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, 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: November 10, 1997
Class
Common stock, no par value 1,027,540
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
ASSETS (Unaudited)
Cash and due from banks $ 8,317,916 $ 9,609,584
Federal funds sold 5,800,000 770,000
Total cash and cash equivalents 14,117,916 10,379,584
Interest-bearing deposits with banks 286,000 384,000
Investment securities available for sale at fair value 11,415,029 9,339,550
Investment securities held to maturity; fair values
of $26,682,890 in 1997 and $25,533,850 in 1996 26,741,271 25,739,588
Mortgage loans sold pending settlement 647,600
Loans held for investment (net of allowance for possible
credit losses of $1,001,015 in 1997 and $944,105
in 1996 85,931,076 80,121,693
Premises and equipment - net 2,431,882 2,278,163
Accrued interest receivable 939,881 1,003,016
Deferred income taxes 661,051 621,191
Other assets 1,035,843 989,921
Total assets $ 143,559,949 $ 31,504,306
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 29,849,952 $ 26,265,743
Interest-bearing:
Transaction accounts 79,884,106 73,532,399
Time certificates, $100,000 and over 10,869,935 9,483,134
Savings and other time deposits 9,703,156 10,577,186
Total interest-bearing deposits 100,457,197 93,592,719
Total deposits 130,307,149 119,858,462
Other borrowings 736,096 446,776
Accrued interest payable and other liabilities 1,034,196 1,013,939
Total liabilities 132,077,441 121,319,177
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 1,030,460 shares in 1997 and 954,422 shares in 1996,
outstanding 1,018,880 shares in 1997 and
942,842 in 1996 10,238,029 9,398,574
Unrealized loss on investment securities available
For sale-net (18,182) (45,378)
Retained earnings 1,262,661 831,933
Total shareholders' equity 11,482,508 10,185,129
Total liabilities and shareholders' equity $ 143,559,949$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 Nine Months
September 30, Ended September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $ 2,234,858 $ 2,095,254 $ 6,339,870 $ 5,589,186
Federal funds sold 79,567 32,487 249,619 190,665
Investment securities 687,358 609,622 1,895,154 1,857,321
Total 3,001,783 2,737,363 8,484,643 7,637,172
INTEREST EXPENSE:
Interest-bearing transaction, savings
and other time deposits 947,743 879,456 2,742,023 2,614,568
Time certificates, $100,000
and over 142,704 122,819 392,129 368,705
Other interest 5,858 9,088 20,983 23,747
Total 1,096,305 1,011,363 3,155,135 3,007,020
NET INTEREST INCOME 1,905,478 1,726,000 5,329,508 4,630,152
PROVISION FOR POSSIBLE
CREDIT LOSSES 20,000 35,000 60,000 175,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 1,885,478 1,691,000 5,269,508 4,455,152
OTHER INCOME:
Gain on sale of loans 26,046 88,994 116,174 347,607
Service fees on deposit
accounts 124,566 96,645 360,446 286,058
Loan servicing fees 7,808 6,083 23,249 17,453
Recovery of litigation expenses 1,824,689
Other 56,215 29,857 125,013 104,980
Total 214,635 221,579 624,882 2,580,787
OTHER EXPENSES:
Salaries and employee benefits 708,979 720,889 2,254,733 2,449,634
Occupancy expense 200,764 180,828 583,212 529,594
Furniture and equipment expense 74,405 96,386 247,939 292,692
Professional services 165,485 75,946 267,604 137,808
Supplies 49,009 52,971 151,324 172,734
Promotional expenses 47,423 67,105 151,528 157,515
Data processing fees 105,961 69,004 253,266 200,935
Regulatory assessments 15,544 11,516 45,021 34,143
Other 86,938 86,392 275,041 252,108
Total 1,454,508 1,361,037 4,229,668 4,227,163
INCOME BEFORE INCOME TAXES 645,605 551,542 1,664,722 2,808,776
INCOME TAX EXPENSE 267,357 224,888 684,031 1,159,526
NET INCOME $ 378,248 $ 326,654 $ 980,691 $ 1,649,256
NET INCOME PER COMMON SHARE:
