FORM 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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:
August 10, 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
June 30, December 31,
1996 1995
ASSETS (Unaudited)
Cash and due from banks $ 6,742,352 $ 7,706,117
Federal funds sold 4,860,000
Total cash and cash equivalents 6,742,352 12,566,117
Interest-bearing deposits with banks 482,000 1,269,000
Investment securities (market value of
$38,759,253 and $39,332,581) 39,530,738 39,232,892
Mortgage loans sold pending settlement 1,696,700 3,515,620
Loans held for investment (net of allowance
for possible credit losses of $900,064
in 1996 and $752,358 in 1995) 72,330,000 58,612,151
Premises and equipment - net 2,448,697 2,550,871
Accrued interest receivable 1,118,763 983,158
Deferred income taxes 329,068 1,483,758
Other assets 1,491,213 2,102,508
Total assets $ 126,169,531 $ 122,316,075
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 25,272,731 $ 21,758,760
Interest-bearing:
Transaction accounts 68,204,175 64,160,115
Time certificates, $100,000
and over 8,842,438 9,106,755
Savings and other
time deposits 11,632,393 15,237,740
Total interest-bearing deposits 88,679,006 88,504,610
Total deposits 113,951,737 110,263,370
Other borrowings 1,821,505 213,378
Accrued interest payable
and other liabilities 917,147 3,568,592
Total liabilities 116,690,389 114,045,340
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 (104,497) 9,691
Retained earnings (accumulated deficit) 674,763 (647,832)
Total shareholders' equity 9,479,142 8,270,735
Total liabilities and shareholders'
equity $ 126,169,531 $ 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 Six Months
June 30, Ended June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $1,829,512 $1,503,217 $3,493,932 $2,890,227
Federal funds sold 34,785 133,116 158,178 185,518
Investment securities 669,949 480,207 1,247,699 897,714
Total 2,534,246 2,116,540 4,899,809 3,973,459
INTEREST EXPENSE:
Interest-bearing transaction,
savings and other
time deposits 859,349 859,590 1,735,112 1,497,013
Time certificates, $100,000
and over 118,690 121,280 245,886 224,226
Other interest 8,838 4,842 14,659 52,647
Total 986,877 985,712 1,995,657 1,773,886
NET INTEREST INCOME 1,547,369 1,130,828 2,904,152 2,199,573
PROVISION FOR POSSIBLE
CREDIT LOSSES 0 10,000 140,000 40,000
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE
CREDIT LOSSES 1,547,369 1,120,828 2,764,152 2,159,573
OTHER INCOME:
Gain on sale of loans 151,380 108,610 258,613 195,155
Service fees on
deposit accounts 98,431 57,603 189,413 116,028
Loan servicing fees 3,789 11,370 4,207
Recovery of litigation
expenses 24,689 13,813 1,824,689 451,640
Other 24,288 20,306 75,123 46,515
Total 302,577 200,332 2,359,208 813,545
OTHER EXPENSES:
Salaries and employee
benefits 763,579 788,144 1,728,745 1,603,713
Occupancy expense 174,449 185,458 348,766 370,489
Furniture and equipment
expense 102,276 90,877 196,306 165,759
Professional services 9,841 93,488 61,862 255,134
Supplies 67,427 85,466 119,763 146,351
Promotional expenses 52,757 94,177 90,410 187,259
Data processing fees 66,671 54,447 131,931 104,875
Regulatory assessments 11,313 51,308 22,627 102,616
Provision for legal
settlement 2,800,000 2,800,000
Other 83,099 134,581 165,717 261,450
Total 1,331,412 4,377,946 2,866,127 5,997,646
INCOME (LOSS) BEFORE
INCOME TAXES 518,534 (3,056,786) 2,257,233 (3,024,528)
INCOME TAXES (BENEFIT) 211,565 (1,161,376) 934,638 (1,154,200)
NET INCOME (LOSS) $ 306,969($ 1,895,410) $ 1,322,595($ 1,870,328)
NET INCOME (LOSS) PER
COMMON SHARE:
Primary and fully diluted $ 0.34 ($ 2.11) $1.47 ($ 2.07)
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
1996 1995
OPERATING ACTIVITIES: (Unaudited)
Net income $ 1,322,595 $ (1,870,328)
Adjustments to reconcile net income to net cash
provided by operating activities:
Originations of loans for sale (20,217,000) (19,352,000)
Settlement of mortgage loans sold 22,035,920 23,306,440
Provision for possible credit losses 140,000 40,000
Depreciation and amortization 284,291 136,180
