-----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, HwgC4K4TbTuge253vteLc21EOgH9ex2SiZ9maCbckUayzvVUuXopczxXzLoKd7cz Ca/KEsunx+J8XW1xQC84BQ== 0000902789-97-000015.txt : 19970818 0000902789-97-000015.hdr.sgml : 19970818 ACCESSION NUMBER: 0000902789-97-000015 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970815 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCB FINANCIAL CORP CENTRAL INDEX KEY: 0000902789 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 680300300 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-76832 FILM NUMBER: 97664283 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, 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: August 10, 1997 Class Common stock, no par value 957,542 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1997 1996 ASSETS (Unaudited) Cash and due from banks $ 7,203,839 $ 9,609,584 Federal funds sold 9,000,000 770,000 Total cash and cash equivalents 16,203,839 10,379,584 Interest-bearing deposits with banks 384,000 384,000 Investment securities available for sale at fair valu 11,736,223 9,339,550 Investment securities held to maturity; fair values of $27,498,494 in 1997 and $25,533,850 in 1996 27,740,714 25,739,588 Mortgage loans sold pending settlement 647,600 Loans held for investment (net of allowance for possible credit losses of $981,015 in 1997 and $944,105 in 1996) 80,922,906 80,121,693 Premises and equipment - net 2,210,341 2,278,163 Accrued interest receivable 1,092,141 1,003,016 Deferred income taxes 695,285 621,191 Other assets 1,176,829 989,921 Total assets $ 142,162,278 $ 131,504,306 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 29,003,443 $ 26,265,743 Interest-bearing: Transaction accounts 80,769,803 73,532,399 Time certificates, $100,000 and over 9,532,527 9,483,134 Savings and other time deposits 10,009,128 10,577,186 Total interest-bearing deposits 100,311,458 93,592,719 Total deposits 129,314,901 119,858,462 Other borrowings 729,068 446,776 Accrued interest payable and other liabilities 1,219,724 1,013,939 Total liabilities 131,263,693 121,319,177 SHAREHOLDERS' EQUITY Preferred stock, no par value: authorized 20,000,000 shares; none issued or outstanding Common stock, no par value: authorized 20,000,000 shares; issued and outstanding 957,542 shares in 1997 and 942,842 in 1996 9,530,569 9,398,574 Unrealized loss on investment securities available for sale - net (66,360) (45,378) Retained earnings 1,434,376 831,933 Total shareholders' equity 10,898,585 10,185,129 Total liabilities and shareholders' equity $ 142,162,278 $ 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 Six Months June 30, Ended June 30, 1997 1996 1997 1996 (Unaudited) (Unaudited) INTEREST INCOME: Loans, including fees $ 2,107,103 $ 1,829,512 $ 4,105,012 $ 3,493,932 Federal funds sold 98,022 34,785 170,052 158,178 Investment securities 641,998 669,949 1,207,796 1,247,699 Total 2,847,123 2,534,246 5,482,860 4,899,809 INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 929,929 859,349 1,794,280 1,735,112 Time certificates, $100,00 and over 126,607 118,690 249,425 245,886 Other interest 6,894 8,838 15,125 14,659 Total 1,063,430 986,877 2,058,830 1,995,657 NET INTEREST INCOME 1,783,693 1,547,369 3,424,030 2,904,152 PROVISION FOR POSSIBLE CREDIT LOSSES 20,000 40,000 140,000 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 1,763,693 1,547,369 3,384,030 2,764,152 OTHER INCOME: Gain on sale of loans 36,995 151,380 90,128 258,613 Service fees on deposit accounts 121,894 98,431 235,880 189,413 Loan servicing fees 8,835 3,789 15,441 11,370 Recovery of litigation expenses 24,689 1,824,689 Other 35,984 24,288 68,798 75,123 Total 203,708 302,577 410,247 2,359,208 OTHER EXPENSES: Salaries and employee benefits 756,229 763,579 1,545,754 1,728,745 Occupancy expense 190,759 174,449 382,448 348,766 Furniture and equipment expense 84,849 102,276 173,534 196,306 