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, 1997
[ ] 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: August 10, 1997
Class
Common stock, no par value 957,542
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
ASSETS (Unaudited)
Cash and due from banks $ 7,203,839 $ 9,609,584
Federal funds sold 9,000,000 770,000
Total cash and cash equivalents 16,203,839 10,379,584
Interest-bearing deposits with banks 384,000 384,000
Investment securities available
for sale at fair valu 11,736,223 9,339,550
Investment securities held to maturity;
fair values of $27,498,494 in 1997 and
$25,533,850 in 1996 27,740,714 25,739,588
Mortgage loans sold pending settlement 647,600
Loans held for investment (net of allowance
for possible credit losses of $981,015
in 1997 and $944,105 in 1996) 80,922,906 80,121,693
Premises and equipment - net 2,210,341 2,278,163
Accrued interest receivable 1,092,141 1,003,016
Deferred income taxes 695,285 621,191
Other assets 1,176,829 989,921
Total assets $ 142,162,278 $ 131,504,306
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 29,003,443 $ 26,265,743
Interest-bearing:
Transaction accounts 80,769,803 73,532,399
Time certificates, $100,000 and over 9,532,527 9,483,134
Savings and other time deposits 10,009,128 10,577,186
Total interest-bearing deposits 100,311,458 93,592,719
Total deposits 129,314,901 119,858,462
Other borrowings 729,068 446,776
Accrued interest payable and other liabilities 1,219,724 1,013,939
Total liabilities 131,263,693 121,319,177
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
957,542 shares in 1997 and 942,842 in 1996 9,530,569 9,398,574
Unrealized loss on investment securities
available for sale - net (66,360) (45,378)
Retained earnings 1,434,376 831,933
Total shareholders' equity 10,898,585 10,185,129
Total liabilities and shareholders' equity $ 142,162,278 $ 131,504,306
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended For the Six Months
June 30, Ended June 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $ 2,107,103 $ 1,829,512 $ 4,105,012 $ 3,493,932
Federal funds sold 98,022 34,785 170,052 158,178
Investment securities 641,998 669,949 1,207,796 1,247,699
Total 2,847,123 2,534,246 5,482,860 4,899,809
INTEREST EXPENSE:
Interest-bearing transaction,
savings and other time deposits 929,929 859,349 1,794,280 1,735,112
Time certificates, $100,00
and over 126,607 118,690 249,425 245,886
Other interest 6,894 8,838 15,125 14,659
Total 1,063,430 986,877 2,058,830 1,995,657
NET INTEREST INCOME 1,783,693 1,547,369 3,424,030 2,904,152
PROVISION FOR POSSIBLE
CREDIT LOSSES 20,000 40,000 140,000
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE CREDIT LOSSES 1,763,693 1,547,369 3,384,030 2,764,152
OTHER INCOME:
Gain on sale of loans 36,995 151,380 90,128 258,613
Service fees on deposit
accounts 121,894 98,431 235,880 189,413
Loan servicing fees 8,835 3,789 15,441 11,370
Recovery of litigation expenses 24,689 1,824,689
Other 35,984 24,288 68,798 75,123
Total 203,708 302,577 410,247 2,359,208
OTHER EXPENSES:
Salaries and employee benefits 756,229 763,579 1,545,754 1,728,745
Occupancy expense 190,759 174,449 382,448 348,766
Furniture and equipment expense 84,849 102,276 173,534 196,306
Professional services 41,326 9,841 102,119 61,862
Supplies 48,856 67,427 102,315 119,763
Promotional expenses 53,462 52,757 104,105 90,410
Data processing fees 76,009 66,671 147,305 131,931
Regulatory assessments 15,021 11,313 29,477 22,627
Other 99,107 83,099 188,103 165,717
Total 1,365,618 1,331,412 2,775,160 2,866,127
INCOME BEFORE INCOME TAXES 601,783 518,534 1,019,117 2,257,233
INCOME TAX EXPENSE 246,270 211,565 416,674 934,638
NET INCOME $ 355,513 $ 306,969 $ 602,443 $ 1,322,595
NET INCOME PER COMMON SHARE:
Primary and fully diluted $ 0.36 $ 0.33 $ 0.61 $ 1.40
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,
1997 1996
OPERATING ACTIVITIES: (Unaudited)
Net income $ 602,443 1,322,595
Adjustments to reconcile net income to net cash
provided by operating activities:
Originations of loans for sale (20,217,000)
Settlement of mortgage loans sold 647,600 22,035,920
Provision for possible credit losses 40,000 140,000
Depreciation and amortization 169,150 284,291
