10KSB 1 0001.txt FORM 10-KSB ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ . Commission file number: 033-76832 MCB FINANCIAL CORPORATION (Name of small business issuer in its charter) California 68-0300300 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1248 Fifth Avenue, San Rafael, California 94901 (415) 459-2265 (Address and telephone number of principal executive offices) Securities registered under Section 12(b) of the Exchange Act: Common Stock, No Par Value (Title of class) Securities registered under Section 12(g) of the Exchange Act: Preferred Stock Purchase Rights (Title of class) 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 [ ]. Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]. The issuer's revenues for its most recent fiscal year were $19,114,000. At March 19, 2001, the aggregate market value of the Common Stock held by non-affiliates of the issuer was approximately $15,683,000. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the issuer were deemed to be shares of Common Stock held by affiliates. At March 19, 2001, the issuer had outstanding 1,775,182 shares of Common Stock, no par value, which is the issuer's only class of common stock. Documents Incorporated by Reference: The information required to be furnished pursuant to Part III of this Form 10-KSB will be set forth in, and incorporated by reference from, the registrant's definitive proxy statement for the annual meeting of stockholders to be held May 16, 2001, which definitive proxy statement will be filed by the issuer with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 2000. ================================================================================
TABLE OF CONTENTS Page PART I Item 1. Description of Business..................................................................... 1 MCB Financial Corporation....................................................................... 1 Metro Commerce Bank............................................................................. 1 Competition..................................................................................... 2 Insurance....................................................................................... 2 Employees....................................................................................... 3 Supervision and Regulation...................................................................... 3 Item 2. Description of Property..................................................................... 9 Item 3. Legal Proceedings........................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders......................................... 9 PART II Item 5. Market for Common Equity and Related Stockholder Matters.................................... 10 Item 6. Management's Discussion and Analysis........................................................ 10 Item 7. Financial Statements........................................................................ 22 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure........ 46 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act......................................................................... 46 Item 10. Executive Compensation...................................................................... 46 Item 11. Security Ownership of Certain Beneficial Owners and Management.............................. 46 Item 12. Certain Relationships and Related Transactions.............................................. 46 Item 13. Exhibits and Reports on Form 8-K............................................................ 46
PART I Item 1. Description of Business MCB Financial Corporation MCB Financial Corporation (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The Company was incorporated under the laws of the State of California on January 20, 1993. On October 1, 1993, the Company began operations as a bank holding company with Metro Commerce Bank (the "Bank") as its wholly-owned bank subsidiary. MCB Statutory Trust I (the "Trust"), which is a Connecticut statutory trust formed for the exclusive purpose of issuing and selling trust preferred securities, is also a subsidiary of the Company. The principal business and activity of the Company is to serve as the bank holding company for the Bank and its principal source of income is dividends paid by the Bank. Metro Commerce Bank The Bank is a California state-chartered commercial bank that is a member of the Federal Reserve System. The Bank was licensed by the Office of the Comptroller of the Currency ("Comptroller") on June 12, 1989, and commenced operations as a national banking association on December 8, 1989. On July 24, 1998, the Bank converted from a national banking association into a California State bank. The Bank is subject to primary supervision, examination and regulation by the State of California Department of Financial Institutions ("DFI") and the Federal Reserve Board ("FRB"). The Bank is also subject to certain federal laws and regulations, and the Bank is subject to applicable provisions of California law insofar as such provisions do not conflict with or are not preempted by federal banking laws. The deposits of the Bank are insured under the Federal Deposit Insurance Act up to the applicable limits thereof. The Bank is a wholly-owned subsidiary of the Company and presently has no subsidiaries or affiliates other than the Trust. The Bank is engaged in substantially all of the business operations customarily conducted by independent commercial banks in California. The Bank's banking services include checking and savings deposits, and the making of commercial, construction, mortgage, real estate, small business administration, home equity and other installment loans and term extensions of credit. The Bank also offers travelers' checks, notary public and other customary bank services to its customers. The Bank is not a credit card issuing bank; however, it offers Visa cards through one of its correspondent banks. The Bank operates a Small Business Administration ("SBA") Loan Division. The SBA is an agency of the U.S. Government that offers guaranteed loan programs for small businesses which might not otherwise qualify for standard bank credit. The SBA Loan Division offers various business loan programs secured by both residential and commercial real estate and business property. The Bank primarily sells the guaranteed portion of SBA loans in the secondary market to private investors. Loan fundings through this division began during the first quarter of 1995. The Bank does not operate a trust department; however, it has arranged with a correspondent institution to offer trust services to the Bank's customers upon request. The Bank also does not offer international banking services although such services are offered indirectly through correspondent institutions. Currently, the Bank conducts its business operations through its head office located in San Rafael, California, and through its five branch office locations in San Francisco, South San Francisco, Hayward, Petaluma and Upland, California. The Bank's primary service area is central Marin County along with the cities of San Francisco, South San Francisco, Hayward, Petaluma and Upland. Most of the Bank's loans and deposits originate from small and medium sized businesses and professionals located within the Bank's primary service areas. The Bank's business has little, if any, emphasis on foreign sources and application of funds. The Bank's business, based upon performance to date, does not appear to be seasonal. The Bank is not dependent upon a single customer or group of related customers for a material portion of its deposits, nor is a material portion of the Bank's loans concentrated within a single industry or group of related industries. Management of the Bank is unaware of any material effect upon the Bank's capital expenditures, earnings or competitive position as a result of federal, state or local environmental regulation. The Bank holds no patents, licenses (other than licenses obtained from bank regulatory authorities), franchises or concessions. Competition The banking business in California is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area. The Bank competes for deposits and loans principally with other commercial banks and also with non-bank financial intermediaries, including savings and loan associations, credit unions, thrift and loans, mortgage companies, money market and mutual funds, finance and insurance companies and other financial and non-financial institutions. In addition, other entities (both governmental and private industry) seeking to raise capital through the issuance and sale of debt or equity securities and instruments provide competition for the Bank in the acquisition of deposits. Among the advantages certain of these institutions have over the Bank are their ability to finance wide-ranging and effective advertising campaigns and to allocate their investment resources to regions of highest yield and demand. Many of the major commercial banks operating in the Bank's service area offer certain services (such as international banking and trust services) which are not offered directly by the Bank. In addition, by virtue of their greater total capitalization, such banks have substantially higher lending limits than does the Bank (legal lending limits to each customer are restricted to a percentage of a bank's capital, the exact percentage depending on the nature of the particular loan transaction involved). From the time the Bank commenced its operations, officers and employees of the Bank have continually engaged in marketing activities, including the evaluation and development of new services, involvement in community service groups, and direct marketing in order to retain and improve the Bank's competitive position in its service areas. Insurance The Company and the Bank maintain insurance at levels deemed adequate by its Board of Directors to protect against certain business risks, operational losses, and property damage. In accordance with rulings promulgated by the DFI and pursuant to the Company's and the Bank's Articles of Incorporation and certain contractual obligations, the officers and directors are entitled to indemnification, under certain circumstances, for certain expenses, liabilities and losses including, but not limited to, costs of defense, settlements and judgments rendered against them. However, indemnification is not authorized when a supervisory action results in a final order assessing civil money penalties or when a supervisory action requires affirmative action in the form of payments by an individual to the Bank. The Company and the Bank maintain directors and officers liability insurance to cover certain costs of indemnification. Employees Except for its officers, the Company has no full-time or part-time employees. It is anticipated that the Company will rely on its officers and will utilize the employees of the Bank until it becomes actively engaged in additional business activities. The Company reimburses the Bank a fair and reasonable amount for all services furnished to it. As of December 31, 2000, the Bank had a total of 58 full-time equivalent employees. The management of the Bank believes that its employee relations are satisfactory. SUPERVISION AND REGULATION Bank Holding Company Regulation The Company is a bank holding company registered under the BHC Act and is subject to the supervision of the FRB. As a bank holding company, the Company must obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5% of the voting shares of such bank. With certain limited exceptions, the Company is prohibited from engaging in or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities, unless the FRB determines that such activities are so closely related to banking as to be a proper incident thereof. The FRB has the authority to examine the Company periodically. In 1997, the FRB adopted a policy for risk-focused supervision of small bank holding companies that do not engage in significant non-banking activities. Under this policy, examinations focus on whether the Company has systems in place to manage the risks inherent in its business. In analyzing risk, the FRB looks at the financial condition of the Company and the Bank, management, compliance with laws and regulations, inter-company transactions and any new or contemplated activities. The Company and any subsidiary which it may acquire or organize in the future are deemed to be affiliates of the Bank within the meaning set forth in the Federal Reserve Act and are subject to the Federal Reserve Act. This means, for example, that there are limitations on loans by the Bank to affiliates, on investments by the Bank in any affiliate's stock and on the Bank's taking any affiliate's stock as collateral for loans to any borrower. All affiliate transactions must satisfy certain limitations and otherwise be on terms and conditions that are consistent with safe and sound banking practices. In this regard, the Bank generally may not purchase from any affiliate a low-quality asset (as that term is defined in the Federal Reserve Act). Also, transactions by the Bank with an affiliate must be on substantially the same terms as would be available for non-affiliates. The Company and the Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. The Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. For example, the Bank generally may not extend credit on the condition that the customer obtain some additional service from the Bank or the Company, or refrain from obtaining such service from a competitor. Dividends Payable by the Company Holders of Common Stock of the Company are entitled to receive dividends as and when declared by the Company's Board of Directors out of funds legally available therefor under the laws of the State of California. A California corporation such as the Company may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. In the event sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if, after giving effect to the distribution, the corporation's assets equal at least 125 percent of its liabilities and certain other conditions are met. Since the 125 percent ratio translates into a minimum capital ratio of 25 percent, most bank holding companies, including the Company based on its current capital ratios, are unable to meet this last test and so must have sufficient retained earnings to fund the proposed distribution. The FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, banks and their holding companies may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items such as sales of buildings or other large assets in order to generate profits to enable payment of future dividends. Further, the FRB's position that holding companies are expected to provide a source of managerial and financial strength to their subsidiary banks potentially restricts a bank holding company's ability to pay dividends. Financial Services Modernization Legislation The Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act") became effective March 11, 2000. The Financial Services Modernization Act repeals the two provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Generally, the Financial Services Modernization Act: o Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; o Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; o Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; o Provides an enhanced framework for protecting the privacy of consumer information; o Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; o Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and o Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order for the Company to take advantage of the ability to affiliate with other financial services providers, the Company must become a "Financial Holding Company" as permitted under an amendment to the BHCA. To become a Financial Holding Company, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. In addition, the Federal Reserve must also determine that each insured depository institution subsidiary of the Company has at least a "satisfactory" CRA rating. The Company currently meets the requirements to make an election to become a Financial Holding Company. The Company's management has not determined at this time whether it will seek an election to become a Financial Holding Company. The Company is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Company and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Company desires to utilize any of its expanded powers provided in the Financial Services Modernization Act. The Financial Services Modernization Act provides that designated federal regulatory agencies, including the FDIC, the FRB, the OCC and the Securities and Exchange Commission, are to publish regulations to implement certain provisions of the Act. These agencies have cooperated in the release of rules that establish minimum requirements to be followed by financial institutions for protecting the privacy of financial information provided by consumers. The FDIC's rule, which would establish privacy standards to be followed by state nonmember bank such as the Banks, requires a financial institution to (i) provide notice to customers about its privacy policies and practices, (ii) describe the conditions under which the institution may disclose nonpublic personal information about consumers to nonaffiliated third parties, and (iii) provide a method for consumers to prevent the financial institution from disclosing that information to nonaffiliated third parties by "opting out" of that disclosure. The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation. A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well-managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities. The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, the bank must be well-capitalized, and the bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. The Company and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank faces from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Bank. Bank Regulation The Bank is subject to regulation, supervision and regular examination by the DFI and FRB. The deposits of the Bank are insured up to the maximum legal limits by the Bank Insurance Fund ("BIF"), which is managed by the Federal Deposit Insurance Corporation ("FDIC"), and the Bank is therefore subject to applicable provisions of the Federal Deposit Insurance Act. The regulations of these agencies affect most aspects of the Bank's business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the Bank's activities and various other requirements. Supervision and Examination Federal law mandates frequent examinations of all banks, with the costs of examinations to be assessed against the bank being examined. In the case of the Bank, its primary Federal regulator is the FRB. The Federal banking regulatory agencies have substantial enforcement powers over the depository institutions that they regulate. Civil and criminal penalties may be imposed on such institutions and persons associated with those institutions for violations of laws or regulation. