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, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________ to________
Commission file number: 33-76832
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, 1996
Class
Common stock, no par value 898,324
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1996 1995
ASSETS (Unaudited)
Cash and due from banks $ 7,227,325 $ 7,706,117
Federal funds sold 2,320,000 4,860,000
Total cash and cash equivalents 9,547,325 12,566,117
Interest-bearing deposits with banks 384,000 1,269,000
Investment securities (market value of
$35,719,718 and $39,332,581) 36,200,762 39,232,892
Mortgage loans sold pending settlement 862,400 3,515,620
Loans held for investment (net of allowance
for possible credit losses of $945,545
in 1996 and $752,358 in 1995) 77,993,446 58,612,151
Premises and equipment - net 2,359,627 2,550,871
Accrued interest receivable 866,655 983,158
Deferred income taxes 110,788 1,483,758
Other assets 1,411,336 2,102,508
Total assets $ 129,736,339 $ 122,316,075
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 24,383,082 $ 21,758,760
Interest-bearing:
Transaction accounts 73,275,836 64,160,115
Time certificates, $100,000
and over 9,170,401 9,106,755
Savings and other time deposits 11,327,431 15,237,740
Total interest-bearing deposits 93,773,668 88,504,610
Total deposits 118,156,750 110,263,370
Other borrowings 750,500 213,378
Accrued interest payable
and other liabilities 997,107 3,568,592
Total liabilities 119,904,357 114,045,340
Commitments and contingencies
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 898,324 shares
in 1996 and 1995 8,908,876 8,908,876
Unrealized (loss) gain on investment
securities available for sale - net (78,312) 9,691
Retained earnings (accumulated deficit) 1,001,418 (647,832)
Total shareholders' equity 9,831,982 8,270,735
Total liabilities and shareholders' equity $ 129,736,339 $ 122,316,075
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended For the Nine Months
September 30, Ended September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $2,095,254 $1,656,866 $5,589,186 $4,547,093
Federal funds sold 32,487 160,622 190,665 346,140
Investment securities 609,622 538,111 1,857,321 1,435,825
Total 2,737,363 2,355,599 7,637,172 6,329,058
INTEREST EXPENSE:
Interest-bearing transaction,
savings and other time deposits 879,456 888,525 2,614,568 2,385,538
Time certificates, $100,000
and over 122,819 133,701 368,705 357,927
Other interest 9,088 8,588 23,747 61,235
Total 1,011,363 1,030,814 3,007,020 2,804,700
NET INTEREST INCOME 1,726,000 1,324,785 4,630,152 3,524,358
PROVISION FOR POSSIBLE CREDIT
LOSSES 35,000 175,000 40,000
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE CREDIT
LOSSES 1,691,000 1,324,785 4,455,152 3,484,358
OTHER INCOME:
Gain on sale of loans 88,994 133,089 347,607 328,244
Service fees on deposit accounts 96,645 63,342 286,058 179,370
Loan servicing fees 6,083 17,453 4,207
Recovery of litigation expenses 1,824,689 451,640
Other 29,857 24,044 104,980 70,559
Total 221,579 220,475 2,580,787 1,034,020
OTHER EXPENSES:
Salaries and employee benefits 720,889 692,792 2,449,634 2,296,505
Occupancy expense 180,828 172,927 529,594 543,416
Furniture and equipment expense 96,386 96,273 292,692 262,032
Professional services 75,946 129,483 137,808 384,617
Supplies 52,971 49,858 172,734 196,209
Promotional expenses 67,105 45,724 157,515 232,983
Data processing fees 69,004 62,865 200,935 167,740
Regulatory assessments 11,516 7,285 34,143 109,901
Provision for legal settlement 2,800,000
Other 86,392 53,687 252,108 315,137
Total 1,361,037 1,310,894 4,227,163 7,308,540
INCOME (LOSS) BEFORE INCOME TAXES 551,542 234,366 2,808,776 (2,790,162)
INCOME TAXES (BENEFIT) 224,888 86,785 1,159,526 (1,067,415)
NET INCOME (LOSS) $326,654 $147,581 $1,649,250 ($ 1,722,747)
NET INCOME (LOSS) PER COMMON SHARE:
Primary and fully diluted $ 0.36 $ 0.16 $ 1.83 ($ 1.91)
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
1996 1995
OPERATING ACTIVITIES: (Unaudited)
Net income $1,649,250 $(1,722,747)
Adjustments to reconcile net income to net cash
provided by operating activities:
Originations of loans for sale (26,407,000) (31,963,000)
Settlement of mortgage loans sold 29,060,220 34,156,050
Provision for possible credit losses 175,000 40,000
Depreciation and amortization 400,063 204,136
Loss on sale of other real estate owned 9,972
Provision for legal settlement 2,800,000
Loss on sale of investment securities 56,243
Recovery of litigation expenses (1,800,000)
Change in deferred income taxes 1,435,503 (643,830)
Decrease (increase) in accrued interest receivable 116,503 (230,061)
Decrease (increase) in other assets 1,915,664 (187,227)
(Decrease) increase in accrued interest
payable and other liabilities (1,992,765) 116,110
Net cash provided by operating activities 4,552,438 2,635,646
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 9,000,000 6,100,000
Purchases (16,238,750) (23,800,615)
Available for sale securities:
