FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number: 033-76832
MCB FINANCIAL CORPORATION
(Name of small business issuer in its charter)
California 68-0300300
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1248 Fifth Avenue,
San Rafael, California 94901
(415) 459-2265
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None
(Title of class)
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
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 .
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ].
The issuer's revenues for its most recent fiscal year were
$13,153,453.
At March 24, 1997, the aggregate market value of the voting stock held
by non-affiliates of the issuer was approximately $9,083,202. For purposes
of this information, the outstanding shares of Common Stock owned by
directors and executive officers of the issuer were deemed to be shares of
Common Stock held by affiliates.
At March 24, 1997, the issuer had outstanding 947,042 shares of Common
Stock, no par value, which is the issuer's only class of common stock.
Documents Incorporated by Reference:
Part II of this Form 10-KSB incorporates information by reference from
certain portions of the issuer's 1996 Annual Report to Shareholders. The
information required to be furnished pursuant to Part III of this Form 10-
KSB will be set forth in, and incorporated by reference from, the
registrant's definitive proxy statement for the annual meeting of
stockholders to be held May 21, 1997, which definitive proxy statement will
be filed by the issuer with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year ended December 31,
1996.
PART I
Item 1. Description of Business.
MCB Financial
MCB Financial is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended ("BHC Act"). MCB Financial was
incorporated under the laws of the State of California on January 20, 1993.
On October 1, 1993, MCB Financial began operations as a bank holding
company with Metro Commerce Bank (Metro Commerce) as its wholly-owned
subsidiary. MCB Financial's only significant asset is its investment in
Metro Commerce. The principal business and activity of MCB Financial is to
serve as the bank holding company for Metro Commerce and its principal
source of income is dividends paid by Metro Commerce.
Metro Commerce
Metro Commerce was licensed by the Office of the Comptroller of the
Currency ("Comptroller") on June 12, 1989, and commenced operations as a
national banking association on December 8, 1989. As a national banking
association, Metro Commerce is subject to primary supervision, examination
and regulation by the Comptroller. Metro Commerce is also subject to
certain other federal laws and regulations. In addition, Metro Commerce is
subject to applicable provisions of California law insofar as such
provisions do not conflict with or are not preempted by federal banking
laws. The deposits of Metro Commerce are insured under the Federal Deposit
Insurance Act up to the applicable limits thereof and, like all national
banks, Metro Commerce is a member of the Federal Reserve System. Metro
Commerce is a wholly-owned subsidiary of MCB Financial and presently has no
subsidiaries or other affiliates.
Metro Commerce is engaged in substantially all of the business
operations customarily conducted by independent commercial national banks
in California. Metro Commerce's banking services include the acceptance of
checking and savings deposits, and the making of commercial, construction,
mortgage, real estate, small business administration, home equity and other
installment loans and term extensions of credit. Metro Commerce also
offers travelers' checks, notary public and other customary bank services
to its customers. Metro Commerce is not a credit card issuing bank;
however, it offers Visa cards through one of its correspondent banks.
From 1992 through 1996, Metro Commerce was an active wholesale mortgage
lender. Due to continued changes in the mortgage industry and the
unfavorable prospects for future improvement, Metro Commerce decided to
wind down its wholesale mortgage banking operations at the end of 1996.
Metro Commerce will continue to offer limited retail mortgage lending
through its commercial bank. Prior to winding down its wholesale
operations, Metro Commerce originated and sold its mortgage loans in the
secondary market to both government and private mortgage purchasers. Until
the end of 1994, Metro Commerce retained servicing rights to certain
mortgage loans. Mortgage loan servicing primarily encompasses the
collection of payments due, impound accounting, investor remitting and
foreclosure processing. Metro Commerce sold all of its mortgage servicing
rights in 1994 and discontinued its mortgage servicing operations.
In January 1995, Metro Commerce began a Small Business Administration
("SBA") Loan Division. SBA is an agency of the U.S. Government that offers
guaranteed loan programs for small businesses which might not otherwise
qualify for standard bank credit. SBA offers various business loan
programs secured by both residential and commercial real estate and
business property. Metro Commerce primarily sells the guaranteed portion
of SBA loans in the secondary market to private investors. Loan fundings
through this division began during the first quarter of 1995.
Metro Commerce does not operate a trust department; however, it has
arranged with a correspondent institution to offer trust services to Metro
Commerce's customers upon request. Metro Commerce also does not offer
international banking services although such services are offered
indirectly through correspondent institutions.
Currently, Metro Commerce conducts its business operations through its
head office located in San Rafael, California, and through its three branch
office locations in South San Francisco, Hayward, and Upland, California.
An application to establish the branch in South San Francisco, California
was approved by the Comptroller on September 7, 1993, and an application to
establish the branch in Upland, California was approved by the Comptroller
on February 27, 1995. The South San Francisco office was opened on May 9,
1994, and the Upland office was opened on February 28, 1995.
Metro Commerce's primary service area is central Marin County along
with the cities of South San Francisco, Hayward and Upland. Most of Metro
Commerce's loans and deposits originate from small and medium sized
businesses and professionals located within Metro Commerce's primary
service areas.
Metro Commerce's business has little, if any, emphasis on foreign
sources and application of funds. Metro Commerce's business, based upon
performance to date, does not appear to be seasonal. Metro Commerce is not
dependent upon a single customer or group of related customers for a
material portion of its deposits, nor is a material portion of Metro
Commerce's loans concentrated within a single industry or group of related
industries. Management of Metro Commerce is unaware of any material effect
upon Metro Commerce's capital expenditures, earnings or competitive
position as a result of federal, state or local environmental regulation.
Metro Commerce holds no patents, licenses (other than licenses obtained
from bank regulatory authorities), franchises or concessions.
Competition
The banking business in California is highly competitive with respect
to both loans and deposits, and is dominated by a relatively small number
of major banks with many offices operating over a wide geographic area.
Metro Commerce competes for deposits and loans principally with other
commercial banks and also with non-bank financial intermediaries, including
savings and loan associations, credit unions, thrift and loans, mortgage
companies, money market and mutual funds, finance and insurance companies
and other financial and non-financial institutions. In addition, other
entities (both governmental and private industry) seeking to raise capital
through the issuance and sale of debt or equity securities and instruments
provide competition for Metro Commerce in the acquisition of deposits.
Among the advantages certain of these institutions have over Metro
Commerce are their ability to finance wide-ranging and effective
advertising campaigns and to allocate their investment resources to regions
of highest yield and demand. Many of the major commercial banks operating
in Metro Commerce's service area offer certain services (such as
international banking and trust services) which are not offered directly by
Metro Commerce. In addition, by virtue of their greater total
capitalization, such banks have substantially higher lending limits than
does Metro Commerce (legal lending limits to each customer are restricted
to a percentage of a bank's capital, the exact percentage depending on the
nature of the particular loan transaction involved).
From the time Metro Commerce commenced its operations, officers and
employees of Metro Commerce have continually engaged in marketing
activities, including the evaluation and development of new services,
involvement in community service groups, and direct marketing in order to
retain and improve Metro Commerce's competitive position in its service
areas.
Insurance
Metro Commerce maintains insurance at levels deemed adequate by its
Board of Directors to protect against certain business risks, operational
losses, and property damage. In accordance with rulings promulgated by the
Comptroller and pursuant to Metro Commerce's Articles of Association and
certain contractual obligations, the officers and directors are entitled to
indemnification by Metro Commerce, under certain circumstances, for certain
expenses, liabilities and losses including, but not limited to, costs of
defense, settlements and judgments rendered against them. However,
indemnification is not authorized when a supervisory action results in a
final order assessing civil money penalties or when a supervisory action
requires affirmative action in the form of payments by an individual to
Metro Commerce. Metro Commerce has directors and officers liability
insurance to cover certain costs of indemnification.
Employees
Except for its officers, currently MCB Financial has no full-time or
part-time employees. It is anticipated that MCB Financial will rely on its
officers and will utilize the employees of Metro Commerce until it becomes
actively engaged in additional business activities. MCB Financial
reimburses Metro Commerce for a fair and reasonable amount for all services
furnished to it.
As of December 31, 1996, Metro Commerce had a total of 50 full-time
equivalent employees. The management of Metro Commerce believes that its
employee relations are satisfactory.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion of statutes and
regulations is only a summary and does not purport to be complete. This
discussion is qualified in its entirety by reference to such statutes and
regulations. No assurance can be given that such statutes or regulations
will not change significantly in the future.
MCB Financial
MCB Financial, as a registered bank holding company, is subject to
regulation under the BHC Act. MCB Financial is required to file with the
Federal Reserve Board quarterly and annual reports and such additional
information regarding its business operations and those of its subsidiaries
as the Federal Reserve Board may require pursuant to the BHC Act. MCB
Financial and its subsidiaries are also subject to examination by the
Federal Reserve Board.