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 1,235,828 (1,236,212)
(Increase) decrease in accrued interest
receivable (135,605) 11,859
Decrease in other assets 1,839,289 167,876
Decrease in accrued interest payable and
other liabilities (2,077,092) (60,716)
Net cash provided by operating activities 2,628,226 4,009,314
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 9,000,000 2,100,000
Purchases (16,238,750) (6,860,074)
Available for sale securities:
Sales 1,731,520
Maturities 7,646,336 339,032
Purchases (1,000,481) (933,469)
Decrease (increase) in interest-bearing
deposits with banks 787,000 (387,000)
Proceeds from sale of other real estate owned 286,090
Net increase in loans held for investment (13,857,849) (8,658,541)
Purchases of premises and equipment (84,741) (368,590)
Net cash used by investing activities (13,748,485) (12,751,032)
FINANCING ACTIVITIES:
Net increase in noninterest-bearing
demand deposits 3,513,971 902,249
Net increase in interest-bearing transaction,
savings and other time deposits 174,396 27,174,011
Net increase (decrease) in other borrowings 1,608,127 (3,740,943)
Purchases of common stock (104,970)
Net cash provided by financing activities 5,296,494 24,230,347
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,823,765) 15,488,629
CASH AND CASH EQUIVALENTS:
Beginning of period 12,566,117 7,062,896
End of period $ 6,742,352 $ 22,551,525
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 2,126,004 $ 1,777,298
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six
months ended June 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
$306,969, or $0.34 per share, for the second quarter of 1996.
This compares to a net operating loss of $1,895,410, or $2.11 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. The net
operating loss in 1995 was due to the creation of a contingency
reserve established in anticipation of possible losses from
litigation outstanding at that time.
For the six months ended June 30, 1996, the Company reported
net income of $1,322,595, or $1.47 per share. This compares to a
net operating loss of $1,870,328, or $2.07 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 second quarter of 1996 were 0.98% and 13.10%, respectively,
as compared to (7.17%) and (79.22%), respectively, for the same
period of 1995. Return on average assets and return on average
equity for the six months ended June 30, 1996 were 2.14% and
29.78%, respectively, as compared to (3.75%) and (38.86%),
respectively, for the same period of 1995.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $3.9
million, or 3.2%, from the end of 1995 to reach $126.2 million at
June 30, 1996. This increase resulted from growth of existing
operations.
Loans Held for Investment. Net loans held for investment
increased by $13.7 million, or 23.4%, during the first six months
of 1996. Demand for credit continued to improve particularly
with respect to commercial real estate lending. The following
table sets forth the amount of total loans outstanding by
category as of the dates indicated:
Total Loans June 30, December 31,
(dollar amounts in thousands) 1996 1995
Commercial $ 18,449 $ 16,145
Real estate:
Commercial 40,071 32,161
Construction 6,861 4,388
Land 2,407 1,882
Home equity 3,200 2,903
Loans to consumers and individuals 2,293 1,960
Total 73,281 59,439
Deferred loan fees (51) (75)
Allowance for possible credit losses (900) (752)
Total net loans $ 72,330 $ 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 $58.1 million, or
77.0% of the total portfolio as of June 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 June 30,
1996, the two largest industry concentrations within the loan
portfolio were real estate and related services at 22.0% and the
business/personal service industry at 18.4% of the portfolio.
Because credit concentrations increase portfolio risk, the
Company places significant emphasis on the purpose of each loan
and the related sources of repayment. The Company generally
limits unsecured commercial loans to maturities of three years
and secured commercial loans to maturities of five years.