Recovery of litigation expenses (1,800,000)
Change in deferred income taxes (59,186) 1,235,828
Increase in accrued interest receivable (89,125) (135,605)
(Increase) decrease in other assets (193,914) 1,839,289
Increase (decrease) in accrued interest
payable and other liabilities 214,518 (2,077,092)
Net cash provided by operating activities 1,331,486 2,628,226
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 3,000,000
Calls 1,000,000 6,000,000
Purchases (3,000,000) (16,238,750)
Available for sale securities:
Maturities 2,571,895 7,646,336
Purchases (5,000,000) (1,000,481)
Decrease in interest-bearing deposits with banks 787,000
Net increase in loans held for investment (841,213) (13,857,849)
Purchases of premises and equipment (108,639) (84,741)
Net cash used by investing activities (5,377,957) (13,748,485)
FINANCING ACTIVITIES:
Net increase in noninterest-bearing demand deposits 2,737,700 3,513,971
Net increase in interest-bearing transaction,
savings and other time deposits 6,718,739 174,396
Net increase in other borrowings 282,292 1,608,127
Proceeds from the exercise of stock options 131,995
Net cash provided by financing activities 9,870,726 5,296,494
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT 5,824,255 (5,823,765)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,379,584 12,566,117
End of period $ 16,203,839 6,742,352
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 2,085,736 2,126,004
Income taxes $ 356,000
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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, 1996. 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, 1997 may not be indicative of
operating results for the year ended December 31, 1997. 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.
Recently Issued Accounting Pronouncements
In June 1996, Statement of Financial Accounting Standards ("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 extinquishments of liabilities after December 31, 1996. In
December 1996, the Financial Accounting Standards Board ("FASB") reconsidered
certain provisions of SFAS No. 125 and issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" to defer for
one year the effective date of implementation for transactions related to
repurchase agreements, dollar-roll repurchase agreements, securities lending
and similar transactions. Management determined that the effect of adoption
of SFAS No. 125 on the Company's financial statements was not material and
believes that the effect of adoption of SFAS No. 127 will also not be
material.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
Statement simplifies the standards for computing earnings per share ("EPS")
and makes them comparable to international EPS standards. SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS.
In addition, all entities with complex capital structures are required to
provide a dual disclosure of basic and diluted EPS on the face of the income
statement and a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. This Statement applies to entities with publicly held common
stock or potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and requires restatement of all prior period EPS data presented. The Company
adopted SFAS No. 128 in the quarter ended March 31, 1997.
The following table provides pro forma disclosure of basic and diluted EPS in
accordance with SFAS No. 128:
Three Six
Months Months
Ended Ended
June 30, June 30,
1997 1996 1997 1996
Pro forma basic EPS........................ $0.37 $0.33 $0.64 $1.40
Pro forma diluted EPS........... .......... $0.36 $0.33 $0.61 $1.40
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from nonowner sources;
and No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
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 operations of MCB Financial Corporation and
subsidiary ("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.
This document may contain forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those indicated. For a discussion of factors that could cause actual results
to differ, please see the discussion contained herein and in the Company's
publicly available Securities and Exchange Commission filings and press
releases.