Under the BHC Act, MCB Financial is required to obtain the prior
approval of the Federal Reserve Board before acquiring, directly or
indirectly, ownership or control of more than 5 percent of the outstanding
shares of any class of voting securities, unless it already owns a majority
of the voting securities, or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of MCB Financial and another bank
holding company. Furthermore, the BHC Act provides that the Federal
Reserve Board will not approve any such acquisition that would result in or
further the creation of a monopoly, or the effect of which may be
substantially to lessen competition, unless the anticompetitive effects of
the proposed transaction are clearly outweighed by the probable effect in
meeting the convenience and needs of the community to be served.
Under the BHC Act, MCB Financial is, except in certain statutorily
prescribed instances, prohibited from (i) acquiring direct or indirect
ownership or control of more than 5 percent of the outstanding voting
shares of any company which is not a bank or bank holding company or (ii)
engaging, directly or indirectly, in activities other than those of
banking, managing or controlling banks or furnishing services to its
subsidiaries. However, MCB Financial may, subject to the prior approval of
the Federal Reserve Board, engage in any, or acquire shares of companies
engaged in, activities that are deemed by the Federal Reserve Board to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal
Reserve Board is required to consider whether the performance of such
activities by MCB Financial or an affiliate can reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve
Board is also empowered to differentiate between activities commenced de
novo and activities commenced by acquisition, in whole or in part, of a
going concern.
The Federal Reserve Board has by regulation determined that certain
activities are so closely related to banking as to be a proper incident
thereto within the meaning of the BHC Act. These activities include, but
are not limited to the following: making, acquiring or servicing loans or
other extensions of credit such as would be made by a mortgage company,
finance company, credit card company, or factoring company; operating an
industrial loan company, industrial bank or Morris Plan bank; performing
certain data processing operations; providing investment and financial
advice or operating as a trust company in certain instances; selling
travelers' checks, U.S. savings bonds and certain money orders; providing
certain courier services; performing real estate appraisals; providing
management consulting advice to nonaffiliated depository institutions in
some instances; acting as an insurance agent for certain types of credit-
related insurance and underwriting certain types of credit-related
insurance; leasing property or acting as agent, broker or advisor for
leasing property on a "full payout basis"; acting as a consumer financial
counselor, including providing tax planning and return preparation
services; providing futures and options advisory services, check guarantee
services and discount brokerage services; operating a collection agency or
credit bureau; or performing personal property appraisals.
During 1996, the Federal Reserve Board increased the types of
activities in which bank holding companies can engage, and made it easier
to engage in such activities, by adopting interim regulations to implement
Section 2208 of the Economic Growth and Regulatory Paperwork Reduction Act
of 1996 (the "Economic Growth Act"). The Economic Growth Act permits
certain well-capitalized bank holding companies to engage (de novo or by
acquisition) in activities previously approved by regulation without
submitting a prior application. Under the new procedure, a qualifying bank
holding company can engage in new permitted activities after providing 12
business days advance notice to the Federal Reserve Board. To qualify, the
bank holding company must be well-capitalized and must have received a
sufficiently high composite rating and management rating during its last
examination.
The interim rule defines well-capitalized for purposes of the new
procedures. In general, in order for a bank holding company to be
considered well capitalized, it must (a) have a total risk-based capital
ratio of 10% or more, (b) have a Tier 1 risk-based capital ratio of 6% or
more, (c) have either (i) a Tier 1 leverage ratio of 4% or more or (ii) a
composite rating of 1 or use a market risk adjustment to its risk-based
capital ratio, and have a tier 1 leverage ratio of 3% or more, and (d) not
be subject to any written agreement, order or capital directive issued by
the Federal Reserve Board. This change in the law provides an advantage to
a well-capitalized bank holding company, permitting it to engage in new
activities more freely and quickly. MCB Financial is considered well-
capitalized under this rule.
The Federal Reserve Board also has determined that certain other
activities are not so closely related to banking as to be a proper incident
thereto within the meaning of the BHC Act. Such activities include the
following: real estate brokerage and syndication; real estate development;
property management; underwriting of life insurance not related to credit
transactions; and, with certain exceptions, securities underwriting and
equity funding. In the future, the Federal Reserve Board may add to or
delete from the list of activities permissible for bank holding companies.
Under the BHC Act, a bank holding company and its subsidiaries are
generally prohibited from acquiring any voting shares of or interest in all
or substantially all of the assets of any bank located outside the state in
which the operations of the bank holding company's banking subsidiaries are
principally conducted, unless the acquisition is specifically authorized by
the law of the state in which the bank to be acquired is located, or unless
the transaction qualifies under federal law as an "emergency interstate
acquisition" of a closed or failing bank. (See "Other Items - Interstate
Banking and Branching," herein.)
Under the BHC Act and regulations adopted by the Federal Reserve
Board, a bank holding company and its non-banking subsidiaries are
prohibited from requiring certain tie-in arrangements in connection with
any extension of credit, sale or lease of property or furnishing of
services. For example, with certain exceptions, a bank may not condition
an extension of credit on a promise by its customer to obtain other
services provided by it, its holding company or other subsidiaries, or on a
promise by its customer not to obtain other services from a competitor. In
1995, the Federal Reserve Board loosened the anti-tying restrictions
somewhat, permitting banks to vary the consideration for a traditional bank
product on condition that the customer obtain another traditional product
from an affiliate of the bank.
Federal law also imposes certain restrictions on transactions between MCB
Financial and its subsidiaries, including Metro Commerce. As an affiliate
of Metro Commerce, MCB Financial is subject, with certain exceptions, to
provisions of federal law imposing limitations on, and requiring collateral
for, extensions of credit by Metro Commerce to its affiliates. (See
"RESTRICTIONS ON TRANSFERS OF FUNDS TO MCB FINANCIAL BY METRO COMMERCE",
herein.)
The Federal Reserve Board may require that MCB Financial terminate an
activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the Federal Reserve Board believes the
activity or the control or the subsidiary or affiliate constitutes a
serious risk to the financial safety, soundness or stability of any of its
banking subsidiaries and is inconsistent with sound banking principles or
the purposes of the BHC Act or the Financial Institutions Supervisory Act
of 1966, as amended. The Federal Reserve Board also has the authority to
regulate provisions of certain bank holding company debt, including
authority to impose interest ceilings and reserve requirements on such
debt. Under certain circumstances, MCB Financial must file written notice
and obtain approval from the Federal Reserve Board prior to purchasing or
redeeming its equity securities.
Furthermore, MCB Financial is required by the Federal Reserve Board to
maintain certain levels of capital. The Federal Reserve Board's risk-based
capital guidelines establish a minimum level of qualifying total capital to
risk-weighted assets of 8.00% (of which at least 4.00% should be in the
form of Tier I capital). Tier I capital generally consists of common
shareholder's equity less goodwill. The regulations set forth minimum
requirements, and the Federal Reserve Board has reserved the right to
require that companies maintain higher capital ratios. As of December 31,
1996, MCB Financial had a ratio of total qualifying capital to risk-
weighted assets of 11.7% of which 10.7% was in the form of Tier I capital.
Additionally, the Federal Reserve Board has established a minimum leverage
ratio of 4.00%, except that the most highly rated bank holding companies
may operate at a minimum leverage ratio of 3.00%. The leverage ratio
consists of Tier I capital divided by quarterly average assets, excluding
goodwill. As of December 31, 1996, MCB Financial's leverage ratio was
7.6%. For a more complete description of the Federal Reserve Board's risk-
based and leverage capital guidelines, see "Effect of Governmental Policies
and Recent Legislation - Capital Adequacy Guidelines."
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in
serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks.
A bank holding company's failure to meet its obligations to serve as a
source of strength to its subsidiary banks will generally be considered by
the Federal Reserve Board to be an unsafe and unsound banking practice or a
violation of the Federal Reserve Board's regulations or both. This
doctrine has become known as the "source of strength" doctrine. Although
the United States Court of Appeals for the Fifth Circuit found the Federal
Reserve Board's source of strength doctrine invalid in 1990, stating that
the Federal Reserve Board had no authority to assert the doctrine under the
BHC Act, the decision, which is not binding on federal courts outside the
Fifth Circuit, was reversed by the United States Supreme Court on
procedural grounds. The validity of the source of strength doctrine is
likely to continue to be the subject of litigation until definitively
resolved by the courts or by Congress.
MCB Financial is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, MCB Financial and
its subsidiaries are subject to examination by, and may be required to file
reports with, the California State Banking Department.
Metro Commerce
Metro Commerce, as a national banking association, is subject to
primary supervision, periodic examination and regulation by the Comptroller
of the Currency. If, as a result of an examination of Metro Commerce, the
OCC should determine that the financial condition, capital resources, asset
quality, earnings prospects, management, liquidity, or other aspects of
Metro Commerce's operations are unsatisfactory or that Metro Commerce or
its management is violating or has violated any law or regulation, various
remedies are available to the OCC. Such remedies include the power to
enjoin "unsafe or unsound" practices, to require affirmative action to
correct any conditions resulting from any violation or practice, to issue
an administrative order that can be judicially enforced, to direct an
increase in capital, to restrict the growth of Metro Commerce, to assess
civil monetary penalties, to remove officers and directors, and ultimately
to terminate Metro Commerce's deposit insurance. The Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") has provided the
Federal Deposit Insurance Corporation ("FDIC") with similar enforcement
authority in the absence of action by the OCC and upon a finding that a
bank is in an unsafe or unsound condition, is engaging in unsafe or unsound
activities, or that its conduct poses a risk to the deposit insurance fund
or may prejudice the interests of its depositors. Metro Commerce has never
been the subject of any such actions by the OCC or the FDIC.
