10QSB 1 0001.txt FORM 10QSB DATED SEPTEMBER 30, 2000 FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ----------- ------------ COMMISSION FILE NUMBER: 033-76832 --------- MCB FINANCIAL CORPORATION ------------------------- (exact name of small business issuer) CALIFORNIA 68-0300300 ---------- ---------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1248 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901 ----------------------------------------------- (Address of principal executive offices) (415) 459-2265 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ------ State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: November 13, 2000 CLASS Common stock, no par value 2,000,449 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS:
MCB FINANCIAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS Dollar amounts in thousands December 31, September 30, 1999 2000 ------------ ------------ (Unaudited) ASSETS Cash and due from banks $6,556 $12,476 Federal funds sold 10,400 6,350 ------------ ------------ Total cash and cash equivalents 16,956 18,826 Interest-bearing deposits with banks 286 286 Investment securities available for sale at fair value 34,118 24,515 Investment securities held to maturity at cost; fair values of $1,979 in 1999 and $1,983 in 2000 2,000 2,000 Loans held for investment (net of allowance for possible credit losses of $1,492 in 1999 and $1,849 in 2000) 136,474 154,570 Premises and equipment, net 2,791 3,097 Accrued interest receivable 1,077 1,155 Deferred income taxes 1,068 916 Other assets 1,349 844 ------------ ------------ Total assets $196,119 $206,209 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing $41,011 $53,092 Interest-bearing: Transaction accounts 112,742 101,230 Time certificates, $100,000 and over 14,471 19,133 Savings and other time deposits 11,560 10,972 ------------ ------------ Total interest-bearing deposits 138,773 131,335 ------------ ------------ Total deposits 179,784 184,427 Other borrowings 750 750 Accrued interest payable and other liabilities 1,188 1,619 ------------ ------------ Total liabilities 181,722 186,796 Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trust holding soley 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 2,046,506 shares in 2000 10,750 10,587 Accumulated other comprehensive loss (518) (303) Retained earnings 4,165 6,129 ------------ ------------ Total shareholders' equity 14,397 16,413 ------------ ------------ Total liabilities and shareholders' equity $196,119 $206,209 ============ ============
See notes to condensed consolidated financial statements. 2
MCB FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended Dollar amounts in thousands, except per share amounts September 30, September 30, ----------------------- -------------------------- 1999 2000 1999 2000 (Unaudited) (Unaudited) INTEREST INCOME: Loans, including fees $ 3,336 $ 4,167 $ 9,365 $ 11,554 Federal funds sold 185 156 274 473 Investment securities 387 414 1,342 1,331 ----------- ---------- ------------- ---------- Total interest income 3,908 4,737 10,981 13,358 ----------- ---------- ------------- ---------- INTEREST EXPENSE: Interest-bearing transaction, savings and other time deposits 990 1,175 2,755 3,364 Time certificates, $100,000 and over 167 232 472 611 Other interest 7 30 30 46 ----------- ---------- ------------- ---------- Total interest expense 1,164 1,437 3,257 4,021 ----------- ---------- ------------- ---------- NET INTEREST INCOME 2,744 3,300 7,724 9,337 ----------- ---------- ------------- ---------- PROVISION FOR POSSIBLE CREDIT LOSSES 120 100 245 320 ----------- ---------- ------------- ---------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE CREDIT LOSSES 2,624 3,200 7,479 9,017 ----------- ---------- ------------- ---------- OTHER INCOME: Gain on sale of loans 5 12 87 47 Service fees on deposit accounts 149 111 465 356 Loan servicing fees 14 14 40 41 Gain (loss) on sale of investment securities 12 (2) Other 77 57 174 200 ----------- ---------- ------------- ---------- Total other income 245 194 778 642 ----------- ---------- ------------- ---------- OTHER EXPENSES: Salaries and employee benefits 1,006 1,096 3,018 3,283 Occupancy expense 265 273 730 800 Furniture and equipment expense 107 119 306 343 Professional services 62 107 236 233 Supplies 67 68 201 218 Promotional expenses 58 69 226 217 Data processing fees 85 93 280 270 Regulatory assessments 12 16 31 46 Other 119 134 311 417 ----------- ---------- ------------- ---------- Total other expenses 1,781 1,975 5,339 5,827 ----------- ---------- ------------- ---------- INCOME BEFORE INCOME TAXES 1,088 1,419 2,918 3,832 INCOME TAX PROVISION 448 580 1,202 1,579 ----------- ---------- ------------- ---------- NET INCOME $ 640 $ 839 $ 1,716 $ 2,253 =========== ========== ============= ========== BASIC EARNINGS PER SHARE $ 0.31 $ 0.41 $ 0.83 $ 1.10 =========== ========== ============= ========== DILUTED EARNINGS PER SHARE $ 0.30 $ 0.39 $ 0.79 $ 1.05 =========== ========== ============= ==========
See notes to condensed consolidated financial statements. 3
MCB FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Nine Months Ended Dollar amounts in thousands September 30, September 30, ---------------------- ----------------------- 1999 2000 1999 2000 (Unaudited) (Unaudited) Net income $ 640 $ 839 $ 1,716 $ 2,253 Other comprehensive income (loss) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax 18 175 (566) 216 Reclassification adjustment for gains (losses) included in net income, net of tax 7 (1) ---------- ---------- ---------- ---------- Other comprehensive income (loss) 18 175 (559) 215 ---------- ---------- ---------- ---------- Comprehensive income $ 658 $ 1,014 $ 1,157 $ 2,468 ========== ========== ========== ==========