Primary $ 0.36 $ 0.33 $ 0.94 $ 1.66
Fully diluted $ 0.35 $ 0.33 $ 0.93 $ 1.66
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,
1997 1996
OPERATING ACTIVITIES: (Unaudited)
Net income $ 980,691 $ 1,649,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Originations of loans for sale (26,407,000)
Settlement of mortgage loans sold 647,600 29,060,220
Provision for possible credit losses 60,000 175,000
Depreciation and amortization 241,852 400,063
Recovery of litigation expenses (1,800,000)
Change in deferred income taxes (59,186) 1,435,503
Decrease in accrued interest receivable 63,135 116,503
(Increase) decrease in other assets (56,430) 1,915,664
Increase (decrease) in accrued interest payable and
other liabilities 76,215 (1,992,765)
Net cash provided by operating activities 1,953,877 4,552,438
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 3,000,000
Calls 2,000,000 6,000,000
Purchases (3,000,000) (16,238,750)
Available for sale securities:
Maturities 3,997,064 10,998,591
Calls 2,000,000
Purchases (8,016,758) (1,000,481)
Decrease in interest-bearing deposits with banks 98,000 885,000
Net increase in loans held for investment (5,869,383) (19,556,295)
Purchases of premises and equipment (409,109) (89,797)
Net cash used by investing activities (9,200,186) (16,001,732)
FINANCING ACTIVITIES:
Net increase in noninterest-bearing
demand deposits 3,584,209 2,624,322
Net increase in interest-bearing transaction,
savings and other time deposits 6,864,478 5,269,058
Net increase in other borrowings 289,320 537,122
Cash dividends paid (2,122)
Proceeds from the exercise of stock options 248,756
Net cash provided by financing activities 10,984,641 8,430,502
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,738,332 (3,018,792)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,379,584 12,566,117
End of period $ 14,117,916 $ 9,547,325
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 3,167,006 $ 3,155,374
Income taxes $ 720,000 $ 1,600
NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock dividends paid on common stock $ 590,699
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 extinguishments 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 following table provides pro forma disclosure of basic and diluted EPS
in accordance with SFAS No. 128:
Three Nine
Months Months
Ended Ended
September 30, September 30,
1997 1996 1997 1996
Pro forma basic EPS. . . . . . . . . . . . $0.38 $0.33 $0.98 $1.67
Pro forma diluted EPS. . . . . . . . . . . $0.36 $0.33 $0.94 $1.66
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 $378,248,
or $0.36 per share, for the third quarter of 1997. This compares to net
income of $326,654, or $0.33 per share, for the same period in 1996.
Improvement in net interest income, due to the growth in average loans,
continued to positively impact the net interest margin.
For the nine months ended September 30, 1997, the Company reported
net income of $980,691 or $0.94 per share. This compares to net income of
$1,649,250, or $1.66 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 nine months ended September 30, 1996 would have been approximately
$777,000 or $0.78 per share.
Return on average assets and return on average equity for the third
quarter of 1997 were 1.06% and 13.46%, respectively, as compared to 1.02% and
13.45%, respectively, for the same period of 1996. Return on average assets
and return on average equity for the nine months ended September 30, 1997 were
0.95% and 12.12%, respectively, as compared to 1.76% and 23.98%, respectively,
for the same period of 1996.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $12.1 million,
or 9.2%, from the end of 1996 to reach $143.6 million at September 30, 1997.
This increase resulted from growth in existing operations.