The deposits of Metro Commerce are insured by the FDIC, which
currently insures deposits of each member bank generally to a maximum of
$100,000 per depositor. For this protection, Metro Commerce, as is the
case with all insured banks, pays a semi-annual statutory assessment and is
subject to certain of the rules and regulations of the FDIC. (See
"SUPERVISION AND REGULATION - Effect on Governmental Policies and Recent
Legislation - Federal Deposit Insurance Corporation Improvement Act of 1991
- - Deposit Insurance Assessments", herein.) Metro Commerce is also a member
of the Federal Reserve System, and as such is subject to the applicable
provisions of the Federal Reserve Act, as amended, and regulations
thereunder. Metro Commerce is also subject to applicable provisions of
California law, insofar as they do not conflict with or are not preempted
by federal banking law.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of Metro Commerce.
(See "SUPERVISION AND REGULATION - Effect of Government Policies and Recent
Legislation", herein.) State and federal statutes and regulations relate
to many aspects of Metro Commerce's operations, including but not limited
to capital to assets ratios, reserves against deposits, maximum lending
limitations, loans, investments, mergers and acquisitions, borrowings,
dividends and locations of branch offices.
Furthermore, Metro Commerce is required by the OCC to maintain certain
levels of capital. For a description of the risk-based capital
regulations, see "SUPERVISION AND REGULATION - Effect on Governmental
Policies and Recent Legislation - Federal Deposit Insurance Corporation
Improvement Act of 1991 - Prompt Corrective Action"; and "Capital Adequacy
Guidelines".
Supervision, regulation and examination of Metro Commerce by the OCC
and other banking regulatory agencies are generally intended to protect
depositors and are not intended for the protection of Metro Commerce's
shareholders.
The OCC has the authority to prohibit a bank from engaging in what, in
the OCC's opinion, constitutes an unsafe or unsound practice in conducting
its business. Depending upon the financial condition of Metro Commerce
and upon other factors, the OCC could assert that the payment of dividends
or other payments by Metro Commerce to MCB Financial might be such an
unsafe or unsound practice. Furthermore, the payment of dividends by Metro
Commerce to MCB Financial is subject to certain restrictions. (See
"RESTRICTIONS ON TRANSFERS OF FUNDS TO MCB FINANCIAL BY METRO COMMERCE,"
herein.) Also, if Metro Commerce were to experience either significant
loan losses or rapid growth in loans or deposits, or if some other event
resulting in a depletion or deterioration of Metro Commerce's capital
account were to occur, MCB Financial might be compelled by federal or state
bank regulatory authorities to invest additional capital in Metro Commerce
in an amount necessary to return the capital account to a satisfactory
level.
Metro Commerce is also subject to certain restrictions imposed by
federal law on any extensions of credit by Metro Commerce to MCB Financial
or other affiliates. (See "RESTRICTIONS ON TRANSFERS OF FUNDS TO MCB
FINANCIAL BY METRO COMMERCE," herein.)
Effect of Governmental Policies and Legislation
Government Fiscal and Monetary Policies. Banking is a business which
depends in large part on rate differentials. In general, the difference
between the interest rate paid by Metro Commerce on its deposits and its
other borrowings and the interest rate received by Metro Commerce on loans
extended to its customers and securities held in Metro Commerce's portfolio
comprise a major portion of Metro Commerce's earnings. These rates are
highly sensitive to many factors that are beyond the control of Metro
Commerce. Accordingly, the earnings and growth of Metro Commerce and MCB
Financial are subject to the influence of domestic and foreign economic
conditions, including recession, unemployment and inflation.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Federal Reserve Board. The Federal Reserve Board
implements national monetary policies (with objectives such as curbing
inflation and combating recession) by its open-market operations in United
States Government securities, by adjusting the required level of reserves
for financial institutions and intermediaries subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and deposits and also
affect interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions and intermediaries. Proposals to change the laws
and regulations governing the operations and taxation of banks, bank
holding companies and other financial institutions and intermediaries are
frequently made in Congress, in the California legislature and before
various bank regulatory and other professional agencies. The likelihood of
any major changes and the impact such changes might have on Metro Commerce
or MCB Financial are impossible to predict. Certain of the potentially
significant changes which have been enacted, and proposals which have been
made recently, are discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991. In
1991 FDICIA was enacted into law. Set forth below is a summary of certain
provisions of that law and enabling regulations that have been adopted or
proposed by the Federal Reserve Board, the OCC, the Office of Thrift
Supervision and the FDIC (collectively, the "federal banking agencies").
Prompt Corrective Regulatory Action. FDICIA requires each federal
banking agency to take prompt corrective action to resolve the problems of
insured depository institutions that fall below one or more prescribed
minimum capital ratios. The purpose of this law is to resolve the problems
of insured depository institutions at the least possible long-term cost to
the appropriate deposit insurance fund. The prompt corrective action
provisions of FDICIA provide for certain mandatory and discretionary
actions by the appropriate federal banking regulatory agency, and defines
the following five categories in which any insured depository institution
will be placed based on the level of its capital ratios: "Well capitalized"
(significantly exceeding the required minimum capital requirements),
"adequately capitalized" (meeting the required capital requirements),
"undercapitalized" (failing to meet any one of the capital requirements",
"significantly undercapitalized" (significantly below any one capital
requirement), and "critically undercapitalized" (failing to meet all
capital requirements).
In 1992 the federal banking agencies issued substantially uniform
final regulations implementing the prompt corrective action provisions of
FDICIA. Under the regulations, an insured depository institution will be
deemed to be:
-"well capitalized" if it has (i) a total risk-based capital ratio of
10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any written agreement, order or capital directive or
prompt corrective action directive to meet and maintain a specific
capital level for any capital measure;
-"adequately capitalized" if it has (i) a total risk-based capital
ratio of 8% or greater, (ii) a Tier 1 risk-based capital ratio of 4%
or greater, (iii) a leverage ratio of 4% or greater (or a leverage
ratio of 3% or greater if the institution is rated composite 1 under
the applicable regulatory rating system in its most recent report of
examination); and (iv) does not meet the definition of a well
capitalized bank;
-"undercapitalized" if it has (i) a total risk-based capital ratio of
less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4%
or (iii) a leverage ratio of less than 4% (or a leverage ratio of
less than 3% if the institution is rated composite 1 under the
applicable regulatory rating system in its most recent report of
examination);
-"significantly undercapitalized" if it has (i) a total risk-based
capital ratio of less than 6%, (ii) a Tier 1 risk-based capital ratio
of less than 3% or (iii) a leverage ratio of less than 3%; and
-"critically undercapitalized" if it has a ratio of tangible equity to
total assets equal to or less than 2%.
The federal banking agencies may also, under certain circumstances,
reclassify a "well capitalized" institution as "adequately capitalized" or
require an "adequately capitalized" or "undercapitalized" institution to
comply with supervisory actions as if it were in the next lower capital
category. The federal banking agencies may take such action upon a showing
that an institution is in an unsafe or unsound condition or is engaged in
an unsafe or unsound practice (including failure to correct certain
unsatisfactory examination ratings).
Insured depository institutions are subject to certain incremental
supervisory restraints based on their actual or imputed ranking within the
five capital categories. All such institutions are prohibited from paying
management fees to controlling persons or, with certain limited exceptions,
making a capital distribution if, after such transaction, the institution
would be undercapitalized. If an insured depository institution is
undercapitalized, it will be closely monitored by the appropriate federal
banking agency, subject to asset growth restrictions and required to obtain
prior regulatory approval for acquisitions, branching and engaging in new
lines of business. Any undercapitalized depository institution must submit
an acceptable capital restoration plan to the appropriate federal banking
agency 45 days after becoming undercapitalized. The appropriate federal
banking agency cannot accept a capital plan unless, among other things, it
determines that the plan (i) specifies the steps the institution will take
to become adequately capitalized, (ii) is based on realistic assumptions
and (iii) is likely to succeed in restoring the depository institution's
capital. Finally, the appropriate federal banking agency may impose any of
the additional restrictions or sanctions that it may impose on
significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
Also, Federal Reserve Bank advances to such institutions (and institutions
rated composite 5 under the applicable regulatory rating system in its most
recent report of examination) for more than 60 days are generally
restricted. In order to receive regulatory approval of the required
capital restoration plan, a company controlling an undercapitalized
institution is required to guarantee its subsidiary's compliance with the
capital restoration plan, up to an amount equal to the lesser of 5% of the
subsidiary bank's assets or the amount of the capital deficiency when the
bank first failed to comply with the plan.