OVERVIEW
Earnings Summary. The Company reported net income of $355,513, or $0.36
per share, for the second quarter of 1997. This compares to net income of
$306,969, or $0.33 per share, for the same period in 1996. Improvement in net
interest income, due to the growth in average commercial loans , continued to
positively impact the net interest margin. In addition, the Company's
efficiency ratio (noninterest expense divided by operating income) improved to
68.7% from 72.0% in the second quarter of 1996.
For the six months ended June 30, 1997, the Company reported net income of
$602,443 or $0.61 per share. This compares to net income of $1,322,595, or
$1.40 per share, for the same period of 1996 (which includes a pre-tax
recovery of approximately $1.8 million from the Company's litigation
contingency reserve in conjunction with the settlement of its outstanding
litigation). Excluding the litigation recovery, net income for the six months
ended June 30, 1996 would have been approximately $450,000 or $0.48 per share.
Return on average assets and return on average equity for the second quarter
of 1997 were 1.04% and 13.33%, respectively, as compared to 0.98% and 13.10%,
respectively, for the same period of 1996. Return on average assets and
return on average equity for the six months ended June 30, 1997 were 0.90% and
11.45%, respectively, as compared to 2.14% and 29.78%, respectively, for the
same period of 1996.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $10.7 million, or 8.1%,
from the end of 1996 to reach $142.2 million at June 30, 1997. This increase
resulted from growth in existing operations.
Loans Held for Investment. Net loans held for investment increased by $0.8
million, or 1.0%, during the first six months of 1997 as the construction loan
portfolio experienced net paydowns of $3.8 million while the other components
of the portfolio experienced net increases of $4.6 million. 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) 1997 1996
Commercial $ 19,137 $ 16,851
Real estate:
Commercial 53,038 49,856
Construction 3,542 7,348
Land 1,151 1,807
Home equity 2,550 2,809
Loans to consumers and individuals 2,572 2,458
Total 81,990 81,129
Deferred loan fees (86) (63)
Allowance for possible credit losses (981) (944)
Total net loans $ 80,923 80,122
In the normal proctice 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 $66.3
million, or 80.9% of the total portfolio as of June 30, 1997. Due to the
Company's limited marketing area, its real estate collateral is primarily
concentrated in the San Francisco Bay Area and Southern California. The
Company believes that its prudent underwriting standards for real estate
secured loans provides an adequate safeguard against declining real estate
prices which may effect a borrower's ability to liquidate the property and
repay the loan.
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, 1997, the two largest industry
concentrations within the loan portfolio were real estate and related services
at 24.9% 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. No mortgage loans sold pending settlement existed at
June 30, 1997 versus $647,600 at December 31, 1996. Due to production changes
in the mortgage industry and the unfavorable prospects for future improvement,
the Company decided to wind down its wholesale Mortgage Banking operations at
the end 1996. The mortgage industry continues to shift away from the use of
wholesalers in favor of direct lending. In addition, competitive pressures
continue to reduce the gross margins earned by wholesalers.