Mortgage Loans. Mortgage loans sold pending settlement
totaled $1.7 million at June 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 second quarter of 1996, the
Company's mortgage origination volume was $10.7 million as
compared to $8.4 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 June 30, 1996, the Company had nonperforming assets in
the amount of $292,000 which represented three nonaccrual loans.
Had the nonaccrual loans performed under their contractual terms
$14,005 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 June 30, December 31,
(dollar amounts in thousands) 1996 1995
Nonaccrual loans $ 292 $
Loans 90 days or more past due and still accruing
Other real estate owned
$ 292 $
As a percent of total loans 0.40% 0.00%
As a percent of total assets 0.23% 0.00%
At June 30, 1996, the Company had loans 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 $292,000. The Company provided no
allowance for possible credit losses at June 30, 1996 for these
impaired loans.
Allowance for Possible Credit Losses. The Company maintains
an allowance for possible credit losses ("APCL") which is reduced
by credit losses and increased by credit recoveries and
provisions to the APCL charged against operations. Provisions to
the APCL and the total of the APCL are based, among other
factors, upon the Company's credit loss experience, current and
projected economic conditions, the performance of loans within
the portfolio, evaluation of loan collateral value, and the
prospects or worth of respective borrowers and guarantors.
In determining the adequacy of its APCL and after carefully
analyzing each loan individually, the Company segments its loan
portfolio into pools of homogeneous loans that share similar risk
factors. Each pool is given a risk assessment factor which
largely reflects the expected future losses from each category.
These risk assessment factors change as economic conditions shift
and actual loan losses are recorded. As of June 30, 1996, the
APCL of $900,064, or 1.20% of total loans was determined to be
adequate against foreseeable future losses.
The following table summarizes, for the periods indicated,
loan balances at the end of each period and average balances
during the period, changes in the APCL arising from credit
losses, recoveries of credit losses previously incurred,
additions to the APCL charged to operating expense, and certain
ratios relating to the APCL (dollar amounts in thousands):
June 30, December 31,
1996 1995
Balances:
Average loans during period (includes mortgage
loans held for sale) $ 65,739 $ 56,589
Loans at end of period (includes mortgage
loans held for sale) 74,927 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 0 263
Actual credit recoveries:
Commercial loans 8 9
Total 8 9
Net credit losses (8) 254
Provision charged to operating expenses 140 100
Balance at end of period $ 900 $ 752
Ratios:
Net credit losses to average loans -0.01% 0.45%
Allowance for possible credit losses
to loans at end of period 1.20% 1.20%
Net credit losses to beginning of period
allowance for credit losses - 1.06% 28.04%
No loan loss provision was recorded during the second
quarter of 1996 as compared to $10,000 during the same period of
1995. For the six months ended June 30, 1996, based upon growth
in the loan portfolio, the Company provided $140,000 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 from
the Bank of Hayward. These loans were reflected in the allowance
for possible credit losses acquired from the Bank of Hayward in
1994.
The following table sets forth the allocation of the APCL as
of the dates indicated (dollar amounts in thousands):
June 30, December 31,
1996 1995
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 576 47.26% $ 324 46.21%
Real estate loans 166 44.48% 248 45.11%
Consumer loans 50 8.26% 46 8.68%
Not allocated 108 N/A 134 N/A
Total $ 900 100.00% $ 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 $3.7 million, or 3.3%, during the six months ended
June 30, 1996. This increase was primarily the result of growth
in existing operations.