Significantly or critically undercapitalized insured depository
institutions and undercapitalized insured depository institutions which
fail to submit or in a material respect to implement an acceptable capital
restoration plan are subject to one or more of the following additional
regulatory actions (one or more of which is mandatory): (i) forced sale of
voting shares to raise capital or, if grounds exist for conservatorship or
receivership, a forced merger; (ii) restrictions on affiliate transactions;
(iii) limitations on interest rates paid on deposits; (iv) restrictions on
asset growth or required shrinkage; (v) alteration or curtailment of
activities determined by the regulators to pose excessive risk to the
institution: (vi) replacement of directors or senior executive officers,
subject to certain grandfather provisions for those elected prior to
enactment of FDICIA; (vii) prohibition on acceptance of correspondent bank
deposits; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) forced divestiture of an institution's
subsidiaries or divestiture by a bank holding company of an institution or
a financially troubled non-banking affiliate; or (x) other actions as
determined by the appropriate federal regulator. The appropriate federal
banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose; however, it is required
to force a sale of voting shares or merger, impose restrictions on
affiliate transactions and impose restrictions on rates paid on deposits
unless it determines that such actions would not further the purpose of the
prompt corrective action provisions. In addition, without the prior
written approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
FDICIA and its enabling regulations provide for further restrictions
applicable solely to critically undercapitalized insured depository
institutions, including at a minimum, prohibitions on the following
activities without the appropriate federal regulator's prior written
consent: (i) entering into material transactions other than in the usual
course of business; (ii) extending credit for highly leveraged
transactions; (iii) amending an institution's charter or bylaws; (iv)
making a material change in accounting methods; (v) engaging in certain
transactions with affiliates; (vi) paying excessive compensation or
bonuses; or (vii) paying rates on new or renewed liabilities significantly
in excess of market rates. Additionally, 60 days after becoming critically
undercapitalized, an institution may not make payments of interest or
principal on subordinated debt without the permission of the FDIC and its
primary federal regulator (this provision is waived until 1996 for certain
grandfathered subordinated debt). Most importantly, however, except under
limited circumstances, the appropriate federal banking agency, not later
than 90 days after an insured depository institution becomes critically
undercapitalized, is required to appoint a conservator or receiver for the
institution. The board of directors of an insured depository institution
will not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
Although Metro Commerce was deemed to be well capitalized as of
December 31, 1996 under the prompt corrective action provisions of FDICIA,
a subsequent reduction in Metro Commerce's capital could cause it to fall
within a lower capital category and subject it to the mandatory and
discretionary sanctions applicable to that category. Further, as noted
above, an institution that, based upon its capital levels, is adequately
capitalized or undercapitalized can, under certain circumstances, be
reclassified to the next lower capital category.
Rules Governing Insiders. FDICIA restates and enhances the scope
of the Federal Reserve Act limitations of extensions of credit to officers,
directors, and principal shareholders of member banks. FDICIA expands the
scope of the Federal Reserve Act restrictions to include all state
nonmember banks. Under FDICIA, insider loan limitations applicable to
banks will also be made applicable to their subsidiaries.
FDICIA also provides that the total of all extensions of credit by an
institution to all insiders and related interests may not exceed the bank's
unimpaired capital and unimpaired surplus. FDICIA empowers the Federal
Reserve Board to impose more stringent limitations on such loans.
Extensions of credit that were valid on the date of FDICIA's enactment are
not affected.
Standards for Safety and Soundness. In 1995 the federal banking
agencies adopted safety and soundness standards establishing operational
and managerial standards for all insured depository institutions. In 1996,
the agencies adopted additional guidelines for asset quality and earnings.
The standards, which were issued in the form of guidelines rather than
regulations, relate to internal controls, information systems, internal
audit systems, loan underwriting and documentation, compensation and
interest rate exposure. In general, the standards are designed to assist
the federal banking agencies in identifying and addressing problems at
insured depository institutions before capital becomes impaired. If an
institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan may result in enforcement proceedings. The effect
of the guidelines on Metro Commerce depends on how they are implemented by
the OCC. Metro Commerce expects that the guidelines may increase the cost
of doing business, since it must now document compliance with all of the
requirements in the guidelines.
Brokered Deposits. During 1992 the FDIC adopted regulations pursuant
to FDICIA which govern the receipt of brokered deposits. Under the
regulations, brokered deposits include any deposit obtained from or through
a deposit broker, and include deposits, however obtained, of institutions
that offer rates "significantly higher" than those in the market area. An
institution may only accept brokered deposits if it is (i) "well
capitalized" or (ii) "adequately capitalized" and receives a waiver from
the FDIC. "Adequately capitalized" institutions that receive waivers to
accept brokered deposits are, however, subject to certain limits on the
maximum rates which they may pay on such deposits. "Undercapitalized"
institutions may not accept brokered deposits, nor may they offer deposit
instruments yielding in excess of 75 basis points over prevailing yields
offered on comparable instruments in the relevant market area. Also,
FDICIA provides that the FDIC shall not, in most circumstances, provide
deposit insurance coverage on a "pass-through" basis for certain employee
benefit plans to institutions prohibited from accepting brokered deposits.
The definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" for purposes of the brokered deposit regulations
generally conform with the definitions of those terms adopted by the FDIC
for purposes of implementing the prompt corrective action provisions of
FDICIA. (See "Effect of Governmental Policies and Recent Legislation -
Federal Deposit Insurance Corporation Improvement Act of 1991 - Prompt
Corrective Regulatory Action.") Metro Commerce does not believe that the
application of these rules will have a material effect on its ability to
fund operations or its financial condition.
Real Estate Lending Standards. Pursuant to authority contained in
FDICIA, the federal banking agencies adopted final regulations which
require insured depository institutions to establish and maintain written
internal real estate lending policies. These policies must be consistent
with safe and sound banking practices and be appropriate for the size and
nature of the institution involved. Additionally, they must be established
by each institution only after it has considered the Interagency Guidelines
for Real Estate Lending Policies, which are made a part of the final
regulations. The regulations require that certain specific standards be
addressed relating to loan portfolio diversification standards, prudent
underwriting standards (including loan-to-value limits), loan
administration procedures, and documentation, approval and reporting
requirements. Each institution's lending policies must be reviewed and
approved by the institution's board of directors at least once a year.
Finally, each institution is expected to monitor conditions in its real
estate market to ensure that its lending policies are appropriate for
current market conditions. The regulations do not set forth specific loan-
to-value limits, but the Interagency Guidelines do provide certain limits
which should not be exceeded except under limited circumstances.
Deposit Insurance Assessments. The FDIC has established a risk-based
deposit insurance premium system that was mandated by FDICIA. Under these
regulations, members of the Bank Insurance Fund ("BIF") are subject to an
assessment rate schedule of 0 cents per $100 of deposits (subject to a
statutory minimum annual assessment of $2,000) to 27 cents per $100 of
deposits.
To determine the risk-based assessment for each institution, the FDIC
categorizes an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios. A well capitalized
institution is one that has at least a 10% total risk-based capital ratio,
a 6% Tier 1 risk based capital ratio and a 5% leverage capital ratio. An
adequately capitalized institution will have at least an 8% total risk-
based capital ratio, a 4% Tier 1 risk based capital ratio and a 4% leverage
capital ratio. The FDIC also assigns each institution to one of three
subgroups based upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements, and other
information relevant to evaluating the risk posed by the institution. As a
result, the assessment rates for 1997 within each of three capital
categories will be as follows (expressed as cents per $100 of deposits):
Supervisory
Subgroup
A B C
Well Capitalized................. 0 3 17
Adequately capitalized........... 3 10 24
Undercapitalized................. 10 24 27
Under the 1997 risk-related premium schedule, Metro Commerce is exempt
from the BIF premium, and therefore pays the minimum annual assessment of
$2,000.
BIF and SAIF Recapitalization. FDICIA provided the FDIC with three
additional sources of funds to protect deposits insured by the BIF: The
FDIC was authorized to borrow up to $30 billion dollars from the U.S.
Treasury; to borrow from the Federal Financing Bank up to 90% of the fair
market value of assets of institutions acquired by the FDIC as receiver;
and to borrow from financial institutions that are members of the BIF. Any
borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. These premiums must be
sufficient to repay any borrowed funds within 15 years and to provide
insurance fund reserves of $1.25 for each $100 of insured deposits. The
result of these provisions is that the assessment rate on deposits of BIF
members could increase in the future. The FDIC also has authority to
impose special assessments against insured deposits.