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") places limits on brokered deposits and extends the limits to any bank that is not "well capitalized" or is notified that it is in "troubled condition." A well-capitalized institution (which generally includes an institution that is considered well capitalized for purposes of the prompt corrective action regulations discussed below) may still accept brokered deposits without restriction, unless it has been informed by its appropriate Federal regulatory agency that it is in "troubled condition." All other insured depository institutions are prohibited from accepting brokered deposits unless a waiver is obtained from the FDIC. If a waiver is obtained, the interest paid on such deposits may not exceed the rate paid for deposits in the bank's normal market area, or the national rate as determined in the FDIC's regulation. Risk-Based Deposit Insurance Assessments FDICIA required the FDIC to develop and implement a system to account for risks attributable to different categories and concentrations of assets and liabilities in assessing deposit insurance premiums. The FDIC adopted a risk-assessment system effective January 1, 1994. Under this system, each bank's deposit insurance premium assessment is calculated based on information relevant to evaluating the risk posed by the institution. California Law The activities of the Bank are also regulated by state law. State law, for example, regulates certain loans to any officer of the Bank, directly or indirectly, or to any related corporation in which such officer is a stockholder, director, officer or employee. Subject to certain limitations, California law permits California state-chartered banks to invest in the stock and equity securities of other corporations, to engage directly in or invest directly in subsidiaries which conduct real estate related activities (including property management and real estate appraisal), and to participate in management consulting and data processing services for third parties. FDICIA limits the powers, including investment authority and subsidiaries, of state banks to those activities that are either permitted to national banks, or activities that the FDIC finds do not pose a significant risk to the deposit insurance fund. In November 1998, the FDIC announced it would make it easier for well run state banks to engage in real estate and securities underwriting, if permitted by state law. State banks are now required to file notice of intention to engage in such activities. Capital Standards The FRB and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with high credit risk, such as commercial loans. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. See Notes to Consolidated Financial Statements for the capital ratios of the Company and the Bank at December 31, 2000. Dividends Payable by the Bank to the Company The Bank is a legal entity which is separate and distinct from the Company. Aside from raising capital on its own, the exercise of stock options or borrowing funds for operating capital, it is anticipated that the Company may receive additional income through dividends paid by the Bank. Subject to the regulatory restrictions described below, future cash dividends by the Bank will depend upon management's assessment of future capital requirements, contractual restrictions and other factors. The power of the Board of Directors of the Bank to declare a cash dividend is subject to California law, which restricts the amount available for cash dividends to the lesser of the retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the California Commissioner of Financial Institutions, in an amount not exceeding the greatest of (1) the retained earnings of the bank; (2) the net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. See the Notes to Consolidated Financial Statements for the amount of funds the Bank had available for the payment of dividends at December 31, 2000. Under the Federal Deposit Insurance Act, bank regulators also have authority to prohibit a bank from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of the bank in question and other factors, that such regulators could assert that the payment of dividends or other payments might, under certain circumstances, be an unsafe or unsound practice, even if technically permissible. Prompt Corrective Action and Other Enforcement Mechanisms Federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2000, the Company and the Bank exceeded the required ratios for classification as "well capitalized". An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Impact of Monetary Policies Banking is a business which depends in large part on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise a major portion of the Bank's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Bank and the Company are subject to the influence of domestic and foreign economic conditions, including recession, unemployment and inflation. The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions and intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. Environmental Regulation Federal, state and local regulations regarding the discharge of materials into the environment may have an impact on both the Company and the Bank. Under federal law, liability for environmental damage and the cost of cleanup may be imposed upon any person or entity who owns or operates contaminated property. State law provisions, which were modeled after Federal law, impose substantially similar requirements. Both federal and state laws were amended in 1996 to provide generally that a lender who is not actively involved in operating the contaminated property will not be liable to clean up the property, even if the lender has a security interest in the property or becomes an owner of the property through foreclosure. The Economic Growth Act includes protection for lenders from liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 by adding a new section which specifies the actions a lender may take with respect to lending and foreclosure activities without incurring environmental clean-up liability or responsibility. Under the new section typical contractual provisions regarding environmental issues in the loan documentation and due diligence inspections conducted in connection with lending transactions will not lead to lender liability for clean-up, and a lender may foreclose on contaminated property, so long as the lender merely maintains the property and moves to divest it at the earliest possible time. Under California law, a lender generally will not be liable to the State for the cost associated with cleaning up contaminated property unless the lender realized some benefit from the property, failed to divest the property promptly, caused or contributed to the release of the hazardous materials, or made the loan primarily for investment purposes. This amendment to California law became effective with respect to judicial proceedings filed and orders issued after January 1, 1997. The extent of the protection provided by both the federal and state lender protection statutes will depend on the interpretation of those statutes by administrative agencies and courts, and the Bank cannot predict whether it will be adequately protected for the types of loans made by the Bank. In addition, the Company and the Bank remain subject to the risk that a borrower's financial position will be impaired by liability under the environmental laws and that property securing a loan made by the Bank may be environmentally impaired and therefore not provide adequate security for the Bank. California law provides some protection against the second risk by establishing certain additional, alternative remedies for a lender in circumstances where the property securing a loan is later found to be environmentally impaired, permitting the lender to pursue remedies against the borrower other than foreclosure under the deed of trust. The Bank attempts to protect its position against the remaining environmental risks by performing prudent due diligence. Environmental questionnaires and information on use of toxic substances are requested as part of the Bank's underwriting procedures. The Bank makes lending decisions based upon its evaluation of the collateral, the net worth of the borrower and the borrower's capacity for unforeseen business interruptions or risks. Public Interest Laws, Consumer and Lending Laws In addition to the other laws and regulations discussed herein, the Bank is subject to certain consumer and public interest laws and regulations that are designed to protect customers in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act and the Community Reinvestment Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. The Bank must comply with the applicable provisions of these laws and regulations as part of its ongoing customer relations. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers and the loss of certain contractual rights. Americans with Disabilities Act The Americans With Disabilities Act ("ADA"), in conjunction with similar California legislation, has increased the cost of doing business for banks. The legislation requires employers with 15 or more employees and all businesses operating "commercial facilities" or "public accommodations" to accommodate disabled employees and customers. The ADA has two major objectives: (1) to prevent discrimination against disabled job applicants, job candidates and employees, and (2) to provide disabled persons with ready access to commercial facilities and public accommodations. Commercial facilities, such as the Bank, must ensure that all new facilities are accessible to disabled persons, and in some instances may be required to adapt existing facilities to make them accessible. New and Pending Legislation Certain legislative and regulatory proposals that could affect the Company, the Bank and the banking business in general are pending or may be introduced, before the United States Congress, the California State Legislature, and Federal, state and local government agencies. ATM Fees. Legislation has been proposed in the past in the Congress and the California legislature and measures are currently being proposed in local jurisdictions to regulate the amount of ATM fees that operators of ATMs may charge, and to further regulate the disclosure of such fees. If the collection of interchange fees by the operator of an ATM were prohibited, as some of these bills have proposed, the Bank's income from its ATM network would be significantly reduced. Management believes that the possible reduction in ATM income would not have a material impact on the Company's consolidated financial statements. Expansion in Credit Union Membership. In 1999 a broad rule was adopted by the National Credit Union Administration ("NCUA") relaxing the limits on credit union membership. The NCUA will now approve credit unions with memberships of more than 300,000 residents with proof that they function as a community. The effect is to substantially expand the limits on credit union membership and to make credit unions, as tax exempt entities serving credit needs of large communities, more competitive to banks. Litigation attacking the new rule is pending. The Office of Thrift Supervision ("OTS") Expansion of Charters to Insurance Industry. In recent years the OTS granted a number of charters for insurance companies to operate a thrift or savings and loan subsidiary. These new charters to the insurance industry are expected to result in yet more competition for banks. It is not known to what extent the pending proposals will be enacted and what effect such legislation would have on the structure, regulation and competitive relationship of financial institutions. It is likely, however, that many of these proposals would subject the Company and the Bank to increased regulation, disclosure and reporting requirements and would increase competition to the Bank and its cost of doing business. In addition to pending legislative changes, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any such legislation or regulations will be enacted or the effect that such legislation or regulations may have on the Bank's business. Item 2. Description of Property Currently, the Company does not own or lease any property. The Company's headquarters are located within the Bank's headquarters. The Company is not actively engaged in any business activities outside of the activities of the Bank. Therefore, the Bank's property is not significantly used by the Company. The Company will continue to utilize the premises of the Bank until it becomes actively engaged in additional business activities. The Company currently reimburses the Bank for a fair and reasonable amount for all services furnished to it. The Bank leases the land and the buildings at which its office facilities are located. The Bank has six full-service banking offices. The head office of the Bank is located at 1248 Fifth Avenue, San Rafael, California and consists of approximately 10,000 square feet of office space. The Bank occupies the premises for its head office under a lease which will expire in June 2014, with two five-year options to renew. The Bank's five branch offices in San Francisco, South San Francisco, Hayward, Upland and Petaluma, California occupy approximately 3,600, 12,300, 3,400, 5,800 and 4,600 square feet, respectively, under leases that expire at various dates through the year 2010. The Bank believes that its existing facilities are adequate for its current needs and anticipated growth. Item 3. Legal Proceedings There are various legal actions pending against the Company and the Bank arising from the normal course of business. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material effect on the financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Common Equity and Related Stockholder Matters. During most of 1999, the Company's common stock traded on the OTC Bulletin Board under the symbol MCBF. On December 28, 1999, the Company's common stock began trading on the American Stock Exchange under the symbol MCB. The Company's stock transfer agent is U.S. Stock Transfer Corporation. There were approximately 700 shareholders as of December 31, 2000. The following are the high and low sales prices (for 2000) and high and low bid prices (for 1999) as reported by the markets on which the stock was traded for those respective periods. Over-the-counter prices reflect inter-dealer prices which may not include retail markups, markdowns, or commissions. Prices are adjusted to reflect stock dividends and stock splits.
