-----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, P6MESaS2tksTIxOJE9MYESdy59IBLsVQPnFrzodPmP3lMLZ87pw2Kujop8k39hq+ 1vVAxx/LtSKGKZEtA3UcYQ== 0000902789-99-000009.txt : 19991117 0000902789-99-000009.hdr.sgml : 19991117 ACCESSION NUMBER: 0000902789-99-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 000-25293 FILM NUMBER: 99753683 BUSINESS ADDRESS: STREET 1: 1248 FIFTH AVE CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4154592265 MAIL ADDRESS: STREET 1: 1248 FIFTH AVENUE CITY: SAN RAFAEL STATE: CA ZIP: 94901 10QSB 1 FORM 10-QSB U.S. Securities and Exchange Commission Washington, D.C. 20549 (Mark One) [X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from _________________ to _____________________ Commission file number: 033-76832 MCB FINANCIAL CORPORATION (exact name of small business issuer) California 68-0300300 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1248 Fifth Avenue, San Rafael, California 94901 (Address of principal executive offices) (415) 459-2265 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: November 5, 1999 Class Common stock, no par value 2,059,924 PART I - FINANCIAL INFORMATION Item 1. Financial Statements: MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS Dollar amounts in thousands December 31, September 30, 1998 1999 ASSETS (Unaudited) Cash and due from banks $ 8,804 $ 15,184 Federal funds sold 3,200 Total cash and cash equivalents 12,004 15,184 Interest-bearing deposits with banks 286 286 Investment securities available for sale at fair value 36,023 37,679 Investment securities held to maturity; fair values of $6,081 in 1998 and $2,002 in 1999 6,055 2,000 Loans held for investment (net of allowance for possible credit losses of $1,117 in 1998 and $1,406 in 1999 109,958 129,683 Premises and equipment - net 2,431 2,973 Accrued interest receivable 1,152 994 Deferred income taxes 547 855 Other assets 1,040 1,211 Total assets $ 169,496 $ 190,865 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $ 38,788 $ 46,195 Interest-bearing: Transaction accounts 92,491 102,587 Time certificates, $100,000 and over 12,622 14,427 Savings and other time deposits 11,003 11,560 Total interest-bearing deposits 116,116 128,574 Total deposits 154,904 174,769 Other borrowings 356 750 Accrued interest payable and other liabilities 1,154 1,402 Total liabilities 156,414 176,921 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 2,094,031 shares in 1998 and 2,071,043 shares in 1999, outstanding 2,088,466 shares in 1998 and 2,071,043 in 1999 9,578 10,095 Accumulated other comprehensive income 191 (368) Retained earnings 3,313 4,217 Total shareholders' equity 13,082 13,944 Total liabilities and shareholders' equity $ 169,496 $ 190,865 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended For the Nine Months In thousands, September 30, Ended September 30, except per share amounts 1998 1999 1998 1999 (Unaudited) (Unaudited) INTEREST INCOME: Loans, including fees $ 2,788 $ 3,336 $ 7,790 $ 9,365 Federal funds sold 154 185 370 274 Investment securities 511 387 1,576 1,342 Total interest income 3,453 3,908 9,736 10,981 INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 1,050 990 2,943 2,755 Time certificates, $100,000 and over 173 167 492 472 Other interest 7 7 18 30 Total interest expense 1,230 1,164 3,453 3,257 NET INTEREST INCOME 2,223 2,744 6,283 7,724 PROVISION FOR POSSIBLE CREDIT LOSSES 35 120 70 245 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 2,188 2,624 6,213 7,479 OTHER INCOME: Gain on sale of loans 18 5 137 87 Service fees on deposit accounts 129 149 373 465 Loan servicing fees 11 14 32 40 Gain (loss) on sale of investment securities - net 12 Other 45 77 192 174 Total other income 203 245 734 778 OTHER EXPENSES: Salaries and employee benefits 922 1,006 2,707 3,018 Occupancy expense 214 265 648 730 Furniture and equipment expense 99 107 313 306 Professional services 101 62 214 236 Supplies 66 67 215 201 Promotional expenses 57 58 247 226 Data processing fees 80 85 242 280 Regulatory assessments 18 12 49 31 Other 97 119 340 311 Total other expenses 1,654 1,781 4,975 5,339 INCOME BEFORE INCOME TAXES 737 1,088 1,972 2,918 INCOME TAX PROVISION 299 448 807 1,202 NET INCOME $ 438 $ 640 $ 1,165 $ 1,716 BASIC EARNINGS PER SHARE $ 0.20 $ 0.31 $ 0.54 $ 0.83 DILUTED EARNINGS PER SHARE $ 0.19 $ 0.30 $ 0.50 $ 0.79 See notes to condensed consolidated financial statements MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Nine Months Ended Dollar amounts in thousands September 30, September 30, 1998 1999 1998 1999 (Unaudited) (Unaudited) Net income $ 438 $ 640 $1,165 $1,716 Other comprehensive income (loss) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax 422 18 439 (566) Reclassification adjustment for gains (losses) included in net income, net of tax 7 Other comprehensive income (loss) 422 18 439 (559) Comprehensive income $ 860 $ 658 $1,604 $1,157 See notes to condensed consolidated financial statements MCB FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Dollar amounts in thousands Ended September 30, 1998 1999 CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) Net income $ 1,165 $ 1,716 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses 70 245 Depreciation and amortization 347 372 Gain on sale of investment securities, net (12) Change in deferred income taxes 89 (Increase) decrease in accrued interest receivable (104) 158 Decrease (increase) in other assets (6) (171) Increase in accrued interest payable and other liabilities 149 337 Net cash provided by operating activities 1,621 2,734 CASH FLOWS FROM INVESTING ACTIVITIES: Held to maturity securities: Calls 16,750 4,055 Purchases (2,055) Available for sale securities: Maturities 2,880 1,076 Calls 1,000 Purchases (25,547) (14,913) Sales 11,183 Net increase in loans held for investment (16,805) (19,970) Purchases of premises and equipment (257) (873) Net cash used by investing activities (24,034) (19,442) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in noninterest-bearing demand deposits 3,875 7,407 Net increase in interest-bearing transaction, savings and other time deposits 21,424 12,458 Net increase in other borrowings (444) 394 Cash dividends paid (19) Payment for fractional shares resulting from stock dividend (2) Proceeds from the exercise of stock options 90 282 Purchases of common stock (632) Net cash provided by financing activities 29,945 19,888 NET INCREASE IN CASH AND CASH EQUIVALENTS 2,532 3,180 CASH AND CASH EQUIVALENTS: Beginning of period 11,457 12,004 End of period $ 13,989 $ 15,184 CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 3,497 $ 3,312 Income taxes 596 $ 1,088 NONCASH INVESTING AND FINANCING ACTIVITIES: Stock dividends paid on common stock $ 867 See notes to condensed consolidated financial statements. MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 1. 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, 1998. The accompanying interim consolidated financial statements contained herein are unaudited. However, in the opinion of the Company, all adjustments, consisting of normal recurring items necessary for a fair presentation of the operating results for the periods shown, have been made. The results of operations for the nine months ended September 30, 1999 may not be indicative of operating results for the year ending December 31, 1999. 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. 2. EARNINGS PER SHARE - Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. The number of weighted average shares used in computing basic and diluted earnings per share are as follows: In thousands Three months ended September 30, 1998 1999 Basic shares 2,181 2,068 Dilutive effect of stock options 149 101 Diluted shares 2,330 2,169 Nine months ended September 30, 1998 1999 Basic shares 2,174 2,076 Dilutive effect of stock options 151 99 Diluted shares 2,325 2,175 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 nine months ended September 30, 1999 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, 1998. OVERVIEW EARNINGS SUMMARY. The Company reported net income of $640,000, or $0.31 per share basic and $0.30 per share diluted, for the third quarter of 1999. This compares to net income of $438,000, or $0.20 per share basic and $0.19 per share diluted, for the same period in 1998. For the nine months ended September 30, 1999, the Company reported net income of $1,716,000, or $0.83 per share basic and $0.79 per share diluted. This compares to net income of $1,165,000, or $0.54 per share basic and $0.50 per share diluted for the same period in 1998. Growth in average loans as a percentage of earning assets continued to positively impact the net interest margin during the three and nine month periods ended September 30, 1999. Return on average assets and return on average equity for the third quarter of 1999 were 1.39% and 18.66%, respectively, as compared to 1.09% and 13.11%, respectively, for the same period of 1998. Return on average assets and return on average equity for the nine months ended September 30, 1999 were 1.32% and 17.06%, respectively, as compared to 1.02% and 12.17%, respectively, for the same period of 1998. FINANCIAL CONDITION SUMMARY. Total assets of the Company increased by $21.4 million, or 12.6%, from the end of 1998 to reach $190.9 million at September 30, 1999. LOANS HELD FOR INVESTMENT. Net loans held for investment increased by $19.7 million, or 17.9%, during the first nine months of 1999 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 December 31, September 30, 1998 1999 Commercial $ 22,504 $ 20,999 Real estate: Commercial 72,605 78,312 Construction 9,619 25,684 Land 2,592 2,782 Home equity 1,703 1,552 Loans to consumers and individuals 2,085 1,879 Total 111,108 131,208 Deferred loan fees (33) (119) Allowance for possible credit losses (1,117) (1,406) Total net loans $ 109,958 $ 129,683 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 $113.8 million, or 86.7% of the total portfolio as of September 30, 1999. 