In addition, the crisis in the savings and loan industry during the
late 1980's led to the dissolution of the Federal Savings and Loan
Insurance Corporation and the insurance of thrift deposits through a
separate fund of the FDIC called the Saving Association Insurance fund
("SAIF"), as well as the issuance of bonds by the Financing Corporation
("FICO") to cover some of the losses incurred by failed savings
associations. As the banking industry in general has become more healthy
since 1990, deposit insurance premiums for well-managed and strongly-
capitalized BIF insured institutions have decreased to the low levels
described above. However, because of the cost of carrying the FICO bonds
and because the SAIF still needed to build reserves, deposit insurance
premiums for SAIF insured institutions have not decreased along with the
premiums for BIF insured institutions. This created a large disparity
between the cost of deposit insurance and healthy banks and similarly
situated thrifts, leading healthy thrifts to seek ways to either convert to
BIF insurance or to obtain BIF insurance for some portions of their
deposits in order to remain competitive with banks. This migration of
deposits increased the pressure on the remaining thrifts to build up
reserves at the SAIF and pay the cost of servicing the FICO bonds.
Subtitle G of the Economic Growth Act required the remaining SAIF
institutions to pay a one-time deposit assessment of $.657 per $100 of
insured deposits in order to recapitalize the SAIF fund, and required the
banking agencies to take action to prevent the migration of deposits from
the SAIF to the BIF funds until the year 2000. In addition, the cost of
carrying the FICO bonds is now allocated between BIF insured institutions
and SAIF insured institutions, with BIF insured institutions paying 1/5 the
amount paid by SAIF insured institutions. The FDIC recently estimated that
BIF institutions will pay an assessment of approximately $.0128 annually
per $100 insured deposits, and that SAIF institutions will pay
approximately $.0644 annually per $100 of insured deposits. Starting in
the year 2000, BIF and SAIF institutions will share the FICO bond costs
equally, with an estimated assessment of $.0243 annually per $100 of
insured deposits.
This legislation will increase Metro Commerce's premiums, as it will
now be required to share in the cost of carrying the FICO bonds. The
increase will be slight until the year 2000, at which time it will
increase.
Improved Examinations. All insured depository institutions must
undergo a full-scope, on-site examination by their appropriate federal
banking agency at least once every 18 months. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate federal banking agency against each institution or affiliate as
it deems necessary or appropriate.
Other Items. FDICIA also, among other things, (i) directs the
appropriate federal banking agency to determine the amount of readily
marketable purchased mortgage servicing rights that may be included in
calculating an institution's tangible, core and risk-based capital; and
(ii) provides, that, subject to certain limitations, any federal savings
association may acquire or be acquired by any insured depository
institution.
The impact of FDICIA on Metro Commerce and MCB Financial remains
uncertain to some extent. Certain provisions, such as the real estate
lending standards and the rules governing compensation, fees and other
operating policies, may affect the way in which Metro Commerce conducts its
business, and other provisions, such as those relating to the establishment
of the risk-based premium system, may adversely affect Metro Commerce's
results of operations.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Act") permits a bank
holding company that is adequately capitalized and managed to acquire an
existing bank located in another state without regard to state law. A bank
holding company is not permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of
deposits of insured depository institutions in the United States or (b) 30%
or more of the deposits in the state in which the bank is located. A state
may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if doing so does not discriminate
against out-of-state banks. An out-of-state bank holding company may not
acquire a state bank that has been in existence for less than the minimum
length of time prescribed by state law, except that a state may not impose
more that a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of
the acquired bank into branches of the resulting bank. Each state may
permit such combinations earlier than June 1, 1997, and may adopt
legislation to prohibit interstate mergers after that date in that state or
in other states by that state's banks. The same concentration limits
discussed in the preceding paragraph apply. The Interstate Act also
permits a national or state bank to establish branches in a state other
than its home state if permitted by the laws of that state, subject to the
same requirements and conditions as for a merger transaction.
In 1995 California enacted state legislation in accordance with the
Riegle-Neal Act. The state law permits banks headquartered outside
California to acquire or merge with California banks that have been in
existence for at least five years, and to thereby establish one or more
California branch offices. An out-of-state bank may not enter California
by acquiring one or more branches of a California bank or other operations
constituting less than the whole bank. The law authorizes waiver of the
30% limit on state-wide market share for deposits as permitted by the
Riegle-Neal Act. This law also authorizes California state-licensed banks
to conduct certain banking activities (including receipt of deposits and
loan payments and conducting loan closings) on an agency basis on behalf of
out-of-state banks and to have out-of-state banks conduct similar agency
activities on their behalf.
The Interstate Act also authorizes California state-chartered banks to
appoint unaffiliated banks in other states to act as agents of the
California state-chartered bank by accepting deposits and evaluating loan
applications on behalf of the principal bank. Since national banks may
only establish agency relationships with affiliated banks, the expanded
authority for state-chartered banks could place national banks in
California at a disadvantage in the event many state-chartered banks use
agency relationships with unaffiliated entities to increase their business.
Other than that possibility, management of MCB Financial does not believe
that the Interstate Act nor the California interstate banking law has had
or will have any material effect on Metro Commerce, MCB Financial or the
market for MCB Financial's common stock.
The Riegle Community Development and Regulatory Improvement Act of
1994. The Riegle Community Development and Regulatory Improvement Act of
1994 ("Community Development Act") involves many aspects of banking
regulation. It is anticipated that the Act may reduce the overall
regulatory burden on Metro Commerce. At this time, however, management
does not anticipate that the Community Development Act will have any
material effect on Metro Commerce or its operations.
Capital Adequacy Guidelines. The Federal Reserve Board and the OCC
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, takes off-balance sheet items into
account in assessing capital adequacy, and minimizes dis-incentives to
holding liquid, low-risk assets. Under these guidelines, assets and credit
equivalent amounts of off-balance sheet items, such as letters of credit
and outstanding loan commitments are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and
certain U.S. Government securities, to 100% for relatively high-risk
assets, such as loans and investments in fixed assets, premises and other
real estate owned. The aggregated dollar amount of each category is then
multiplied by the risk weight associated with that category. The resulting
weighted values from each of the risk categories are then added together to
determine the amount of total risk-weighted assets.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related
surplus, retained earnings and certain perpetual preferred stocks and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill are generally deducted from Tier 1 capital;
however purchased mortgage servicing rights and purchase credit card
relationships may be included subject to certain limitations. At least 50%
of a banking organization's total regulatory capital must consist of Tier 1
capital, less goodwill.
Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk weighted assets; (ii)
cumulative perpetual preferred stock and long-term preferred stock (which
for bank holding companies must have an original maturity of 20 years or
more) and related surplus; (iii) hybrid capital instruments (instruments
with characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) eligible term subordinated debt and
intermediate-term preferred stock with an original maturity of five years
or more, including related surplus, in an amount up to 50% of Tier 1
capital. The inclusion of the foregoing elements of Tier 2 capital is
subject to certain requirements and limitations of the federal banking
agencies.
The Federal Reserve Board and the OCC have each adopted a minimum
leverage ratio of Tier 1 capital to total assets of 4.00%, except that the
highest rated banks may operate at a minimum leverage ratio of 3.00%. The
leverage ratio is only a minimum. Institutions experiencing or
anticipating significant growth or those with other than minimum risk
profiles will be expected to maintain capital well above the minimum
levels.
Under the so-called "prompt corrective action" provisions of FDICIA
and the regulations promulgated thereunder, Metro Commerce will be
considered "adequately capitalized" if it has a ratio of qualifying total
capital to risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted
assets of 4.00% and a leverage ratio of 4.00% or greater. To be considered
"well capitalized" Metro Commerce must have a ratio of qualifying total
capital to risk-weighted assets of 10.00%, Tier 1 capital to risk-weighted
assets of 6.00% and a leverage ratio of 5.00% or greater as well as not be
subject to any order or directive. Under certain circumstances, the OCC
may require an "adequately capitalized" institution to comply with certain
mandatory or discretionary supervisory actions as if Metro Commerce were
undercapitalized. (see "SUPERVISION AND REGULATION - Effect of
Governmental Policies and Recent Legislation - Federal Deposit Insurance
Corporation Improvement Act of 1991 - Prompt Corrective Action", herein.)
The capital adequacy guidelines of the Federal Reserve Board are
generally applicable to bank holding companies, such as MCB Financial,
while the guidelines of the OCC are generally applicable to national banks,
such as Metro Commerce. However, the Federal Reserve Board's guidelines do
not apply to bank holding companies with total consolidated assets of less
than $150 million. As of December 31, 1996, MCB Financial had total
consolidated assets of $131.5 million. Accordingly, MCB Financial is not
subject to any capital requirements other than those of the OCC that are
applicable to Metro Commerce.
In August 1992, the Federal Reserve Board, the OCC and the FDIC issued
a joint advance notice of proposed rulemaking, in accordance with FDICIA,
seeking public comment on methods to take adequate account of interest rate
risk, concentration of credit risk and the risks of non-traditional
activities, as well as reflect the actual performance and expected risk of
loss on multi-family mortgages in calculating risk-based capital. Although
the notice does not contain any agency proposals relating to concentration
of credit risk and risks of non-traditional activities, the notice includes
a general framework for taking account of interest rate risk. Under that
framework, institutions with interest rate risk exposure in excess of a
certain threshold (1% of assets) would be required to hold capital
proportionate to that excess risk. Exposures would be measured in terms of
the change in the present value of an institution's assets minus the change
in the present value of its liabilities and off-balance sheet positions for
an assumed 100 basis point parallel shift in market interest rates. Metro
Commerce is unable to predict the form in which these proposed regulations
will ultimately be adopted or the effect such regulations would have on the
operations and capital adequacy of Metro Commerce or MCB Financial.