Sales 1,731,520
Maturities 10,998,591 620,305
Purchases (1,000,481) (933,469)
Decrease (increase) in interest-bearing
deposits with banks 885,000 (585,000)
Proceeds from sale of other real estate owned 286,090
Net increase in loans held for investment (19,556,295) (9,979,834)
Purchases of premises and equipment (89,797) (373,921)
Net cash used by investing activities (16,001,732) (26,934,924)
FINANCING ACTIVITIES:
Net increase in noninterest-bearing
demand deposits 2,624,322 4,296,496
Net increase in interest-bearing transaction,
savings and other time deposits 5,269,058 27,121,667
Net increase (decrease) in other borrowings 537,122 (3,769,412)
Purchases of common stock (104,970)
Net cash provided by financing activities 8,430,502 27,543,781
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,018,792) 3,244,503
CASH AND CASH EQUIVALENTS:
Beginning of period 12,566,117 7,062,896
End of period $9,547,325 $10,307,399
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $3,155,374 $2,716,081
Income taxes 1,600
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
Item 1. Financial Statements
Introduction and Basis of Presentation
The unaudited consolidated financial information included
herein has been prepared in conformity with the accounting
principles and practices in MCB Financial Corporation's ("the
Company") consolidated financial statements included in the
Annual Report for the year ended December 31, 1995. The
accompanying interim consolidated financial statements contained
herein are unaudited. However, in the opinion of the Company,
all adjustments, consisting of normal recurring items necessary
for a fair presentation of the operating results for the periods
shown, have been made. The results of operations for the nine
months ended September 30, 1996 may not be indicative of
operating results for the year ended December 31, 1996. 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.
Legal
In September 1992, Chino Valley Bank filed a lawsuit against
Metro Commerce alleging that Metro Commerce and its Chief
Executive Officer, John Cavallucci, had engaged in unfair
competition with Chino Valley Bank. In June 1995, a jury
rendered a verdict in favor of Chino Valley Bank and against
Metro Commerce and Mr. Cavallucci in the amount of $795,000.
Subsequently during 1995 Metro Commerce established a legal
contingency reserve of $2.8 million, based on the amount of the
jury verdict, the legal costs expected to be incurred by Metro
Commerce, and the possibility of an award of attorneys' fees to
the plaintiff. In addition, Metro Commerce agreed to indemnify
Mr. Cavallucci for the amount of his personal liability to Chino
Valley Bank, and Metro Commerce and Mr. Cavallucci reached an
agreement with Metro Commerce's directors and officers liability
insurance carrier pursuant to which the carrier agreed to pay
$1.2 million of the amounts awarded to Chino Valley Bank. In
February 1996, the trial court awarded Chino Valley Bank costs
and attorneys' fees in the amount of $1,327,438. Subsequently,
in March 1996 Metro Commerce and Mr. Cavallucci entered into a
settlement agreement with Chino Valley Bank pursuant to which the
parties agreed to settle all claims upon the payment of
$2,100,000 to Chino Valley Bank. As a result of the settlement
agreement with Chino Valley Bank and the separate settlement with
Metro Commerce's insurance carrier, Metro Commerce recovered and
reversed approximately $1.8 million from the legal contingency
reserve during the first quarter of 1996. This recovery reflects
the final settlement of this matter.
Recently Issued Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 prescribes accounting
and reporting standards for all stock-based compensation plans,
including employee stock options, restricted stock and stock
appreciation rights. The Statement defines a "fair value-based
method" of accounting for employee stock options and encourages
all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an
entity to continue to measure compensation for those plans using
the "intrinsic value- based method" under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(Opinion No. 25).
All of the Company's stock options have no intrinsic value
at grant date, and under Opinion No. 25, no compensation cost is
recognized for them. SFAS No. 123 requires that an employer's
financial statements include certain disclosures about stock-
based compensation arrangements regardless of the method used to
account for them. An employer that continues to apply the
accounting provisions of Opinion No. 25 will disclose pro forma
amounts that reflect the difference between compensation cost, if
any, included in net income and the related cost measured by the
fair value-based method, including tax effects, that would have
been recognized in the income statement if the fair value-based
method had been used. The Company will continue to apply Opinion
No. 25 in accounting for stock-based compensation plans.