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. 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 June 30, 1997, the Company had nonperforming assets in the amount of
$636,000, of which $79,000 represented one nonaccrual loan. Had this
nonaccrual loan performed under its contractual terms approximately $6,395 in
additional interest income would have been recognized during 1997. The
Company had loans 90 days or more past due and still accruing in the amount of
$557,000. These loans are well secured and in the process of collection. 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) 1997 1996
Nonaccrual loans $ 79 $ 79
Loans 90 days or more past due and
still accruing 557
Other real estate owned
Total $ 636 $ 79
As a percent of total loans 0.78% 0.10%
As a percent of total assets 0.45% 0.06%
At June 30, 1997, the Company had loans identified as impaired in the amount
of $636,000. At June 30, 1997, no specific allowance for possible credit
losses was required 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, 1997, the APCL of
$981,015, 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,
1997 1996
Balances:
Average loans during period (includes
mortgage loans held for sale) $ 78,816 $ 72,393
Loans at end of period (includes
mortgage loans held for sale) 81,904 81,713
Allowance for Possible Credit Losses:
Balance at beginning of period 944 752
Actual credit losses:
Commercial loans 46 47
Loans to consumers and individuals 3
Total 49 47
Actual credit recoveries:
Commercial loans 46 16
Loans to consumers and individuals 3
Total 46 19
Net credit losses 3 28
Provision charged to operating expenses 40 220
Balance at end of period $ 981 $ 944
Ratios:
Net credit losses to average loans 0.00% 0.04%
Allowance for possible credit losses
to loans at end of period 1.20% 1.16%
Net credit losses to beginning of
period allowance for credit losses 0.32% 3.72%
The Company provided $20,000 to the allowance for possible credit losses
during the second quarter of 1997. No loan loss provision was recorded
during the second quarter of 1996. For the six months ended June 30, 1997,
the Company provided $40,000 to the allowance for possible credit losses as
compared to $140,000 during the same period of 1996. The $140,000 provision
during the first quarter of 1996 was 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):
June 30, December 31,
1997 1996
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 558 41.42% $ 583 42.85%
Real estate loans 226 52.13% 202 50.27%
Consumer loans 46 6.45% 48 6.88%
Not allocated 151 N/A 111 N/A
Total $ 981 100.00% $ 944 100.00%
The allowance is available to absorb losses from all loans, although
allocations have been made for certain loans and loan categories. The
allocation of the allowance as shown above should not be interpreted as an
indication that charge-offs in future periods will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends. In
addition to the most recent analysis of individual loans and pools of loans,
management's methodology also places emphasis on historical loss data,
delinquency and nonaccrual trends by loan classification category and expected
loan maturity. This analysis, management believes, identifies potential
losses within the loan portfolio and therefore results in allocation of a
large portion of the allowance to specific loan categories.
Investments. The Company continues to invest in callable U.S. government
agency securities. These securities offer above market yields, but may be
called if interest rates fall below certain levels. If these securites are
called, the Company may not be able to reinvest the proceeds to obtain the
same yield.
The following table sets forth the amortized cost and approximate market
value of investment securities as of the dates indicated:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
June 30, 1997: Cost Gains Losses Value Value
Held to maturity
securities:
U.S. Government
agencies $27,740,714 $(242,220) $27,498,494 $27,740,714
Total held to
maturity 27,740,714 (242,220) 27,498,494 27,740,714
Available for sale
securities:
U.S. Treasury 2,980,602 $10,024 2,990,626 2,990,626
U.S. Government
agencies 5,000,000 2,500 (6,562) 4,995,938 4,995,938
Mortgage-backed
securities 3,729,134 (119,648) 3,609,486 3,609,486
Municipal bonds 140,000 249 (76) 140,173 140,173
Total available
for sale 11,849,736 12,773 (126,286) 11,736,223 11,736,223
Total investment
securities $39,590,450 $12,773 $(368,506) $39,234,717 $39,476,937
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
December 31, 1996 Cost Gains Losses Value Value
Held to maturity
securities:
U.S. Government
agencies $25,739,588 $ 9,178 $(214,916) $25,533,850 $25,739,588
Total held to
maturity 25,739,588 9,178 (214,916) 25,533,850 25,739,588
Available for sale
securities:
U.S. Treasury 4,976,871 21,550 (621) 4,997,800 4,997,800
Mortgage-backed
securities 4,275,304 (99,054) 4,176,250 4,176,250
Municipal bonds 165,000 500 165,500 165,500
Total available
for sale 9,417,175 22,050 (99,675) 9,339,550 9,339,550
Total investment
securities $35,156,763 $31,228 $(314,591) $34,873,400 $35,079,138
Deposits/Other Borrowings. Total consolidated deposits increased by $9.5
million, or 7.9%, during the six months ended June 30, 1997. This increase
was primarily the result of growth in existing operations.