Loans Held for Investment. Net loans held for investment increased by
$5.8 million, or 7.25%, during the first nine months of 1997. 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) 1997 1996
Commercial $ 22,737 $ 16,851
Real estate:
Commercial 53,974 49,856
Construction 4,470 7,348
Land 1,024 1,807
Home equity 2,316 2,809
Loans to consumers and individuals 2,521 2,458
Total 87,042 81,129
Deferred loan fees (110) (63)
Allowance for possible credit losses (1,001) (944)
Total net loans $ 85,931 $ 80,122
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 $69.3 million, or 79.7% of the total portfolio as of
September 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 September 30, 1997, the two largest
industry concentrations within the loan portfolio were real estate and related
services at 23.7% and the business/personal service industry at 17.9% 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
September 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 of 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 September 30, 1997, the Company had nonperforming assets in the
amount of $176,000, of which $79,000 represented one nonaccrual loan. Had
this nonaccrual loan performed under its contractual terms approximately
$9,593 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 $97,000. 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 September 30, December 31,
(dollar amounts in thousands) 1997 1996
Nonaccrual loans $ 79 $ 79
Loans 90 days or more past due and
still accruing 97
Other real estate owned
$ 176 $ 79
As a percent of total loans 0.20% 0.10%
As a percent of total assets 0.12% 0.06%
At September 30, 1997, the Company had loans identified as impaired
in the amount of $176,000. At September 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 September 30, 1997, the APCL of
$1,001,015, or 1.15% 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,
1997 1996
Balances:
Average loans during period (includes
mortgage loans held for sale) $ 80,441 $ 72,393
Loans at end of period (includes mortgage
loans held for sale) 86,932 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 60 220
Balance at end of period $ 1,001 $ 944
Ratios:
Net credit losses to average loans 0.00% 0.04%
Allowance for possible credit losses to loans
at end of period 1.15% 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 third quarter of 1997 as compared to $35,000 during the same
period of 1996. For the nine months ended September 30, 1997, the Company
provided $60,000 to the allowance for possible credit losses as compared to
$175,000 during the same period of 1996. A provision of $140,000 was recorded
during the first quarter of 1996 as a prudent measure, based upon growth in
the loan portfolio.
The following table sets forth the allocation of the APCL as of the
dates indicated (dollar amounts in thousands):
September 30, 1997 December 31, 1996
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 553 44.33% $ 583 42.85%
Real estate loans 230 49.94% 202 50.27%
Consumer loans 44 5.73% 48 6.88%
Not allocated 174 N/A 111 N/A
Total $ 1,001 100.00% $ 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
September 30, 1997: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government
agencies $26,741,271 $51,062 $(109,443) $26,682,890 $26,741,271
Total held to maturity 26,741,271 51,062 (109,443) 26,682,890 26,741,271
Available for sale securities:
U.S. Treasury 5,001,814 21,623 5,023,437 5,023,437
U.S. Government
agencies 3,000,000 2,813 3,002,813 3,002,813
Mortgage-backed
Securities 3,304,316 (56,181) 3,248,135 3,248,135
Municipal bonds 140,000 644 140,644 140,644
Total availalable
for sale 11,446,130 25,080 (56,181) 11,415,029 11,415,029
Total investment
securities $38,187,401 $76,142 $(165,624) $38,097,919 $38,156,300
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Decemmber 31, 1997: 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 165,000 500 165,500 165,000
Total availalable
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 $10.4 million, or 8.7%, during the nine months ended September 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 nine months ended September 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 15.3% during the nine months
ended September 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):
Nine Months Ended Year Ended
September 30, 1997 December 31, 1996
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 26,069 $ 22,607
Interest-bearing demand deposits
(includes money market
deposit accounts) 78,476 4.09% 70,533 4.11%
Savings deposits 1,893 1.94% 2,363 1.95%
Time deposits, $100,000 and over 9,692 5.39% 9,023 5.50%
Other time deposits 8,148 5.10% 10,009 5.40%
Total interest-bearing 98,209 4.26% 91,928 4.34%
Total deposits $124,278 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):
September 30, December 31,
Time remaining to maturity 1997 1996
Three months or less $ 2,988 $ 3,835
After three months to six months 3,088 1,934
After six months to one year 4,069 2,159
After twelve months 725 1,555
Total $ 10,870 $ 9,483
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest income
for the quarter ended September 30, 1997 was $1,905,478, an increase of 10.4%
over the net interest income of $1,726,000 during the same period of 1996.