Professional services 41,326 9,841 102,119 61,862 Supplies 48,856 67,427 102,315 119,763 Promotional expenses 53,462 52,757 104,105 90,410 Data processing fees 76,009 66,671 147,305 131,931 Regulatory assessments 15,021 11,313 29,477 22,627 Other 99,107 83,099 188,103 165,717 Total 1,365,618 1,331,412 2,775,160 2,866,127 INCOME BEFORE INCOME TAXES 601,783 518,534 1,019,117 2,257,233 INCOME TAX EXPENSE 246,270 211,565 416,674 934,638 NET INCOME $ 355,513 $ 306,969 $ 602,443 $ 1,322,595 NET INCOME PER COMMON SHARE: Primary and fully diluted $ 0.36 $ 0.33 $ 0.61 $ 1.40 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1997 1996 OPERATING ACTIVITIES: (Unaudited) Net income $ 602,443 1,322,595 Adjustments to reconcile net income to net cash provided by operating activities: Originations of loans for sale (20,217,000) Settlement of mortgage loans sold 647,600 22,035,920 Provision for possible credit losses 40,000 140,000 Depreciation and amortization 169,150 284,291 Recovery of litigation expenses (1,800,000) Change in deferred income taxes (59,186) 1,235,828 Increase in accrued interest receivable (89,125) (135,605) (Increase) decrease in other assets (193,914) 1,839,289 Increase (decrease) in accrued interest payable and other liabilities 214,518 (2,077,092) Net cash provided by operating activities 1,331,486 2,628,226 INVESTING ACTIVITIES: Held to maturity securities: Maturities 3,000,000 Calls 1,000,000 6,000,000 Purchases (3,000,000) (16,238,750) Available for sale securities: Maturities 2,571,895 7,646,336 Purchases (5,000,000) (1,000,481) Decrease in interest-bearing deposits with banks 787,000 Net increase in loans held for investment (841,213) (13,857,849) Purchases of premises and equipment (108,639) (84,741) Net cash used by investing activities (5,377,957) (13,748,485) FINANCING ACTIVITIES: Net increase in noninterest-bearing demand deposits 2,737,700 3,513,971 Net increase in interest-bearing transaction, savings and other time deposits 6,718,739 174,396 Net increase in other borrowings 282,292 1,608,127 Proceeds from the exercise of stock options 131,995 Net cash provided by financing activities 9,870,726 5,296,494 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT 5,824,255 (5,823,765) CASH AND CASH EQUIVALENTS: Beginning of period 10,379,584 12,566,117 End of period $ 16,203,839 6,742,352 CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 2,085,736 2,126,004 Income taxes $ 356,000 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 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 six months ended June 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 extinquishments 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 Company adopted SFAS No. 128 in the quarter ended March 31, 1997. The following table provides pro forma disclosure of basic and diluted EPS in accordance with SFAS No. 128: Three Six Months Months Ended Ended June 30, June 30, 1997 1996 1997 1996 Pro forma basic EPS........................ $0.37 $0.33 $0.64 $1.40 Pro forma diluted EPS........... .......... $0.36 $0.33 $0.61 $1.40 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 $355,513, or $0.36 per share, for the second quarter of 1997. This compares to net income of $306,969, or $0.33 per share, for the same period in 1996. Improvement in net interest income, due to the growth in average commercial loans , continued to positively impact the net interest margin. In addition, the Company's efficiency ratio (noninterest expense divided by operating income) improved to 68.7% from 72.0% in the second quarter of 1996. For the six months ended June 30, 1997, the Company reported net income of $602,443 or $0.61 per share. This compares to net income of $1,322,595, or $1.40 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 six months ended June 30, 1996 would have been approximately $450,000 or $0.48 per share. Return on average