-----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, GXhtTh9Sz6X3xFUDXTpvEVYUcQu6ZS3PGIOpPChT5nle0GifGMxp6YGHFtXBwd0v QfXY4Zfv0InYquMj4WD+6Q== 0000902789-98-000010.txt : 19980817 0000902789-98-000010.hdr.sgml : 19980817 ACCESSION NUMBER: 0000902789-98-000010 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98691357 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 June 30, 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: August 7, 1998 Class Common stock, no par value 1,384,553 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS Dollar amounts in thousands June 30, December 31, 1998 1997 ASSETS (Unaudited) Cash and due from banks $ 10,100 $ 6,557 Federal funds sold 10,650 4,900 Total cash and cash equivalents 20,750 11,457 Interest-bearing deposits with banks 286 286 Investment securities available for sale at fair value 14,009 10,314 Investment securities held to maturity; fair values of $16,555 in 1998 and $25,197 in 1997 16,549 25,242 Loans held for investment (net of allowance for possible credit losses of $1,026 in 1998 and $1,007 in 1997 102,102 87,179 Premises and equipment - net 2,595 2,586 Accrued interest receivable 1,080 1,070 Deferred income taxes 554 568 Other assets 995 1,175 Total assets $ 158,920 $ 139,877 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 34,424 $ 29,151 Interest-bearing: Transaction accounts 88,073 75,488 Time certificates, $100,000 and over 11,862 11,565 Savings and other time deposits 9,827 9,928 Total interest-bearing deposits 109,762 96,981 Total deposits 144,186 126,132 Other borrowings 750 750 Accrued interest payable and other liabilities 1,153 1,028 Total liabilities 146,089 127,910 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 1,401,575 shares in 1998 and 1,386,876 shares in 1997, outstanding 1,384,553 shares in 1998 and 1,369,854 in 1997 10,400 10,310 Accumulated other comprehensive income 18 1 Retained earnings 2,413 1,656 Total shareholders' equity 12,831 11,967 Total liabilities and shareholders' equity $ 158,920 $ 139,877 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended For the Six Months In thousands, June 30, Ended June 30, except per share amounts 1998 1997 1998 1997 (Unaudited) (Unaudited) INTEREST INCOME: Loans, including fees $ 2,649 $ 2,107 $ 5,002 $ 4,105 Federal funds sold 138 98 216 170 Investment securities 498 642 1,065 1,208 Total interest income 3,285 2,847 6,283 5,483 INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 1,002 930 1,893 1,794 Time certificates, $100,000 and over 163 127 319 250 Other interest 5 7 11 15 Total interest expense 1,170 1,064 2,223 2,059 NET INTEREST INCOME 2,115 1,783 4,060 3,424 PROVISION FOR POSSIBLE CREDIT LOSSES 35 20 35 40 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 2,080 1,763 4,025 3,384 OTHER INCOME: Gain on sale of loans 49 37 119 90 Service fees on deposit accounts 120 122 244 236 Loan servicing fees 12 8 21 15 Other 75 37 147 69 Total other income 256 204 531 410 OTHER EXPENSES: Salaries and employee benefits 901 756 1,785 1,546 Occupancy expense 218 190 434 382 Furniture and equipment expense 104 85 214 174 Professional services 66 41 113 102 Supplies 79 49 149 102 Promotional expenses 74 53 190 104 Data processing fees 75 76 162 147 Regulatory assessments 15 16 31 30 Other 115 99 243 188 Total other expenses 1,647 1,365 3,321 2,775 INCOME BEFORE INCOME TAXES 689 602 1,235 1,019 INCOME TAX PROVISION 285 247 508 417 NET INCOME $ 404 $ 355 $ 727 $ 602 BASIC EARNINGS PER SHARE $ 0.29 $ 0.27 $ 0.53 $ 0.45 DILUTED EARNINGS PER SHARE $ 0.27 $ 0.26 $ 0.49 $ 0.44 See notes to condensed consolidated financial statements MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Six Months Ended Dollar amounts in thousands June 30, June 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) Net income $ 404 $ 355 $ 727 $ 602 Other comprehensive income, net of tax: Unrealized gain (loss) on available for sale investments: Unrealized holding gain (loss) arising during period 51 56 17 (21) Comprehensive income $ 455 $ 411 $ 744 $ 581 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Dollar amounts in thousands Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) Net income $ 727 $ 602 Adjustments to reconcile net income to net cash provided by operating activities: Settlement of mortgage loans sold 647 Provision for possible credit losses 35 40 Depreciation and amortization 229 169 Change in deferred income taxes (59) Increase in accrued interest receivable (10) (89) Decrease (increase) in other assets 173 (194) Increase in accrued interest payable and other liabilities 164 215 Net cash provided by operating activities 