Other 0.36% 0.27% Total 4.71% 4.30% Noninterest expense increased to $1.7 million during the first quarter of 1998 from $1.4 million during the same period of the prior year. The Year 2000 Issue is a computer programming situation that may affect many electronic data processing systems. In order to minimize the length of data fields, most computer programs eliminated the first two digits in the year date field. This problem could affect date sensitive calculations that would treat "00" as the year 1900, rather than 2000. Secondly, years that end in "00" are not leap years, except when it is a millenium year. This anomaly could result in miscalculations in the processing of critical date-sensitive information after December 31, 1999. The Company has prepared a project plan, identified all the major application systems that are not Year 2000 compliant, and sought external and internal resources to replace, or develop and test the software. The Company plans to complete the Year 2000 project well in advance of December 31, 1999. The total remaining cost of the Year 2000 project is not expected to have a material effect on the results of operations. As with all financial institutions, there is a high degree of reliance being placed on the systems of other financial institutions to properly settle transactions. Their inability to process transactions properly could have a significant adverse impact on the Company. The cost of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing a number of assumptions of future events including the continued availability of internal and external resources, third party modifications and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ. Income Taxes. The Company's effective tax rate was 40.8% for the quarter ended March 31, 1998 and 1997. 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, 1998, federal funds sold averaged $5.9 million, or 4.1% 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, 1998, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $43.4 million, or 30.1% 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, 1998, the loan-to-deposit ratio was 71.3% as compared to 69.9% at December 31, 1997. 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, 1998, this ratio was 6.8% as compared to 6.3% at December 31, 1997. As of March 31, 1998, 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 table sets forth rate sensitive interest-earning assets and interest-bearing liabilities as of March 31, 1998, 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, 1998 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 $ 7,000 $ 7,000 Interest-bearing deposits with other banks $ 286 286 Investment securities 126 $ 1,349 192 $27,436 $ 3,159 32,262 Loans, gross of allowance for possible losses 40,629 2,642 1,196 30,146 18,320 92,933 Total 47,755 3,991 1,674 57,582 21,479 132,481 Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 34,418 44,898 79,316 Time deposits, $100,000 or more 3,060 3,829 4,808 630 12,327 Savings and other time deposits 2,682 486 3,822 2,536 9,526 Other borrowings 545 545 Total 6,287 4,315 43,048 48,064 $101,714 Period GAP $41,468 $ (324) $(41,374) $ 9,518 $21,479 Cumulative GAP $41,468 $41,144 $ (230) $ 9,288 $30,767 Interest Sensitivity GAP Ratio 86.83% (8.12%)(2471.57%) 16.53% 100.00% Cumulative Interest Sensitivity 86.83% 79.51% (0.43%) 8.37% 23.22% The Company classifies its interest-bearing transaction 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. A negative gap at one year indicates that net interest income and the net interest margin will decrease 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, 1998 December 31, 1997 8.58% 7.96% 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, 1998, the Company's qualifying capital was 12.35%, 11.41% 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, 1998, the Company's leverage ratio was 8.43%. PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities On January 22, 1998, the Company's Board of Directors declared a 4-for-3 stock split of the Company's common stock. On March 24, 1998, the Company amended and restated its Articles of Incorporation to effect this stock split. 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) -- Restated Articles of Incorporation (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). (10)(b)(5) -- San Francisco Office Lease (incorporated by reference to Exhibit (10)(b)(5) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1997). (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 13, 1998 /s/ Patrick E. Phelan Patrick E. Phelan Chief Financial Officer (Principal Accounting Officer and officer authorized to sign on behalf of the registrant) Exhibit 3(a) RESTATED ARTICLES OF INCORPORATION OF MCB FINANCIAL CORPORATION ARTICLE I The name of this corporation is: MCB FINANCIAL CORPORATION ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III (a) This corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock," no par value per share, respectively. The number of shares of Preferred Stock authorized to be issued is 20,000,000 and the number of shares of Common Stock authorized to be issued is 20,000,000. Upon the amendment of this Article III as set forth herein, each outstanding share of Common Stock is divided into one and one-third shares of Common Stock. (b) The Preferred Stock may be divided into such number of series as the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. ARTICLE IV (a) The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through Bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. (c) Any amendment, repeal or modification of any provision of this Article IV shall not adversely affect any right or protection of an agent of this corporation existing at the time of such amendment, repeal or modification. EX-27 2
9 1,000 3-MOS DEC-31-1998 MAR-31-1998 7,602 286 7,000 0 14,211 17,993 17,976 92,933 998 144,330 130,359 545 1,077 0 0 0 10,385 1,964 144,330 2,353 567 78 2,998 1,047 1,053 1,945 0 0 1,674 546 546 0 0 323 .23 .22 9.19 69 544 0 0 1,007 9 0 998 864 0 134
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