assets and return on average equity for the second quarter of 1997 were 1.04% and 13.33%, respectively, as compared to 0.98% and 13.10%, respectively, for the same period of 1996. Return on average assets and return on average equity for the six months ended June 30, 1997 were 0.90% and 11.45%, respectively, as compared to 2.14% and 29.78%, respectively, for the same period of 1996. FINANCIAL CONDITION Summary. Total assets of the Company increased by $10.7 million, or 8.1%, from the end of 1996 to reach $142.2 million at June 30, 1997. This increase resulted from growth in existing operations. Loans Held for Investment. Net loans held for investment increased by $0.8 million, or 1.0%, during the first six months of 1997 as the construction loan portfolio experienced net paydowns of $3.8 million while the other components of the portfolio experienced net increases of $4.6 million. The following table sets forth the amount of total loans outstanding by category as of the dates indicated: Total Loans June 30, December 31, (dollar amounts in thousands) 1997 1996 Commercial $ 19,137 $ 16,851 Real estate: Commercial 53,038 49,856 Construction 3,542 7,348 Land 1,151 1,807 Home equity 2,550 2,809 Loans to consumers and individuals 2,572 2,458 Total 81,990 81,129 Deferred loan fees (86) (63) Allowance for possible credit losses (981) (944) Total net loans $ 80,923 80,122 In the normal proctice 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 $66.3 million, or 80.9% of the total portfolio as of June 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 June 30, 1997, the two largest industry concentrations within the loan portfolio were real estate and related services at 24.9% and the business/personal service industry at 18.4% of the portfolio. Because credit concentrations increase portfolio risk, the Company places significant emphasis on the purpose of each loan and the related sources of repayment. The Company generally limits unsecured commercial loans to maturities of three years and secured commercial loans to maturities of five years. Mortgage Loans. No mortgage loans sold pending settlement existed at June 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 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 June 30, 1997, the Company had nonperforming assets in the amount of $636,000, of which $79,000 represented one nonaccrual loan. Had this nonaccrual loan performed under its contractual terms approximately $6,395 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 $557,000. 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 June 30, December 31, (dollar amounts in thousands) 1997 1996 Nonaccrual loans $ 79 $ 79 Loans 90 days or more past due and still accruing 557 Other real estate owned Total $ 636 $ 79 As a percent of total loans 0.78% 0.10% As a percent of total assets 0.45% 0.06% At June 30, 1997, the Company had loans identified as impaired in the amount of $636,000. At June 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 June 30, 1997, the APCL of $981,015, or 1.20% 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, 1997 1996 Balances: Average loans during period (includes mortgage loans held for sale) $ 78,816 $ 72,393 Loans at end of period (includes mortgage loans held for sale) 81,904 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 40 220 Balance at end of period $ 981 $ 944 Ratios: Net credit losses to average loans 0.00% 0.04% Allowance for possible credit losses to loans at end of period 1.20% 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 second quarter of 1997. No loan loss provision was recorded during the second quarter of 1996. For the six months ended June 30, 1997, the Company provided $40,000 to the allowance for possible credit losses as compared to $140,000 during the same period of 1996. The $140,000 provision during the first quarter of 1996 was recorded as