In 1995 the federal banking agencies issued a rule relating to capital
standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of
their assets concentrated in high risk loans or nontraditional banking
activities and who fail to adequately manage these risks, will be required
to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these
issues as important factors they will review in assessing an individual
bank's capital adequacy.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109. (See "SUPERVISION AND
REGULATION - Effect of Governmental Policies and Recent Legislation -
Accounting Changes," herein.) The federal banking agencies have issued
rules governing banks and bank holding companies which limit the amount of
deferred tax assets that are allowable in computing an institution's
regulatory capital. Deferred tax assets that can only be realized through
future taxable earnings are limited for regulatory capital purposes to the
lesser of (i) the amount that can be realized within one year of the
quarter-end report date or (ii) 10% of Tier 1 capital. The amount of
deferred taxes in excess of this limit, if any, would be excluded from Tier
1 capital and total assets in regulatory capital calculations. Management
does not expect implementation of these rules to have a material impact on
Metro Commerce's regulatory capital levels.
Community Reinvestment Act Developments. The federal banking agencies
substantially amended the Community Reinvestment Act ("CRA") regulations in
1995, and issued guidelines and explanations of the new regulations in
1996. CRA assesses a bank's record of meeting the credit needs of its
entire community, including minorities and low and moderate income groups.
Under the revised CRA regulations, the agencies determine a bank's
rating under the CRA by evaluating its performance on lending, service and
investment tests, with the lending test being the most important. The
tests are applied in an "assessment context" that is developed for the
particular institution and that takes into account demographic data about
the bank's community, the community's characteristics and needs, the
institution's capacities and constraints, the institution's product
offerings and business strategy, the institution's prior performance, and
data on similarly situated lenders. Since the assessment context is
developed by the agencies, a particular bank will not know whether its CRA
programs and efforts have been sufficient until it is examined.
The revised regulations require larger institutions to compile and
report certain data on their lending activities in order to measure
performance. Some of this data is already required under other laws, such
as the Equal Credit Opportunity Act.
Small institutions (those with less than $250 million in assets) are
now examined on a "streamlined assessment method." The streamlined method
focuses on the institution's loan to deposit ratio, degree of local
lending, record of lending to borrowers and neighborhoods of differing
income levels, and record of responding to complaints. The federal
regulators have reported that under the new regulations the time spent at
the banks to conduct CRA examinations is reduced, and that the banks spend
less time on paperwork evidencing compliance.
On March 8, 1996, the federal banking agencies issued joint
examination procedures applicable to compliance examination under the new
CRA regulations. On October 21, 1996, the Consumer Compliance Task Force
of the Federal Financial Institutions Examination Council issued additional
guidelines for CRA compliance. Starting on July 1, 1997, the new
procedures and guidelines will apply to larger institutions.
Large and small institutions have the option of being evaluated for
CRA purposes in relation to their own pre-approved strategic plan. Such a
strategic plan must be submitted to the institution's regulator three
months before its effective date and must be published for public comment.
Metro Commerce is currently considered a small institution under the
CRA regulations and it will be a small institution until it has assets of
greater than $250 million at the ends of two years in a row. The initial
impact of this amendment on the business of Metro Commerce will be less
than the impact when Metro Commerce no longer qualifies as a small
institution. At that time, the new regulations will increase the amount of
reports Metro Commerce is required to prepare and submit, and it could
cause Metro Commerce to change its asset mix in order to meet the
performance standards. At this time, the new regulations have increased
the uncertainty of Metro Commerce's business, both as the rating and
examination procedures change and as Metro Commerce grows to the extent
that it and may no longer qualify as a small institution.
The federal regulators are required to take an institution's CRA
record into account when evaluating an application for new deposit
facilities, such as a bank merger, establishment of a branch, a new charter
or relocation of a branch or home office. In the Metro Commerce's most
recent compliance examination dated August 31, 1995, Metro Commerce
received a "satisfactory" rating for its CRA performance.
Accounting Changes.
In June of 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. In December 1996, the Financial Accounting
Standards Board issued SFAS No. 127. SFAS 127 reconsiders certain
provisions of SFAS 125 and defers for one year the effective date of
implementation for transactions related to repurchase agreements, dollar-
roll repurchase agreements, securities lending, and similar transactions.
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.
SFAS No. 125 is not expected to have a material effect on MCB Financial's
financial statements.
On January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of long-lived assets, such as premises, furniture and
equipment, certain identifiable intangibles and goodwill related to those
assets. Long-lived assets and certain indentifiable intangibles are to be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized when the sum of the future cash flows
expected from the use of the asset and its eventual disposition
(undiscounted and without interest charges) is less than the carrying
amount of the asset. The Statement also requires that long-lived assets
and indentifiable intangibles, except for assets of a discontinued
operation held for disposal, be accounted for at the lower of cost or fair
value less cost to sell. MCB Financial has implemented SFAS No. 121 and
has determined that the measurement of impairment loss is not material.
MCB Financial adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" on January 1, 1996. SFAS 123 establishes accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based compensation plans. As allowed under the provisions of SFAS
123, MCB Financial has chosen to continue using the intrinsic value-based
method of valuing stock options prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. Under the intrinsic value-based method, compensation cost
is measured as the amount by which the quoted market price of MCB
Financial's stock at the date of grant exceeds the stock option exercise
price. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Environmental Regulation
Federal, state and local regulations regarding the discharge of
materials into the environment may have an impact on both MCB Financial and
Metro Commerce. Under federal law, liability for environmental damage and
the cost of cleanup may be imposed upon any person or entity who owns or
operates contaminated property. State law provisions, which were modeled
after Federal law, impose substantially similar requirements. Both federal
and state laws were amended in 1996 to provide generally that a lender who
is not actively involved in operating the contaminated property will not be
liable to clean up the property, even if the lender has a security interest
in the property or becomes an owner of the property through foreclosure.
The Economic Growth Act includes protection for lenders from liability
under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") by adding a new section which specifies the actions
a lender may take with respect to lending and foreclosure activities
without incurring environmental clean-up liability or responsibility.
Under the new section typical contractual provisions regarding
environmental issues in the loan documentation and due diligence
inspections conducted in connection with lending transactions will not lead
to lender liability for clean-up, and a lender may foreclose on
contaminated property, so long as the lender merely maintains the property
and moves to divest it at the earliest possible time.
Under California law, a lender generally will not be liable to the
State for the cost associated with cleaning up contaminated property unless
the lender realized some benefit from the property, failed to divest the
property promptly, caused or contributed to the release of the hazardous
materials, or made the loan primarily for investment purposes. This
amendment to California law became effective with respect to judicial
proceedings filed and orders issued after January 1, 1997.
The extent of the protection provided by both the federal and state
lender protection statutes will depend on the interpretation of those
statutes administrative agencies and courts, and Metro Commerce cannot
predict whether it will be adequately protected for the types of loans made
by Metro Commerce.
In addition, MCB Financial and Metro Commerce remain subject to the
risk that a borrower's financial position will be impaired by liability
under the environmental laws and that property securing a loan made by
Metro Commerce may be environmentally impaired and therefore not provide
adequate security for Metro Commerce. California law provides some
protection against the second risk by establishing certain additional,
alternative remedies for a lender in circumstances where the property
securing a loan is later found to be environmentally impaired, permitting
the lender to pursue remedies against the borrower other than foreclosure
under the deed of trust.
Metro Commerce attempts to protect its position against the remaining
environmental risks by performing prudent due diligence. Environmental
questionnaires and information on use of toxic substances are requested as
part of Metro Commerce's underwriting procedures. Metro Commerce makes
lending based upon its evaluation of the collateral, the net worth of the
borrower and the borrower's capacity for unforeseen business interruptions
or risks.
Americans With Disabilities Act
The Americans With Disabilities Act ("ADA"), in conjunction with
similar California legislation, has increased the cost of doing business
for banks. The legislation requires employers with 15 or more employees
and all businesses operating "commercial facilities" or "public
accommodations" to accommodate disabled employees and customers. The ADA
has two major objectives: (1) to prevent discrimination against disabled
job applicants, job candidates and employees, and (2) to provide disabled
persons with ready access to commercial facilities and public
accommodations. Commercial facilities, such as Metro Commerce, must ensure
that all new facilities are accessible to disabled persons, and in some
instances may be required to adapt existing facilities to make them
accessible.