1,318 1,331 CASH FLOWS FROM INVESTING ACTIVITIES: Held to maturity securities: Calls 10,750 1,000 Purchases (2,055) (3,000) Available for sale securities: Maturities 1,522 2,572 Calls 1,000 Purchases (6,201) (5,000) Net increase in loans held for investment (14,958) (841) Purchases of premises and equipment (227) (109) Net cash used by investing activities (10,169) (5,378) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in noninterest-bearing demand deposits 5,273 2,738 Net increase in interest-bearing transaction, savings and other time deposits 12,781 6,719 Net increase in other borrowings 282 Proceeds from the exercise of stock options 90 132 Net cash provided by financing activities 18,144 9,871 NET INCREASE IN CASH AND CASH EQUIVALENTS 9,293 5,824 CASH AND CASH EQUIVALENTS: Beginning of period 11,457 10,380 End of period $ 20,750 $ 16,204 CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 2,247 $ 2,086 Income taxes 201 $ 356 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 six months ended June 30, 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, the Company's outstanding shares of common stock were split four-for-three. All shares and per share amounts reported have been restated to reflect the split. 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. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after 6/15/99. Initial application of SFAS No. 133 would be as of the beginning of an entity's fiscal quarter. On that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Earlier application of all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. The Company has no derivative or hedged instruments and therefore the implementation of this statement is not expected to have a material impact on the Company's financial position or results of operations. 2. Earnings Per Share The following is a reconciliation of basic earnings per share (EPS) to diluted EPS for the three and six month periods ended June 30, 1998 and 1997. Three months ended June 30, 1998: Net Per Share Income Shares Amount In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited) Basic EPS: Income available to common shareholders $404 1,382 $0.29 Effect of Dilutive Securities: Stock options 105 Diluted EPS: Income available to common shareholders plus assumed conversions $405 1,487 $0.27 Six months ended June 30, 1998: Net Per Share Income Shares Amount In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited) Basic EPS: Income available to common shareholders $727 1,378 $0.53 Effect of Dilutive Securities: Stock options 96 Diluted EPS: Income available to common shareholders plus assumed conversions $727 1,474 $0.49 Three months ended June 30, 1997: Net Per Share Income Shares Amount In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited) Basic EPS: Income available to common shareholders $355 1,335 $0.27 Effect of Dilutive Securities: Stock options 54 Diluted EPS: Income available to common shareholders plus assumed conversions $355 1,389 $0.26 Six months ended June 30, 1997: Net Per Share Income Shares Amount In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited) Basic EPS: Income available to common shareholders $602 1,328 $0.45 Effect of Dilutive Securities: Stock options 52 Diluted EPS: Income available to common shareholders plus assumed conversions $602 1,380 $0.44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. MCB Financial Corporation (the "Company") is the holding company for Metro Commerce Bank in San Rafael, California. This discussion focuses primarily on the results of operations of the Company on a consolidated basis for the three and six months ended June 30, 1998 and the financial condition of the Company as of that date. The following discussion presents information pertaining to the financial condition and results of operations of the Company and its subsidiary 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. Certain matters discussed in this report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the competitive environment and its impact on the Company's net interest margin, changes in interest rates, asset quality risks, concentrations of credit and the economic health of the San Francisco Bay Area and Southern California, volatility of rate sensitive deposits, asset/liability matching risks, the dilutive impact which might occur upon the issuance of new shares of common stock, liquidity risks, and the impact of the Year 2000 problem. Therefore, the matters set forth below should be carefully considered when evaluating the Company's business and prospects. For additional information concerning these risks and