Lower interest rates during the six months ended June 30,
1996 caused the cost of funds to decrease to 3.54% 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):
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 20,970 $ 16,691
Interest-bearing demand deposits
(includes money market deposit
accounts) 68,595 4.10% 55,927 4.46%
Savings deposits 2,601 1.98% 2,430 2.22%
Time deposits, $100,000 and over 8,813 5.58% 8,541 5.78%
Other time deposits 10,973 5.54% 13,357 5.50%
Total interest-bearing 90,982 4.35% 80,255 4.70%
Total deposits $ 111,952 3.54% $ 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):
June 30, December 31,
Time remaining to maturity 1996 1995
Three months or less $ 3,419 $ 3,637
After three months to six months 1,899 2,182
After six months to one year 2,677 2,148
After twelve months 847 1,140
Total $ 8,842 $ 9,107
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest
income for the quarter ended June 30, 1996 was $1,547,369, an
increase of 36.8% over the net interest income of $1,130,828
during the same period of 1995. Net interest income for the six
months ended June 30, 1996 was $2,904,152, an increase of 32.0%
over the net interest income of $2,199,573 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 June 30,
1996 1995
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 2,728 $ 35 5.13% $ 8,910 $ 133 5.97%
Interest-bearing deposits
with banks 669 10 5.98% 885 15 6.78%
Investment securities 42,677 660 6.19% 33,086 466 5.74%
Mortgage loans held for sale 1,958 38 7.76% 1,421 29 8.16%
Loans 65,724 1,791 10.90% 51,498 1,474 11.45%
Total earning assets 113,756 2,534 8.91% 95,800 2,117 8.87%
Total non-earning assets 11,563 9,871
Total assets $125,319 $105,671
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 22,284 $ 15,421
Interest-bearing
transaction accounts 70,655 715 4.05% 56,158 665 4.74%
Time deposits,
$100,000 or more 8,732 119 5.45% 8,288 121 5.84%
Savings and other time 12,394 144 4.65% 15,005 195 5.20%
Total interest-bearing
deposits 91,781 978 4.26% 79,451 981 4.94%
Other borrowings 756 9 4.76% 491 5 4.07%
Total interest-bearing
liabilities 92,537 987 4.27% 79,942 986 4.93%
Other liabilities 1,125 738
Shareholders' equity 9,373 9,570
Total liabilities
and shareholders'
equity $125,319 $105,671
Net interest income $1,547 $1,131
Net interest margin 5.44% 4.76%
For the six months ended June 30,
1996 1995
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 6,064 $ 158 5.21% $6,308 $ 186 5.90%
Interest-bearing deposits
with banks 888 28 6.31% 748 24 6.42%
Investment securities 39,796 1,220 6.14% 31,368 874 5.69%
Mortgage loans held for sale 2,012 82 8.15% 2,349 93 7.92%
Loans 62,897 3,412 10.85% 49,725 2,796 11.25%
Total earning assets 111,657 4,900 8.78% 90,498 3,973 8.82%
Total non-earning assets 12,178 9,355
Total assets $123,835 $99,853
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $20,970 $14,730
Interest-bearing
transaction accounts 68,595 1,405 4.10% 49,137 1,125 4.58%
Time deposits,
$100,000 or more 8,813 246 5.58% 8,215 224 5.45%
Savings and other time 13,574 330 4.86% 15,670 372 4.75%
Total interest-bearing
deposits 90,982 1,981 4.35% 73,022 1,721 4.71%
Other borrowings 634 15 4.73% 1,766 53 6.00%
Total interest-bearing
liabilities 91,616 1,996 4.36% 74,788 1,774 4.74%
Other liabilities 2,366 709
Shareholders' equity 8,883 9,626
Total liabilities
and shareholders' equity $123,835 $99,853
Net interest income $2,904 $2,199
Net interest margin 5.20% 4.90%
The net interest margin increased to 5.44% during the second
quarter of 1996 from 4.76% in the same quarter of 1995. For the
six months ended June 30, 1996, the net interest margin increased
to 5.20% from 4.90% 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).