In June of 1996, SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities"
was issued. This statement establishes standards for when
transfers of financial assets, including those with continuing
involvement by the transferor, should be considered a sale. SFAS
No. 125 also establishes standards for when a liability should be
considered extinguished. This statement is effective for
transfers of assets and extinguishments of liabilities after
December 31, 1996, applied prospectively. Earlier adoption or
retroactive application of this statement is not permitted.
Management will be reviewing this statement during the remainder
of 1996 to determine its effect on the Company's financial
statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion presents information pertaining to
the financial condition and results of operation of MCB Financial
Corporation ("Company") and should be read in conjunction with
the financial statements and notes thereto presented in this 10-
QSB. Average balances, including balances used in calculating
certain financial ratios, are generally comprised of average
daily balances.
OVERVIEW
Earnings Summary. The Company reported net income of
$326,654, or $0.36 per share, for the third quarter of 1996.
This compares to net income of $147,581 or $0.16 per share, for
the same period in 1995. Improvement in net interest income, due
to the recent rise in commercial loan activity, continued to
positively impact the net interest margin. In addition, the
Company's efficiency ratio (noninterest expense divided by
operating income) improved to 69.9% from 84.8% in the third
quarter of 1995.
For the nine months ended September 30, 1996, the Company
reported net income of $1,649,250, or $1.83 per share. This
compares to a net operating loss of $1,722,747, or $1.91 per
share, for the same period of 1995. During the first quarter of
1996, the Company recovered approximately $1.8 million from its
litigation contingency reserve in conjunction with the settlement
of its outstanding litigation.
Return on average assets and return on average equity for
the third quarter of 1996 were 1.02% and 13.45%, respectively, as
compared to 0.50% and 7.44%, respectively, for the same period of
1995. Return on average assets and return on average equity for
the nine months ended September 30, 1996 were 1.76% and 23.98%,
respectively, as compared to (2.19%) and (25.50%), respectively,
for the same period of 1995.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $7.4
million, or 6.1%, from the end of 1995 to reach $129.7 million at
September 30, 1996. This increase resulted from growth in
existing operations.
Investment Securities. Investment securities totaled $36.2
million at September 30, 1996. This represented a $3.0 million,
or 7.7%, decrease from the December 31, 1995 balance of $39.2
million. Investments decreased as proceeds from maturities were
used to fund commercial loans during the period.
Loans Held for Investment. Net loans held for investment
increased by $19.4 million, or 33.1%, during the first nine
months of 1996. Most of the growth came from an increase in
commercial real estate refinancings due to lower interest rates
and a 10-year commercial real estate financing program the
Company offered to small businesses from March to August. The
following table sets forth the amount of total loans outstanding
by category as of the dates indicated:
Total Loans September 30, December 31,
(dollar amounts in thousands) 1996 1995
Commercial $19,789 $16,145
Real estate:
Commercial 45,183 32,161
Construction 6,759 4,388
Land 1,951 1,882
Home equity 2,830 2,903
Loans to consumers and individuals 2,464 1,960
Total 78,976 59,439
Deferred loan fees (37) (75)
Allowance for possible credit losses (946) (752)
Total net loans $77,993 $58,612
In the normal practice of extending credit, the Company
accepts real estate collateral on loans which have primary
sources of repayment from commercial operations. The total
amount of loans secured by real estate equaled $62.1 million, or
78.6% of the total portfolio as of September 30, 1996. Due to
the Company's limited marketing area, its real estate collateral
is concentrated primarily in Northern California. The Company
believes that its prudent underwriting standards for real estate
secured loans provides an adequate safeguard against decreasing
real estate prices.
The Company focuses its portfolio lending on commercial,
commercial real estate, and construction loans. These loans
generally carry a higher level of risk than conventional real
estate loans, accordingly, yields on these loans are typically
higher than those of other loans. The performance of commercial
and construction loans is generally dependent upon future cash
flows from business operations (including the sale of products,
merchandise and services) and the successful completion or
operation of large real estate projects. Risks attributable to
such loans can be significantly increased, often to a greater
extent than other loans, by regional economic factors, real
estate prices, the demand for commercial and retail office space,
and the demand for products and services of industries which are
concentrated within the Company's loan portfolio. As of
September 30, 1996, the two largest industry concentrations
within the loan portfolio were real estate and related services
at 21.8% and the business/personal service industry at 18.5% of
the portfolio. Because credit concentrations increase portfolio
risk, the Company places significant emphasis on the purpose of
each loan and the related sources of repayment. The Company
generally limits unsecured commercial loans to maturities of
three years and secured commercial loans to maturities of five
years.