See notes to condensed consolidated financial statements. 4
MCB FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Dollar amounts in thousands Ended September 30, ---------------------------- 1999 2000 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,716 $ 2,253 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses 245 320 Depreciation and amortization 372 288 (Gain) loss on sale of investment securities, net (12) 2 Deferred income taxes 89 Changes in: Accrued interest receivable 158 (78) Other assets (171) 505 Accrued interest payable and other liabilities 337 447 ------------ ------------ Net cash provided by operating activities 2,734 3,737 CASH FLOWS FROM INVESTING ACTIVITIES: Held to maturity securities: Calls 4,055 Available for sale securities: Maturities 1,076 5,000 Purchases (14,913) (6,925) Sales 11,183 11,957 Net increase in loans held for investment (19,970) (18,416) Purchases of premises and equipment, net (873) (671) ------------ ------------ Net cash used in investing activities (19,442) (9,055) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in noninterest-bearing demand deposits 7,407 12,081 Net increase (decrease) in interest-bearing transaction, savings and other time deposits 12,458 (7,438) Net increase in other borrowings 394 Company obligated mandatorially redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures issued 3,000 Cash dividends paid (19) (61) Payment for fractional shares resulting from stock dividend (2) Proceeds from the exercise of stock options 282 87 Repurchases of common stock (632) (481) ------------ ------------ Net cash provided by financing activities 19,888 7,188 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 3,180 1,870 CASH AND CASH EQUIVALENTS: Beginning of period 12,004 16,956 ------------ ------------ End of period $ 15,184 $ 18,826 ============ ============ CASH PAID DURING THE PERIOD FOR: Interest on deposits and other borrowings $ 3,312 $ 3,941 Income taxes $ 1,088 $ 1,575 NONCASH INVESTING AND FINANCING ACTIVITIES: Stock dividends paid on common stock $ 867
See notes to condensed consolidated financial statements. 5 MCB FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 1. BASIS OF PRESENTATION - The unaudited condensed consolidated financial information included herein has been prepared in conformity with generally accepted accounting principles and practices in MCB Financial Corporation's (the "Company") consolidated financial statements included in the Annual Report on Form 10-KSB for the year ended December 31, 1999. The interim condensed consolidated financial statements contained herein are unaudited. However, in the opinion of the Company, all adjustments, consisting only of normal recurring items necessary for a fair presentation of the operating results for the periods shown, have been made. The results of operations for the three and nine months ended September 30, 2000 should not be considered indicative of operating results to be expected for the year ending December 31, 2000. Certain prior year and prior quarter amounts have been reclassified to conform to current classifications. Cash and cash equivalents consists of cash, due from banks, and federal funds sold. 2. EARNINGS PER SHARE - Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. The number of weighted average shares used in computing basic and diluted earnings per share are as follows:
In thousands THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------- 1999 2000 -------------------- ---------------------- Basic shares 2,068 2,040 Dilutive effect of stock options 101 86 -------------------------------------------- Diluted shares 2,169 2,126 ============================================
In thousands NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------- 1999 2000 -------------------- ---------------------- Basic shares 2,076 2,041 Dilutive effect of stock options 99 99 -------------------------------------------- Diluted shares 2,175 2,140 ============================================
3. RECENTLY ISSUED ACCOUNTING STANDARDS - Statement of Financial Accounting Standards (SFAS) No. 133,"Accounting for Derivative Instruments and Hedging Activities," was issued June 1998 and amended by SFAS No. 138, issued in June 2000. The standard defines derivatives, requires that all derivatives be carried at fair value, and provides for hedge accounting when certain conditions are met. The requirements of SFAS No. 133 as amended by SFAS No. 138 will be effective for the Company in the first quarter of the fiscal year beginning January 1, 2001. Management does not expect the adoption of SFAS No. 133 as amended by SFAS No. 138 to have a significant impact on the Company's financial statements. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The condensed consolidated financial statements include the accounts of MCB Financial Corporation (the "Company" on a consolidated basis) and its wholly owned subsidiaries, Metro Commerce Bank and MCB Statutory Trust I (the "Trust"). This discussion focuses primarily on the results of operations of the Company on a consolidated basis for the three and nine months ended September 30, 2000 and the financial condition of the Company as of that date. The following discussion presents information pertaining to the financial condition and results of operations of the Company and its subsidiaries and should be read in conjunction with the financial statements and notes thereto presented in this 10-QSB. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances. Certain matters discussed in this report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the competitive environment and its impact on the Company's net interest margin, changes in interest rates, asset quality risks, concentrations of credit and the economic health of the San Francisco Bay Area and Southern California, volatility of rate sensitive deposits, asset/liability matching risks, the dilutive impact which might occur upon the issuance of new shares of common stock and liquidity risks. Therefore, the matters set forth below should be carefully considered when evaluating the Company's business and prospects. For additional information concerning these risks and uncertainties, please refer to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. OVERVIEW EARNINGS SUMMARY. The Company reported net income of $839,000, or $0.41 per share basic and $0.39 per share diluted, for the third quarter of 2000. This compares to net income of $640,000, or $0.31 per share basic and $0.30 per share diluted, for the same period in 1999. For the nine months ended September 30, 2000, the Company reported net income of $2,253,000, or $1.10 per share basic and $1.05 per share diluted. This compares to net income of $1,716,000, or $0.83 per share basic and $0.79 per share diluted for the same period in 1999. For the nine months ended September 30, 2000, growth in average loans as a percentage of earning assets contributed to a 22% increase in interest income and an increase in the net interest margin to 6.64%. The growth in average loans was largely due to the continuation of favorable economic conditions in the Company's market areas. 7 Return on average assets and return on average equity for the third quarter of 2000 were 1.64% and 20.85%, respectively, as compared to 1.39% and 18.66%, respectively, for the same period of 1999. Return on average assets and return on average equity for the nine months ended September 30, 2000 were 1.50% and 19.66%, respectively, as compared to 1.32% and 17.06%, respectively, for the same period of 1999. FINANCIAL CONDITION SUMMARY. Total assets of the Company increased by $10.1 million, or 5.1%, from the end of 1999 to reach $206.2 million at September 30, 2000. LOANS HELD FOR INVESTMENT. Net loans held for investment increased by $18.1 million, or 13.3%, during the first nine months of 2000 as demand for commercial real estate loans increased. The following table sets forth the amount of total loans outstanding by category as of the dates indicated (dollar amounts in thousands):
TOTAL LOANS DECEMBER 31, SEPTEMBER 30, 1999 2000 ----------------- ----------------- Commercial $ 23,413 $ 23,947 Real estate: Commercial 83,737 102,663 Construction 23,546 23,658 Land 4,440 2,974 Home equity 1,289 1,519 Loans to consumers and individuals 1,672 1,826 ----------------- ----------------- Total 138,097 156,587 Deferred loan fees (131) (168) Allowance for possible credit losses (1,492) (1,849) ----------------- ----------------- Total net loans $ 136,474 $ 154,570 ================= =================
In the normal practice of extending credit, the Company accepts real estate collateral for loans which have primary sources of repayment from commercial operations. The total amount of loans secured by real estate equaled $131.0 million, or 83.7% of the total portfolio as of September 30, 2000. Due to the Company's limited marketing areas, its real estate collateral is primarily concentrated in the San Francisco Bay Area and Southern California. The Company believes that its underwriting standards for real estate secured loans are prudent and provide an adequate safeguard against declining real estate prices which may effect a borrower's ability to liquidate the property and repay the loan. However, no assurance can be given that real estate values will not decline and impair the value of the security for loans held by the Company. The Company focuses its portfolio lending on commercial, commercial real estate, and construction loans. These loans generally carry a higher level of risk than conventional real estate loans; accordingly, yields on these loans are typically higher than those of other loans. The performance of commercial and construction loans is generally dependent upon future cash flows from 8 business operations (including the sale of products, merchandise and services) and the successful completion or operation of large real estate projects. Risks attributable to such loans can be significantly increased, often to a greater extent than other loans, by regional economic factors, real estate prices, the demand for commercial and retail office space, and the demand for products and services of industries which are concentrated within the Company's loan portfolio. As of September 30, 2000 the two largest industry concentrations within the loan portfolio were real estate and related services at 30.8% and the services - personal/business industry at 24.0% of the portfolio. Because credit concentrations increase portfolio risk, the Company places significant emphasis on the purpose of each loan and the related sources of repayment. The Company generally limits unsecured commercial loans to maturities of three years and secured commercial loans to maturities of five years. NONPERFORMING ASSETS. The Company carefully monitors the quality of its loan portfolio and the factors that affect it, including regional economic conditions, employment stability, and real estate values. The accrual of interest on loans is discontinued when the payment of principal or interest is considered to be in doubt, or when a loan becomes contractually past due by 90 days or more with respect to principal or interest, except for loans that are well secured and in the process of collection. As of September 30, 2000, the Company had nonperforming assets in the amount of $78,000. The following table sets forth the balance of nonperforming assets as of the dates indicated (dollar amounts in thousands):