Quarter Ended June 30, 1996 Six Months Ended June 30, 1996
Compared to Compared to
Quarter Ended June 30, 1995 Six Months Ended June 30, 1995"
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold ($92)($19) $13 ($98) ($7)($22) $1 ($28)
Interest-bearing
deposits with banks (4) (2) 1 (5) 4 0 0 4
Investment securities 138 45 11 194 240 87 19 346
Mortgage loans
held for sale 11 (1) (1) 9 (13) 2 0 (11)
Loans 407 (71) (19) 317 741 (99) (26) 616
Total Interest Income 460 (48) 5 417 965 (32) (6) 927
Interest Expense:
Interest-bearing
transaction
accounts 172 (97) (25) 50 446 (118) (48) 280
Time deposits,
$100,000 or more 6 (8) 0 (2) 16 6 0 22
Savings and other time (34) (21) 4 (51) (50) 9 (1) (42)
Other borrowings 3 1 0 4 (34) (11) 7 (38)
Total Interest Expense 147 (125) (21) 1 378 (114) (42) 222
Net Interest Income $313 $77 $26 $416 $587 $82 $36 $705
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 June 30, Six Months Ended June 30,
Components of Noninterest
Income 1996 1995 1996 1995
Gain on sale of loans $151 $109 $259 $195
Service fees on deposit
accounts 99 57 189 116
Loan servicing fees 4 11 4
Recovery of litigation expenses 25 14 1,825 452
Other 24 20 75 47
Total $303 $200 $2,359 814
As a Percentage of
Average Assets (Annualized)
Gain on sale of loans 0.48% 0.41% 0.42% 0.39%
Service fees on deposit
accounts 0.32% 0.22% 0.31% 0.23%
Service fees on deposit
accounts 0.01% 0.00% 0.02% 0.01%
Recovery of litigation
expenses 0.08% 0.05% 2.95% 0.91%
Other 0.08% 0.08% 0.12% 0.09%
Total 0.97% 0.76% 3.81% 1.63%
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 six months
ended June 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.
Quarter Ended June 30, Six Months Ended June 30,
Components of Noninterest
Expense 1996 1995 1996 1995
Salaries and employee benefits $764 $788 $1,729 $1,604
Occupancy expense 174 186 349 370
Furniture and equipment expense 102 91 196 166
Professional services 10 94 62 255
Supplies 67 85 120 146
Promotional expenses 53 94 90 187
Data processing fees 67 54 132 105
Regulatory assessments 11 51 22 103
Provision for legal settlement 2,800 2,800
Other 83 135 166 262
Total $1,331 $4,378 $2,866 $5,998
Average full-time equivalent
employees 51 50 50 53
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.44% 2.98% 2.79% 3.21%
Occupancy expense 0.56% 0.70% 0.56% 0.74%
Furniture and equipment expense 0.33% 0.34% 0.32% 0.33%
Professional services 0.03% 0.36% 0.10% 0.51%
Supplies 0.21% 0.32% 0.19% 0.29%
Promotional expenses 0.17% 0.36% 0.15% 0.37%
Data processing fees 0.21% 0.20% 0.21% 0.21%
Regulatory assessments 0.04% 0.19% 0.04% 0.21%
Provision for legal settlement 0.00% 10.60% 0.00% 5.61%
Other 0.26% 0.51% 0.27% 0.52%
Total 4.25% 16.57% 4.63% 12.01%
Noninterest expense decreased to $1.3 million during the
second quarter of 1996 from $4.4 million during the same period
of the prior year. For the six months ended June 30, 1996,
noninterest expense decreased to $2.9 million from $6.0 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 June 30, 1996 was 40.8% as compared to a 38.0%
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 six months ended June 30, 1996,
federal funds sold averaged $6.1 million, or 4.9% 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 June 30, 1996, the Company had cash, time deposits with
banks, federal funds sold, and unpledged investment securities of
approximately $43.1 million, or 34.2% 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 June 30, 1996, the loan-to-deposit ratio was 64.3% 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 June 30,
1996, this ratio was 7.04% as compared to 20.0% at December 31,
1995.