Mortgage Loans. Mortgage loans sold pending settlement
totaled $0.9 million at September 30, 1996, as compared to $3.5
million at December 31, 1995. The outstanding aggregate amount
of mortgage loans is dependent upon the volume of mortgage
originations, loan delivery schedules, and sale transaction
settlement dates. During the third quarter of 1996, the
Company's mortgage origination volume was $6.2 million as
compared to $12.6 million during the same period of 1995. Higher
interest rates and the lack of real estate transaction activity
have severely impacted the mortgage market since the second
quarter of 1994.
Nonperforming Assets. The Company carefully monitors the
quality of its loan portfolio and the factors that effect it
including regional economic conditions, employment stability, and
real estate values. It is the Company's policy to transfer loans
which become 90 days or more past due, from either delinquent
principal or interest payments, to "nonaccrual" status. No
additional interest income is recognized once a loan is
classified as nonaccrual. If previously accrued interest is
deemed uncollectable, it is reversed from interest income.
As of September 30, 1996, the Company had one nonperforming
loan in the amount of $78,731. Had this loan performed under its
contractual terms $6,508 in additional interest income would have
been recognized during 1996. The following table sets forth the
balance of nonperforming assets as of the dates indicated.
Nonperforming Assets September 30, December 31,
(dollar amounts in thousands) 1996 1995
Nonaccrual loans $ 79 $
Loans 90 days or more past due and still accruing
Other real estate owned
$ 79 $
As a percent of total loans 0.10% 0.00%
As a percent of total assets 0.06% 0.00%
At September 30, 1996, the Company had one loan identified
as impaired in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118 (an amendment to SFAS No.
114), in the amount of $78,731. The Company provided no
allowance for possible credit losses at September 30, 1996 for
this impaired loan.
Allowance for Possible Credit Losses. The Company maintains
an allowance for possible credit losses ("APCL") which is reduced
by credit losses and increased by credit recoveries and
provisions to the APCL charged against operations. Provisions to
the APCL and the total of the APCL are based, among other
factors, upon the Company's credit loss experience, current and
projected economic conditions, the performance of loans within
the portfolio, evaluation of loan collateral value, and the
prospects or worth of respective borrowers and guarantors.
In determining the adequacy of its APCL and after carefully
analyzing each loan individually, the Company segments its loan
portfolio into pools of homogeneous loans that share similar risk
factors. Each pool is given a risk assessment factor which
largely reflects the expected future losses from each category.
These risk assessment factors change as economic conditions shift
and actual loan losses are recorded. As of September 30, 1996,
the APCL of $945,545, or 1.19% of total loans was determined to
be adequate against foreseeable future losses.
The following table summarizes, for the periods indicated,
loan balances at the end of each period and average balances
during the period, changes in the APCL arising from credit
losses, recoveries of credit losses previously incurred,
additions to the APCL charged to operating expense, and certain
ratios relating to the APCL (dollar amounts in thousands):
September 30, December 31,
1996 1995
Balances:
Average loans during period (includes
mortgage loans held for sale) $69,299 $56,589
Loans at end of period (includes mortgage
loans held for sale) 79,801 62,880
Allowance for Possible Credit Losses:
Balance at beginning of period 752 906
Actual credit losses:
Commercial loans 242
Loans to consumers and individuals 21
Total 263
Actual credit recoveries:
Commercial loans 16 9
Loans to consumers and individuals 3
Total 19 9
Net credit losses (19) 254
Provision charged to operating expenses 175 100
Balance at end of period $ 946 $ 752
Ratios:
Net credit losses to average loans -0.03% 0.45%
Allowance for possible credit losses to
loans at end of period 1.19% 1.20%
Net credit losses to beginning of period
allowance for credit losses -2.53% 28.04%
As a prudent measure, based upon recent growth in the loan
portfolio, the Company provided $35,000 to the allowance for
possible credit losses during the third quarter of 1996. No
loan loss provision was recorded during the third quarter of
1995. For the nine months ended September 30, 1996, based upon
growth in the loan portfolio, the Company provided $175,000 to
the allowance for possible credit losses as compared to $40,000
during the same period of 1995. Net credit losses in 1995
resulted from the write-off of substandard loans acquired when
the Company purchased the Bank of Hayward in 1994. These loans
were reflected in the allowance for possible credit losses
acquired from the Bank of Hayward.
The following table sets forth the allocation of the APCL as
of the dates indicated (dollar amounts in thousands):
September 30, December 31,
1996 1995
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $611 45.18% $324 46.21%
Real estate loans 187 47.65% 248 45.11%
Consumer loans 50 7.18% 46 8.68%
Not allocated 98 N/A 134 N/A
Total $946 100.00% $752 100.00%
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.
Deposits/Other Borrowings. Total consolidated deposits
increased by $7.9 million, or 7.2%, during the nine months ended
September 30, 1996. This increase was primarily the result of
growth in existing operations.