NONPERFORMING ASSETS DECEMBER 31, SEPTEMBER 30, 1999 2000 ------------------ ------------------ Nonaccrual loans $ 1,707 $ 0 Loans 90 days or more past due and still accruing 40 78 ------------------ ------------------ $ 1,747 $ 78 ================== ================== As a percent of total loans 1.27% 0.05% As a percent of total assets 0.89% 0.04%
Nonaccrual loans decreased by $1.7 million during the nine months ended September 30, 2000. The decrease was due to the sale of a property securing one of the loans. No specific allowance for possible credit losses was applied to the nonaccrual loans at December 31, 1999 because they were adequately collateralized. At September 30, 2000, the Company had loans identified as impaired in the amount of $78,000. At September 30, 2000, no specific allowance for possible credit losses was required for these impaired loans because they were adequately collateralized. 9 ALLOWANCE FOR POSSIBLE CREDIT LOSSES. The Company maintains an allowance for possible credit losses ("APCL") which is reduced by credit losses and increased by credit recoveries and by the provision to the APCL which is charged against operations. Provisions to the APCL and the total of the APCL are based, among other factors, upon the Company's credit loss experience, current economic conditions, the performance of loans within the portfolio, evaluation of loan collateral value, and the prospects or worth of respective borrowers and guarantors. In determining the adequacy of its APCL and after carefully analyzing each loan individually, the Company segments its loan portfolio into pools of homogeneous loans that share similar risk factors. Each pool is given a risk assessment factor which largely reflects the expected future losses from each category. These risk assessment factors change as economic conditions shift and actual loan losses are recorded. As of September 30, 2000, the APCL of $1,849,000, or 1.18% of total loans, was determined by management to be adequate against foreseeable future losses. No assurance can be given that nonperforming loans will not increase or that future losses will not exceed the amount of the APCL. The following table summarizes, for the periods indicated, loan balances at the end of each period and average balances during the period, changes in the APCL arising from credit losses, recoveries of credit losses previously incurred, additions to the APCL charged to operating expense, and certain ratios relating to the APCL (dollar amounts in thousands):
AT AND FOR AT AND FOR THE THE YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1999 2000 -------------- --------------------- BALANCES: Average loans during period $ 125,035 $ 146,676 Loans at end of period 137,966 156,419 ALLOWANCE FOR POSSIBLE CREDIT LOSSES: Balance at beginning of period 1,117 1,492 Actual credit losses: Commercial 62 -------------- --------------------- Total 62 0 Actual credit recoveries: Commercial 72 37 -------------- --------------------- Total 72 37 -------------- --------------------- Net credit losses (recoveries) (10) (37) -------------- --------------------- Provision charged to operating expense 365 320 -------------- --------------------- Balance at end of period $ 1,492 $ 1,849 ============== ===================== RATIOS: Net credit losses (recoveries) to average loans -0.01% -0.03% Allowance for possible credit losses to loans at end of period 1.08% 1.18% Net credit losses (recoveries) to beginning of period allowance for credit losses -0.90% -2.48%
10 The Company provided $100,000 to the allowance for possible credit losses during the third quarter of 2000 as compared to $120,000 during the third quarter of 1999. For the nine months ended September 30, 2000, the Company provided $320,000 to the allowance for possible credit losses as compared to $245,000 during the same period of 1999. The provisions during both periods were recorded as a prudent measure, based upon growth in the loan portfolio. The following table sets forth the allocation of the APCL as of the dates indicated (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1999 1999 2000 ---------------------------- ---------------------------- ---------------------------- % of % of % of Category Category Category to Total to Total to Total APCL Loans APCL Loans APCL Loans Commercial loans $ 904 48.48% $ 904 47.87% $ 660 43.72% Real estate loans 260 46.74% 260 48.98% 315 53.09% Consumer loans 41 4.78% 30 3.15% 33 3.19% Not allocated 201 N/A 298 N/A 841 N/A ------------ ------------ ------------ ------------ ------------ ------------ Total $ 1,406 100.00% $ 1,492 100.00% $ 1,849 100.00% ============ ============ ============ ============ ============ ============