During 1996, Management made a decision to slow the Company's rate of growth
in order to concentrate on improving profit margins. This policy included
repositioning the Company's deposit rates in the marketplace so as to limit
non-relationship deposit growth. This policy continued during the six months
ended June 30, 1997 resulting in lower interest rates paid on deposits as
compared to the year ended December 31, 1996. Average noninterest-bearing
demand deposits increased 11.1% during the six months ended June 30, 1997
contributing to the decrease in the cost of funds to 3.37% from 3.48% during
1996. 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, 1997 December 31, 1996
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 25,109 $ 22,607
Interest-bearing demand deposits
(includes money market
deposit accounts) 76,926 4.08% 70,533 4.11%
Savings deposits 1,868 1.93% 2,363 1.95%
Time deposits, $100,000 and over 9,386 5.31% 9,023 5.50%
Other time deposits 8,307 5.05% 10,009 5.40%
Total interest-bearing 96,487 4.24% 91,928 4.34%
Total deposits $ 121,596 3.37% $ 114,535 3.48%
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 1997 1996
Three months or less $ 3,323 $ 3,835
After three months to six months 2,177 1,934
After six months to one year 3,193 2,159
After twelve months 840 1,555
Total $ 9,533 $ 9,483
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest income for the quarter
ended June 30, 1997 was $1,783,693, an increase of 15.3% over the net interest
income of $1,547,369 during the same period of 1996. Net interest income for
the six months ended June 30, 1997 was $3,424,030, an increase of 17.9% over
the net interest income of $2,904,152 during the same period of 1996. 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,
1997 1996
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 7,225 $ 98 5.43% $ 2,728 $ 35 5.13%
Interest-bearing
deposits with banks 384 6 6.25% 669 10 5.98%
Investment securities 39,385 636 6.46% 42,677 660 6.19%
Mortgage loans held
for sale 1,958 38 7.76%
Loans 78,806 2,107 10.69% 65,724 1,791 10.90%
Total earning assets 125,800 2,847 9.05% 113,756 2,534 8.91%
Total non-earning assets 10,885 11,563
Total assets $ 136,685 $ 125,319
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 25,519 $ 22,284
Interest-bearing
transaction accounts 79,234 $ 817 4.12% 70,655 $ 715 4.05%
Time deposits,
$100,000 or more 9,512 126 5.30% 8,732 119 5.45%
Savings and other time 9,944 113 4.55% 12,394 144 4.65%
Total interest-bearing
deposits 98,690 1,056 4.28% 91,781 978 4.26%
Other borrowings 589 7 4.75% 756 9 4.76%
Total interest-bearing
liabilities 99,279 1,063 4.28% 92,537 987 4.27%
Other liabilities 1,218 1,125
Shareholders' equity 10,669 9,373
Total liabilities
and shareholders' equity $ 136,685 $ 125,319
Net interest income $ 1,784 $ 1,547
Net interest margin 5.67% 5.44%
For the six months ended June 30,
1997 1996
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 6,424 $ 170 5.29% $ 6,064 $ 158 5.21%
Interest-bearing
deposits with banks 384 12 6.25% 888 28 6.31%
Investment securities 37,472 1,196 6.39% 39,796 1,220 6.14%
Mortgage loans held
for sale 132 5 7.58% 2,012 82 8.15%
Loans 78,816 4,100 10.40% 62,897 3,412 10.85%
Total earning assets 123,228 5,483 8.90% 111,657 4,900 8.78%
Total non-earning assets 10,708 12,178
Total assets $ 133,936 $ 123,835
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 25,109 $ 20,970
Interest-bearing
transaction accounts 76,926 $ 1,567 4.07% 68,595 $ 1,405 4.10%
Time deposits,
$100,000 or more 9,386 249 5.31% 8,813 246 5.58%
Savings and other time 10,175 228 4.48% 13,574 330 4.86%
Total interest-bearing
deposits 96,487 2,044 4.24% 90,982 1,981 4.35%
Other borrowings 654 15 4.59% 634 15 4.73%