uncertainties, please refer to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. OVERVIEW Earnings Summary. The Company reported net income of $404,000, or $0.29 per share basic and $0.27 per share diluted, for the second quarter of 1998. This compares to net income of $355,000, or $0.27 per share basic and $0.26 per share diluted, for the same period in 1997. For the six months ended June 30, 1998, the Company reported net income of $727,000, or $0.53 per share basic and $0.49 per share diluted. This compares to net income of $602,000, or $0.45 per share basic and $0.44 per share diluted for the same period in 1997. Growth in average loans as a percentage of earning assets and the increase in average yields earned on loans continued to positively impact the net interest margin during the three and six month periods ended June 30, 1998. Return on average assets and return on average equity for the second quarter of 1998 were 1.06% and 12.78%, respectively, as compared to 1.04% and 13.31%, respectively, for the same period of 1997. Return on average assets and return on average equity for the six months ended June 30, 1998 were 0.99% and 11.70%, respectively, as compared to 0.90% and 11.44%, respectively, for the same period of 1997. FINANCIAL CONDITION Summary. Total assets of the Company increased by $19.0 million, or 13.6%, from the end of 1997 to reach $158.9 million at June 30, 1998. This increase resulted primarily from growth in existing operations, largely due to improved economic conditions in the Company's market areas. Loans Held for Investment. Net loans held for investment increased by $14.9 million, or 17.1%, during the first six months of 1998 as demand for commercial real estate and construction loans continued to increase. The following table sets forth the amount of total loans outstanding by category as of the dates indicated (dollar amounts in thousands): Total Loans June 30, December 31, 1998 1997 Commercial $ 22,609 $ 21,217 Real estate: Commercial 66,152 57,385 Construction 9,215 3,757 Land 885 1,307 Home equity 2,049 2,314 Loans to consumers and individuals 2,315 2,331 Total 103,225 88,311 Deferred loan fees (97) (125) Allowance for possible credit losses (1,026) (1,007) Total net loans $ 102,102 $ 87,179 In the normal practice of extending credit, the Company accepts real estate collateral for loans which have primary sources of repayment from commercial operations. The total amount of loans secured by real estate equaled $85.3 million, or 82.6% of the total portfolio as of June 30, 1998. Due to the Company's limited marketing areas, 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 June 30, 1998, the two largest industry concentrations within the loan portfolio were real estate and related services at 25.2% and the business/personal service industry at 21.6% 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 June 30, 1998, the Company had nonperforming assets in the amount of $621,000, of which $563,000 represented four nonaccrual loans. Had these nonaccrual loans performed under their contractual terms approximately $9,494 in additional interest income would have been recognized during 1998. Also, as of June 30, 1998, the Company had two loans 90 days or more past due and still accruing in the aggregate amount of $58,000. 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 June 30, December 31, 1998 1997 Nonaccrual loans $ 563 $ 69 Loans 90 days or more past due and still accruing 58 40 Other real estate owned 0 0 $ 621 $ 109 As a percent of total loans 0.60% 0.12% As a percent of total assets 0.39% 0.08% At June 30, 1998, the Company had loans identified as impaired in the amount of $621,000. At June 30, 1998, no specific allowance for possible credit losses was required for these impaired loans because 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 June 30, 1998, the APCL of $1,026,000, or 1.00% 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): June 30, December 31, 1998 1997 Balances: Average loans during period (net of unearned income) $ 93,735 $ 82,893 Loans at end of period (net of unearned income) 103,128 88,186 Allowance for Possible Credit Losses: Balance at beginning of period 1,007 944 Actual credit losses: Commercial loans 17 105 Loans to consumers and individuals 3 Total 17 108 Actual credit recoveries: Commercial loans 51 Loans to consumers and individuals 1 Total 1 51 Net credit losses 16 57 Provision charged to operating expenses 35 120 Balance at end of period $ 1,026 $ 1,007 Ratios: Net credit losses to average loans 0.02% 0.07% Allowance for possible credit losses to loans at end of period 1.00% 