The APCL is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories. The allocation of the APCL as shown above should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. In addition to the most recent analysis of individual loans and pools of loans, management's methodology also places emphasis on historical loss data, delinquency and nonaccrual trends by loan classification category and expected loan maturity. This analysis, management believes, identifies potential losses within the loan portfolio and therefore results in allocation of a large portion of the allowance to specific loan categories. 11 INVESTMENTS. The following tables set forth the amortized cost and approximate market value of investment securities as of the dates indicated (dollar amounts in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING SEPTEMBER 30, 2000: COST GAINS LOSSES VALUE VALUE ----------------------------------------------------------------------------------------------------- Held to maturity securities: U.S. Government agencies $ 2,000 $ (17) $ 1,983 $ 2,000 -------- ------- -------- -------- -------- Total held to maturity 2,000 (17) 1,983 2,000 -------- ------- -------- -------- -------- Available for sale securities: U.S. Treasury 13,985 $ 75 (181) 13,879 13,879 U.S. Government agencies 9,114 (396) 8,718 8,718 Corporate securities 1,934 (16) 1,918 1,918 -------- ------- -------- -------- -------- Total available for sale 25,033 75 (593) 24,515 24,515 -------- ------- -------- -------- -------- Total investment securities $ 27,033 $ 75 $ (610) $ 26,498 $ 26,515 ======== ======= ======== ======== ========
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING DECEMBER 31, 1999 COST GAINS LOSSES VALUE VALUE ----------------------------------------------------------------------------------------------------- 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 Corporate 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 ======== ======= ======== ======== ========
12 DEPOSITS. Total consolidated deposits increased by $4.6 million, or 2.6%, during the nine months ended September 30, 2000. Rates paid on deposits increased during the nine months ended September 30, 2000 contributing to the increase in the cost of funds to 2.90% for the nine months ended September 30, 2000 as compared to 2.73% for the year ended December 31, 1999. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated (dollar amounts in thousands):
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1999 SEPTEMBER 30, 2000 ---------------------------------- ------------------------------- Average Average Average Average Balance Rate Balance Rate -------------- ---------------- ------------ --------------- Noninterest-bearing demand deposits $ 40,290 $ 46,843 Interest-bearing demand deposits (includes money market deposit accounts) 98,954 3.42% 109,469 3.65% Savings deposits 2,259 1.90% 2,094 1.93% Time deposits, $100,000 and over 13,477 4.85% 15,379 5.30% Other time deposits 8,816 4.41% 9,216 4.82% -------------- ---------------- ------------ --------------- Total interest-bearing 123,506 3.62% 136,158 3.89% -------------- ---------------- ------------ --------------- Total deposits $ 163,796 2.73% $ 183,001 2.90% ============== ================ ============ ===============
The following table sets forth the time remaining to maturity of the Company's time deposits in amounts of $100,000 or more as of the dates indicated below (dollar amounts in thousands):
DECEMBER 31, SEPTEMBER 30, TIME REMAINING TO MATURITY 1999 2000 ----------------- ----------------- Three months or less $ 5,719 $ 8,822 After three months to six months 3,229 4,287 After six months to one year 4,766 5,222 After twelve months 757 802 ----------------- ----------------- Total $ 14,471 $ 19,133 ================= =================
13 RESULTS OF OPERATIONS NET INTEREST INCOME / NET INTEREST MARGIN. Net interest income for the quarter ended September 30, 2000 was $3,300,000, an increase of 20.3% over the net interest income of $2,744,000 during the same period of 1999. Net interest income for the nine months ended September 30, 2000 was $9,337,000, an increase of 20.9% over the net interest income of $7,724,000 during the same period of 1999. The increase 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; and the average yield or rate for each category of interest-bearing assets and interest-bearing liabilities and the net interest margin (net interest income divided by average earning assets) for the periods indicated (dollar amounts in thousands):
FOR THE QUARTER ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1999 2000 ----------------------------------- ----------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ---------- ---------- --------- ---------- ---------- --------- ASSETS Federal funds sold $ 14,702 $ 185 5.03% $ 9,563 $ 156 6.53% Interest-bearing deposits with banks 286 4 5.59% 286 4 5.59% Investment securities 27,782 383 5.51% 27,572 410 5.95% Loans (1) 129,241 3,336 10.32% 153,272 4,167 10.87% ---------- ---------- --------- ---------- ---------- --------- Total earning assets 172,011 3,908 9.09% 190,693 4,737 9.94% Total non-earning assets 12,649 13,637 ---------- ---------- Total assets $ 184,660 $ 204,330 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 42,035 $ 48,338 Interest-bearing transaction accounts 101,140 $ 879 3.48% 108,933 $ 1,050 3.86% Time deposits, $100,000 or more 14,181 167 4.71% 16,541 232 5.61% Savings and other time 11,337 111 3.92% 11,176 125 4.47% ---------- ---------- --------- ---------- ---------- --------- Total interest-bearing deposits 126,658 1,157 3.65% 136,650 1,407 4.12% ---------- ---------- --------- ---------- ---------- --------- Other borrowings 593 7 4.72% 1,274 30 9.42% ---------- ---------- --------- ---------- ---------- --------- Total interest-bearing liabilities 127,251 1,164 3.66% 137,924 1,437 4.17% Other liabilities 1,645 1,972 Shareholders' equity 13,729 16,096 Total liabilities ---------- ---------- and shareholders' equity $ 184,660 $ 204,330 ========== ========== ---------- ---------- Net interest income $ 2,744 $ 3,300 ========== ========== Net interest margin 6.38% 6.92% (1) Nonaccrual loans are included in the average balance.