Total interest-bearing
liabilities 97,141 2,059 4.24% 91,616 1,996 4.36%
Other liabilities 1,160 2,366
Shareholders' equity 10,526 8,883
Total liabilities
and shareholders' equity $133,936 $123,835
Net interest income $ 3,424 $ 2,904
Net interest margin 5.56% 5.20%
The net interest margin increased to 5.67% during the second quarter of 1997
from 5.44% in the same quarter of 1996. For the six months ended June 30,
1997, the net interest margin increased to 5.56% from 5.20% for the same
period of 1996. The increase in both periods was primarily attributable to an
increase in commercial loan activity and an increase 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 Six Months Ended
June 30, 1997 June 30, 1997
Compared to Compared to
Quarter Ended Six Months Ended
June 30, 1996 June 30, 1996
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold $58 $2 $3 $63 $9 $2 $1 $12
Interest-bearing deposits
with banks (4) 0 0 (4) (16) 0 0 (16)
Investment securities (53) 31 (2) (24) (71) 50 (3) (24)
Mortgage loans held
for sale (38) 0 0 (38) (77) (5) 5 (77)
Loans 358 (35) (7) 316 864 (140) (36) 688
Total Interest Income 321 (2) (6) 313 709 (93) (33) 583
Interest Expense:
Interest-bearing
transaction accounts 88 12 2 102 172 (9) (1) 162
Time deposits,
$100,000 or more 10 (3) 0 7 16 (12) (1) 3
Savings and other time (28) (4) 1 (31) (82) (26) 6 (102)
Other borrowings (2) 0 0 (2) 0 0 0 0
Total Interest Expense 68 5 3 76 106 (47) 4 63
Net Interest Income $253 ($7) ($9) $237 $603 ($46) ($37) $520
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 Six Months Ended
June 30, June 30,
Components of Noninterest Income 1997 1996 1997 1996
Gain on sale of loans $ 37 $ 151 $ 90 $ 259
Service fees on deposit accounts 122 99 236 189
Loan servicing fees 9 4 15 11
Recovery of litigation expenses 25 1,825
Other 36 24 69 75
Total $ 204 $ 303 $ 410 $ 2,359
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.11% 0.48% 0.13% 0.42%
Service fees on deposit accounts 0.36% 0.32% 0.35% 0.31%
Service fees on deposit accounts 0.03% 0.01% 0.02% 0.02%
Recovery of litigation expenses 0.08% 2.95%
Other 0.11% 0.08% 0.10% 0.12%
Total 0.60% 0.97% 0.61% 3.81%
During the first quarter of 1996, the Company recovered approximately $1.8
million in litigation expenses in conjunction with the settlement and release
of its litigation involving Chino Valley Bank.
Noninterest Expenses. The following table summarizes noninterest expenses
and the associated ratios to average assets for the periods indicated.
Quarter Ended Six Months Ended
June 30, June 30,
Components of Noninterest Expense 1997 1996 1997 1996
Salaries and employee benefits $ 756 $ 764 $ 1,546 $ 1,729
Occupancy expense 191 174 382 349
Furniture and equipment expense 85 102 174 196
Professional services 41 10 102 62
Supplies 49 67 102 120
Promotional expenses 53 53 104 90
Data processing fees 76 67 147 132
Regulatory assessments 15 11 30 22
Other 99 83 188 166
Total $ 1,365 $ 1,331 $ 2,775 $ 2,866
Average full-time equivalent employees 47 51 48 50
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.21% 2.44% 2.31% 2.79%
Occupancy expense 0.56% 0.56% 0.57% 0.56%
Furniture and equipment expense 0.25% 0.33% 0.26% 0.32%
Professional services 0.12% 0.03% 0.15% 0.10%
Supplies 0.14% 0.21% 0.15% 0.19%
Promotional expenses 0.16% 0.17% 0.16% 0.15%
Data processing fees 0.22% 0.21% 0.22% 0.21%
Regulatory assessments 0.04% 0.04% 0.04% 0.04%
Other 0.29% 0.26% 0.28% 0.27%
Total 3.99% 4.25% 4.14% 4.63%
Noninterest expense increased to $1.37 million during the second quarter of
1997 from $1.33 million during the same period of the prior year. For the six
months ended June 30, 1997, noninterest expense decreased to $2.78 million
from $2.87 million during the same period of the prior year.