New and Pending Legislation
Economic Growth and Regulatory Paperwork Reduction Act of 1996
In addition to the provisions discussed above, the Economic Growth Act
also included many regulatory relief provisions applicable to MCB Financial
and Metro Commerce. National banks no longer need to submit branch
applications with respect to ATM machines. Application procedures for MCB
Financial to engage in certain non-banking activities will be streamlined,
so long as MCB Financial maintains an adequate financial position and is
considered well-managed. The lending restrictions on directors and
officers have been relaxed to permit loans having favorable terms under
employee benefit plans. The Federal Reserve Board and the department of
Housing and Urban Development ("HUD") are required to simplify and improve
their regulations with respect to disclosures relating to certain mortgage
loans, and certain exemptions from the disclosure requirements were added.
The Economic Growth Act also provides protection for lenders who self-
test for compliance with the Equal Credit Opportunity At (the "ECOA") and
the Fair Housing Act ("FHA"). The ECOA now provides that the results or
report generated or obtained by a bank from a self-test may not be obtained
by an agency, department or applicant to be used with respect to any
proceeding or civil action alleging a violation of the ECOA. This change
in the law protects Metro Commerce against liability based on the results
of internal tests done to enhance compliance with the law and encourages
Metro Commerce to use self-testing to evaluate its compliance with the ECOA
and the FHA.
On November 20, 1996, the OCC issued final regulations permitting
national banks to engage in a wider range of activities through
subsidiaries. "Eligible institutions" (that is, national banks that are
well capitalized, have a high overall rating and a satisfactory CRA rating,
and are not subject to an enforcement order) may engage in activities
related to banking through operating subsidiaries after going through a new
expedited application process. In addition, the new regulations include a
provision whereby a national bank may apply to the OCC to engage in an
activity through a subsidiary in which the bank itself may not engage. In
determining whether to permit the subsidiary to engage in the activity, the
OCC will evaluate why the bank itself is not permitted to engage in the
activity and whether a Congressional purpose will be frustrated if the OCC
permits the subsidiary to engage in the activity.
Although Metro Commerce is not currently intending to enter into any
new type of business, either relating to banking or that is not currently
permitted for a bank, this regulation could help Metro Commerce if it
determines to expand its operations in the future. The amount of the
benefit to Metro Commerce depends on the extent to which the OCC permits
banks to engage in new lines of business, and whether Metro Commerce
qualifies as an "eligible institution" at such time as it might decide to
expand.
New OCC Corporate Activities and Transaction Regulations
On November 26, 1996, the OCC completely revised its rules to simplify
and streamline the procedures for corporate applications and notices by
national banks, including branch applications, fiduciary powers
applications, change in bank control, and changes in capital. The
amendments became effective on December 31, 1996. Metro Commerce is not
currently anticipating filing any corporate applications with the OCC, but
the new rules could have an effect on Metro Commerce if such an application
is required.
ATM Fee Legislation
In April of 1996, two of the larger ATM networks lifted their prior
restriction prohibiting ATM operators from directly surcharging
noncustomers who use their ATMs. This action triggered a series of
legislative proposals and hearings with respect to whether such fees should
be regulated. Part of the reason the lifting of the restriction on
surcharges was controversial was because customers may thereby be required
to pay two charges for a single transaction, one to the bank issuing the
ATM card and another to the operator of the ATM being used.
Currently, Federal law requires a bank at which a depositor has an
account to disclose to its own customers the amount of fees it charges, and
California law requires an ATM operator to disclose to users of the ATM
machine who are using an ATM card issued by someone other than the ATM
operator that a fee will be charged. California law was amended in 1996,
effective July 1, 1997, to require the operators of ATMs in California to
disclose to customers any surcharge or fee that the operator of the machine
will charge, including charges for mini-statements and other services.
Metro Commerce owns and operates ATMs, and it issues ATM cards to its
customers. This legislation will not have a significant effect on Metro
Commerce as it is currently stated, but other proposed changes could affect
Metro Commerce by limiting ATM charges to customers.
Proposed Legislation and Regulation
Certain legislative and regulatory proposals that could affect MCB
Financial, Metro Commerce and the banking business in general are pending,
or may be introduced, before the United States Congress, the California
State Legislature, and Federal and state government agencies. The United
States Congress in particular is considering numerous bills that could
reform the banking laws substantially. Other proposals to permit banks to
engage in related financial services and to permit other financial services
companies to offer banking-related services are pending and, if adopted,
would increase competition for Metro Commerce.
It is not known to what extent, if any, these proposals will be
enacted and what effect such legislation would have on the structure,
regulation and competitive relationship of financial institutions. It is
likely, however, that many of these proposals would subject MCB Financial
and Metro Commerce to increased regulation, disclosure and reporting
requirements and would increase competition for Metro Commerce and increase
its cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to implement
and enforce already existing legislation. It cannot be predicted whether
or in what form any such legislation or regulations will be enacted or the
effect that such legislation may have on Metro Commerce's business.
RESTRICTIONS ON TRANSFERS OF FUNDS TO MCB FINANCIAL BY METRO COMMERCE
Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose pressure on the
capital of subsidiary banks or would be funded only through borrowings or
other arrangements that might adversely affect the holding company's
financial position. The policy further declares that a bank holding
company should not continue its existing rate of cash dividends on its
common stock unless its net income is sufficient to fully fund each
dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
Other Federal Reserve Board policies forbid the payment by bank
subsidiaries to their parent companies of management fees which are
unreasonable in amount or exceed the fair market value of the services
rendered (or, if no market exists, actual cost plus a reasonable profit).
MCB Financial is a legal entity separate and distinct from Metro
Commerce. At present, substantially all of MCB Financial's revenues,
including funds available for the payments of dividends and other operating
expenses, are expected to be obtained from dividends paid to MCB Financial
from Metro Commerce. Metro Commerce paid dividends in the amount of
$50,000 and $300,000 to MCB Financial in October, 1996 and February, 1994,
respectively. Until that time, funds to cover certain costs of MCB
Financial in connection with the Reorganization were provided by a $90,000
loan made to MCB Financial by John Cavallucci, MCB Financial's President
and Chief Executive Officer and Metro Commerce's Chief Executive Officer.
(See "INFORMATION CONCERNING THE BUSINESS AND PROPERTIES OF MCB FINANCIAL -
MCB Financial", herein.)
There are statutory and regulatory limitations on the amount of
dividends which may be paid to MCB Financial by Metro Commerce. Sections
56 and 60 of Title 12 of the United States Code contain the major
limitations on the payment of dividends by national banks. Section 56
generally prohibits national banks from paying dividends out of capital,
and Section 60 further limits dividends, absent the OCC's approval, to the
amount of a national bank's recent earnings.
Pursuant to Title 12, Metro Commerce may declare dividends from funds
legally available therefor, when and as declared by the Metro Commerce
Board of Directors; provided, however, that dividends may not be paid from
Metro Commerce's capital. Dividends must be paid out of available net
profits, after deduction of all current operating expenses, actual losses,
accrued dividends on preferred stock, if any, and all federal and state
taxes. Additionally, a national bank is prohibited from declaring a
dividend on its shares of common stock until its surplus fund equals its
common capital, or, if its surplus fund does not equal its common capital,
until at least one-tenth of such bank's net profits, for the preceding half
year in the case of quarterly or semi-annual dividends, or the preceding
two half years in the case of an annual dividend, are transferred to its
surplus fund each time dividends are declared. Title 12 also provides that
the approval of the Comptroller is required if the total of all dividends
declared by a national bank in any calendar year exceeds the total of its
net profits for that year combined with its retained net profits of the two
preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. Furthermore, the Comptroller also has
authority to prohibit the payment of dividends by a national bank when it
determines such payment to be an unsafe and unsound banking practice.
At December 31, 1996, Metro Commerce had available $1,747,490 for the
payment of dividends.
Under the prompt corrective action rules of FDICIA, no depository
institution, such as Metro Commerce, may issue a dividend or pay a
management fee if it would cause the institution to become
undercapitalized. Additionally, undercapitalized institutions are subject
to restrictions on dividends and management fees, as well as other
automatic actions. Other supervisory actions may be taken against
institutions that are significantly undercapitalized, as well as
undercapitalized institutions that fail to submit any acceptable capital
restoration plan as required by law or that fail in any material respect to
implement an accepted plan.
The OCC also has authority to prohibit Metro Commerce from engaging in
what, in the OCC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the OCC could
assert that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the OCC and
the Federal Reserve Board have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set
forth in such guidelines could limit the amount of dividends which Metro
Commerce or MCB Financial may pay. (See "Effect of Governmental Policies
and Recent Legislation - Federal Deposit Insurance Corporation Improvement
Act of 1991" for a discussion of additional restrictions on capital
distributions.)
Metro Commerce is subject to certain restrictions imposed by federal
law on any extension of credit to, or the issuance of a guarantee or letter
of credit on behalf of, MCB Financial or other affiliates, the purchase of
or investment in stock or other securities thereof, the taking of such
securities as collateral for loans and the purchase of assets of MCB
Financial or other affiliates. Such restrictions prevent MCB Financial and
such other affiliates from borrowing from Metro Commerce unless the loans
are secured by marketable obligations of designated amounts. Further, such
secured loans and investments by Metro Commerce in MCB Financial or in any
other affiliate are limited to 10% of Metro Commerce's capital and surplus
(as defined by federal regulations) and such secured loans and investments
are limited, in the aggregate, to 20% of Metro Commerce's capital and
surplus (as defined by federal regulation). Additional restrictions on
transactions with affiliates may be imposed on Metro Commerce under the
prompt corrective action provisions of FDICIA. (See "SUPERVISION AND
REGULATION - Effect of Governmental Policies and Recent Legislation -
Federal Deposit Insurance Corporation Improvement Act of 1991 - Prompt
Corrective Action", herein.)