Lower interest rates and growth in noninterest-bearing
demand deposits during the nine months ended September 30, 1996
caused the cost of funds to decrease to 3.51% from 3.89% during
1995. The following table summarizes the distribution of average
deposits and the average rates paid for the periods indicated
(dollar amounts in thousands):
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand
deposits $ 21,897 $ 16,691
Interest-bearing demand deposits
(includes money market
deposit accounts) 69,724 4.12% 55,927 4.46%
Savings deposits 2,494 1.97% 2,430 2.22%
Time deposits, $100,000 and over 8,911 5.52% 8,541 5.78%
Other time deposits 10,411 5.46% 13,357 5.50%
Total interest-bearing 91,540 4.34% 80,255 4.70%
Total deposits $ 113,437 3.51% $ 96,946 3.89%
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):
September 30, December 31,
Time remaining to maturity 1996 1995
Three months or less $ 3,259 $ 3,637
After three months to six months 2,545 2,182
After six months to one year 2,111 2,148
After twelve months 1,255 1,140
Total $ 9,170 $ 9,107
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest
income for the quarter ended September 30, 1996 was $1,726,000,
an increase of 30.3% over the net interest income of $1,324,785
during the same period of 1995. Net interest income for the nine
months ended September 30, 1996 was $4,630,152, an increase of
31.4% over the net interest income of $3,524,358 during the same
period of 1995. The increases in both periods were primarily due
to the growth in commercial lending.
The following table sets forth average assets, liabilities,
and shareholders' equity; the amount of interest income or
interest expense; and the average yield or rate for each category
of interest-bearing assets and interest-bearing liabilities and
the net interest margin (net interest income divided by average
earning assets) for the periods indicated (dollar amounts in
thousands):
For the quarter ended September 30,
1996 1995
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 2,531 $ 32 5.06% $ 11,109 $ 161 5.80%
Interest-bearing deposits
with banks 467 7 6.00% 1,049 18 6.86%
Investment securities 38,247 603 6.32% 35,496 520 5.87%
Mortgage loans held
for sale 964 21 8.71% 1,940 37 7.63%
Loans 74,472 2,074 11.14% 55,885 1,620 11.60%
Total earning assets 116,681 2,737 9.39% 105,479 2,356 8.94%
Total non-earning assets 11,238 10,809
Total assets $ 127,919 $ 116,288
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 23,734 $ 17,762
Interest-bearing
transaction accounts 71,962 746 4.15% 61,982 678 4.38%
Time deposits,
$100,000 or more 9,105 123 5.40% 8,746 134 6.13%
Savings and other time 11,580 133 4.59% 16,055 210 5.23%
Total interest-bearing
deposits 92,647 1,002 4.33% 86,783 1,022 4.71%
Other borrowings 799 9 4.51% 655 9 5.50%
Total interest-bearing
liabilities 93,446 1,011 4.33% 87,438 1,031 4.72%
Other liabilities 1,026 3,219
Shareholders' equity 9,713 7,869
Total liabilities
and shareholders'
equity $ 127,919 $ 116,288
Net interest income $ 1,726 $ 1,325
Net interest margin 5.92% 5.03%
For the nine months ended September 30,
1996 1995
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 4,878 $ 191 5.22% $ 7,926 $ 346 5.82%
Interest-bearing deposits
with banks 747 35 6.25% 849 42 6.59%
Investment securities 39,287 1,822 6.19% 32,759 1,394 5.75%
Mortgage loans held
for sale 1,660 103 8.27% 2,211 130 7.84%
Loans 66,783 5,486 10.95% 51,801 4,417 11.37%
Total earning assets 113,355 7,637 8.99% 95,546 6,329 8.86%
Total non-earning assets 11,856 9,845
Total assets $ 125,211 $ 105,391
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 21,897 $ 15,752
Interest-bearing
transaction accounts 69,724 2,152 4.12% 53,465 1,804 4.50%
Time deposits, $100,000
or more 8,911 369 5.52% 8,394 358 5.69%
Savings and other time 12,905 462 4.77% 15,800 582 4.91%
Total interest-bearing
deposits 91,540 2,983 4.34% 77,659 2,744 4.71%
Other borrowings 690 24 4.64% 1,392 61 5.84%
Total interest-bearing
liabilities 92,230 3,007 4.35% 79,051 2,805 4.73%
Other liabilities 1,915 1,554
Shareholders' equity 9,169 9,034
Total liabilities
and shareholders'
equity $ 125,211 $ 105,391
Net interest income $ 4,630 $ 3,524
Net interest margin 5.45% 4.94%
The net interest margin increased to 5.92% during the third
quarter of 1996 from 5.03% in the same quarter of 1995. For the
nine months ended September 30, 1996, the net interest margin
increased to 5.45% from 4.94% for the same period of 1995. The
increase in both periods was primarily attributable to an
increase in commercial loan activity and noninterest bearing
deposits.