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 provide an adequate safeguard against declining real estate prices which may effect a borrower's ability to liquidate the property and repay the loan. However, no assurance can be given that real estate values will not decline and impair the value of the security for loans held by the Company. The Company focuses its portfolio lending on commercial, commercial real estate, and construction loans. These loans generally carry a higher level of risk than conventional real estate loans; accordingly, yields on these loans are typically higher than those of other loans. The performance of commercial and construction loans is generally dependent upon future cash flows from business operations (including the sale of products, merchandise and services) and the successful completion or operation of large real estate projects. Risks attributable to such loans can be significantly increased, often to a greater extent than other loans, by regional economic factors, real estate prices, the demand for commercial and retail office space, and the demand for products and services of industries which are concentrated within the Company's loan portfolio. As of September 30, 1999 the two largest industry concentrations within the loan portfolio were real estate and related services at 28.3% and the construction industry at 18.9% of the portfolio. Because credit concentrations increase portfolio risk, the Company places significant emphasis on the purpose of each loan and the related sources of repayment. The Company generally limits unsecured commercial loans to maturities of three years and secured commercial loans to maturities of five years. NONPERFORMING ASSETS. The Company carefully monitors the quality of its loan portfolio and the factors that affect it, including regional economic conditions, employment stability, and real estate values. The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection. As of September 30, 1999, the Company had nonperforming assets in the amount of $1,777,000, of which $1,737,000 represented three nonaccrual loans. Had these nonaccrual loans performed under their contractual terms, approximately $24,000 in additional interest income would have been recognized during 1999. Also, as of September 30, 1999, the Company had one loan 90 days or more past due and still accruing in the aggregate amount of $40,000. This loan is 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 December 31, September 30, 1998 1999 Nonaccrual loans $ 563 $ 1,737 Loans 90 days or more past due and still accruing 404 40 Other real estate owned $ 967 $ 1,777 As a percent of total loans 0.87% 1.36% As a percent of total assets 0.57% 0.93% The increase in nonperforming assets was due to a loan in the amount of $1.7 million being placed on nonaccrual status during the third quarter of 1999. No specific allowance for possible credit losses was applied to this loan because it was adequately collateralized. At September 30, 1999, the Company had loans identified as impaired in the amount of $1,777,000. At September 30, 1999, 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 September 30, 1999 the APCL of $1,406,000, or 1.07% of total loans, was determined by management to be adequate against foreseeable future losses. No assurance can be given that nonperforming loans will not increase or that future losses will not exceed the amount of the APCL. 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): At and For At and For the the Year Ended Nine Months Ended December 31, September 30, 1998 1999 Balances: Average loans during period $ 100,130 $ 121,934 Loans at end of period 111,075 131,089 Allowance for Possible Credit Losses: Balance at beginning of period 1,007 1,117 Actual credit losses: Commercial 53 28 Consumer Total 53 28 Actual credit recoveries: Commercial 9 72 Consumer 1 Total 10 72 Net credit losses (recoveries) 43 (44) Provision charged to operating expenses 153 245 Balance at end of period $ 1,117 $ 1,406 Ratios: Net credit losses (recoveries) to average loans 0.04% (0.04%) Allowance for possible credit losses to loans at end of period 1.01% 1.07% Net credit losses (recoveries) to beginning of period allowance for credit losses 4.27% (3.94%) The Company provided $120,000 to the allowance for possible credit losses during the third quarter of 1999 as compared to $35,000 during the third quarter of 1998. For the nine months ended September 30, 1999, the Company provided $245,000 to the allowance for possible credit losses as compared to $70,000 during the same period of 1998. The provisions