a prudent measure, based upon growth in the loan portfolio. The following table sets forth the allocation of the APCL as of the dates indicated (dollar amounts in thousands): June 30, December 31, 1997 1996 % of % of Category Category to Total to Total APCL Loans APCL Loans Commercial loans $ 558 41.42% $ 583 42.85% Real estate loans 226 52.13% 202 50.27% Consumer loans 46 6.45% 48 6.88% Not allocated 151 N/A 111 N/A Total $ 981 100.00% $ 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 June 30, 1997: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $27,740,714 $(242,220) $27,498,494 $27,740,714 Total held to maturity 27,740,714 (242,220) 27,498,494 27,740,714 Available for sale securities: U.S. Treasury 2,980,602 $10,024 2,990,626 2,990,626 U.S. Government agencies 5,000,000 2,500 (6,562) 4,995,938 4,995,938 Mortgage-backed securities 3,729,134 (119,648) 3,609,486 3,609,486 Municipal bonds 140,000 249 (76) 140,173 140,173 Total available for sale 11,849,736 12,773 (126,286) 11,736,223 11,736,223 Total investment securities $39,590,450 $12,773 $(368,506) $39,234,717 $39,476,937 Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying December 31, 1996 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 165,000 500 165,500 165,500 Total available 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 $9.5 million, or 7.9%, during the six months ended June 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 six months ended June 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 11.1% during the six months ended June 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): Six Months Ended Year Ended June 30, 1997 December 31, 1996 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing demand deposits $ 25,109 $ 22,607 Interest-bearing demand deposits (includes money market deposit accounts) 76,926 4.08% 70,533 4.11% Savings deposits 1,868 1.93% 2,363 1.95% Time deposits, $100,000 and over 9,386 5.31% 9,023 5.50% Other time deposits 8,307 5.05% 10,009 5.40% Total interest-bearing 96,487 4.24% 91,928 4.34% Total deposits $ 121,596 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): June 30, December 31, Time remaining to maturity 1997 1996 Three months or less $ 3,323 $ 3,835 After three months to six months 2,177 1,934 After six months to one year 3,193 2,159 After twelve months 840 1,555 Total $ 9,533 $ 9,483 RESULTS OF OPERATIONS Net Interest Income/Net Interest Margin. Net interest income for the quarter ended June 30, 1997 was $1,783,693, an increase of 15.3% over the net interest income of $1,547,369 during the same period of 1996. Net interest income for the six months ended June 30, 1997 was $3,424,030, an increase of 17.9% over the net interest income of $2,904,152 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 June 30, 1997 1996 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 7,225 $ 98 5.43% $ 2,728 $ 35 5.13% Interest-bearing deposits with banks 384 6 6.25% 669 10 5.98% Investment securities 39,385 636 6.46% 42,677 660 6.19% Mortgage loans held for sale 1,958 38 7.76% Loans 78,806 2,107 10.69% 65,724 1,791 10.90% Total earning assets 125,800 2,847 9.05% 113,756 2,534 8.91% Total non-earning assets 10,885 11,563 Total assets $ 136,685 $ 125,319 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 25,519 $ 22,284 Interest-bearing transaction accounts 79,234 $ 817 4.12% 70,655 $ 715 4.05% Time deposits, $100,000 or more 9,512 126 5.30% 8,732 119 5.45% Savings and other time 9,944 113 4.55% 12,394 144 4.65% Total interest-bearing deposits 98,690 1,056 4.28% 91,781 978 4.26% Other borrowings 589 7 4.75% 756 9 4.76% Total interest-bearing liabilities 99,279 1,063 4.28% 92,537 987 4.27% Other liabilities 1,218 1,125 Shareholders' equity 10,669 9,373 Total liabilities and shareholders' equity $ 136,685 $ 125,319 Net interest income $ 1,784 $ 1,547 Net interest margin 5.67% 5.44% For the six