1999 Cash Dividend 2000 Cash Dividend High Low Declared High Low Declared ------------------------------------------------------------------------------------------------- First quarter $9.05 $7.14 $11.50 $7.38 $0.01 Second quarter 7.98 6.55 8.75 7.56 0.01 Third quarter 9.25 6.67 $0.01 8.69 7.75 0.01 Fourth quarter 11.75 8.50 0.01 10.50 8.06 0.01 -------------------------------------------------------------------------------------------------
Item 6. Management's Discussion and Analysis. The following discussion presents information pertaining to the financial condition and results of operations of the Company that may not otherwise be apparent from the financial statements and related notes. This discussion should be read in conjunction with the consolidated financial statements and notes found in Item 7 of this report as well as other information presented throughout this report. 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. In addition to historical information, this discussion and analysis includes certain forward-looking statements that are subject to risks and uncertainties and include information about possible or assumed future results of operations. Many possible events or factors could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers of the Company's Form 10-KSB should not rely solely on forward looking statements and should consider all uncertainties and risks discussed throughout this report. These statements are representative only on the date hereof, and the Company undertakes no obligation to update any forward-looking statements made. Some possible events or factors that could occur that may cause differences from expected results include the following: the Company's loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to sell, or purchase certain loans or loan portfolios; participations of loans and the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographical conditions, the mix of the loan portfolio and management's judgements regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Company and the mix of funding sources. Decisions to purchase, hold, or sell securities are also dependent on liquidity requirements and market volatility, as well as on and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities and the wholesale and retail funding sources of the Company. The Company is also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, and deposits. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation and state regulators, whose policies and regulations could affect the Company's results. Other factors that may cause actual results to differ from the forward-looking statements include the following: competition with other local and regional banks, savings and loan associations, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, mutual funds and insurance companies, as well as other entities which offer financial services; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies, mergers and acquisitions and their integration into the Company and management's ability to manage these and other risks. OVERVIEW Earnings Summary. The Company reported net income of $3,070,000, or $1.52 per share basic and $1.45 per share diluted, for 2000 compared to net income of $2,333,000, or $1.12 per share basic and $1.07 per share diluted, in 1999 and net income of 1,621,000, or $0.75 per share basic and $0.70 per share diluted, in 1998. Return on average assets for 2000 was 1.51% compared to 1.30% in 1999 and 1.03% in 1998. Return on average equity for 2000 was 19.78% compared to 17.12% in 1999 and 12.61% in 1998. FINANCIAL CONDITION Summary. Assets increased by 6.7% during 2000 versus 15.7% and 21.2% in 1999 and 1998, respectively. The increase in assets during 2000 resulted primarily from growth in existing operations. Loans. Loans held for investment increased by $26.4 million, or 19.4% in 2000, as compared to an increase of $26.5 million, or 24.1%, during 1999. Strong demand for commercial real estate resulted in the loan growth for 2000. Strong demand for commercial real estate and construction loans resulted in the loan growth for 1999. In the normal practice of extending credit, the Bank accepts real estate collateral on loans that have primary sources of repayment from commercial operations. Loans secured by real estate totaled $131.1 million, or 79.4% of all loans, at December 31, 2000 versus $113.9 million, or 82.5% of all loans, a year earlier. Due to the Bank's limited lending area, its real estate collateral is primarily concentrated in the San Francisco Bay Area and Southern California and is subject to economic uncertainties of these economies. Management believes that its prudent underwriting standards for real estate secured lending provide reasonable safeguards against these uncertainties. The Bank 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, and accordingly, yields on these loans are typically higher than those on 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 on 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 Bank's loan portfolio. As of December 31, 2000, the two largest industry concentrations within the loan portfolio were real estate and related services at 30.2% and the business/personal service industry at 22.3% of the portfolio. Because credit concentrations increase portfolio risk, the Bank places significant emphasis on the purpose of each loan and the related sources of repayment. 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 December 31, 2000 the Company had nonperforming assets in the amount of $40,000 which represented one loan 90 days or more past due and still accruing. 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 at December 31, 1996 1997 1998 1999 2000 ------------- -------------- ------------- ------------- ------------- Nonaccrual loans $ 79 $ 69 $ 563 $ 1,707 Loans 90 days or more past due and still accruing 40 404 40 $ 40 ------------- -------------- ------------- ------------- ------------- $ 79 $ 109 $ 967 $ 1,747 $ 40 ============= ============== ============= ============= ============= As a percent of total loans 0.10% 0.12% 0.87% 1.27% 0.02% As a percent of total assets 0.06% 0.08% 0.57% 0.89% 0.02%
Allowance for Loan Losses. The Company maintains an allowance for loan losses (the "ALL") which is reduced by credit losses and increased by credit recoveries and provisions to the ALL charged against operations. Provisions to the ALL and the total of the ALL are based, among other factors, upon the Company's credit loss experience, 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 ALL, the Company segments its loan portfolio into pools of homogeneous loans that share similar risk factors. Each pool is given a risk assessment factor that largely reflects the expected future losses from each category. These risk assessment factors change as economic conditions shift and actual loan losses are recorded. The ALL totaled $1,939,000, or 1.18% of total loans, as of December 31, 2000 versus $1,492,000 or 1.08% of total loans, a year earlier. In both periods, the ALL was determined to be an adequate allowance against foreseeable future losses. Note 3 to the consolidated financial statements provides a summary of the activity in the ALL for the five years ended December 31, 2000. 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 allowance for loan losses arising from credit losses, recoveries of credits losses previously incurred, additions to the allowance for loan losses charged to operating expense, and certain ratios relating to the allowance for loan losses:
Analysis of the Allowance for Loan Losses 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------- (Dollars in thousands) Allowance for loan losses: Beginning balance $ 752 $ 944 $ 1,007 $ 1,117 $ 1,492 --------------- --------------- --------------- -------------- --------------- Provision for loan losses 220 120 153 365 420 Charge-offs: Commercial 47 105 53 62 9 Consumer 3 1 --------------- --------------- --------------- -------------- --------------- Total charge-offs 47 108 53 62 10 --------------- --------------- --------------- -------------- --------------- Recoveries: Commercial 16 51 9 72 37 Consumer 3 1 --------------- --------------- --------------- -------------- --------------- Total recoveries 19 51 10 72 37 --------------- --------------- --------------- -------------- --------------- Net charge-offs (recoveries) 28 57 43 (10) (27) --------------- --------------- --------------- -------------- --------------- Ending balance $ 944 $ 1,007 $ 1,117 $ 1,492 $ 1,939 =============== =============== =============== ============== =============== Loans outstanding at December 31 $ 81,713 $ 88,186 $ 111,075 $ 137,966 $ 164,823 Average loans outstanding during period ended December 31 $ 72,393 $ 82,959 $ 100,130 $ 125,035 $ 149,645 Ratios: Allowance to loans at end of period 1.16% 1.14% 1.01% 1.08% 1.18% Net charge-offs (recoveries) to average loans during period 0.04% 0.07% 0.04% -0.01% -0.02% Net charge-offs (recoveries) to allowance at beginning of period 3.72% 6.04% 4.27% -0.90% -1.81%
The following table sets forth the allocation of the allowance for loan losses as of the dates indicated: Allocation of the Allowance for Loan Losses (Dollars in thousands)
1996 1997 1998 1999 2000 ---------------------- ------------------------ ----------------------- ----------------------- -------------------- Percent of Percent of Percent of Percent of Percent of Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans for in Each for in Each for in Each for in Each for in Each Loan Category to Loan Category to Loan Category to Loan Category to Loan Category to Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans Losses Total Loans ---------- ----------- ---------- ------------ ---------- ----------- ---------- ------------ --------- ---------- Commercial $ 583 42.85 % $ 570 41.79 % $ 641 42.79 % $ 904 47.87 % $ 793 43.34 % Real Estate 202 50.27 245 52.39 245 53.27 260 48.98 978 53.47 Consumer 48 6.88 43 5.82 38 3.94 30 3.15 65 3.19 Not Allocated 111 N/A 149 N/A 193 N/A 298 N/A 103 N/A ---------- ----------- ---------- ------------ ---------- ----------- ---------- ------------ ---------- --------- Total $ 944 100.00 % $ 1,007 100.00 % $ 1,117 100.00 % $ 1,492 100.00 % $ 1,939 100.00 % ========== =========== ========== ============ ========== =========== ========== ============ ========== =========
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. Total investment securities decreased by $9,018,000, or 25.0% in 2000, as compared to a decrease of $5,960,000, or 14.2% in 1999. At December 31, 2000, investment securities held to maturity remained at $2,000,000, unchanged from December 31, 1999. Investment securities available for sale decreased $9.0 million as the Company used the proceeds of sales and maturities to fund loan growth during the year. At December 31, 2000, $2.0 million, or 7.4% of the Company's investment securities were invested in callable government agency debentures compared to $2.0 million, or 5.5% at December 31, 1999. These securities offer above market yields, but may be called if interest rates fall below certain levels. If these securities are called, the Company may not be able to reinvest the proceeds to obtain the same yield. Deposits. Total deposits increased by $8.8 million, or 4.9%, during 2000 as compared to an increase of $24.9 million, or 16.1%, during 1999. The increase in 2000 was primarily the result of growth in existing operations. The Company's cost of funds increased to 2.96% during 2000 from 2.73% during 1999 as the Company's rates paid on deposits in 2000 increased from the rates paid in 1999 in response to the increase in overall interest rates year over year. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated (dollar amounts in thousands):
For the Years Ended December 31, -------------------------------------------------------------------------------- 1998 1999 2000 ------------------------ ------------------------ ------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ---------- ---------- ---------- ---------- ---------- ---------- Noninterest-bearing demand deposits $ 31,371 $ 40,290 $ 47,329 Interest-bearing transaction deposits (includes money market deposit accounts) 88,255 3.93% 98,954 3.42% 108,708 3.70% Savings deposits 1,845 1.92% 2,259 1.90% 2,146 1.95% Time deposits, $100,000 and over 12,493 5.31% 13,477 4.85% 17,730 5.46% Other time deposits 8,194 5.06% 8,816 4.41% 9,086 4.96% ------------ ------------ ------------ Total interest-bearing 110,787 4.14% 123,506 3.62% 137,670 3.98% ------------ ------------ ------------ Total deposits $ 142,158 3.23% $ 163,796 2.73% $ 184,999 2.96% ============ ============ ============
RESULTS OF OPERATIONS Net Interest Income / Net Interest Margin. Net interest income increased by $2,214,000, or 21.1%, during 2000 to reach $12.7 million. This compares to net interest income of $10.5 million in 1999 and $8.6 million in 1998. The increase in 2000 was primarily due to the growth in average loans, largely due to the continuation of favorable 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; the average yield or rate for each category of interest-bearing assets and interest-bearing liabilities; and the net interest margin for the periods indicated. Nonaccrual loans are included in the average balances and only collected interest on nonaccrual loans is included in the interest column. (dollar amounts in thousands):
----------------------------------------------------------------------------------- 1998 1999 2000 ----------------------------------------------------------------------------------- Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------------------------------------------------------------------------------- ASSETS Federal funds sold $ 9,005 $ 473 5.25% $ 10,775 $ 544 5.05% $ 10,810 $ 677 6.26% Interest-bearing deposits with banks 286 17 5.94% 286 15 5.24% 286 17 5.94% Investment securities 36,431 2,156 5.93% 31,475 1,732 5.51% 29,440 1,713 5.82% Loans 100,130 10,559 10.55% 125,035 12,735 10.19% 149,645 15,838 10.58% ------------------------------------------------------------------------------------ Total Earning Assets 145,852 13,205 9.06% 167,571 15,026 8.97% 190,181 18,245 9.59% Total Non-earning Assets 10,894 12,127 13,566 ---------- ---------- ----------- Total Assets $156,746 $179,698 $203,747 ========== ========== =========== LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 31,371 $ 40,290 $ 47,329 Interest-bearing transaction accounts 88,255 3,472 3.93% 98,954 3,388 3.42% 108,708 4,020 3.70% Time deposits, $100,000 or more 12,493 664 5.31% 13,477 653 4.85% 17,730 968 5.46% Savings and other time 10,039 450 4.48% 11,075 432 3.90% 11,232 493 4.39% ------------------------------------------------------------------------------------ Total interest-bearing deposits 110,787 4,586 4.14% 123,506 4,473 3.62% 137,670 5,481 3.98% ------------------------------------------------------------------------------------ Other borrowings 495 24 4.85% 793 37 4.67% 1,510 34 2.25% ------------------------------------------------------------------------------------ Total interest-bearing liabilities 111,282 4,610 4.14% 124,299 4,510 3.63% 139,180 5,515 3.96% Other liabilities 1,243 1,483 1,714 Shareholders' equity 12,850 13,626 15,524 Total Liabilities ---------- ---------- ----------- and Shareholders' Equity $156,746 $179,698 $203,747 ========== ========== =========== --------- --------- ---------- Net interest income $ 8,595 $10,516 $ 12,730 ========= ========= ========== Net interest margin 5.89% 6.28% 6.69%
The Company's net interest margin (net interest income divided by average earning assets) increased to 6.69% during 2000. This compared to 6.28% in 1999 and 5.89% in 1998. The increases were primarily attributable to growth in average loans, which generally provide a greater return than other interest-earning assets. The increase in average loans was largely due to the continuation of favorable 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. The variance attributable to both balance and rate fluctuations is allocated to a combined rate/volume variance (dollar amounts in thousands):