during the third quarter of 1999 and the nine months ended September 30, 1999 were 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): December 31, 1998 September 30, 1999 % of % of Category Category to Total to Total APCL Loans APCL Loans Commercial loans $ 641 42.79% $ 904 48.48% Real estate loans 245 53.27% 260 46.74% Consumer loans 38 3.94% 41 4.78% Not allocated 193 N/A 201 N/A Total $ 1,117 100.00% $ 1,406 100.00% 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 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 September 30, 1999: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $ 2,000 $ 2 $ $ 2,002 $ 2,000 Total held to maturity 2,000 2 2,002 2,000 Available for sale securities: U.S. Treasury 25,017 3 (213) 24,807 24,807 U.S. Government agencies 11,140 (400) 10,740 10,740 Mortgage-backed Securities 196 (6) 190 190 Corporate securities 1,955 (13) 1,942 1,942 Total available for sale 38,308 3 (632) 37,679 37,679 Total investment securities $40,308 $ 5 $ (632) $39,681 $39,679 Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying December 31, 1998: Cost Gains Losses Value Value Held to maturity securities: U.S. Government agencies $ 6,055 $ 26 $ $ 6,081 $ 6,055 Total held to maturity 6,055 26 6,081 6,055 Available for sale securities: U.S. Treasury 15,206 214 (6) 15,414 15,414 U.S. Government agencies 17,247 137 (60) 17,324 17,324 Mortgage-backed Securities 1,172 5 1,177 1,177 Corporate securities 1,971 36 2,007 2,007 Municipal bonds 100 1 101 101 Total available for sale 35,696 393 (66) 36,023 36,023 Total investment securities $41,751 $ 419 $ (66) $42,104 $42,078 DEPOSITS. Total consolidated deposits increased by $19.9 million, or 12.8%, during the nine months ended September 30, 1999. Rates paid on deposits decreased during the nine months ended September 30, 1999 contributing to the decrease in the cost of funds to 2.73% for the nine months ended September 30, 1999 as compared to 3.23% for the year ended December 31, 1998. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated (dollar amounts in thousands): Year Ended Nine Months Ended December 31, 1998 September 30, 1999 Average Average Average Average Balance Rate Balance Rate Noninterest-bearing demand deposits $ 31,371 $ 38,413 Interest-bearing demand deposits (includes money market deposit accounts) 88,255 3.93% 95,603 3.40% Savings deposits 1,845 1.92% 2,230 1.89% Time deposits, $100,000 and over 12,493 5.31% 13,004 4.85% Other time deposits 8,194 5.06% 8,662 4.41% Total interest-bearing 110,787 4.14% 119,499 3.60% Total deposits $142,158 3.23% $157,912 2.73% 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): December 31, September 30, Time remaining to maturity 1998 1999 Three months or less $ 4,682 $ 6,522 After three months to six months 3,620 2,603 After six months to one year 3,620 4,545 After twelve months 700 757 Total $ 12,622 $ 14,427 RESULTS OF OPERATIONS NET INTEREST INCOME / NET INTEREST MARGIN. Net interest income for the quarter ended September 30, 1999 was $2,744,000, an increase of 23.4% over the net interest income of $2,223,000 during the same period of 1998. Net interest income for the nine months ended September 30, 1999 was $7,724,000, an increase of 22.9% over the net interest income of $6,283,000 during the same period of 1998. The increase in both periods was primarily due to the growth in average loans, largely due to 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 September 30, 1998 1999 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 11,382 $ 154 5.41% $ 14,702 $ 185 5.03% Interest-bearing deposits with banks 286 4 5.59% 286 4 5.59% Investment securities 34,289 507 5.92% 27,782 383 5.51% Loans 104,605 2,788 10.66% 129,241 3,336 10.32% Total earning assets 150,562 3,453 9.18% 172,011 3,908 9.09% Total non-earning assets 10,890 12,649 Total assets $161,452 $184,660 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 30,899 $ 42,035 Interest-bearing transaction accounts 92,480 $ 936 4.04% 101,140 $ 879 3.48% Time deposits, $100,000 or more 12,722 173 5.44% 14,181 167 4.71% Savings and other time 10,168 114 4.48% 11,337 111 3.92% Total interest-bearing deposits 115,370 1,223 4.24% 126,658 1,157 3.65% Other borrowings 514 7 5.45% 593 7 4.72% Total interest-bearing Liabilities 115,884 1,230 4.25% 127,251 1,164 3.66% Other liabilities 1,308 1,645 Shareholders' equity 13,361 13,729 Total liabilities and shareholders' equity $161,452 $184,660 Net interest income $2,223 $2,744 Net interest margin 5.91% 6.38% For the nine months ended September 30, 1998 1999 Average Average Balance Interest Rate Balance Interest Rate ASSETS Federal funds sold $ 9,216 $ 370 5.35% $ 7,532 $ 274 4.85% Interest-bearing deposits with banks 286 13 6.06% 286 11 5.13% Investment securities 34,293 1,563 6.09% 32,195 1,331 5.52% Loans 97,396 7,790 10.66% 121,934 9,365 10.24% Total earning assets 