The following table presents the dollar amount of changes in
interest earned and interest paid for each major category of
interest-earning asset and interest-bearing liability and the
amount of change attributable to average balances (volume)
fluctuations and average rate fluctuations. The variance
attributable to both balance and rate fluctuations is allocated
to a combined rate/volume variance (dollar amounts in thousands).
<TABLE>
<CAPTION>
Quarter Ended September 30, 1996 Nine Months Ended September 30, 1996
Compared to Compared to
Quarter Ended September 30, 1995 Nine Months Ended September 30, 1995
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold ($124) ($21) $16 ($129) ($133) ($36) $14 ($155)
Interest-bearing deposits
with banks (10) (2) 1 (11) (5) (2) 0 (7)
Investment securities 40 40 3 83 282 108 38 428
Mortgage loans held for sale (18) 5 (3) (16) (32) 7 (2) (27)
Loans 539 (64) (21) 454 1,279 (163) (47) 1,069
Total Interest Income 427 (42) (4) 381 1,391 (86) 3 1,308
Interest Expense:
Interest-bearing transaction
accounts 110 (36) (6) 68 546 (152) (46) 348
Time deposits, $100,000
or more 6 (16) (1) (11) 23 (11) (1) 11
Savings and other time (58) (26) 7 (77) (106) (17) 3 (120)
Other borrowings 2 (2) 0 0 (30) (13) 6 (37)
Total Interest Expense 60 (80) 0 (20) 433 (193) (38) 202
Net Interest Income $367 $38 ($4) $401 $958 $107 $41 $1,106
</TABLE>
Noninterest Income. The following table summarizes
noninterest income for periods indicated and expresses the
amounts as a percentage of average assets (dollar amounts in
thousands).
Quarter Ended Nine Months Ended
September 30, September 30,
Components of Noninterest Income 1996 1995 1996 1995
Gain on sale of loans $ 89 $ 133 $ 348 $ 328
Service fees on deposit accounts 97 63 286 179
Loan servicing fees 6 17 4
Recovery of litigation expenses 1,825 452
Other 30 24 105 71
Total $ 222 $ 220 $ 2,581 $ 1,034
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.28% 0.46% 0.37% 0.41%
Service fees on deposit accounts 0.30% 0.22% 0.30% 0.23%
Loan servicing fees 0.02% 0.00% 0.02% 0.01%
Recovery of litigation expenses 0.00% 0.00% 1.94% 0.57%
Other 0.09% 0.08% 0.11% 0.09%
Total 0.69% 0.76% 2.74% 1.30%
During the first quarter of 1996, the Company recovered $1.8
million from its litigation contingency reserve. The recovery
resulted from the settlement agreement reached in conjunction
with the Company's outstanding litigation. During the nine
months ended September 30, 1995, the Company received
reimbursements totaling $452,000 from its primary liability
insurers for litigation expenses incurred in prior periods.
Noninterest Expenses. The following table summarizes
noninterest expenses and the associated ratios to average assets
for the periods indicated (dollar amounts in thousands).
Quarter Ended Nine Months Ended
September 30, September 30,
Components of Noninterest Expense 1996 1995 1996 1995
Salaries and employee benefits $ 721 $ 693 $ 2,450 $ 2,297
Occupancy expense 181 173 530 543
Furniture and equipment expense 96 96 292 262
Professional services 76 129 138 385
Supplies 53 50 173 196
Promotional expenses 67 46 157 233
Data processing fees 69 63 201 168
Regulatory assessments 12 7 34 110
Provision for legal settlement 2,800
Other 86 54 252 315
Total $ 1,361 $ 1,311 $ 4,227 $ 7,309
Average full-time equivalent employees 50 46 50 52
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.25% 2.38% 2.61% 2.91%
Occupancy expense 0.57% 0.60% 0.56% 0.69%
Furniture and equipment expense 0.30% 0.33% 0.31% 0.33%
Professional services 0.24% 0.44% 0.15% 0.49%
Supplies 0.17% 0.17% 0.18% 0.25%
Promotional expenses 0.21% 0.16% 0.17% 0.29%
Data processing fees 0.22% 0.22% 0.21% 0.21%
Regulatory assessments 0.04% 0.02% 0.04% 0.14%
Provision for legal settlement 0.00% 0.00% 0.00% 3.54%
Other 0.27% 0.19% 0.27% 0.40%
Total 4.26% 4.51% 4.50% 9.25%
For the nine months ended September 30, 1996, noninterest
expense decreased to $4.2 million from $7.3 million during the
same period of the prior year. The principal reason for the
decline was the creation of the legal contingency reserve of $2.8
million in the second quarter of 1995.