1999 Compared to 1998 2000 Compared to 1999 Increase (decrease) due to Increase (decrease) due to ---------------------------------------------------------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ---------------------------------------------------------------------------------------- Interest Income: Federal funds sold $93 ($18) ($4) $71 $2 $131 $0 $133 Interest-bearing deposits with banks 0 (2) 0 (2) 0 2 0 2 Investment securities (292) (153) 21 (424) (111) 98 (6) (19) Loans 2,626 (360) (90) 2,176 2,514 492 97 3,103 ------------------------------------------------------------------------------------ Total Interest Income 2,427 (533) (73) 1,821 2,405 723 91 3,219 ------------------------------------------------------------------------------------ Interest Expense: Interest-bearing transaction accounts 421 (450) (55) (84) 331 274 27 632 Time deposits, $100,000 or more 52 (58) (5) (11) 207 82 26 315 Savings and other time 46 (58) (6) (18) 6 54 1 61 Other borrowings 15 (1) (1) 13 33 (19) (17) (3) ------------------------------------------------------------------------------------ Total Interest Expense 534 (567) (67) (100) 577 391 37 1,005 ------------------------------------------------------------------------------------ Net Interest Income $1,893 $34 ($6) $1,921 $1,828 $332 $54 $2,214 ====================================================================================
Provision for Loan Losses. The Company provided $420,000 to the ALL during 2000 compared to $365,000 in 1999 and $153,000 in 1998. The provisions during these periods were recorded primarily due to growth in the loan portfolio. Net credit recoveries were $27,000 in 2000, compared to net credit recoveries of $10,000 in 1999 and net credit losses of $43,000 in 1998. Noninterest Income. The following table summarizes noninterest income for the years 1998, 1999 and 2000 and expresses these amounts as a percentage of average assets (dollar amounts in thousands): Years Ended December 31, ----------------------------------- Components of Noninterest Income 1998 1999 2000 ----------------------------------------- --------- ----------- --------- Gain on sale of SBA loans $ 151 $ 87 $ 85 Service fees on deposit accounts 522 610 468 Loan servicing fees 45 53 56 Gain on sale of investment securities 53 13 (2) Other income 238 225 262 -------- -------- -------- Total $ 1,009 $ 988 $ 869 ======== ======== ======== As a Percentage of Average Assets ----------------------------------------- Gain on sale of SBA loans 0.10% 0.05% 0.04% Service fees on deposit accounts 0.33% 0.34% 0.23% Loan servicing fees 0.03% 0.03% 0.03% Gain on sale of investment securities 0.03% 0.01% 0.00% Other income 0.15% 0.12% 0.13% -------- -------- -------- Total 0.64% 0.55% 0.43% ======== ======== ======== Noninterest Expenses. The following table summarizes noninterest expenses and the associated ratios to average assets for the years 1998, 1999 and 2000 (dollar amounts in thousands): -------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------------- -------------------------------------------------------------------------------- Components of Noninterest Expense 1998 1999 2000 -------------------------------------------------------------------------------- Salaries and employee benefits $ 3,646 $ 4,069 $ 4,464 Occupancy expense 864 983 1,097 Furniture and equipment expense 414 414 464 Professional services 310 300 272 Supplies 294 272 278 Promotional 361 293 305 Data processing 323 369 361 Regulatory assessments 58 41 61 Other 433 428 561 ------------------------------------------------------------------------------- Total $ 6,703 $ 7,169 $ 7,863 =============================================================================== Average full-time equivalent staff 55 56 58 As a Percentage of Average Assets ------------------------------------------------------------------------------- Salaries and employee benefits 2.32% 2.26% 2.19% Occupancy expense 0.55% 0.55% 0.54% Furniture and equipment expense 0.26% 0.23% 0.23% Professional services 0.20% 0.17% 0.13% Supplies 0.19% 0.15% 0.14% Promotional 0.23% 0.16% 0.15% Data processing 0.21% 0.21% 0.18% Regulatory assessments 0.04% 0.02% 0.03% Other 0.28% 0.24% 0.27% ------------------------------------------------------------------------------- Total 4.28% 3.99% 3.86% =============================================================================== Income Taxes. The Company's effective tax rate was 41.1% in 2000 compared to 41.2% in 1999 and 41.0% in 1998. Note 6 to the consolidated financial statements provides a reconciliation of the statutory tax rates to the effective tax rate for each period. 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 include payments of principal and interest on loans and investments, proceeds from the sale or maturity of loans and investments, growth in deposits, and increases in other borrowings. The Company holds overnight federal funds as a cushion for temporary liquidity needs. During 2000, federal funds sold averaged $10.8 million, or 5.3% 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. As of December 31, 2000, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $35.7 million, or 17.1% of total assets. This represented the total amount of liquid assets available for sale and/or available to secure the Company's lines of credit. 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. As of December 31, 2000, the loan-to-deposit ratio was 87.4% compared to 76.7% a year earlier. 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. As of December 31, 2000, this ratio was 1.3% compared to 15.2% a year earlier. As of December 31, 2000 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 December 31, 2000, 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):
December 31, 2000 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 $ 250 $ 250 Interest-bearing deposits with other banks 90 $ 196 286 Investment securities, at amortized cost 2,000 1,010 $ 19,960 $ 4,050 27,020 Loans, gross of allowance for possible losses and deferred loan fees 84,781 $ 1,324 1,694 59,767 17,477 165,043 ----------- ------------ ------------ ----------- ----------- ------------ Total 87,121 1,324 2,900 79,727 21,527 192,599 ----------- ------------ ------------ ----------- ----------- ------------ Interest-Bearing Liabilities (Rate Sensitive): Interest-bearing transaction deposits 45,326 59,958 105,284 Time deposits, $100,000 or more 14,456 4,519 5,678 500 25,153 Savings and other time deposits 2,924 2,600 1,529 3,712 10,765 Other borrowings 750 750 Trust preferred securities 3,000 3,000 ----------- ------------ ------------ ----------- ----------- ------------ Total 18,130 7,119 52,533 64,170 3,000 144,952 ----------- ------------ ------------ ----------- ----------- ------------ Period GAP $ 68,991 $ (5,795)$ (49,633)$ 15,557 $ 18,527 =========== ============ ============ =========== =========== Cumulative GAP $ 68,991 $ 63,196 $ 13,563 $ 29,120 $ 47,647 =========== ============ ============ =========== =========== Interest Sensitivity GAP Ratio 79.19% (437.69%) (1711.48%) 19.51% 86.06% =========== ============ ============ =========== =========== Cumulative Interest Sensitivity 79.19% 71.45% 14.85% 17.02% 24.74% =========== ============ ============ =========== ===========
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 relative insensitivity of these accounts to changes in interest rates. Although rates on these accounts can be contractually reset at the Company's discretion, historically these accounts have not demonstrated strong correlations 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. Currently, the Company neither utilizes financial derivatives to hedge its asset/liability position nor has any plans to employ such strategies in the near future. The maturities and weighted average yields of investment securities are presented in the following table:
Maturities of Investment Securities at December 31, 2000 (At amortized cost) After 1 Year After 5 Years Within 1 Year Within 5 Years Within 10 Years Total ------------------------------------------------------------------------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury and other U.S. government agencies $2,010 5.32% $19,031 5.76% $4,050 5.61% $25,091 5.70% Corporate securities 1,929 6.32% 1,929 6.32% -------------------------------------------------------------------------------------------------------------- Total $2,010 5.32% $20,960 5.81% $4,050 5.61% $27,020 5.75% ==============================================================================================================
Time Certificates, $100,000 and Over 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): Time remaining to maturity December 31, 2000 ------------------- Three months or less $ 14,456 After three months to six months 4,519 After six months to one year 5,678 After twelve months 500 ----------------- Total $ 25,153 ================= Maturities of Loans at December 31, 2000 Time remaining to maturity Fixed rate Adjustable rate Total -------------- -------------- ------------- One year or less $ 8,397 $ 36,118 $ 44,515 After one year to five years 58,294 19,972 78,266 After five years 17,478 24,784 42,262 ------------ -------------- ------------- Total $ 84,169 $ 80,874 $ 165,043 ============ ============== ============= As of December 31, 2000, the percentage of loans held for investment with fixed and floating interest rates was 51% and 49%, respectively. The following table provides typical terms of maturity ranges offered by the Company for each loan category indicated: Loan Category Typical Term in Years --------------------- Commercial Loans 1 to 3 Real Estate Loans: Commercial 5 Construction 1 Land 1 Home Equity 5 Loans to Consumers and Individuals 1 to 5 Capital Resources. Total shareholders' equity was $15.1 million as of December 31, 2000 compared to $14.4 million a year earlier. Trust Preferred Securities On September 7, 2000, the Company completed an offering of 10.60% capital securities in an aggregate amount of $3.0 million through MCB Statutory Trust I (the "Trust"), a wholly owned trust subsidiary formed for the purpose of the offering. The securities issued in the offering were sold by the Trust in a private transaction pursuant to an applicable exemption from registration under the Securities Act. The entire proceeds of the issuance were invested by the Trust in $3,000,000 of 10.60% Junior Subordinated Deferrable Interest Debentures due 2030 issued by the Company under a similar exemption from registration. The debentures represent the sole assets of the Trust. Interest on the debentures is payable semi-annually and the principal is redeemable by the Company at a premium beginning on or after September 7, 2010 through September 6, 2020 plus any accrued and unpaid interest to the redemption date. On or after September 7, 2020, the principal is redeemable by the Company at 100% of the principal amount. The trust preferred securities are subject to mandatory redemption to the extent of any early redemption of the debentures and upon maturity of the debentures on September 7, 2030. The debentures bear the same terms and interest rates as the trust preferred securities. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities. The debentures and related Trust investment in the debentures have been eliminated in consolidation and the trust preferred securities are reflected as outstanding in the accompanying consolidated financial statements. Under applicable regulatory guidelines, the trust preferred securities currently qualify as Tier 1 capital up to a maximum of 25% of Tier I capital. Any additional portion of trust preferred securities would currently qualify as Tier 2 capital. As of December 31, 2000, the entire $3.0 million outstanding of trust preferred securities qualified as Tier I capital. Stock Repurchase Plan In October, 2000 the Board of Directors authorized the Company to repurchase an additional $3 million of the Company's common stock in addition to the $2 million authorized pursuant to the repurchase program announced in February, 1999. The 1999 repurchase program was completed in November, 2000. As of December 31, 2000, 160,815 shares had been repurchased under the 2000 repurchase program for a total purchase price of $1,768,965. Shareholder Rights Plan 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 improper takeover tactics and takeover bids that are not fair to all shareholders. In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on February 8, 1999. The rights, which are not immediately exercisable, entitle the holders to purchase one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $37.00 upon the occurrence of certain triggering events. In the event of an acquisition not approved by the Board of Directors, each right enables its holder (other than the prospective acquirer) to purchase the Preferred Stock at 50% of the market value. Further, in the event the Company is acquired in an unwanted merger or business combination, each right enables the holder to purchase shares of the acquiring entity at a similar discount. Under certain circumstances, the rights may be exchanged for common shares of the Company. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. The rights can be exercised and separate rights certificates distributed only if any of the following events occur: acquisition by a person of 10% or more of the Company's common shares; a tender offer for 10% or more of the Company's common shares; or ownership of 10% or more of the Company's common shares by a shareholder whose actions are likely to have a material adverse impact on the Company or shareholder interests. The rights will initially trade automatically with the common shares. The rights are not deemed by the Board of Directors to be presently exercisable. Cash Dividends During the third quarter of 1999 the Company began the payment of a regular quarterly cash dividend of $0.01 per share. Total dividends paid in 2000 totaled $81,000. Risk Based Capital Regulatory authorities have established minimum capital adequacy guidelines requiring that qualifying capital be 8% of risk-based assets, of which at least 4% must be tier 1 capital (primarily shareholders' equity). As of December 31, 2000 the Company's qualifying capital was 11.5%, of which the tier 1 capital ratio was 10.4%. 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 December 31, 2000, the Company's leverage ratio was 8.3%. Item 7. Financial Statements. MCB Financial Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1999 and 2000
Dollar amounts in thousands 1999 2000 Assets Cash and due from banks $ 6,556 $ 12,040 Federal funds sold 10,400 250 --------- --------- Total cash and cash equivalents 16,956 12,290 Interest-bearing deposits with banks 286 286 Investment securities available for sale at fair value 34,118 25,100 Investment securities held to maturity at amortized cost (fair values of $1,979 in 1999 and $1,999 in 2000) 2,000 2,000 Loans held for investment (net of allowance for loan losses of $1,492 in 1999 and $1,939 in 2000) 136,474 162,884 Premises and equipment - net 2,791 3,470 Accrued interest receivable 1,077 1,276 Deferred income taxes 1,068 1,019 Other assets 1,349 929 --------- --------- Total assets $ 196,119 $ 209,254 ========= ========= Liabilities and Shareholders' Equity Liabilities: Deposits: Noninterest-bearing $ 41,011 $ 47,383 Interest-bearing: Transaction accounts 112,742 105,284 Time certificates, $100,000 and over 14,471 25,153 Savings and other time deposits 11,560 10,765 --------- --------- Total interest-bearing deposits 138,773 141,202 --------- --------- Total deposits 179,784 188,585 Other borrowings 750 750 Accrued interest payable and other liabilities 1,188 1,813 --------- --------- Total liabilities 181,722 191,148 --------- --------- Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trust holding solely junior subordinated debentures 3,000 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 2,078,501 shares in 1999 and 1,834,877 in 2000 10,750 9,501 Accumulated other comprehensive (loss) income (518) 47 Retained earnings 4,165 5,558 --------- --------- Total shareholders' equity 14,397 15,106 --------- --------- Total liabilities and shareholders' equity $ 196,119 $ 209,254 ========= ========= See notes to consolidated financial statements.