141,191 9,736 9.20% 161,947 10,981 9.04% Total non-earning assets 10,810 11,745 Total assets $152,001 $173,692 LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 30,010 $ 38,413 Interest-bearing transaction accounts 85,402 2,609 4.07% 95,603 2,437 3.40% Time deposits, $100,000 or more 12,306 492 5.33% 13,004 472 4.84% Savings and other time 9,837 334 4.53% 10,892 318 3.89% Total interest-bearing deposits 107,545 3,435 4.26% 119,499 3,227 3.60% Other borrowings 481 18 4.99% 881 30 4.54% Total interest-bearing Liabilities 108,026 3,453 4.26% 120,380 3,257 3.61% Other liabilities 1,197 1,482 Shareholders' equity 12,768 13,417 Total liabilities and shareholders' equity $152,001 $173,692 Net interest income $6,283 $7,724 Net interest margin 5.93% 6.36% The net interest margin increased to 6.38% during the third quarter of 1999 from 5.91% in the same quarter of 1998. For the nine months ended September 30, 1999, the net interest margin increased to 6.36% from 5.93% during the same period of 1998. The increase in both periods was primarily attributable to growth in average loans as a percentage of earning assets. The increase in average loans was largely due to the 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 Nine Months Ended September 30, 1998 September 30, 1998 Compared to Compared to Quarter Ended Nine Months Ended September 30, 1999 September 30, 1999 Change in Change in Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total Interest Income: Federal funds sold $45 ($11) ($3) $31 ($67) ($35) $6 ($96) Interest-bearing deposits with banks 0 0 0 0 0 (2) 0 (2) Investment securities (96) (35) 7 (124) (96) (145) 9 (232) Loans 658 (89) (21) 548 1,960 (308) (77) 1,575 Total Interest Income 607 (135) (17) 455 1,797 (490) (62) 1,245 Interest Expense: Interest-bearing transaction accounts 86 (131) (12) (57) 310 (431) (51) (172) Time deposits, $100,000 or more 20 (23) (3) (6) 28 (45) (3) (20) Savings and other time 13 (14) (2) (3) 36 (47) (5) (16) Other borrowings 1 (1) 0 0 15 (2) (1) 12 Total Interest Expense 120 (169) (17) (66) 389 (525) (60) (196) Net Interest Income $487 $34 $0 $521 $1,408 $35 ($2) $1,441 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 Nine Months Ended September 30, September 30, Components of Noninterest Income 1998 1999 1998 1999 Gain on sale of loans $ 18 $ 5 $ 137 $ 87 Service fees on deposit accounts 129 149 373 465 Loan servicing fees 11 14 32 40 Gain (loss) on sale of investment securities - net 12 Other 45 77 192 174 Total $ 203 $ 245 $ 734 $ 778 As a Percentage of Average Assets (Annualized) Gain on sale of loans 0.04% 0.01% 0.12% 0.07% Service fees on deposit accounts 0.32% 0.32% 0.32% 0.36% Loan servicing fees 0.03% 0.03% 0.03% 0.03% Gain (loss) on sale of investment securities - net 0.01% Other 0.11% 0.17% 0.17% 0.13% Total 0.50% 0.53% 0.64% 0.60% 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 Nine Months Ended September 30, September 30, Components of Noninterest Expense 1998 1999 1998 1999 Salaries and employee benefits $ 922 $ 1,006 $ 2,707 $ 3,018 Occupancy expense 214 265 648 730 Furniture and equipment expense 99 107 313 306 Professional services 101 62 214 236 Supplies 66 67 215 201 Promotional expenses 57 58 247 226 Data processing fees 80 85 242 280 Regulatory assessments 18 12 49 31 Other 97 119 340 311 Total $ 1,654 $ 1,781 $ 4,975 $ 5,339 Average full-time equivalent employees 56 57 55 56 As a Percentage of Average Assets (Annualized) Salaries and employee benefits 2.28% 2.18% 2.37% 2.32% Occupancy expense 0.53% 0.57% 0.57% 0.56% Furniture and equipment expense 0.25% 0.23% 0.27% 0.24% Professional services 0.25% 0.13% 0.19% 0.18% Supplies 0.16% 0.15% 0.19% 0.15% Promotional expenses 0.14% 0.13% 0.22% 0.17% Data processing fees 0.20% 0.18% 0.21% 0.22% Regulatory assessments 0.04% 0.03% 0.04% 0.02% Other 0.24% 0.26% 0.30% 0.24% Total 4.10% 3.86% 4.36% 4.10% Noninterest expense increased to $1.8 million during the third quarter of 1999 from $1.7 million during the same period of the prior year. For the nine months ended September 30, 1999, noninterest expense increased to $5.3 million from $5.0 million during the same period of the prior year. YEAR 2000. The Year 2000 creates challenges with respect to the automated systems used by financial institutions and other companies. Many software programs are not able to recognize the year 2000, since most programs and systems were designed to store calendar years in the 1900's by assuming the "19" and storing only the last two digits of the year. For example, these automated systems would recognize a year stored as "00" as the year "1900", rather than as the year "2000". If these automated systems are not appropriately re-coded, updated or replaced before the year 2000, they will likely crash or fail in some manner. In addition, many software programs and automated systems will fail to