months ended June 30, 1997 1996 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 6,424 $ 170 5.29% $ 6,064 $ 158 5.21% Interest-bearing deposits with banks 384 12 6.25% 888 28 6.31% Investment securities 37,472 1,196 6.39% 39,796 1,220 6.14% Mortgage loans held for sale 132 5 7.58% 2,012 82 8.15% Loans 78,816 4,100 10.40% 62,897 3,412 10.85% Total earning assets 123,228 5,483 8.90% 111,657 4,900 8.78% Total non-earning assets 10,708 12,178 Total assets $ 133,936 $ 123,835 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 25,109 $ 20,970 Interest-bearing transaction accounts 76,926 $ 1,567 4.07% 68,595 $ 1,405 4.10% Time deposits, $100,000 or more 9,386 249 5.31% 8,813 246 5.58% Savings and other time 10,175 228 4.48% 13,574 330 4.86% Total interest-bearing deposits 96,487 2,044 4.24% 90,982 1,981 4.35% Other borrowings 654 15 4.59% 634 15 4.73% Total interest-bearing liabilities 97,141 2,059 4.24% 91,616 1,996 4.36% Other liabilities 1,160 2,366 Shareholders' equity 10,526 8,883 Total liabilities and shareholders' equity $133,936 $123,835 Net interest income $ 3,424 $ 2,904 Net interest margin 5.56% 5.20% The net interest margin increased to 5.67% during the second quarter of 1997 from 5.44% in the same quarter of 1996. For the six months ended June 30, 1997, the net interest margin increased to 5.56% from 5.20% for the same period of 1996. The increase in both periods was primarily attributable to an increase in commercial loan activity and an increase noninterest bearing deposits. 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 Six Months Ended June 30, 1997 June 30, 1997 Compared to Compared to Quarter Ended Six Months Ended June 30, 1996 June 30, 1996 Change in Change in Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total Interest Income: Federal funds sold $58 $2 $3 $63 $9 $2 $1 $12 Interest-bearing deposits with banks (4) 0 0 (4) (16) 0 0 (16) Investment securities (53) 31 (2) (24) (71) 50 (3) (24) Mortgage loans held for sale (38) 0 0 (38) (77) (5) 5 (77) Loans 358 (35) (7) 316 864 (140) (36) 688 Total Interest Income 321 (2) (6) 313 709 (93) (33) 583 Interest Expense: Interest-bearing transaction accounts 88 12 2 102 172 (9) (1) 162 Time deposits, $100,000 or more 10 (3) 0 7 16 (12) (1) 3 Savings and other time (28) (4) 1 (31) (82) (26) 6 (102) Other borrowings (2) 0 0 (2) 0 0 0 0 Total Interest Expense 68 5 3 76 106 (47) 4 63 Net Interest Income $253 ($7) ($9) $237 $603 ($46) ($37) $520 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 Six Months Ended June 30, June 30, Components of Noninterest Income 1997 1996 1997 1996 Gain on sale of loans $ 37 $ 151 $ 90 $ 259 Service fees on deposit accounts 122 99 236 189 Loan servicing fees 9 4 15 11 Recovery of litigation expenses 25 1,825 Other 36 24 69 75 Total $ 204 $ 303 $ 410 $ 2,359 As a Percentage of Average Assets (Annualized) Gain on sale of loans 0.11% 0.48% 0.13% 0.42% Service fees on deposit accounts 0.36% 0.32% 0.35% 0.31% Service fees on deposit accounts 0.03% 0.01% 0.02% 0.02% Recovery of litigation expenses 0.08% 2.95% Other 0.11% 0.08% 0.10% 0.12% Total 0.60% 0.97% 0.61% 3.81% 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 Six Months Ended June 30, June 30, Components of Noninterest Expense 1997 1996 1997 1996 Salaries and employee benefits $ 756 $ 764 $ 1,546 $ 1,729 Occupancy expense 191 174 382 349 Furniture and equipment expense 85 102 174 196 Professional services 41 10 102 62 Supplies 49 67 102 120 Promotional expenses 53 53 104 90 Data processing fees 76 67 147 132 Regulatory assessments 15 11 30 22 Other 99 83 188 166 Total $ 1,365 $ 1,331 $ 2,775 $ 2,866 Average full-time equivalent employees 47 51 48 50 As a Percentage of Average Assets (Annualized) Salaries and employee benefits 2.21% 2.44% 2.31% 2.79% Occupancy expense 0.56% 0.56% 0.57% 0.56% Furniture and equipment expense 0.25% 0.33% 0.26% 0.32% Professional