1.14% Net credit losses to beginning of period allowance for credit losses 1.59% 6.04 The Company provided $35,000 to the allowance for possible credit losses during the second quarter of 1998 as compared to $20,000 during the second quarter of 1997. For the six months ended June 30, 1998, the Company provided $35,000 to the allowance for possible credit losses as compared to $40,000 during the same period of 1997. The $35,000 provision in the second quarter of 1998 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): The following table sets forth the allocation of the APCL as of the dates indicated (dollar amounts in thousands): June 30, 1998 December 31, 1997 % of % of Category Category to Total to Total APCL Loans APCL Loans Commercial loans $ 618 44.03% $ 570 41.79% Real estate loans 221 51.51% 245 52.39% Consumer loans 40 4.46% 43 5.82% Not allocated 147 N/A 149 N/A Total $ 1,026 100.00% $ 1,007 100.00% The APCL is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories. The allocation of the APCL 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 securities 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 June 30, 1998: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $16,549 $ 35 $ (28) $16,556 $16,549 Total held to maturity 16,549 35 (28) 16,556 16,549 Available for sale securities: U.S. Treasury 10,202 46 (24) 10,224 10,224 Mortgage-backed Securities 1,655 (11) 1,644 1,644 Corporate securities 1,981 19 2,000 2,000 Municipal bonds 140 1 141 141 Total available for sale 13,978 66 (35) 14,009 14,009 Total investment securities $30,527 $ 101 $ (63) $30,565 $30,558 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. Total consolidated deposits increased by $18.1 million, or 14.3%, during the six months ended June 30, 1998. This increase was primarily the result of growth in existing operations, largely due to improved economic conditions in the Company's market areas. Average noninterest-bearing demand deposits increased 9.4% during the six months ended June 30, 1998 contributing to the decrease in the cost of funds to 3.32% from 3.36% for the year ended December 31, 1997. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated (dollar amounts in thousands): Six Months Ended Year Ended June 30, 1998 December 31, 1997 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing demand deposits $ 29,559 $ 27,019 Interest-bearing demand deposits (includes money market deposit accounts) 81,802 4.09% 78,521 4.10% Savings deposits 1,851 1.80% 1,928 1.93% Time deposits, $100,000 and over 12,094 5.27% 10,214 5.42% Other time deposits 7,818 5.18% 8,080 5.13% Total interest-bearing 103,565 4.27% 98,743 4.28% Total deposits $133,124 3.32% $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 as of the dates indicated below (dollar amounts in thousands): June 30, December 31, Time remaining to maturity 1998 1997 Three months or less 5,470 4,359 After three months to six months 1,940 3,388 After six months to one year 3,852 3,388 After twelve months 600 430 Total 11,862 11,565 RESULTS OF OPERATIONS Net Interest Income/Net Interest Margin. Net interest income for the quarter ended June 30, 1998 was $2,115,000, an increase of 18.6% over the net interest income of $1,783,000 during the same period of 1997. Net interest income for the six months ended June 30, 1998 was $4,060,000, an increase of 18.6% over the net interest income of $3,424,000 during the same period of 1997. The increase in both periods was primarily due to the growth in average loans, largely due to improved economic conditions in the Company's market areas. 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 June 30, 1998 1997 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 10,310 $ 138 5.35% $ 7,225 $ 98 5.43% Interest-bearing deposits with banks 286 4 5.59% 384 6 6.25% Investment securities 32,417 494 6.11% 39,385 636 6.46% Loans 97,089 2,649 10.91% 78,806 2,107 10.69% Total earning assets 140,102 3,285 9.38% 125,800 2,847 9.05% Total non-earning assets 11,882 10,885 Total assets $151,984 $136,685 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 29,669 $ 25,519 Interest-bearing transaction accounts 86,143 $ 891 4.13% 79,234 $ 818 4.13% Time deposits, $100,000 or more 12,130 163 5.38% 9,512 126 5.30% Savings and other time 9,716 111 4.57% 9,944 113 4.55% Total interest-bearing deposits 107,989 1,165 4.32% 98,690 1,057 4.28% Other borrowings 484 5 4.13% 589 7 4.75% Total interest-bearing Liabilities 108,473 1,170 4.31% 99,279 1,064 4.29% Other liabilities 1,196 1,218 Shareholders' equity 12,646 10,669 Total liabilities and shareholders' equity $151,984 $136,685 Net interest