recognize the year 2000 as a leap year. The problem is not limited to computer systems. Year 2000 issues will potentially affect every system that has an embedded microchip, such as automated teller machines, elevators and vaults. The year 2000 challenge is especially problematic for financial institutions, since many transactions such as interest accruals and payments are date sensitive. It also may affect the operations of third parties with whom the Company does business, including the Company's vendors, suppliers, utility companies and customers. THE COMPANY'S STATE OF READINESS. The Company is committed to addressing these year 2000 challenges in a prompt and responsible manner and has dedicated resources to do so. Management has completed an assessment of its automated systems and has implemented a plan to resolve these issues, including purchasing appropriate computer technology. The Company's year 2000 compliance plan ("Plan") has five phases. These phases are (1) project management, (2) awareness, (3) assessment, (4) testing, and (5) renovation and implementation. The Company has substantially completed these phases, although appropriate follow-up activities are continuing to occur. PROJECT MANAGEMENT. The Company's senior management provides periodic reports to its board of directors in order to assist them in overseeing the Company's year 2000 readiness. AWARENESS. The Company has completed several projects designed to promote awareness of year 2000 issues throughout the Company and the Company's customer base. These projects include mailing information to deposit and loan customers, providing training for lending officers and other staff, and responding to vendor, customer, and shareholder inquiries. ASSESSMENT. Assessment is the process of identifying all mission-critical applications that could potentially be negatively affected by dates in the year 2000 and beyond. The Company's assessment phase is complete. Systems examined during this phase included telecommunications systems, account-processing applications, and other software and hardware used in connection with customer accounts. The Company's operations, like those of many other companies, are intertwined with the operations of certain of its business partners. Accordingly, the Company's operations could be materially affected if the operations of those companies who provide the Company with mission critical applications, systems, and services are materially affected. For example, the Company depends upon vendors who provide equipment, technology, and software to it in connection with its business operations. Failure of these software vendors to achieve year 2000 readiness could substantially affect the operations of the Company. In addition, lawsuits and other financial challenges materially affecting the financial viability of these vendors could materially affect the Company. In response to this concern, the Company has identified and contacted those vendors who provide our mission-critical applications. The Company has received year 2000 compliance assurance from its primary mission-critical vendors. TESTING. Updating and testing of the Company's mission-critical automated systems is complete. Testing of modified or new systems will continue as needed. RENOVATION AND IMPLEMENTATION. This phase involves obtaining and implementing renovated software applications provided by our vendors. As these applications were received and implemented, the Company tested them for year 2000 compliance. At this time there are no mission-critical systems that remain unimplemented or untested. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The total financial effect of these year 2000 challenges on the Company cannot be predicted with certainty at this time. In fact, in spite of all efforts being made to rectify these problems, the success of these efforts cannot be predicted until the year 2000 actually arrives. The Company upgraded and replaced its data processing and network system in 1997. The Company spent a total of approximately $500,000 on this conversion. The Company will continue to upgrade or replace certain automated systems before the year 2000, if necessary; however some of these systems would have been replaced before the year 2000 without regard to year 2000 compliance issues, due to technology updates and Company expansion. Management does not believe that future expenses related to meeting the Company's year 2000 challenges will have a material effect on the operations or financial performance of the Company. However, factors beyond the control of management, such as the effects on vendors of our mission-critical software and systems, the effects of year 2000 issues on the economy, and the development of the risks identified below under "The Risks of the Company's Year 2000 Issues," among other things, could have a material effect on the operations or financial performance of the Company. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The year 2000 presents certain risks to the Company and its operations. Some of these risks are present because the Company purchases technology applications from other parties who face year 2000 challenges. Other of these risks are inherent in the business of banking or are risks faced by many other companies in other industries. Although it is impossible to identify every possible risk that the Company may face moving into the new millennium, management has to date identified the following potential risks: 1. Commercial banks may experience a contraction in their deposit base if a significant amount of deposited funds are withdrawn by customers prior to the year 2000. This potential deposit contraction could make it necessary for the Company to change its sources of funding and could materially impact future earnings. The Company has developed a contingency plan for addressing this situation, should it occur. 2. The Company lends significant amounts to businesses in its market areas. If these businesses are adversely affected by year 2000 issues, their ability to repay loans could be impaired. This increased credit risk could affect the Company's financial performance. As part of the Company's Plan, its primary borrowers were identified and the assessment of their year 2000 readiness and risk to the Company continues to be monitored. 3. The Company's operations, like those of many other companies, can be affected by the year 2000 triggered failures of other companies upon whom the Company depends for the functioning of its automated systems. Accordingly, the Company's operations could be materially affected if the operations of those companies who provide the Company with mission critical systems and services are materially affected. As described above, the Company has identified its mission-critical vendors and is monitoring their year 2000 compliance progress. 4. All companies with publicly traded stock, including the Company, could experience a drop in stock price as investors change their investment portfolios or sell stock prior to the new millennium. At this time, it is impossible to predict whether or not this will in fact be the case with respect to the stock of MCB Financial Corporation or any other company. 5. The Company's ability to operate effectively in the year 2000 could be affected by communications abilities and access to utilities, such as electricity, water and telephone. To the extent access is interrupted due to the effects of year 2000 issues on these and other utilities, the operations of the Company could be disrupted. The Company has adopted a contingency plan for addressing this situation, to the extent possible, should it occur; however, normal operations could be seriously affected. THE COMPANY'S CONTINGENCY PLANS. The Company has completed the development of a contingency plan related to year 2000 issues, including cash reserves, liquidity and operational issues. Additions to the plan may be made as events unfold in 1999. INCOME TAXES. The Company's effective tax rate was 41.2% for the quarter ended September 30, 1999 compared to 40.6% in the same period of the prior year. For the nine months ended September 30, 1999, the effective tax rate was 41.2% 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 nine months ended September 30, 1999, federal funds sold averaged $7.5 million, or 4.3% of total assets. In addition to its federal funds, the Company maintains various lines of credit with correspondent banks, the Federal Reserve Bank of San Francisco, and the Federal Home Loan Bank of San Francisco. At September 30, 1999, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $45.3 million, or 23.7% of total assets. This represented all available liquid assets, excluding other assets. Several methods are used to measure liquidity. One method is to measure the balance between loans and deposits (gross loans divided by total deposits). In general, the closer this ratio is to 100%, the more reliant an institution becomes on its illiquid loan portfolio to absorb temporary fluctuations in deposit levels. At September 30, 1999, the loan-to-deposit ratio was 75.0% as compared to 71.7% at December 31, 1998. Another frequently used method is the relationship between short-term liquid assets (federal funds sold and investments maturing within one year) and short- term liabilities (total deposits and other borrowings) as measured by the liquidity ratio. The Company targets a minimum ratio of 5%. At September 30, 1999, this ratio was 11.6% as compared to 3.1% at December 31, 1998. As of September 30, 1999, 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 September 30, 1999, 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, and the