As of June 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 June 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):
June 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):
Interest-bearing deposits
with other banks $286 $196 $482
Investment securities 3,159 2,165 $2,349 $20,789 $11,247 39,709 "
Mortgage loans held
for sale 1,697 1,697
Loans, gross of allowance
for possible losses 39,770 1,014 2,815 16,918 12,765 73,282 "
Total 44,912 3,375 5,164 37,707 24,012 115,170 "
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 8,543 29,831 29,831 68,204
Time deposits,
$100,000 or more 3,419 1,899 2,677 847 8,842
Savings and other time
deposits 2,769 1,637 4,163 3,063 11,632
Other borrowings 1,822 1,822
Total 16,553 3,536 36,671 33,741 $90,500
Period GAP $28,359 $(161) $(31,507) $3,967 $24,012
Cumulative GAP $28,359 $28,198 $(3,309) $658 $24,670
Interest Sensitivity
GAP Ratio 63.14% (4.77%) (610.12%) 10.52% 100.00%
Cumulative Interest
Sensitivity 63.14% 58.40% (6.19%) 0.72% 21.42%
The Company classifies its money market accounts and savings
accounts into the over 180 days to 365 days time period as well
as the after one year to five years time period. This is done to
adjust for the insensitivity of these accounts to changes in
interest rates. Although rates on these accounts can
contractually be reset at the Company's discretion, historically
these accounts have not demonstrated strong correlation to
changes in the prime rate. Generally, a positive gap at one year
indicates that net interest income and the net interest margin
will increase if interest rates rise in the future. The Company
neither currently utilizes financial derivatives to hedge its
asset/liability position nor has any plans to employ such
strategies in the near future.
Capital Resources. The principal source of capital for the
Company is and will continue to be the retention of operating
profits. The ratios of average equity to average assets for the
periods indicated are set forth below.
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
7.17% 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 June 30, 1996, the Company's
qualifying capital was 11.80%, 10.77% of which was tier 1
capital. In addition, the Company, under the guidelines
established for adequately capitalized institutions, must also
maintain a minimum leverage ratio (tier 1 capital divided by
total assets) of 4%. As of June 30, 1996, the Company's leverage
ratio was 7.4%.
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
The annual meeting of shareholders of the Company was held
on May 22, 1996. A quorum was established with the presence of
534,222 shares of 898,324 shares of common stock outstanding.
The following matters were voted upon at the annual meeting with
the voting results as indicated:
Proposal 1. - Election of Directors - The following persons were
elected as directors:
Name Votes For Votes Withheld
John Cavallucci 524,888 9,334
Robert E. Eklund 527,388 6,834
Timothy J. Jorstad 527,388 6,834
Catherine H. Munson 527,388 6,834
Gary T. Ragghianti 527,388 6,834
Michael J. Smith 527,388 6,834
Edward P. Tarrant 527,388 6,834
Randall J. Verrue 527,388 6,834
Proposal 2. - Ratification of Independent Auditors - The firm of
Deloitte & Touche LLP was ratified to serve as the Company's
independent auditors for the fiscal year 1996. There were
528,987 votes cast for the proposal, 4,735 votes cast against the
proposal, and 500 abstentions.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
(3)(a) -- Articles of incorporation (incorporated by
reference to the registrant's registration statement
on Form S-4 (File No. 33-76832).
(3)(b) -- By-laws (incorporated by reference to the registrant's
registration statement on Form S-4 (File No. 33-76832).
(10)(a)(1) -- Stock Option Plan (incorporated by reference to
the registrant's registration statement on Form S-4
(File No. 33-76832).
(10)(a)(2) -- Deferred Compensation Plan for Executives
(incorporated by reference to Exhibit (10)(a)(2)
to the registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994).
(10)(b) -- Leases
(10)(b)(1) -- San Rafael Office Lease (incorporated by
reference to Exhibit (10)(b)(1) to the
registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31,
1994).
(10)(b)(2) -- South San Francisco Office Lease (incorporated
by reference to Exhibit (10)(b)(2) to the
registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31,
1994).
(10)(b)(3) -- Hayward Office Lease (incorporated by
reference to Exhibit (10)(b)(3) to the
registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31,
1994).
(10)(b)(4) -- Upland Office Lease (incorporated by
reference to Exhibit (10)(b)(4) to the
registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994).
(27) -- Financial Data Schedule
(b) Reports on Form 8-K. The Company filed the following Current
Report on Form 8-K during the three months ended June 30, 1996:
(i) A Current Report on Form 8-K dated June 25, 1996,
pertaining to a change in the Chairman of the Board.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCB FINANCIAL CORPORATION
(Registrant)
Date: August 13, 1996 By:/s/ Brian M. Riley
Chief Financial Officer
(Principal Accounting Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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STATEMENTS.
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