services 0.12% 0.03% 0.15% 0.10% Supplies 0.14% 0.21% 0.15% 0.19% Promotional expenses 0.16% 0.17% 0.16% 0.15% Data processing fees 0.22% 0.21% 0.22% 0.21% Regulatory assessments 0.04% 0.04% 0.04% 0.04% Other 0.29% 0.26% 0.28% 0.27% Total 3.99% 4.25% 4.14% 4.63% Noninterest expense increased to $1.37 million during the second quarter of 1997 from $1.33 million during the same period of the prior year. For the six months ended June 30, 1997, noninterest expense decreased to $2.78 million from $2.87 million during the same period of the prior year. Income Taxes. The Company's effective tax rate for the quarter ended June 30, 1997 was 40.9% as compared to 40.8% in the same period of the prior year. For the six months ended June 30, 1997, the effective tax rate was 40.9% as compared to 41.4% 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, 1977, federal funds sold averaged $6.4 million, or 4.8% 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, 1997, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $51.7 million, or 36.4% 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, 1997, the loan-to-deposit ratio was 63.3% 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 June 30, 1997, this ratio was 10.1% as compared to 5.1% at December 31, 1996. As of June 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 June 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): June 30, 1997 Over 90 Over 180 After One After 90 days days to days to Year to Five or less 180 days 365 days Five Years Years Total Earning Assets (Rate Sensitive): Federal funds sold $ 9,000 $ 9,000 Interest-bearing deposits with other banks 98 $ 196 $ 90 384 Investment securities 1,232 1,246 1,252 $ 23,363 $ 12,497 39,590 Mortgage loans held for sale 0 Loans, gross of allowance for possible losses 34,427 945 5,217 25,747 15,568 81,904 Total 44,757 2,387 6,559 49,110 28,065 130,878 Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 35,168 45,602 80,770 Time deposits, $100,000 or more 3,323 2,177 3,193 840 9,533 Savings and other time deposits 2,348 1,339 3,813 2,509 10,009 Other borrowings 729 729 Total 6,400 3,516 42,174 48,951 $ 101,041 Period GAP $ 38,357 $(1,129)$(35,615) $ 159 $ 28,065 Cumulative GAP $ 38,357 $37,228 $ 1,613 $ 1,772 $ 29,837 Interest Sensitivity GAP Ratio 85.70% (47.30%)(542.99%) 0.32% 100.00% Cumulative Interest Sensitivity 85.70% 78.97% 3.00% 1.72% 22.80% 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. Six Months Ended Year Ended June 30, 1997 December 31, 1997 7.86% 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 June 30, 1997, the Company's qualifying capital was 12.19%, 11.17% 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, 1997, the Company's leverage ratio was 7.79%. 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 The annual meeting of shareholders of the Company was held on May 21, 1997. A quorum was established with the presence of 789,281 shares of 957,542 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 785,041 4,200 Robert E. Eklund 785,041 4,200 Timothy J. Jorstad 785,041 4,200 Catherine H. Munson 785,041 4,200 Gary T. Ragghianti 785,041 4,200 Michael J. Smith 785,041 4,200 Edward P. Tarrant 785,041 4,200 Randall J. Verrue 785,041 4,200 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 1997. There were 777,356 votes cast for the proposal, 7,071 votes cast against the proposal, and 4,854 abstentions. 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: August 13, 1997 /s/ Patrick E. Phelan Patrick E. Phelan Chief Financial Officer (Principal Accounting Officer) EX-27 2
9 1,000 6-MOS DEC-31-1997 JUN-30-1997 7,203 384 9,000 0 11,736 27,741 27,498 81,904 981 142,162 129,315 729 1,220 0 0 0 9,531 1,368 142,162 4,105 1,208 170 5,483 2,044 2,059 3,424 40 0 2,775 1,019 1,019 0 0 602 0.61 0.61 8.90 79 557 0 0 944 49 46 981 830 0 151
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