MCB Financial Corporation and Subsidiaries Consolidated Statements of Operations Years ended December 31, 1998, 1999 and 2000
In thousands, except per share amounts 1998 1999 2000 Interest Income: Loans, including fees $ 10,559 $ 12,735 $ 15,838 Federal funds sold 473 544 677 Investment securities 2,173 1,747 1,730 -------- -------- -------- Total interest income 13,205 15,026 18,245 Interest Expense: Interest-bearing transaction, savings and other time deposits 3,922 3,820 4,513 Time certificates, $100,000 and over 664 653 968 Other interest 24 37 34 -------- -------- -------- Total interest expense 4,610 4,510 5,515 -------- -------- -------- Net Interest Income 8,595 10,516 12,730 Provision for Loan Losses 153 365 420 -------- -------- -------- Net Interest Income After Provision for Loan Losses 8,442 10,151 12,310 Other Income: Gain on sale of loans 151 87 85 Service fees on deposit accounts 522 610 468 Loan servicing fees 45 53 56 Gain on sale of investment securities 53 13 (2) Other 238 225 262 -------- -------- -------- Total other income 1,009 988 869 -------- -------- -------- Other Expenses: Salaries and employee benefits 3,646 4,069 4,464 Occupancy expense 864 983 1,097 Furniture and equipment expense 414 414 464 Professional services 310 300 272 Supplies 294 272 278 Promotional expenses 361 293 305 Data processing fees 323 369 361 Regulatory assessments 58 41 61 Other 433 428 561 -------- -------- -------- Total other expenses 6,703 7,169 7,863 -------- -------- -------- Income Before Income Taxes and Dividends Paid on Trust Preferred Securities 2,748 3,970 5,316 Income Tax Provision 1,127 1,637 2,145 -------- -------- -------- Income Before Dividends Paid on Trust Preferred Securities 1,621 2,333 3,171 Dividends paid on trust preferred securities 101 Net Income $ 1,621 $ 2,333 $ 3,070 ======== ======== ======== Basic Earnings Per Share $ 0.75 $ 1.12 $ 1.52 ======== ======== ======== Diluted Earnings Per Share $ 0.70 $ 1.07 $ 1.45 ======== ======== ======== See notes to consolidated financial statements.
MCB Financial Corporation and Subsidiaries Consolidated Statements of Comprehensive Income Years ended December 31, 1998, 1999 and 2000
In thousands 1998 1999 2000 Net Income $1,621 $2,333 $3,070 Other comprehensive income: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period (net of taxes 159 (717) 566 of $110 in 1998, $(498) in 1999 and $393 in 2000) Less: reclassification adjustment for gains (losses) included in net income (net of taxes of $22 in 1998, $5 in 1999 and $(1) in 2000) 31 8 (1) -------------------------------------- Other comprehensive income (loss) 190 (709) 565 -------------------------------------- Comprehensive income $1,811 $1,624 $3,635 ====================================== See notes to consolidated financial statements.
MCB Financial Corporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1998, 1999 and 2000
Accumulated Common Stock Other ----------------------------- Comprehensive Retained Dollar amounts in thousands Shares Amount Income (Loss) Earnings Total ------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1998 2,054,715 $10,300 $1 $1,666 $11,967 Net income 1,621 1,621 Other comprehensive income, net of taxes 190 190 Common stock issued upon exercise of stock options 26,457 115 115 Tax benefit of stock options exercised 36 36 Purchases of common stock (92,156) (461) (386) (847) ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 1,989,016 9,954 191 2,937 13,082 Net income 2,333 2,333 Other comprehensive income, net of taxes (709) (709) Dividends on common stock (5%) Cash payment (2) (2) Stock issued 98,427 867 (867) Cash Dividends (40) (40) Common stock issued upon exercise of stock options 77,831 363 363 Tax benefit of stock options exercised 110 110 Purchases of common stock (86,773) (434) (306) (740) ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 2,078,501 10,750 (518) 4,165 14,397 Net income 3,070 3,070 Other comprehensive income, net of taxes 565 565 Cash Dividends (81) (81) Common stock issued upon exercise of stock options 44,212 191 191 Tax benefit of stock options exercised 41 41 Purchases of common stock (287,836) (1,440) (1,637) (3,077) ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 1,834,877 $9,501 $47 $5,558 $15,106 ========================================================================================================================= See notes to consolidated financial statements.
MCB Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows Years ended December 31, 1998, 1999 and 2000
Dollar Amounts In Thousands 1998 1999 2000 Cash Flows From Operating Activities: Net income $ 1,621 $ 2,333 $ 3,070 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 153 365 420 Depreciation and amortization 479 463 428 Gain on sale of investment securities, net (53) (13) 2 Deferred income taxes (32) (17) (352) Changes in: Accrued interest receivable (82) 75 (199) Other assets 124 (309) 420 Accrued interest payable and other liabilities 96 161 683 -------- -------- -------- Net cash provided by operating activities 2,306 3,058 4,472 -------- -------- -------- Cash Flows From Investing Activities: Held to maturity securities: Calls 21,250 4,055 Purchases (2,055) Available for sale securities: Maturities 3,046 4,272 5,000 Calls 1,000 Purchases (30,642) (26,760) (6,925) Sales 1,206 23,164 11,957 Decrease in interest-bearing deposits with banks Net (increase) in loans held for investment (22,932) (26,881) (26,830) Purchases of premises and equipment (278) (811) (1,174) -------- -------- -------- Net cash used by investing activities (29,405) (22,961) (17,972) -------- -------- -------- Cash Flows From Financing Activities: Net increase in noninterest-bearing demand deposits 9,637 2,223 6,372 Net increase in interest-bearing transaction, savings and other time deposits 19,135 22,657 2,429 Net increase (decrease) in other borrowings (394) 394 Proceeds from Company obligated mandatorially redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures 3,000 Cash dividends paid (40) (81) Cash payment for fractional shares resulting from stock dividend (2) Proceeds from the exercise of stock options 115 362 191 Purchases of common stock (847) (739) (3,077) -------- -------- -------- Net cash provided by financing activities 27,646 24,855 8,834 -------- -------- -------- Net Increase in Cash and Cash Equivalents 547 4,952 (4,666) -------- -------- -------- Cash and Cash Equivalents: Beginning of year 11,457 12,004 16,956 -------- -------- -------- End of year $ 12,004 $ 16,956 $ 12,290 ======== ======== ======== Cash Paid During the Year for: Interest on deposits and other borrowings $ 4,648 $ 4,522 $ 5,361 ======== ======== ======== Income taxes $ 976 $ 1,666 $ 2,255 ======== ======== ======== Noncash Investing and Financing Activities: Stock dividends paid on common stock $ 867 ======== See notes to consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MCB Financial Corporation (the "Company" on a consolidated basis) is a bank holding company with one bank subsidiary: Metro Commerce Bank (the"Bank"). MCB Statutory Trust I (the Trust), which is a Connecticut statutory trust formed for the exclusive purpose of issuing and selling trust preferred securities, is also a subsidiary of the Company. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practice in the banking industry. The Company was incorporated in California on January 20, 1993 for the purpose of becoming a bank holding company registered under the Bank Holding Company Act of 1956. The following is a summary of the significant accounting policies and reporting methods used by the Company: Nature of Operations The Company operates five branches in the San Francisco Bay Area and one branch in Upland, California. The Company's primary source of revenue is providing loans to small and middle-market businesses. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Consolidation The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries, the Bank and the Trust. All intercompany amounts are eliminated in consolidation. Cash and Due from Banks Cash and due from banks include balances with the Federal Reserve Bank. The Company is required by federal regulations to maintain certain minimum average balances with the Federal Reserve, based primarily on the Company's average daily deposit balances. At December 31, 2000, the Company had required balances and compensating balances with the Federal Reserve of $1,676,000. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Investment Securities The Company classifies its qualifying investments as trading, available for sale or held to maturity. Management has reviewed the securities portfolio and classified securities as either held to maturity or available for sale. The Company's policy of classifying investments as held to maturity is based upon its ability and management's intent to hold such securities to maturity. Securities expected to be held to maturity are carried at amortized historical cost. All other securities are classified as available for sale and are carried at fair value. Fair value is determined based upon quoted market prices . Unrealized gains and losses on securities available for sale are included as a component of shareholders' equity on an after-tax basis. Gains and losses on dispositions of investment securities are included in noninterest income and are determined using the specific identification method. Loans Loans which are held for investment are stated at the principal amount outstanding, net of deferred loan origination fees and costs and the allowance for possible credit losses. Interest income is recognized using methods which approximate a level yield on principal amounts outstanding. 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. Loan origination fees, net of certain related direct loan origination costs, are deferred and amortized as yield adjustments over the contractual lives of the underlying loans. Sale and Servicing of Small Business Administration ("SBA") Loans The Company originates loans to customers under SBA programs that generally provide for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of the majority of the loans to an investor and retains the unguaranteed portion and servicing rights in its own portfolio. Funding for the SBA programs depend on annual appropriations by the U.S. Congress. Gains on these sales are earned through the sale of the guaranteed portion of the loan for an amount in excess of the adjusted carrying value of the portion of the loan sold. The Company allocates the carrying value of such loans between the portion sold, the portion retained and a value assigned to the right to service the loan. The difference between the adjusted carrying value of the portion retained and the face amount of the portion retained is amortized to interest income over the life of the related loan using a method which approximates the interest method. Allowance for Loan Losses The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio and commitments to extend credit. The allowance is based upon management's continuing assessment of various factors affecting the collectibility of loans and commitments to extend credit, including current and projected economic conditions, past credit experience, the value of the underlying collateral, and such other factors that in management's judgment deserve current recognition in estimating potential credit losses. Loans deemed uncollectible are charged-off and deducted from the allowance, while subsequent recoveries are credited to the allowance. A loan is considered impaired when management determines that it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. Impaired loans are carried at the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent, if less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs and unamortized premium or discount). An impairment is recognized by adjusting an allocation of the existing allowance for loan losses. Premises and Equipment Premises and equipment consist of leasehold improvements, furniture and equipment, and automobiles which are stated at cost, less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, primarily from three to ten years. Leasehold improvements are amortized over the terms of the lease or their estimated useful lives, whichever is shorter. Stock-based Compensation The Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Income Taxes The Company and the Bank file consolidated income tax returns. The Company provides a deferred tax expense or benefit equal to the net change in deferred tax assets and liabilities during the year. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Stock Splits and Stock Dividends In February 1998, the Company's outstanding shares of common stock were split four-for-three. In August 1998, outstanding shares of common stock were split three-for-two. In September 1999, outstanding shares of common stock were increased due to the payment of a 5% stock dividend. All shares and per share amounts reported have been restated to reflect the splits and dividends. Comprehensive Income Comprehensive income is equal to net income plus the change in "other comprehensive income" which includes income and (loss) from non-owner sources. The only component of other comprehensive income currently applicable to the Company is the net unrealized gain or loss on available for sale investments. Net Income Per Common Share Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares plus common equivalent shares outstanding including dilutive stock options. Segment Information The Company operates as a single business segment - commercial banking. Derivatives and Hedging Activities Statement of Financial Accounting Standards (SFAS) No. 133,"Accounting for Derivative Instruments and Hedging Activities," is effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. SFAS 133 as amended establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company will adopt the standard effective January 1, 2001. Management does not expect the adoption of SFAS No. 133 to have a significant impact on the financial position or results of operations, or cash flows of the Company. Accounting Pronouncements SFAS No. 140,"Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities," was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125,"Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities". Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Standards Board ("FASB"), and some were changed only in minor ways. In issuing SFAS No.140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Required disclosures about securitization and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000 have been included herein. Management does not expect the adoption of SFAS No. 140 on March 31, 2001 to have a significant impact on the financial position or results of operations of the Company. Reclassifications Certain 1998 and 1999 amounts were reclassified to conform to the 2000 presentation. 2. INVESTMENT SECURITIES The amortized cost and approximate market value of investment securities at December 31 were as follows (dollar amounts in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value 2000: Held to maturity securities: U.S. Government agencies $ 2,000 $ (1) $ 1,999 $ 2,000 ------- ------- ------- ------- ------- Total held to maturity 2,000 (1) 1,999 2,000 ------- ------- ------- ------- ------- Available for sale securities: U.S. Treasury 13,983 188 (42) 14,129 14,129 U.S. Government agencies 9,108 5 (75) 9,038 9,038 Corporate securities 1,929 4 1,933 1,933 ------- ------- ------- ------- ------- Total available for sale 25,020 197 (117) 25,100 25,100 ------- ------- ------- ------- ------- Total investment securities $27,020 $ 197 $ (118) $27,099 $27,100 ======= ======= ======= ======= =======
Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value 1999: Held to maturity securities: U.S. Government agencies $ 2,000 $ (21) $ 1,979 $ 2,000 -------- ------ ------- ------- ------- Total held to maturity 2,000 (21) 1,979 2,000 -------- ------ ------- ------- ------- Available for sale securities: U.S. Treasury 21,920 $ (320) 21,600 21,600 U.S. Government agencies 11,134 (537) 10,597 10,597 Coporate securities 1,950 (29) 1,921 1,921 -------- ------ ------- ------- ------- Total available for sale 35,004 (886) 34,118 34,118 -------- ------ ------- ------- ------- Total investment securities $ 37,004 $ $ (907) $36,097 $36,118 ======== ====== ======= ======= =======
Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Cost Gains Losses Value Value 1998: 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 Mortage-backed securities 1,172 5 1,177 1,177 Coporate 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 ======== ====== ===== ======= =======
The following table shows the amortized cost and approximate fair value of investment securities by contractual maturity at December 31, 2000 (dollar amounts in thousands):
Held to Maturity Available for Sale -------------------------------- -------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value Within one year $ 1,000 $ 999 $ 1,010 $ 1,003 After one but within five years 1,000 1,000 19,960 20,078 Over five years 4,050 4,019 ------- ------- ------- ------- Total $ 2,000 $ 1,999 $25,020 $25,100 ======= ======= ======= =======
The Bank carries its Federal Reserve Bank stock and Federal Home Loan Bank stock as other assets. These securities are not covered by the provisions of SFAS No. 115 and are recorded at historical cost. The total carrying value at December 31, 1999 and 2000 was $791,000 and $327,000, respectively. Securities with an amortized cost of approximately $8,062,000 as of December 31, 1999, and $6,050,000 as of December 31, 2000, were pledged to secure other borrowings. In 2000, proceeds from the sale of investment securities available for sale totaled $11,957,000. Realized net losses on these sales totaled $2,000. In 1999, proceeds from the sale of investment securities available for sale totaled $23,164,000. Realized net gains on these sales totaled $13,000. In 1998, proceeds from sale of investment securities available for sale totaled $1,206,000, and the realized net gains totaled $53,000. 3. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans at December 31, consisted of the following (dollar amounts in thousands): 1998 1999 2000 Commercial $ 22,504 $ 23,413 $ 27,137 Real estate: Commercial 72,605 83,737 108,557 Construction 9,619 23,546 24,157 Land 2,592 4,440 1,675 Home equity 1,703 1,289 1,581 Loans to consumers and individuals 2,085 1,672 1,936 --------- --------- --------- Total 111,108 138,097 165,043 Deferred loan fees (33) (131) (220) Allowance for loan losses (1,117) (1,492) (1,939) --------- --------- --------- Total $ 109,958 $ 136,474 $ 162,884 ========= ========= ========= The Company is principally engaged in commercial banking in the San Francisco Bay and Greater Los Angeles Areas of California. The Company primarily grants commercial loans, the majority of which are secured by commercial properties. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic sector of Northern California, including the real estate markets of the San Francisco Bay Area. Approximately 49% of the Company's loans have interest rates that are variable and tied to the prime rate, whereas the remaining are fixed rate loans. Following is a schedule of the activity in the allowance for loan losses on loans for the years ended December 31 (dollar amounts in thousands): 1998 1999 2000 Balances, January 1 $ 1,007 $ 1,117 $ 1,492 Provision for loan losses 153 365 420 Loans charged-off (53) (62) (10) Recoveries 10 72 37 ------- ------- ------- Total $ 1,117 $ 1,492 $ 1,939 ======= ======= ======= At December 31, 1999 and 2000, the Company had nonperforming loans in the amounts of $1,747,000 and $40,000, respectively. At December 31, 1999, the nonperforming loans included nonaccrual loans totaling $1,707,000. Had these loans performed under their contractual terms, $66,000 in additional interest income would have been recognized during the year. At December 31, 2000, the nonperforming loans included one loan 90 days or more past due and still accruing totaling $40,000. This loan is well secured and in the process of collection. At December 31, 1999 and 2000, the Company had loans identified as impaired, in the aggregate amounts of $1,747,000 and $40,000, respectively. The Company provided no specific allowance for loan losses at December 31, 1999 and 2000 for these impaired loans since they were adequately collateralized. 4. PREMISES AND EQUIPMENT The components of premises and equipment at December 31, are as follows (dollar amounts in thousands): 1999 2000 Leasehold improvements $ 2,494 $ 2,936 Furniture and equipment 2,574 2,838 Automobiles 274 356 Construction in progress 387 ------- ------- Total 5,342 6,517 Less accumulated depreciation and amortization (2,551) (3,047) ------- ------- Premises and equipment, net $ 2,791 $ 3,470 ======= ======= The amount of depreciation and amortization was $433,000 in 1998, $451,000 in 1999and $496,000 in 2000. 5. DEPOSITS The aggregate amount of short-term jumbo CD's, each with a minimum denomination of $100,000, was approximately $13,714,000 and $24,653,000 in 1999 and 2000, respectively. At December 31, 2000, the scheduled maturities of CDs are as follows: 2001 $ 32,574 2002 654 2003 338 2004 12 2005 96 -------------- Total $ 33,674 ============== 6. INCOME TAXES The components of the provision (benefit) for income taxes for the years ended December 31 are as follows (dollar amounts in thousands): 1998 1999 2000 Current payable (benefit): Federal $ 867 $ 1,245 $ 1,864 State 292 409 633 ------- ------- ------- Total current payable (benefit) 1,159 1,654 2,497 Deferred: Federal (37) (15) (316) State 5 (2) (36) ------- ------- ------- Total deferred (32) (17) (352) ------- ------- ------- Total $ 1,127 $ 1,637 $ 2,145 ======= ======= ======= A reconciliation of the statutory federal income tax rates with the Company's effective income tax rates is as follows: 1998 1999 2000 Statutory federal tax rate 34.0 % 34.0 % 34.0 % State income taxes, net of federal income tax benefit 7.1 7.1 7.1 Municipal interest (0.1) (0.2) Other 0.3 ----------------------------------- Effective tax rate 41.0 % 41.2 % 41.1 % =================================== Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows (dollar amounts in thousands): December 31 ------------------------ 1999 2000 Deferred tax assets: Net operating loss carryforwards $ 259 $ 224 Reserves not currently deductible 542 709 Unrealized loss on securities available for sale 368 State income taxes 108 181 Other 14 208 ------------------------ Total 1,291 1,322 Deferred tax liabilities: Tax over book depreciation 223 270 Unrealized gain on securities available for sale 33 ------------------------ Total 223 303 ------------------------ Net deferred tax asset $ 1,068 $ 1,019 ======================== The Company has acquired net operating loss carryforwards ("NOL") in connection with the acquisition of the Bank of Hayward in 1994. The utilization of NOLs acquired through acquisition is limited by federal tax laws. The Company has determined that the annual limitation on its ability to utilize NOLs is $78,130 for the fifteen-year period. The following table presents the NOLs (after limitation) at December 31, 2000, by expiration date: Expiration Date Federal Amount December 31, 2004 $ 391 December 31, 2005 78 December 31, 2006 11 December 31, 2007 145 December 31, 2008 78 The Company reduced its 2000 federal current tax liability by approximately $27,000 by utilizing $78,130 in net operating loss carryforwards. 7. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has made loans and advances under lines of credit to directors and their related interests. All such loans and advances were made under terms that are consistent with the Company's normal lending policies. At December 31, 2000, loans outstanding to related parties were $2,892,000 and loan commitments to related parties amounted to $3,905,000. 8. STOCK OPTION PLANS Stock Option Plans Under the Company's 1989 Stock Option Plan (the "1989 Plan"), a total of 499,284 stock options were authorized for grant. The 1989 Plan terminated according to its terms in December 1999. Options granted pursuant to the 1989 Plan generally had lives of 10 years from the date of grant, subject to earlier expiration in certain cases, such as termination of the grantee's employment. On May 19, 1999, the Company's shareholders approved the MCB Financial Corporation 1999 Stock Option Plan (the "Plan"). The Plan was designed to replace the 1989 Plan which terminated in December 1999. The Plan authorizes the Company to grant options that qualify as incentive stock options ("ISO") under the Internal Revenue Code of 1986 and nonqualified stock options ("NQSO") to officers and employees of the Company. Nonemployee directors are eligible to receive only NQSOs. The Plan has set aside 415,485 authorized, but unissued, shares of the Company's common stock for grant at not less than the fair market value of the Company's common stock on the date the option is granted. The term of the options may not exceed 10 years from the date of grant, and the options generally vest over a four year period. The following is a summary of changes in options outstanding:
Weighted Number Average of Exercise Shares Price ---------------------------- Outstanding at January 1, 1998 (234,817 exercisable at a weighted average price of $4.18) 285,070 $ 4.30 Granted (weighted average fair value of $4.39) 10,762 9.72 Exercised (27,779) 4.17 --------------------------- Outstanding at December 31, 1998 (227,533 exercisable at a weighted average price of $4.26) 268,053 4.52 Granted (weighted average fair value of $3.96) 87,147 7.59 Exercised (80,797) 4.48 Canceled (7,560) 7.27 --------------------------- Outstanding at December 31, 1999 (181,080 exercisable at a weighted average price of $4.51) 266,843 5.46 Granted (weighted average fair value of $4.92) 42,500 10.12 Exercised (44,212) 4.32 Canceled (12,810) 7.43 --------------------------- Outstanding at December 31, 2000 252,321 $ 6.34 ===========================