cumulative interest rate sensitivity gap ratio. For the purposes of the following table, an asset or liability is considered rate sensitive within a specified period when it matures or can be repriced within that period pursuant to its original contractual terms (dollar amounts in thousands): September 30, 1999 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): Interest-bearing deposits with other banks $ 196 $ 90 $ 286 Investment securities 17,131 3,006 $ 2,001 $13,098 $ 5,072 40,308 Loans, gross of allowance for possible losses 69,747 1,684 3,062 39,490 17,106 131,089 Total 87,074 4,780 5,063 52,588 22,178 171,683 Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 45,043 57,544 102,587 Time deposits, $100,000 or more 6,522 2,603 4,545 757 14,427 Savings and other time deposits 5,755 865 2,391 2,549 11,560 Other borrowings 750 750 Total 13,027 3,468 51,979 60,850 $129,324 Period GAP $74,047 $ 1,312 $(46,916) $(8,262)$22,178 Cumulative GAP $74,047 $75,359 $ 28,443 $20,181 $42,359 Interest Sensitivity GAP Ratio 85.04% 27.45% (926.64%) (15.71%)100.00% Cumulative Interest Sensitivity 85.04% 82.04% 29.35% 13.50% 24.67% 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. Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1999 8.40% 7.72% During the third quarter of 1999, the Company commenced the payment of a regular cash dividend. The regular cash dividends will be paid on a quarterly basis. In March 1999, the Board of Directors authorized the Company to repurchase $2,000,000 of the Company's common stock. This authorization was in addition to the $1,000,000 authorized pursuant to repurchase programs announced in 1994 and 1998. As of February 1999, the Company had repurchased the maximum amount authorized under the 1994 and 1998 repurchase programs. The 1999 repurchase program authorizes the Company to repurchase and retire up to $2,000,000 of its common stock in open market and private transactions during the next five years. As of September 30, 1999, 70,019 shares had been repurchased for a total of $584,988 under the 1999 program. 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. Total 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 total capital be 8% of risk-based assets, of which at least 4% must be Tier 1 capital. As of September 30, 1999, the Company's total capital was 11.03% and its Tier 1 capital ratio was 10.03%. In addition, the Company, under the guidelines established for adequately capitalized institutions, must also maintain a minimum leverage ratio (Tier 1 capital divided by total assets) of 4%. As of September 30, 1999, the Company's leverage ratio was 7.55%. 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 None Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In January 1999 the Company adopted a shareholder rights plan designed to maximize the long-term value of the Company and to protect the Company's shareholders from certain takeover tactics and takeover bids that are not fair to all shareholders. The plan limits or qualifies the rights of holders of the Company's common stock who may wish to acquire shares in excess of the trigger amount under the plan. A Rights Agreement was filed with the SEC on Form 8-A12G on January 25, 1999. Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) List of Exhibits: (3)(a) Restated Articles of Incorporation (incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for its quarter ended September 30, 1998). (3)(b) By-laws (incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832)). (4) Rights Agreement (incorporated by reference from the registrant's Form 8-A12G filed with the SEC on January 25, 1999). (10)(a)(1) 1989 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)(a)(3) 1999 Stock Option Plan (incorporated by reference from Exhibit A of the registrant's Proxy Statement on Schedule 14A filed with the SEC on April 27, 1999). (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). (10)(b)(6) Petaluma Office Lease (incorporated by reference to Exhibit 10)(b)(6) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1998). (27) Financial Data Schedule (b) REPORTS ON FORM 8-K. The Company filed the following Current Reports on Form 8-K: (i) A Current Report on Form 8-K filed with the SEC on September 15, 1999, pertaining to a press release announcing the commencement of a quarterly cash dividend and a five percent stock dividend. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MCB FINANCIAL CORPORATION (Registrant) Date: November 9, 1999 /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 9-MOS DEC-31-1999 SEP-30-1999 15,184 286 0 0 37,679 2,000 2,002 131,089 1,406 190,865 174,769 750 1,402 0 0 0 10,095 3,849 190,865 9,365 1,342 274 10,981 3,227 3,257 7,724 245 12 5,339 2,918 2,918 0 0 1,716 .83 .79 9.04 1,737 40 0 0 1,117 28 72 1,406 1,205 0 201
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