Income Taxes. The Company's effective tax rate for the quarter ended
June 30, 1997 was 40.9% as compared to 40.8% in the same period of the prior
year. For the six months ended June 30, 1997, the effective tax rate was
40.9% as compared to 41.4% in the same period of the prior year.
Liquidity and Asset/Liability Management. Liquidity is the Company's ability
to absorb fluctuations in deposits while simultaneously providing for the
credit needs of its borrowers. The objective in liquidity management is to
balance the sources and uses of funds. Primary sources of liquidity for the
Company include payments of principal and interest on loans and investments,
proceeds from the sale or maturity of loans and investments, growth in
deposits, and other borrowings. The Company holds overnight federal funds as
a cushion for temporary liquidity needs. During the six months ended June 30,
1977, federal funds sold averaged $6.4 million, or 4.8% 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, 1997, the Company had cash, time deposits with banks, federal
funds sold, and unpledged investment securities of approximately $51.7
million, or 36.4% of total assets. This represented all available liquid
assets, excluding other assets.
Several methods are used to measure liquidity. One method is to measure the
balance between loans and deposits (gross loans divided by total deposits).
In general, the closer this ratio is to 100%, the more reliant an institution
becomes on its illiquid loan portfolio to absorb temporary fluctuations in
deposit levels. At June 30, 1997, the loan-to-deposit ratio was 63.3% as
compared to 68.1% at December 31, 1996.
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,
1997, this ratio was 10.1% as compared to 5.1% at December 31, 1996.
As of June 30, 1997, 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, 1997, 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, 1997 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 $ 9,000 $ 9,000
Interest-bearing deposits
with other banks 98 $ 196 $ 90 384
Investment securities 1,232 1,246 1,252 $ 23,363 $ 12,497 39,590
Mortgage loans held for sale 0
Loans, gross of allowance
for possible losses 34,427 945 5,217 25,747 15,568 81,904
Total 44,757 2,387 6,559 49,110 28,065 130,878
Interest-Bearing Liabilities
(Rate Sensitive):
Interest-bearing
transaction deposits 35,168 45,602 80,770
Time deposits,
$100,000 or more 3,323 2,177 3,193 840 9,533
Savings and other
time deposits 2,348 1,339 3,813 2,509 10,009
Other borrowings 729 729
Total 6,400 3,516 42,174 48,951 $ 101,041
Period GAP $ 38,357 $(1,129)$(35,615) $ 159 $ 28,065
Cumulative GAP $ 38,357 $37,228 $ 1,613 $ 1,772 $ 29,837
Interest Sensitivity
GAP Ratio 85.70% (47.30%)(542.99%) 0.32% 100.00%
Cumulative Interest
Sensitivity 85.70% 78.97% 3.00% 1.72% 22.80%
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, 1997 December 31, 1997
7.86% 7.44%
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,
1997, the Company's qualifying capital was 12.19%, 11.17% 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, 1997,
the Company's leverage ratio was 7.79%.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
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 21, 1997.
A quorum was established with the presence of 789,281 shares of 957,542 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 785,041 4,200
Robert E. Eklund 785,041 4,200
Timothy J. Jorstad 785,041 4,200
Catherine H. Munson 785,041 4,200
Gary T. Ragghianti 785,041 4,200
Michael J. Smith 785,041 4,200
Edward P. Tarrant 785,041 4,200
Randall J. Verrue 785,041 4,200
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 1997. There were 777,356 votes cast for the proposal, 7,071
votes cast against the proposal, and 4,854 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.
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: August 13, 1997 /s/ Patrick E. Phelan
Patrick E. Phelan
Chief Financial Officer
(Principal Accounting Officer)
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