Net interest income for the nine months ended September 30, 1997 was
$5,329,508, an increase of 15.1% over the net interest income of $4,630,152
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 September 30,
1997 1996
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 5,801 $ 80 5.52% $ 2,531 $ 32 5.06%
Interest-bearing deposits
with banks 338 5 5.92% 467 7 6.00%
Investment securities 42,168 682 6.47% 38,247 603 6.32%
Mortgage loans held for sale 964 21 8.71%
Loans 83,380 2,235 10.72% 74,472 2,074 11.14%
Total earning assets 131,687 3,002 9.12% 116,681 2,737 9.39%
Total non-earning assets 11,051 11,238
Total assets $142,738 $127,919
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 27,957 $ 23,734
Interest-bearing transaction
Accounts 81,569 836 4.10% 71,962 746 4.15%
Time deposits, $100,000 or more 10,292 143 5.56% 9,105 123 5.40%
Savings and other time 9,780 111 4.54% 11,580 133 4.59%
Total interest-bearing deposits 101,641 1,090 4.29% 92,647 1,002 4.33%
Other borrowings 484 6 4.96% 799 9 4.51%
Total interest-bearing
Liabilities 102,125 1,096 4.29% 93,446 1,011 4.33%
Other liabilities 1,414 1,026
Shareholders' equity 11,242 9,713
Total liabilities
and shareholders' equity $142,738 $127,919
Net interest income $1,906 $1,726
Net interest margin 5.79% 5.92%
For the nine months ended September 30,
1997 1996
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 6,214 $ 250 5.36% $ 4,878 $ 191 5.22%
Interest-bearing deposits
with banks 369 17 6.14% 747 35 6.25%
Investment securities 39,059 1,878 6.42% 39,287 1,822 6.19%
Mortgage loans held for sale 87 5 7.66% 1,660 103 8.27%
Loans 80,354 6,335 10.51% 66,783 5,486 10.95%
Total earning assets 126,083 8,485 8.98% 113,355 7,637 8.99%
Total non-earning assets 10,840 11,856
Total assets $136,923 $125,211
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 26,069 $ 21,897
Interest-bearing transaction
Accounts 78,476 2,403 4.08% 69,724 2,152 4.12%
Time deposits, $100,000 or more 9,692 392 5.39% 8,911 369 5.52%
Savings and other time 10,041 339 4.50% 12,905 462 4.77%
Total interest-bearing deposits 98,209 3,134 4.25% 91,540 2,983 4.34%
Other borrowings 597 21 4.69% 690 24 4.64%
Total interest-bearing
Liabilities 98,806 3,155 4.26% 92,230 3,007 4.35%
Other liabilities 1,260 1,915
Shareholders' equity 10,788 9,169
Total liabilities
and shareholders' equity $136,923 $125,211
Net interest income $5,330 $4,630
Net interest margin 5.64% 5.45%
The net interest margin decreased to 5.79% during the third quarter of 1997
from 5.92% in the same quarter of 1996 as loan yields fell to 10.72% compared
to 11.14%. For the nine months ended September 30, 1997, the net interest
margin increased to 5.64% from 5.45% for the same period of 1996 as interest
rates paid on deposits declined to 4.26% from 4.35%.
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 Nine Months Ended
September 30, 1997 September 30, 1997
Compared to Compared to
Quarter Ended Nine Months Ended
September 30, 1996 September 30, 1996
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold $41 $3 $4 $48 $53 $5 $1 $59
Interest-bearing deposits
with banks (2) 0 0 (2) (17) (1) 0 (18)
Investment securities 64 14 1 79 (11) 67 0 56
Mortgage loans held
for sale (21) 0 0 (21) (97) (8) 7 (98)
Loans 248 (78) (9) 161 1,114 (220) (45) 849
Total Interest Income 330 (61) (4) 265 1,042 (157) (37) 848
Interest Expense:
Interest-bearing
Transaction accounts 100 (9) (1) 90 275 (21) (3) 251
Time deposits, $100,000
or more 16 4 0 20 33 (9) (1) 23
Savings and other time (21) (1) 0 (22) (103) (26) 6 (123)
Other borrowings (4) 1 0 (3) (3) 0 0 (3)
Total Interest Expense 91 (5) (1) 85 202 (56) 2 148
Net Interest Income $239 ($56) ($3) $180 $840 ($101) ($39) $700
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 1997 1996 1997 1996
Gain on sale of loans $ 26 $ 89 $ 116 $ 348
Service fees on deposit accounts 125 97 361 286
Loan servicing fees 8 6 23 17
Recovery of litigation expenses 1,825
Other 56 30 125 105
Total $ 215 $ 222 $ 625 $2,581
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.07% 0.28% 0.11% 0.37%
Service fees on deposit accounts 0.35% 0.30% 0.35% 0.30%
Loan servicing fees 0.02% 0.02% 0.02% 0.02%
Recovery of litigation expenses 1.94%
Other 0.16% 0.09% 0.12% 0.11%
Total 0.60% 0.69% 0.60% 2.74%
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 Nine Months Ended
September 30, September 30,
Components of Noninterest Expense 1997 1996 1997 1996