14
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------------------------------- 1999 2000 ----------------------------------- ----------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ---------- ---------- --------- ---------- ---------- --------- ASSETS Federal funds sold $ 7,532 $ 274 4.85% $ 10,268 $ 473 6.14% Interest-bearing deposits with banks 286 11 5.13% 286 12 5.59% Investment securities 32,195 1,331 5.52% 30,173 1,319 5.83% Loans (1) 121,934 9,365 10.24% 146,676 11,554 10.50% ---------- ---------- --------- ---------- ---------- --------- Total earning assets 161,947 10,981 9.04% 187,403 13,358 9.50% Total non-earning assets 11,745 13,398 ---------- ---------- Total assets $ 173,692 $ 200,801 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY Demand deposits $ 38,413 $ 46,843 Interest-bearing transaction accounts 95,603 $ 2,437 3.40% 109,469 $ 3,001 3.66% Time deposits, $100,000 or more 13,004 472 4.84% 15,379 611 5.30% Savings and other time 10,892 318 3.89% 11,310 363 4.28% ---------- ---------- --------- ---------- ---------- --------- Total interest-bearing deposits 119,499 3,227 3.60% 136,158 3,975 3.89% ---------- ---------- --------- ---------- ---------- --------- Other borrowings 881 30 4.54% 837 46 7.33% ---------- ---------- --------- ---------- ---------- --------- Total interest-bearing liabilities 120,380 3,257 3.61% 136,995 4,021 3.91% Other liabilities 1,482 1,683 Shareholders' equity 13,417 15,280 Total liabilities ---------- ---------- and shareholders' equity $ 173,692 $ 200,801 ========== ========== ---------- ---------- Net interest income $ 7,724 $ 9,337 ========== ========== Net interest margin 6.36% 6.64% (1) Nonaccrual loans are included in the average balance.
The net interest margin increased to 6.92% during the third quarter of 2000 from 6.38% in the same quarter of 1999. For the nine months ended September 30, 2000, the net interest margin increased to 6.64% from 6.36% during the same period of 1999. The increase was primarily attributable to growth in average earning assets exceeding growth in average interest-bearing liabilities. The following table presents the dollar amount of changes in interest earned and interest paid for each major category of interest-earning asset and interest-bearing liability and the amount of change attributable to average balances (volume) fluctuations and average rate fluctuations for the periods indicated. The variance attributable to both balance and rate fluctuations is allocated to a combined rate/volume variance (dollar amounts in thousands): 15
QUARTER ENDED SEPTEMBER 30, 1999 NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 2000 CHANGE IN CHANGE IN --------------------------------------------- ------------------------------------------ RATE/ RATE/ VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL --------------------------------------------- ------------------------------------------ INTEREST INCOME: Federal funds sold ($65) $55 ($19) ($29) $100 $73 $26 $199 Interest-bearing deposits with banks 0 0 0 0 0 1 0 1 Investment securities (3) 30 0 27 (82) 75 (5) (12) Loans 620 178 33 831 1,903 238 48 2,189 --------------------------------------------- ------------------------------------------ Total Interest Income 552 263 14 829 1,921 387 69 2,377 --------------------------------------------- ------------------------------------------ INTEREST EXPENSE: Interest-bearing transaction accounts 68 96 7 171 351 186 27 564 Time deposits, $100,000 or more 28 32 5 65 86 45 8 139 Savings and other time (2) 16 0 14 12 32 1 45 Other borrowings 8 7 8 23 (1) 18 (1) 16 --------------------------------------------- ------------------------------------------ Total Interest Expense 102 151 20 273 448 281 35 764 --------------------------------------------- ------------------------------------------ NET INTEREST INCOME $450 $112 ($6) $556 $1,473 $106 $34 $1,613 ============================================= ==========================================
NONINTEREST INCOME. The following table summarizes noninterest income for the periods indicated and expresses the amounts as a percentage of average assets (dollar amounts in thousands):
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- ----------------------------------- COMPONENTS OF NONINTEREST INCOME 1999 2000 1999 2000 ---------------------------------------------------- -------------- --------------- --------------- --------------- Gain on sale of loans $ 5 $ 12 $ 87 $ 47 Service fees on deposit accounts 149 111 465 356 Loan servicing fees 14 14 40 41 Gain (loss) on sale of investment securities - net 12 (2) Other 77 57 174 200 -------------- --------------- --------------- --------------- Total $ 245 $ 194 $ 778 $ 642 ============== =============== =============== =============== AS A PERCENTAGE OF AVERAGE ASSETS (ANNUALIZED) ---------------------------------------------------- Gain on sale of loans 0.01% 0.02% 0.07% 0.03% Service fees on deposit accounts 0.32% 0.22% 0.36% 0.24% Loan servicing fees 0.03% 0.03% 0.03% 0.03% Gain (loss) on sale of investment securities - net 0.01% 0.00% Other 0.17% 0.11% 0.13% 0.13% -------------- --------------- --------------- --------------- Total 0.53% 0.38% 0.60% 0.43% ============== =============== =============== ===============
16 NONINTEREST EXPENSE. The following table summarizes noninterest expenses and the associated ratios to average assets for the periods indicated (dollar amounts in thousands):