Additional information regarding options outstanding as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable -------------------------------------------------------------------------- ------------------------------- Remaining Weighted Weighted Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (Yrs.) Exercise Price Exercisable Exercise Price -------------------- -------------- -------------- ---------------- ------------ --------------- $ 3.24 -- $ 3.98 99,436 2.0 $ 3.84 99,436 $ 3.84 4.11 -- 5.61 26,123 3.8 4.74 25,021 4.71 7.62 -- 8.50 88,500 8.7 7.77 32,400 7.70 9.05 -- 11.50 38,262 8.7 10.64 11,957 10.31 -------------- ------------ 252,321 168,814 ============== ============
At December 31, 2000, 341,485 options were available for future grants under the Plan. The Company continues to account for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25,"Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 36 months following full vesting; stock volatility, 34% in 1998, 42% in 1999 and 41% in 2000; risk free interest rates, 4.7% in 1998, 6.3% in 1999 and 4.8% in 2000; no dividend yield in 1998, a dividend yield of 0.48% in 1999 and a dividend yield of 0.45% in 2000. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1995 - 2000 awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been as follows (dollar amounts in thousands, except per share amounts): Years Ended December 31, 1998 1999 2000 -------------------------------------- Net Income: As reported $1,621 $2,333 $3,070 Pro forma 1,594 2,266 2,987 Basic earnings per share: As reported $0.75 $1.12 $1.52 Pro forma 0.74 1.09 1.48 Diluted earnings per share: As reported $0.70 $1.07 $1.45 Pro forma 0.70 1.04 1.41 9. TRUST PREFERRED SECURITIES On September 7, 2000, the Company completed an offering of 10.60% capital securities in an aggregate amount of $3.0 million through MCB Statutory Trust I (the "Trust"), a wholly owned trust subsidiary formed for the purpose of the offering. The entire proceeds of the issuance were invested by the trust in $3,000,000 of 10.60% Junior Subordinated Deferrable Interest Debentures due 2030 issued by the Company. The debentures represent the sole assets of the Trust. Interest on the debentures is payable semi-annually and the principal is redeemable by the Company at a premium beginning on or after September 7, 2010 through September 6, 2020 plus any accrued and unpaid interest to the redemption date. On or after September 7, 2020, the principal is redeemable by the Company at 100% of the principal amount. The trust preferred securities are subject to mandatory redemption to the extent of any early redemption of the debentures and upon maturity of the debentures on September 7, 2030. The debentures bear the same terms and interest rates as the trust preferred securities. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities. The debentures and related Trust investment in the debentures have been eliminated in consolidation and the trust preferred securities are reflected as outstanding in the accompanying consolidated financial statements. Under applicable regulatory guidelines, the trust preferred securities currently qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital. Any additional portion of trust preferred securities would currently qualify as Tier 2 capital. As of December 31, 2000, the entire $3.0 million outstanding of trust preferred securities qualified as Tier 1 capital. 10. COMMITMENTS AND CONTINGENCIES The Bank leases its premises under noncancelable operating leases expiring through June 30, 2014. Future minimum lease commitments are $611,000 in 2001, $604,000 in 2002, $604,000 in 2003, $561,000 in 2004, $491,000 in 2005, and $2,839,000, thereafter. Rental expense for premises under operating leases included in occupancy expense was $583,000, $676,000 and $744,000 in 1998, 1999 and 2000, respectively. There are various legal actions pending against the Company and the Bank arising from the normal course of business. Management, upon the advice of legal counsel handling such actions, believes that the ultimate resolution of these actions will not have a material effect on the financial position or results of operations of the Company. 11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is a party to various financial instruments with on-balance sheet and off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Financial instruments include commitments to extend credit, standby letters-of-credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters-of-credit and financial guarantees is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Bank controls the credit risk of these transactions through credit approvals, credit limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include marketable securities, accounts receivable, inventory, property, plant and equipment. Standby letters-of-credit and financial guarantees are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most guarantees extend for less than five years and expire in decreasing amounts. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The following table summarizes these financial instruments and other commitments and contingent liabilities at December 31 (dollar amounts in thousands): 1999 2000 Financial instruments whose credit risk is represented by contract amounts: Commitments to extend credit - loans $33,750 $36,698 Standby letters-of-credit and financial guarantees 495 1,551 ------- ------- Total $34,245 $38,249 ======= ======= 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments have been determined using the available market information and appropriate valuation methodologies consistent with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. December 31, 2000 --------------------- Carrying Estimated Amount Fair Value Financial assets: Cash and due from banks $ 12,040 $ 12,040 Federal funds sold 250 250 Interest-bearing deposits with banks 286 286 Available for sale securities 25,100 25,100 Held to maturity securities 2,000 1,999 Loans, net 162,884 161,665 Financial liabilities: Noninterest-bearing deposits 47,383 47,383 Interest-bearing deposits 141,202 141,220 Other borrowings 750 750 Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trust holding solely junior subordinated debentures 3,000 3,000 December 31, 1999 --------------------- Carrying Estimated Amount Fair Value Financial assets: Cash and due from banks $ 6,556 $ 6,556 Federal funds sold 10,400 10,400 Interest-bearing deposits with banks 286 286 Available for sale securities 34,118 34,118 Held to maturity securities 2,000 1,979 Loans, net 136,474 135,489 Financial liabilities: Noninterest-bearing deposits 41,011 41,011 Interest-bearing deposits 138,773 138,718 Other borrowings 750 750 The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Short-Term Financial Assets - This category includes cash and due from banks, federal funds sold and interest-bearing deposits with banks. Because of their relatively short maturities, the fair value of these financial instruments is considered to be equal to book value. Available-For-Sale and Held-To-Maturity Securities - Fair value is quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans - The fair value of floating rate loans is deemed to approximate book value. The fair value of all other performing loans is determined by discounting expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition to the above, the allowance for loan losses is considered a reasonable adjustment for credit risk relating to the entire credit portfolio, including obligations to extent credit and other off-balance-sheet transactions. Deposits - The fair value of demand, savings and money market deposits is equal to the amount payable on demand at the reporting date. For other types of deposits with fixed maturities, fair value is estimated by discounting contractual cash flows at interest rates currently being offered on deposits with similar characteristics and maturities. A fair value for the deposits base is not practicable. Other Borrowings and Trust Preferred Securities - The fair value of the other borrowings is determined by discounting contractual cash flows at current market interest rates for similar instruments. Off-Balance-Sheet Financial Instruments - The Company has not estimated the fair value of off-balance-sheet commitments to extend credit, standby letters of credit and financial guarantees. Because of the uncertainty involved in attempting to assess the likelihood and timing of a commitment being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is practicable to provide a meaningful estimate of fair value. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. Management does not intend to dispose of a significant portion of its financial instruments. 13. REGULATORY MATTERS The Company and Bank are subject to various regulations issued by Federal banking agencies, including minimum capital requirements. Failure to meet minimum regulatory capital requirements could result in regulators requiring prompt corrective action to be taken which could have a material effect on the financial statements. As of December 31, 2000, both the Company and Bank exceeded the capital adequacy requirements for a well capitalized institution. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital ( (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital (as defined) to average assets (as defined). As of December 31, 1999 and 2000, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, tier 1 risk-based, and tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company and Bank's actual capital amounts and ratios are also presented below (dollar amounts in thousands):
For Capital Required to be Actual Adequacy Purposes Well Capitalized ------------------------------------------------------------------------------------------------------------------------- 2000 Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk weighted assets) Company $ 19,815 11.5 % $ 13,790 8.0 % n/a Bank 18,080 10.5 % 13,782 8.0 % $ 17,228 10.0% Tier 1 Capital (to risk weighted assets) Company 17,876 10.4 % 6,895 4.0 % n/a Bank 16,141 9.4 % 6,891 4.0 % 10,337 6.0% Tier 1 Capital (to average assets) Company 17,876 8.3 % 8,577 4.0 % n/a Bank 16,141 7.5 % 8,574 4.0 % 10,717 5.0% For Capital Required to be Actual Adequacy Purposes Well Capitalized ------------------------------------------------------------------------------------------------------------------------- 1999 Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk weighted assets) Company $ 16,190 10.9 % $ 11,865 8.0 % n/a Bank 15,419 10.4 % 11,863 8.0 % $ 14,829 10.0% Tier 1 Capital (to risk weighted assets) Company 14,698 9.9 % 5,932 4.0 % n/a Bank 13,927 9.4 % 5,932 4.0 % 8,897 6.0% Tier 1 Capital (to average assets) Company 14,698 7.4 % 7,976 4.0 % n/a Bank 13,927 7.0 % 7,976 4.0 % 9,970 5.0%
Management believes, as of December 31, 2000, that the Bank meets all capital requirements to which it is subject. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2000, retained earnings of $4,986,000 were not restricted as to the payment of dividends. The Bank paid $750,000 in dividends during 1999, and $1,000,000 in dividends to the Company during 2000. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Company is prohibited from borrowing from the Bank unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Bank are limited to 10% of the Bank's shareholders' equity on a per affiliate basis. There were no such extensions of credit by the Bank in 1999 and 2000. 14. EMPLOYEE BENEFIT PLANS In 1999, the Company established an Employee Stock Ownership Plan (ESOP) to provide an ownership interest in the Company and retirement benefits to substantially all full-time employees. The amount of the annual contributions is at the discretion of the Board of Directors. The Company contributed $90,000 in 1999 and 2000. The ESOP purchased 6,000 and 12,400 shares of Company stock in the open market during 1999 and 2000, respectively. The Company has a Deferred Compensation Plan for Executives. Participation in the Plan is limited to a select group of management and other employees as determined by the Board of Directors. Under the terms of the Plan, participants may defer a portion of their cash compensation and receive minimum 50% matching contributions from the Company, which vest over the employee's remaining years of employment to retirement. The Company has guaranteed participants a certain minimum return on their contributions and on the Company's matching contributions. Net expenses incurred by the Company for the years ended December 31, 1998, 1999 and 2000 were $39,000, $43,000 and $7,000, respectively. The Company also has a defined contribution plan covering all eligible salaried employees. Employees may, up to prescribed limits, contribute to the plan. The Company may also elect to make discretionary contributions to the plan based on the Company's earnings. No contributions were made by the Company in 1998, 1999 or 2000. 15. EARNINGS PER SHARE The following table reconciles the numerators and the denominators of the basic and diluted per share computations in accordance with SFAS No. 128 (in thousands, except per share amounts):