Salaries and employee benefits $ 709 $ 721 $2,255 $2,450
Occupancy expense 201 181 583 530
Furniture and equipment expense 74 96 248 292
Professional services 166 76 268 138
Supplies 49 53 151 173
Promotional expenses 47 67 152 157
Data processing fees 106 69 253 201
Regulatory assessments 16 12 45 34
Other 87 86 275 252
Total $1,455 $1,361 $4,230 $4,227
Average full-time equivalent employees 46 50 48 50
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 1.99% 2.25% 2.20% 2.61%
Occupancy expense 0.56% 0.57% 0.57% 0.56%
Furniture and equipment expense 0.21% 0.30% 0.24% 0.31%
Professional services 0.47% 0.24% 0.26% 0.15%
Supplies 0.14% 0.17% 0.15% 0.18%
Promotional expenses 0.13% 0.21% 0.15% 0.17%
Data processing fees 0.30% 0.22% 0.25% 0.21%
Regulatory assessments 0.04% 0.04% 0.04% 0.04%
Other 0.24% 0.27% 0.27% 0.27%
Total 4.08% 4.26% 4.13% 4.50%
Noninterest expense increased to $1.5 million during the third quarter of 1997
from $1.4 million during the same period of the prior year. For the nine
months ended September 30, 1997, noninterest expense remained consistent with
the same period of the prior year. Professional services increased due to
costs associated with a dispute regarding a former employee's employment
agreement. Data processing fees included charges incurred in connection with
making the Company's computer systems year 2000 compliant. The Company
expects to continue incurring charges related to this project through the
year 2000.
Income Taxes. The Company's effective tax rate for the quarter
ended September 30, 1997 was 41.4% as compared to 40.8% in the same period of
the prior year. For the nine months ended September 30, 1997, the effective
tax rate was 41.1% as compared to 41.3% 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 nine months ended September 30, 1997, federal funds sold
averaged $6.2 million, or 4.5% 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, 1997, the Company had cash, time deposits with
banks, federal funds sold, and unpledged investment securities of
approximately $47.4 million, or 33.0% of total assets. This represented all
available liquid assets, excluding other assets.
Several methods are used to measure liquidity. One method is to
measure the balance between loans and deposits (gross loans divided by total
deposits). In general, the closer this ratio is to 100%, the more reliant
an institution becomes on its illiquid loan portfolio to absorb temporary
fluctuations in deposit levels. At September 30, 1997, the loan-to-deposit
ratio was 66.7% 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 September 30, 1997, this ratio was 7.6% as compared to 5.1% at
December 31, 1996.
As of September 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 September 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):
September 30, 1997 After
One
Over 90 Over 180 Year After
90 days days to days to to Five Five
or less 180 days 365 days Years Years Total
Earning Assets (Rate Sensitive):
Federal funds sold $ 5,800 $ 5,800
Interest-bearing deposits
With other banks 196 90 286
Investment securities 1,113 1,126 1,658 24,793 9,497 38,187
Mortgage loans held for sale 0
Loans, gross of allowance
for possible losses 35,898 3,085 4,472 28,249 15,228 86,932
Total 43,007 4,301 6,130 53,042 24,725 131,205
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 34,778 45,106 79,884
Time deposits, $100,000
or more 2,988 3,088 4,069 725 10,870
Savings and other
time deposits 1,914 2,376 2,693 2,720 9,703
Other borrowings 736 736
Total 5,638 5,464 41,540 48,551 $101,193
Period GAP $37,369 $(1,163) $(35,410) $ 4,491 $24,725
Cumulative GAP $37,369 $36,206 $ 796 $ 5,287 $30,012
Interest Sensitivity
GAP Ratio 86.89% (27.04%) (577.65%) 8.47% 100.00%
Cumulative Interest
Sensitivity 86.89% 76.53% 1.49% 4.97% 22.87%
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, 1997 December 31, 1996
7.88% 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
September 30, 1997, the Company's qualifying capital was 12.28%, 11.28% 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, 1997, the Company's leverage ratio was 7.83%.
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
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, 1997 /s/ Patrick E. Phelan
Patrick E. Phelan
Chief Financial Officer
(Principal Accounting Officer)
23
30
6
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