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- ------------------------------------ COMPONENTS OF NONINTEREST EXPENSE 1999 2000 1999 2000 ------------------------------------------------- ----------------- ----------------- ---------------- ---------------- Salaries and employee benefits $ 1,006 $ 1,096 $ 3,018 $ 3,283 Occupancy expense 265 273 730 800 Furniture and equipment expense 107 119 306 343 Professional services 62 107 236 233 Supplies 67 68 201 218 Promotional expenses 58 69 226 217 Data processing fees 85 93 280 270 Regulatory assessments 12 16 31 46 Other 119 134 311 417 ----------------- ----------------- ---------------- ---------------- Total $ 1,781 $ 1,975 $ 5,339 $ 5,827 ================= ================= ================ ================ Average full-time equivalent employees 57 58 56 58 AS A PERCENTAGE OF AVERAGE ASSETS (ANNUALIZED) ------------------------------------------------- Salaries and employee benefits 2.18% 2.15% 2.32% 2.18% Occupancy expense 0.57% 0.54% 0.56% 0.53% Furniture and equipment expense 0.23% 0.23% 0.24% 0.23% Professional services 0.13% 0.21% 0.18% 0.15% Supplies 0.15% 0.13% 0.15% 0.14% Promotional expenses 0.13% 0.14% 0.17% 0.14% Data processing fees 0.18% 0.18% 0.22% 0.18% Regulatory assessments 0.03% 0.03% 0.02% 0.03% Other 0.26% 0.26% 0.24% 0.28% ----------------- ----------------- ---------------- ---------------- Total 3.86% 3.87% 4.10% 3.87% ================= ================= ================ ================
Noninterest expense increased to $2.0 million during the third quarter of 2000 from $1.8 million during the same period of the prior year. For the nine months ended September 30, 2000, noninterest expense increased to $5.8 million from $5.3 million during the same period of the prior year. Growth in existing operations and the addition of the Petaluma branch office in July 1999 contributed to the increase. INCOME TAXES. The Company's effective tax rate was 40.9% for the quarter ended September 30, 2000 compared to 41.2% in the same period of the prior year. For the nine months ended September 30, 2000, the effective tax rate was 41.2% compared to 41.2% in the same period of the prior year. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT. Liquidity is the Company's ability to absorb fluctuations in deposits while simultaneously providing for the credit needs of its borrowers. The objective in liquidity management is to balance the sources and uses of funds. Primary sources of liquidity for the Company include payments of principal and interest on loans and investments, proceeds from the sale or maturity of loans and investments, growth in deposits, 17 and other borrowings. The Company holds overnight federal funds as a cushion for temporary liquidity needs. During the nine months ended September 30, 2000, federal funds sold averaged $10.3 million, or 5.1% of total assets. In addition to its federal funds, the Company maintains various lines of credit with correspondent banks, the Federal Reserve Bank of San Francisco, and the Federal Home Loan Bank of San Francisco. At September 30, 2000, the Company had cash, time deposits with banks, federal funds sold, and unpledged investment securities of approximately $37.1 million, or 18.0% of total assets. This represented all available liquid assets, excluding other assets. Several methods are used to measure liquidity. One method is to measure the balance between loans and deposits (gross loans divided by total deposits). In general, the closer this ratio is to 100%, the more reliant an institution becomes on its illiquid loan portfolio and its securities portfolio to absorb temporary fluctuations in deposit levels. At September 30, 2000, the loan-to-deposit ratio was 84.8% as compared to 76.7% at December 31, 1999. 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), or the liquidity ratio. The Company targets a minimum ratio of 5%. At September 30, 2000, this ratio was 4.0% as compared to 15.2% at December 31, 1999. As of September 30, 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 September 30, 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, 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): 18
SEPTEMBER 30, 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 $ 6,350 $ 6,350 Interest-bearing deposits with other banks 196 $ 90 286 Investment securities 2,000 $ 20,011 $ 5,022 27,033 Loans, excluding allowance for possible losses 78,611 2,585 $ 2,571 55,531 17,289 156,587 ----------- ----------- ------------ ----------- ----------- ----------- Total 87,157 2,675 2,571 75,542 22,311 190,256 ----------- ----------- ------------ ----------- ----------- ----------- INTEREST-BEARING LIABILITIES (RATE SENSITIVE): Interest-bearing transaction deposits 46,024 55,206 101,230 Time deposits, $100,000 or more 8,822 4,287 5,222 802 19,133 Savings and other time deposits 3,009 2,016 375 5,572 10,972 Other borrowings 750 3,000 3,750 ----------- ----------- ------------ ----------- ----------- ----------- Total 12,581 6,303 51,621 61,580 $ 135,085 ----------- ----------- ------------ ----------- ----------- ----------- Period GAP $ 74,576 $ (3,628) $ (49,050) $ 13,962 $ 22,311 =========== =========== ============ =========== =========== Cumulative GAP $ 74,576 $ 70,948 $ 21,898 $ 35,860 $ 58,171 =========== =========== ============ =========== =========== Interest Sensitivity GAP Ratio 85.57% (135.63%) (1907.82%) 18.48% 100.00% =========== =========== ============ =========== =========== Cumulative Interest Sensitivity 85.57% 78.98% 23.70% 21.35% 30.58% =========== =========== ============ =========== ===========