Year Ended December 31, ----------------------------------------------------------------------------------------------------------- 1998 1999 2000 ----------------------------------------------------------------------------------------------------------- Income Shares Per Share Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------- ----------- ------ --------- ----------- ------ --------- ----------- ----- Basic EPS Income available to $ 1,621 2,158 $ 0.75 $ 2,333 2,075 $ 1.12 $ 3,070 2,022 $ 1.52 common shareholders Effect of Dilutive Securities Stock options 146 107 99 ----------------------------------------------------------------------------------------------------------- Diluted EPS Income available to common shareholders plus assumed conversions $ 1,621 2,304 $ 0.70 $ 2,333 2,182 $ 1.07 $ 3,070 2,121 $ 1.45 ===========================================================================================================
16. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION The condensed financial information for MCB Financial Corporation (parent company only) at December 31, 1999 and 2000, and the results of its operations and cash flows for the years then ended, is summarized as follows (dollar amounts in thousands): 1999 2000 Financial Condition: Assets: Cash and due from banks $ 702 $ 1,695 Investment in subsidiaries 13,625 16,465 Other 70 144 -------- -------- Total $ 14,397 $ 18,304 ======== ======== Liabilities and shareholders' equity: Other liabilities $ $ 105 Subordinated debt 3,093 -------- -------- Total liabilities 0 3,198 -------- -------- Shareholders' equity: Common stock $ 10,750 9,501 Accumulated other comprehensive (loss) income (518) 47 Retained earnings 4,165 5,558 -------- -------- Total shareholders' equity 14,397 15,106 -------- -------- Total $ 14,397 $ 18,304 ======== ======== 1998 1999 2000 Results of Operations: Income: Interest income $ 32 $ 28 $ 42 Dividend income from Bank 500 750 1,000 ----------------------------------- Total 532 778 1,042 Expenses: Interest expense 105 Other expenses 140 102 160 ----------------------------------- Total 140 102 265 Income before taxes and equity in undistributed net income of Bank 392 676 777 Income tax benefit 53 37 110 ----------------------------------- Income before equity in undistributed net income of Bank 445 713 887 Equity in undistributed net income of Bank 1,176 1,620 2,183 ----------------------------------- Net income $ 1,621 $ 2,333 $ 3,070 ===================================
1998 1999 2000 Cash Flows: Cash flows from operating activities: Net income $ 1,621 $ 2,333 $ 3,070 Reconciliation to cash used in operating activities: (Increase) in equity in undistributed net income of Bank (1,175) (1,621) (2,182) Amortization 11 2 Decrease in other assets 29 53 (35) Decrease in accrued interest payable and other liabilities (1) 105 ----------------------------------------- Cash provided by operating activities 485 765 960 Cash flows from investing activities: Capital contribution to MCB Statutory Trust I (93) Net (increase) decrease in loans held for investment (92) 92 ----------------------------------------- Cash (used in) provided by investing activities (92) 92 (93) Cash flows from financing activities: Cash dividends paid (40) (81) Cash payment for fractional shares resulting from stock dividend (2) Proceeds from the exercise of stock options 115 362 191 Proceeds from issuance of subordinated debt 3,093 Purchases of common stock (847) (739) (3,077) ----------------------------------------- Cash (used in) provided by financing activities (732) (419) 126 Net (decrease) increase in cash and equivalents (339) 438 993 Cash and equivalents: Beginning of period 603 264 702 End of period $ 264 $ 702 $ 1,695
17. SUBSEQUENT EVENTS The 2000 stock repurchase program was completed in January 2001 with the purchase of 105,060 shares for a total purchase price of $1,231,031. 18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Certain amounts in the following unaudited quarterly financial information have be reclassified to conform with the current presentation. In the opinion of management, all adjustments necessary to fairly present the results of operations have been made.
---------------------------------------------------------------------------------------------------------------------------------- 2000 Quarters ended March 31 June 30 September 30 December 31 ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Interest income $ 4,190 $ 4,431 $ 4,737 $ 4,887 Interest expense 1,256 1,328 1,416 1,515 ---------------- ---------------- ---------------- ---------------- Net interest income 2,934 3,103 3,321 3,372 Provision for loan losses 120 100 100 100 Other income 211 237 194 227 Other expenses 1,918 1,934 1,975 2,036 ---------------- ---------------- ---------------- ---------------- Income before income taxes and dividends paid on trust preferred securities 1,107 1,306 1,440 1,463 Income tax provision 454 545 580 566 ---------------- ---------------- ---------------- ---------------- Net income before dividends paid on trust preferred securities 653 761 860 897 Dividends paid on trust preferred securities 21 80 ---------------- ---------------- ---------------- ---------------- Net income $ 653 $ 761 $ 839 $ 817 ================ ================ ================ ================ Basic earnings per share $ 0.32 $ 0.37 $ 0.41 $ 0.41 Diluted earnings per share $ 0.30 $ 0.36 $ 0.39 $ 0.39 Dividends per share $ 0.01 $ 0.01 $ 0.01 $ 0.01 ---------------------------------------------------------------------------------------------------------------------------------- 1999 Quarters ended March 31 June 30 September 30 December 31 ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Interest income $ 3,436 $ 3,637 $ 3,908 $ 4,045 Interest expense 1,040 1,053 1,164 1,253 ---------------- ---------------- ---------------- ---------------- Net interest income 2,396 2,584 2,744 2,792 Provision for loan losses 90 35 120 120 Other income 291 242 245 210 Other expenses 1,815 1,743 1,781 1,830 ---------------- ---------------- ---------------- ---------------- Income before income taxes 782 1,048 1,088 1,052 Income tax provision 321 433 448 435 ---------------- ---------------- ---------------- ---------------- Net income $ 461 $ 615 $ 640 $ 617 ================ ================ ================ ================ Basic earnings per share $ 0.22 $ 0.30 $ 0.31 $ 0.30 Diluted earnings per share $ 0.21 $ 0.29 $ 0.30 $ 0.28 Dividends per share $ 0.01 $ 0.01
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of MCB Financial Corporation: We have audited the accompanying consolidated balance sheets of MCB Financial Corporation and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MCB Financial Corporation and its subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP San Francisco, California January 12, 2001 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. The information required to be furnished pursuant to this item will be set forth under the captions "Election of Directors" and "Executive Officers" in the registrant's proxy statement (the "Proxy Statement") to be furnished to stockholders in connection with the solicitation of proxies by the Company's Board of Directors for use at the 2001 Annual Meeting of Shareholders to be held on May 16, 2001, and is incorporated herein by reference. Item 10. Executive Compensation The information required to be furnished pursuant to this item will be set forth under the caption "Executive Compensation of the Company and Metro Commerce" of the Proxy Statement, and is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information required to be furnished pursuant to this item will be set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" of the Proxy Statement, and is incorporated herein by reference. Item 12. Certain Relationships and Related Transactions. The information required to be furnished pursuant to this item will be set forth under the caption "Certain Relationships and Related Transactions Regarding The Company and Metro Commerce" of the Proxy Statement, and is incorporated herein by reference. Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits: The Exhibit Index is incorporated by reference. (b) Reports on Form 8-K. The Company filed the following Current Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March, 2001. By /s/ Charles O. Hall ---------------------------------------- Charles O. Hall President and Chief Executive Officer (Principal Executive Officer); Director By /s/ Patrick E. Phelan ---------------------------------------- Patrick E. Phelan Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28th day of March, 2001. Name Title ---- ----- /s/ John Cavallucci Director ------------------------------------ John Cavallucci /s/ Charles O. Hall Director ------------------------------------ Charles O. Hall /s/ Timothy J. Jorstad Chairman; Director ------------------------------------ Timothy J. Jorstad /s/ Catherine H. Munson Director ------------------------------------ Catherine H. Munson /s/ Gary T. Ragghianti Vice Chairman; Director ------------------------------------ Gary T. Ragghianti /s/ Edward P. Tarrant Director ------------------------------------ Edward P. Tarrant /s/ Randall J. Verrue Director ------------------------------------ Randall J. Verrue Exhibit Index: Exhibit Description ------- ----------- 2 -- Plan of acquisition, reorganization (1) 3.1 -- Articles of incorporation (1) 3.2 -- By-laws (1) 4 -- Rights Agreement (2) 4.1 -- Amended and Restated Declaration of Trust dated as of September 7, 2000 (13) 4.2 -- Indenture, dated as of September 7, 2000, between MCB Financial Corporation and State Street Bank and Trust Company, as Trustee (14) 4.3 -- Guarantee Agreement, dated as of September 7, 2000, between MCB Financial Corporation and State Street Bank and Trust Company, as Trustee (15) 4.4 -- Placement Agreement dated as of August 31, 2000 (16) 4.5 -- Subscription Agreement dated as of September 7, 2000 (17) 10.1.1 -- San Rafael Office Lease (6) 10.1.2 -- South San Francisco Office Lease (7) 10.1.3 -- Hayward Office Lease (1151 A Street) (8) 10.1.4 -- Upland Office Lease (9) 10.1.5 -- San Francisco Office Lease (353 Sacramento Street) (10) 10.1.6 -- Petaluma Office Lease (11) 10.1.7 -- San Francisco Office Lease (650 Townsend Street) (12) 10.1.8 -- Hayward Office Lease (B Street Marketplace) (18) 10.2.1 -- 1989 Stock Option Plan (1) 10.2.2 -- 1999 Stock Option Plan (4) 10.2.3 -- Deferred Compensation Plan for Executives (3) 10.2.4 -- Employee Stock Ownership Plan (5) 10.3 -- Severance Agreement, dated as of May 15, 2000, between MCB Financial Corporation, Metro Commerce Bank and Patrick E. Phelan (19) 11 -- Statement re: computation of per share earnings (the information required to be furnished pursuant to this exhibit is contained in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements) 21 -- Subsidiaries of the small business issuer (the information required to be furnished pursuant to this exhibit is contained in the Notes to Consolidated Financial Statements) 23.1 -- Consent of Deloitte & Touche LLP ---------- (1) Incorporated by reference to the registrant's registration statement on Form S-4 (File No. 33-76832). (2) Incorporated by reference from the registrant's Form 8-A12G filed with the SEC on January 25, 1999. (3) 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. (4) Incorporated by reference to Exhibit A of registrant's Proxy Statement on Schedule 14A filed with the SEC on April 27, 1999. (5) Incorporated by reference to Exhibit (10)(a)(4) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1999. (6) 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. (7) 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. (8) 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. (9) 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) 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. (11) 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. (12) Incorporated by reference to Exhibit (10)(b)(7) to the registrant's Annual Report on Form 10-KSB for its fiscal year ended December 31, 1999. (13) Incorporated by reference to Exhibit 4.1 to the registrant's Form 10QSB for its quarter ended September 30, 2000. (14) Incorporated by reference to Exhibit 4.2 to the registrant's Form 10QSB for its quarter ended September 30, 2000. (15) Incorporated by reference to Exhibit 4.3 to the registrant's Form 10QSB for its quarter ended September 30, 2000. (16) Incorporated by reference to Exhibit 4.4 to the registrant's Form 10QSB for its quarter ended September 30, 2000. (17) Incorporated by reference to Exhibit 4.5 to the registrant's Form 10QSB for its quarter ended September 30, 2000. (18) Incorporated by reference to Exhibit 10 to the registrant's Form 10QSB for its quarter ended September 30, 2000. (19) Incorporated by reference to Exhibit 10 to the registrant's Form 10QSB for its quarter ended June 30, 2000.