Income Taxes. The Company's effective tax rate for the
quarter ended September 30, 1996 was 40.8% as compared to 37.0%
in the same period of the prior year. For the nine months ended
September 30, 1996, the effective tax rate was 41.3% as compared
to a 38.3% benefit in the same period of the prior year. The
benefit recorded in 1995 was principally attributable to the
recording of the $2.8 million legal reserve and the Company's
ability to recover federal taxes paid in prior years and the
expected use of net operating losses to offset future taxable
income.
Liquidity and Asset/Liability Management. Liquidity is the
Company's ability to absorb fluctuations in deposits while
simultaneously providing for the credit needs of its borrowers.
The objective in liquidity management is to balance the sources
and uses of funds. Primary sources of liquidity for the Company
include payments of principal and interest on loans and
investments, proceeds from the sale or maturity of loans and
investments, growth in deposits, and other borrowings. The
Company, at times, holds overnight federal funds as a cushion for
temporary liquidity needs. During the nine months ended
September 30, 1996, federal funds sold averaged $4.9 million, or
3.9% of total assets. In addition to its federal funds, the
Company maintains various lines of credit with correspondent
banks, the Federal Reserve Bank, and the Federal Home Loan Bank.
At September 30, 1996, the Company had cash, time deposits
with banks, federal funds sold, and unpledged investment
securities of approximately $43.6 million, or 33.6% of total
assets. This represented all available liquid assets, excluding
mortgage loans held for sale and other assets.
Several methods are used to measure liquidity. One method
is to measure the balance between loans and deposits (gross loans
divided by total deposits). In general, the closer this ratio is
to 100%, the more reliant an institution becomes on its illiquid
loan portfolio to absorb temporary fluctuations in deposit
levels. At September 30, 1996, the loan-to-deposit ratio was
66.8% as compared to 53.8% at December 31, 1995.
Another frequently used method is the relationship between
short-term liquid assets (federal funds sold and investments
maturing within one year) and short-term liabilities (total
deposits and other borrowings) as measured by the liquidity
ratio. The Company targets a minimum ratio of 5%. At September
30, 1996, this ratio was 6.94% as compared to 20.0% at December
31, 1995.
As of September 30, 1996, the Company had no material
commitments that were expected to adversely impact liquidity.
Net interest income and the net interest margin are largely
dependent on the Company's ability to closely match interest-
earning assets with interest-bearing liabilities. As interest
rates change, the Company must constantly balance maturing and
repricing liabilities with maturing and repricing assets. This
process is called asset/liability management and is commonly
measured by the maturity/repricing gap. The maturity/repricing
gap is the dollar difference between maturing or repricing assets
and maturing or repricing liabilities at different intervals of
time.
The following tables sets forth rate sensitive interest-
earning assets and interest-bearing liabilities as of September
30, 1996, 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):
September 30, 1996 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 $2,320 $2,320
Interest-bearing deposits
with other banks 196 $98 $90 384
Investment securities 2,154 $1,158 2,326 22,200 $8,497 36,335
Mortgage loans held
for sale 862 862
Loans, gross of allowance
for possible losses 38,955 1,265 3,078 19,085 16,593 78,976
Total 44,487 2,423 5,502 41,375 25,090 118,877
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 9,494 31,891 31,891 73,276
Time deposits,
$100,000 or more 3,259 2,545 2,111 1,255 9,170
Savings and other
time deposits 2,106 2,778 3,519 2,924 11,327
Other borrowings 751 751
Total 15,610 5,323 37,521 36,070 $94,524
Period GAP $28,877 $(2,900) $(32,019) $5,305 $25,090
Cumulative GAP $28,877 $25,977 $(6,042) $(737)$24,353
Interest Sensitivity
GAP Ratio 64.91% (119.69%) (581.95%) 12.82% 100.00%
Cumulative Interest
Sensitivity 64.91% 55.38% (11.53%) (0.79%) 20.49%
The Company classifies its money market accounts and savings
accounts into the over 180 days to 365 days time period as well
as the after one year to five years time period. This is done to
adjust for the insensitivity of these accounts to changes in
interest rates. Although rates on these accounts can
contractually be reset at the Company's discretion, historically
these accounts have not demonstrated strong correlation to
changes in the prime rate. Generally, a positive gap at one year
indicates that net interest income and the net interest margin
will increase if interest rates rise in the future. The Company
neither currently utilizes financial derivatives to hedge its
asset/liability position nor has any plans to employ such
strategies in the near future.
Capital Resources. The principal source of capital for the
Company is and will continue to be the retention of operating
profits. The ratios of average equity to average assets for the
periods indicated are set forth below.