income $2,115 $1,783 Net interest margin 6.04% 5.67% For the six months ended June 30, 1998 1997 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 8,115 $ 216 5.32% $ 6,424 $ 170 5.29% Interest-bearing deposits with banks 286 8 5.59% 384 12 6.25% Investment securities 34,211 1,057 6.19% 37,472 1,196 6.39% Mortgage loans held for sale 132 5 7.58% Loans 92,734 5,002 10.79% 78,816 4,100 10.40% Total earning assets 135,346 6,283 9.29% 123,228 5,483 8.90% Total non-earning assets 11,808 10,708 Total assets $147,154 $133,936 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 29,559 $ 25,109 Interest-bearing transaction accounts 81,802 1,674 4.09% 76,926 1,567 4.07% Time deposits, $100,000 or more 12,094 319 5.28% 9,386 249 5.31% Savings and other time 9,669 219 4.53% 10,175 228 4.48% Total interest-bearing deposits 103,565 2,212 4.27% 96,487 2,044 4.24% Other borrowings 465 11 4.73% 654 15 4.59% Total interest-bearing Liabilities 104,030 2,223 4.27% 97,141 2,059 4.24% Other liabilities 1,140 1,160 Shareholders' equity 12,425 10,526 Total liabilities and shareholders' equity $147,154 $133,936 Net interest income $4,060 $3,424 Net interest margin 6.00% 5.56% The net interest margin increased to 6.04% during the second quarter of 1998 from 5.67% in the same quarter of 1997. For the six months ended June 30, 1998, the net interest margin increased to 6.00% from 5.56% during the same period of 1997. The increase in both periods was primarily attributable to growth in average loans as a percentage of earning assets and the increase in average yields earned on loans. The increase in average loans was largely due to the improved economic conditions in the Company's market areas. 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 for the periods indicated. The variance attributable to both balance and rate fluctuations is allocated to a combined rate/volume variance (dollar amounts in thousands): Quarter Ended Six Months Ended June 30, 1998 June 30, 1998 Compared to Compared to Quarter Ended Six Months Ended June 30, 1997 June 30, 1997 Change in Change in Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total Interest Income: Federal funds sold $42 ($1) ($1) $40 $45 $1 $0 $46 Interest-bearing deposits with banks (1) (1) 0 (2) (3) (1) 0 (4) Investment securities (114) (34) 6 (142) (105) (37) 3 (139) Mortgage loans held for sale (5) (5) 5 (5) Loans 489 43 10 542 722 153 27 902 Total Interest Income 416 7 15 438 654 111 35 800 Interest Expense: Interest-bearing transaction accounts 73 0 0 73 99 8 0 107 Time deposits, $100,000 or more 35 2 1 38 71 (1) 0 70 Savings and other time (3) 0 0 (3) (12) 3 0 (9) Other borrowings (1) (1) 0 (2) (4) 0 0 (4) Total Interest Expense 104 1 1 106 154 10 0 164 Net Interest Income $312 $6 $14 $332 $500 $101 $35 $636 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 Six Months Ended June 30, June 30, Components of Noninterest Income 1998 1997 1998 1997 Gain on sale of loans $ 49 $ 37 $ 119 $ 90 Service fees on deposit accounts 120 122 244 236 Loan servicing fees 12 8 21 15 Other 75 37 147 69 Total $ 256 $ 204 $ 531 $ 410 As a Percentage of Average Assets (Annualized) Gain on sale of loans 0.13% 0.11% 0.16% 0.13% Service fees on deposit accounts 0.32% 0.36% 0.33% 0.35% Loan servicing fees 0.03% 0.02% 0.03% 0.02% Other 0.20% 0.11% 0.20% 0.10% Total 0.67% 0.60% 0.72% 0.61% Noninterest Expense. The following table summarizes noninterest expenses and the associated ratios to average assets for the periods indicated (dollar amounts in thousands): Quarter Ended Six Months Ended June 30, June 30, Components of Noninterest Expense 1998 1997 1998 1997 Salaries and employee benefits $ 901 $ 756 $ 1,785 $ 1,546 Occupancy expense 218 190 434 382 Furniture and equipment expense 104 85 214 174 Professional services 66 41 113 102 Supplies 79 49 149 102 Promotional expenses 74 53 190 104 Data processing fees 75 76 162 147 Regulatory assessments 15 16 31 30 Other 115 99 243 188 Total $ 1,647 $ 1,365 $ 3,321 $ 2,775 Average full-time equivalent employees 56 47 55 48 As a Percentage of Average Assets (Annualized) Salaries and employee benefits 2.37% 2.21% 2.43% 2.31% Occupancy expense 0.57% 0.56% 0.59% 0.57% Furniture and equipment expense 0.27% 0.25% 0.29% 0.26% Professional services 0.17% 0.12% 0.15% 0.15% Supplies 0.21% 0.14% 0.20% 0.15% Promotional expenses 0.19% 0.16% 0.26% 0.16% Data processing fees 0.20% 0.22% 0.22% 0.22% Regulatory assessments 0.04% 0.05% 0.04% 0.04% Other 0.30% 0.29% 0.33% 0.28% Total 4.33% 3.99% 4.51% 4.14% Noninterest expense increased to $1.6 million during the second quarter of 1998 from $1.4 million during the same period of the prior year. For the six months ended June 30, 1998, noninterest expense increased to $3.3 million from $2.8 million during the same period of the prior year. In January, 1998, the Company opened a branch office in San Francisco which contributed to the increase in noninterest expense during the second quarter of 1998 and for the six months ended June 30, 1998. Year 2000. 