The Company classifies its interest-bearing transaction accounts and savings accounts into the over 180 days to 365 days time period as well as the after one year to five years time period. This is done to adjust for the insensitivity of these accounts to changes in interest rates. Although rates on these accounts can contractually be reset at the Company's discretion, historically these accounts have not demonstrated strong correlation to changes in the prime rate. Generally, a positive gap at one year indicates that net interest income and the net interest margin will increase if interest rates rise in the future. A negative gap at one year indicates that net interest income and the net interest margin will decrease if interest rates rise in the future. The Company neither currently utilizes financial derivatives to hedge its asset/liability position nor has any plans to employ such strategies in the near future. The maturities and weighted average yields of investment securities at September 30, 2000 are presented in the following table (at amortized cost) (dollar amounts in thousands):
AFTER 1 YEAR AFTER 5 YEARS WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS TOTAL --------------------- --------------------- ------------------- -------------------- Amount Yield Amount Yield Amount Yield Amount Yield U.S. Treasury and other U.S. government agencies $1,000 5.98% $19,077 5.67% $5,022 5.80% $25,099 5.71% Corporate securities 1,934 6.32% 1,934 6.32% ---------- --------- ---------- --------- ---------- -------- ---------- -------- Total $1,000 5.98% $21,011 5.73% $5,022 5.80% $27,033 5.75% ========== ========= ========== ========= ========== ======== ========== ========
19 Maturities of Loans at September 30, 2000 (dollar amounts in thousands):
TIME REMAINING TO MATURITY FIXED RATE ADJUSTABLE RATE TOTAL ------------ ---------------- ------------ One year or less $ 8,079 $ 37,232 $ 45,311 After one year to five years 55,159 18,083 73,242 After five years 17,288 20,746 38,034 ------------ ---------------- ------------ Total $ 80,526 $ 76,061 $ 156,587 ============ ================ ============
As of September 30, 2000, the percentage of loans held for investment with fixed and floating interest rates was 51.4% and 48.6%, respectively. CAPITAL RESOURCES. The principal source of capital for the Company is and will continue to be the retention of operating profits. The ratios of average equity to average assets for the periods indicated are set forth below. NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 ------------------------------ ----------------------------- 7.72% 7.61% On September 7, 2000, the Company completed an offering of 10.60% capital securities in an aggregate amount of $3.0 million through 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. 20 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 condensed 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 September 30, 2000, the entire $3.0 million outstanding of trust preferred securities qualified as Tier I capital. Regulatory authorities have issued guidelines to implement risk-based capital requirements. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Total capital is classified into two components: Tier 1 (primarily shareholder's equity) and Tier 2 (supplementary capital including allowance for possible credit losses, certain preferred stock, eligible subordinated debt, and other qualifying instruments). The guidelines require that total capital be 8% of risk-based assets, of which at least 4% must be Tier 1 capital. As of September 30, 2000, the Company's total capital was 12.80% and its Tier 1 capital ratio was 11.69%. In addition, the Company, under the guidelines established for adequately capitalized institutions, must also maintain a minimum leverage ratio (Tier 1 capital divided by total assets) of 4%. As of September 30, 2000, the Company's leverage ratio was 9.44%. It is the Company's intention to maintain risk-based capital ratios at levels characterized as "well-capitalized" for banking organizations: Tier 1 risk-based capital of 6 percent or above and total risk-based capital at 10 percent or above. 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) 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 22 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MCB FINANCIAL CORPORATION ------------------------- (REGISTRANT) Date: November 14, 2000 /s/ PATRICK E. PHELAN ----------------------------------------- Patrick E. Phelan Chief Financial Officer (Principal Accounting Officer and officer authorized to sign on behalf of the registrant) 23 EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- 4.1 Amended and Restated Declaration of Trust dated as of September 7, 2000 4.2 Indenture, dated as of September 7, 2000, between MCB Financial Corporation and State Street Bank and Trust Company, as trustee 4.3 Guarantee Agreement, dated as of September 7, 2000, between MCB Financial Corporation and State Street Bank and Trust Company, as trustee 4.4 Placement Agreement dated as of August 31, 2000 4.5 Subscription Agreement dated as of September 7, 2000 10 Hayward Office Lease (B Street Marketplace), dated as of September 7, 2000, between the Redevelopment Agency of the City of Hayward and Metro Commerce Bank 27 Financial Data Schedule 24