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
7.32% 8.06%
Regulatory authorities have issued guidelines to implement
risk-based capital requirements. The guidelines establish a
systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among
banking organizations. Capital is classified into two
components: tier 1 (primarily shareholder's equity) and tier 2
(supplementary capital including allowance for possible credit
losses, certain preferred stock, eligible subordinated debt, and
other qualifying instruments). The guidelines require that
qualifying capital be 8% of risk-based assets, of which at least
4% must be tier 1 capital. As of September 30, 1996, the
Company's qualifying capital was 11.51%, 10.47% of which was tier
1 capital. In addition, the Company, under the guidelines
established for adequately capitalized institutions, must also
maintain a minimum leverage ratio (tier 1 capital divided by
total assets) of 4%. As of September 30, 1996, the Company's
leverage ratio was 7.42%.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In September 1992, Chino Valley Bank filed a lawsuit against
Metro Commerce alleging that Metro Commerce and its Chief
Executive Officer, John Cavallucci, had engaged in unfair
competition with Chino Valley Bank. In June 1995, a jury
rendered a verdict in favor of Chino Valley Bank and against
Metro Commerce and Mr. Cavallucci in the amount of $795,000.
Subsequently during 1995 Metro Commerce established a legal
contingency reserve of $2.8 million, based on the amount of the
jury verdict, the legal costs expected to be incurred by Metro
Commerce, and the possibility of an award of attorneys' fees to
the plaintiff. In addition, Metro Commerce agreed to indemnify
Mr. Cavallucci for the amount of his personal liability to Chino
Valley Bank, and Metro Commerce and Mr. Cavallucci reached an
agreement with Metro Commerce's directors and officers liability
insurance carrier pursuant to which the carrier agreed to pay
$1.2 million of the amounts awarded to Chino Valley Bank. In
February 1996, the trial court awarded Chino Valley Bank costs
and attorneys' fees in the amount of $1,327,438. Subsequently,
in March 1996 Metro Commerce and Mr. Cavallucci entered into a
settlement agreement with Chino Valley Bank pursuant to which the
parties agreed to settle all claims upon the payment of
$2,100,000 to Chino Valley Bank. As a result of the settlement
agreement with Chino Valley Bank and the separate settlement with
Metro Commerce's insurance carrier, Metro Commerce recovered and
reversed approximately $1.8 million from the legal contingency
reserve during the first quarter of 1996. This recovery reflects
the final settlement of this matter.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
(3)(a) -- Articles of incorporation (incorporated by
reference to the registrant's registration statement
on Form S-4 (File No. 33-76832).
(3)(b) -- By-laws (incorporated by reference to the
registrant's registration statement on Form S-4
(File No. 33-76832).
(10)(a)(1) -- Stock Option Plan (incorporated by reference to
the registrant's registration statement on Form S-4
(File No. 33-76832).
(10)(a)(2) -- Deferred Compensation Plan for Executives
(incorporated by reference to Exhibit (10)(a)(2) to the
registrant's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1994).
(10)(b) -- Leases
(10)(b)(1) -- San Rafael Office Lease (incorporated by
reference to Exhibit (10)(b)(1) to the registrant's
Annual Report on Form 10-KSB for its fiscal year ended
December 31,1994).
(10)(b)(2) -- South San Francisco Office Lease (incorporated
by reference to Exhibit (10)(b)(2) to the registrant's
Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1994).
(10)(b)(3) -- Hayward Office Lease (incorporated by reference to
Exhibit (10)(b)(3) to the registrant's Annual Report
on Form 10-KSB for its fiscal year ended
December 31,1994).
(10)(b)(4) -- Upland Office Lease (incorporated by reference to
Exhibit (10)(b)(4) to the registrant's Annual Report
on Form 10-KSB for its fiscal year ended December
31, 1994).
(27) -- Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCB FINANCIAL CORPORATION
(Registrant)
Date: November 13, 1996 By:/s/ Brian M. Riley
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,227
<INT-BEARING-DEPOSITS> 384
<FED-FUNDS-SOLD> 2,320
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,462
<INVESTMENTS-CARRYING> 24,739
<INVESTMENTS-MARKET> 24,258
<LOANS> 77,993
<ALLOWANCE> 946
<TOTAL-ASSETS> 129,736
<DEPOSITS> 118,157
<SHORT-TERM> 751
<LIABILITIES-OTHER> 997
<LONG-TERM> 0
0
0
<COMMON> 8,909
<OTHER-SE> 923
<TOTAL-LIABILITIES-AND-EQUITY> 129,736
<INTEREST-LOAN> 5,589
<INTEREST-INVEST> 2,048
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,637
<INTEREST-DEPOSIT> 2,983
<INTEREST-EXPENSE> 3,007
<INTEREST-INCOME-NET> 4,630
<LOAN-LOSSES> 175
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,227
<INCOME-PRETAX> 2,809
<INCOME-PRE-EXTRAORDINARY> 2,809
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,649
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.83
<YIELD-ACTUAL> 8.99
<LOANS-NON> 79
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 752
<CHARGE-OFFS> 0
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 946
<ALLOWANCE-DOMESTIC> 946
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 98
</TABLE>