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 eliminate the first two digits in the year date field. This problem may affect date sensitive calculations if "00" is treated as the year 1900, rather than 2000. Also, years that end in "00" are not leap years, except when it is a millenium year. These anomalies 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 41.4% for the quarter ended June 30, 1998 compared to 41.0% in the same period of the prior year. For the six months ended June 30, 1998, the effective tax rate was 41.1% compared to 40.9% 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 six months ended June 30, 1998, federal funds sold averaged $8.1 million, or 5.5% 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 June 30, 1998, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $49.1 million, or 30.9% 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 June 30, 1998, the loan-to-deposit ratio was 71.5% 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 June 30, 1998, this ratio was 8.8% as compared to 6.3% at December 31, 1997. As of June 30, 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 June 30, 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): June 30, 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 $10,650 $ 10,650 Interest-bearing deposits with other banks $ 196 $ 90 286 Investment securities 1,217 96 477 $25,578 $ 3,160 30,528 Loans, gross of allowance for possible losses 47,186 744 1,901 35,275 18,022 103,128 Total 59,053 1,036 2,468 60,853 21,182 144,592 Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 38,564 49,509 88,073 Time deposits, $100,000 or more 5,470 1,940 3,852 600 11,862 Savings and other time deposits 1,838 1,780 3,587 2,622 9,827 Other borrowings 750 750 Total 8,058 3,720 46,003 52,731 $110,512 Period GAP $50,995 $(2,684) $(43,535) $ 8,122 $21,182 Cumulative GAP $50,995 $48,311 $ 4,776 $12,898 $34,080 Interest Sensitivity GAP Ratio 86.35% (259.07%)(1763.98%) 13.35% 100.00% Cumulative Interest Sensitivity 86.35% 80.40% 7.63% 10.45% 23.57% 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. Six Months Ended Year Ended June 30, 1998 December 31, 1997 8.44% 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 June 30, 1998, the Company's qualifying capital was 11.59%, 10.71% 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 June 30, 1998, the Company's leverage ratio was 8.19%. It is the Company's intention to maintain risk-based capital ratios at levels characterized as "well-capitalized" for banking organizations: Tier 1 risk-based capital of 6 percent or above and total risk-based capital at 10 percent or above. PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held on May 20, 1998. A quorum was established with the presence of 784,988 shares out of 1,382,202 shares of common stock outstanding. The following matters were voted upon at the annual meeting with the voting results as indicated: Proposal 1. - Election of Directors - The following persons were elected as directors: Name Votes For Votes Withheld John Cavallucci 784,988 0 Robert E. Eklund 784,988 0 Timothy J. Jorstad 784,988 0 Catherine H. Munson 784,988 0 Gary T. Ragghianti 784,988 0 Michael J. Smith 784,988 0 Edward P. Tarrant 784,988 0 Randall J. Verrue 784,988 0 Proposal 2. - Ratification of Independent Auditors - The firm of Deloitte & Touche LLP was ratified to serve as the Company's independent auditors for the fiscal year 1998. There were 778,374 votes cast for the proposal, 734 votes cast against the proposal, and 5,880 abstentions. Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K. (a) List of Exhibits: (3)(a) -- Restated Articles of Incorporation (incorporated by reference to Exhibit (3)(a) to the registrant's Quarterly Report on Form 10- QSB for its quarterly period ended March 31, 1998). (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: August 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) EX-27 2
9 1,000 6-MOS DEC-31-1998 JUN-30-1998 10,100 286 10,650 0 14,009 16,549 16,556 103,128 1,026 158,920 144,186 750 1,153 0 0 0 10,400 2,431 158,920 5,002 1,065 216 6,283 2,212 2,223 4,060 0 0 3,321 1,235 1,235 0 0 727 .53 .49 9.29 563 58 0 0 1,007 17 1 1,026 879 0 147
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