It is impossible to predict with any degree of accuracy the
competitive impact these laws have on commercial banking in general or on
the business of Metro Commerce in particular. However, there appears to be
a lessening of the historical distinction between the services offered by
insured depository institutions and other businesses offering financial
services. It is anticipated that commercial banks will experience
increased competition for deposits and loans and increases in their cost of
funds in the future.
Item 2. Description of Property
Currently, MCB Financial does not own or lease any property. MCB
Financial is not actively engaged in any business activities outside of the
activities of Metro Commerce. Therefore, Metro Commerce's property is not
significantly used by MCB Financial. MCB Financial will continue to
utilize the premises of Metro Commerce until it becomes actively engaged in
additional business activities. MCB Financial currently reimburses Metro
Commerce for a fair and reasonable amount for all services furnished to it.
Metro Commerce leases the land and the buildings at which its office
facilities are located. Metro Commerce has four full-service banking
offices. The head office of Metro Commerce is located at 1248 Fifth
Avenue, San Rafael, California and consists of approximately 10,000 square
feet of office space. In 1995, Metro Commerce consolidated its mortgage
operations into the head office site. Metro Commerce occupies the premises
for its head office under a lease which will expire in June 2014, with two
five-year options to renew.
Metro Commerce's three branch offices in South San Francisco, Hayward
and Upland, California occupy approximately 12,300, 14,000 and 5,000 square
feet, respectively, under leases that expire at various dates through the
year 2005.
Metro Commerce believes that its existing facilities are adequate for
its current needs and anticipated growth.
Item 3. Legal Proceedings
MCB Financial is not a party to any pending legal proceeding and is
unaware of any proceeding being contemplated against it by any governmental
authority.
There are various legal actions pending against MCB Financial arising
from the normal course of business. MCB Financial is also named as
defendant in various lawsuits in which damages are sought. Management,
upon the advice of legal counsel handling such actions, believes that the
ultimate resolution of these actions will not have a material effect on the
financial position of MCB Financial.
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 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required to be furnished pursuant to this item is set
forth under the caption "Market Price of MCB Financial Corporation" in the
Annual Report, which is incorporated herein by reference to Exhibit No.
(13) of this report.
Item 6. Management's Discussion and Analysis.
Except for the information provided below, the information required to
be furnished pursuant to this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the Notes to Consolidated Financial Statements in the
Annual Report, which are incorporated herein by reference to Exhibit No.
(13) of this report.
The maturities and weighted average yields of investment securities
are presented in the following table:
Maturities of Investment Securities at December 31, 1996 (At book value)
After 1 Year After 5 Years
(Dollars in Within 1 Year Within 5 Years Within 10 Years Total
thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------
Mortgage-backed
securities (1) $2,006 5.55% $2,269 5.55% $4,275 5.55%
U.S. Treasury
and other U.S.
government
agencies 3,002 5.47% 20,218 6.45% $7,497 6.53% 30,717 6.38%
States and muni-
cipalities(2) 25 5.90% 140 6.58% 165 6.48%
- -------------------------------------------------------------------------
Total $5,033 5.42% $22,627 6.34% $7,497 6.53% 35,157 6.25%
=========================================================================
(1) Mortgage securities are shown at stated maturities; however, these
securities are subject to substantial prepayments which will
accelerate actual maturities.
(2) Weighted-average yield calculated on a tax equivalent basis using
statutory rates.
Maturities of Loans at December 31, 1996
Currently, MCB Financial's data processing system does not have the
capability to provide, and therefore MCB Financial has not provided herein,
the dollar amount of floating rate loans maturing within one year, after
one year but within five years, and in more than five years or the total
amount of loans due after one year which have floating interest rates. As
of December 31, 1996, the percentage of loans held for investment with
fixed and floating interest rates was 56% and 44%, respectively.
The following table provides typical terms of maturity ranges offered
by MCB Financial for each loan category indicated:
Loan Category Typical Term in
Years
Commercial Loans 1 to 3
Real Estate Loans:
Commercial 5
Construction 1
Land 1
Home Equity 5
Loans to Consumers and
Individuals 1 to 5
Asset/Liability Management
Net interest income and the net interest margin are largely dependent
on MCB Financial's ability to closely match interest-earning assets with
interest-bearing liabilities. As interest rates change, MCB Financial 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 December 31, 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):
December 31, 1996
Over 90 Over 180 After One After
90 days days to days to Year to Five
or less 180 days 365 days Five Years Years Total
Earning Assets
(Rate Sensitive):
Federal funds sold $770 $770
Interest-bearing deposits
with other banks $294 $90 384
Investment securities 1,237 1,264 2,533 22,626 7,497 35,157
Mortgage loans held
for sale 648 648
Loans, gross 37,836 1,976 2,134 22,006 17,176 81,128
Total 40,491 3,240 4,961 44,722 24,673118,087
Interest-bearing
Liabilities
(Rate Sensitive):
Interest-bearing transaction
deposits 9,401 32,066 32,066 73,532
Time deposits, $100,000 3,835 1,934 2,158 1,556 9,483
Savings and other time 3,261 2,162 2,498 2,656 10,577
Other borrowings 447 447
Total 16,944 4,096 36,722 36,278 94,039
Period GAP 23,547 (856) (31,761) 8,445 24,673
Cumulative GAP 23,547 22,691 (9,070) (625) 24,048
Interest Sensitivity GAP Ratio58.15%(26.42%)(640.20%) 18.88% 100.00%
Cumulative Interest Sensitivit58.15% 51.89% (18.63%) (0.67%) 20.36%
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 relative
insensitivity of these accounts to changes in interest rates. Although
rates on these accounts can be contractually reset at the Company's
discretion, historically these accounts have not demonstrated strong
correlations 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. If interest rates
decline in the future, a positve gap generally indicates that net interest
income and the net interest margin will decrease. The Company neither
currently utilizes financial derivatives to hedge its asset/liability
position nor has any plans to employ such strategies in the near future.
The following table summarizes, for the periods indicated, loan
balances at the end of each period and average balances during the period,
changes in the allowance for possible credit losses arising from credit
losses, recoveries of credits losses previously incurred, additions to the
allowance for possible credit losses charged to operating expense, and
certain ratios relating to the allowance for possible credit losses:
Analysis of the Allowance for Possible Credit Losses
(Dollars in thousands) 1996 1995
Allowance for loan losses:
Beginning balance $752 $906
Provision for loan losses 220 100
Charge-offs:
Commercial 47 242
Real estate
Consumer 21
Total charge-offs 47 263
Recoveries:
Commercial 16 9
Real estate
Consumer 3
Total recoveries 19 9
Net charge-offs 28 254
Ending balance $944 $752
Loans (net of unearned income)
outstanding at December 31 (1) $81,713 $62,880
Average loans (net of unearned
income) outstanding at
December 31 (1) $72,393 $56,589
Ratios:
Allowance to loans (net of
unearned income)* 1.16% 1.20%
Net charge-offs to average
loans (net of unearned income)* .04% .45%
Net charge-offs to allowance 2.97% 33.78%
(1) Includes mortgage loans sold and mortgage loans held for sale reported
on the Consolidated Balance Sheets.
Based upon growth in the loan portfolio, MCB Financial provided
$220,000 to the allowance for possible credit losses during 1996 as
compared to $100,000 during the same period of 1995. Net charge-offs
totaled $28,000 and $254,000, respectively. Charge-offs during 1996
resulted from the charge-off of one unsecured commercial loan. Charge-offs
in 1995 resulted from the write-off of substandard loans acquired from the
Bank of Hayward when it was purchased in 1994. These loans were reflected
in the allowance for possible credit losses originally acquired from the
Bank of Hayward.
The following table sets forth the allocation of the allowance for
possible credit losses as of the dates indicated:
Allocation of the Allowance for Possible Credit Losses
1996 1995
Percen Percen
t of t of
loans loans
Allowa in Allowa in
nce Each nce Each
for Catego for Catego
Possib ry to Possib ry to
le le
(Dollars in Credit Total Credit Total
thousands) Losses Loans Losses Loans
Commercial $583 42.85% $324 46.21%
Real estate 202 50.27% 248 45.11%
Consumer 48 6.88% 46 8.68%
Not allocated 111 N/A 134 N/A
Total $944 100.00% $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 below 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.
Time Certificates, $100,000 and Over
The following table sets forth the time remaining to maturity of MCB
Financial's time deposits in amounts of $100,000 or more (dollar amounts in
thousands):
Time remaining to December
maturity 31, 1996
Three months or less $ 3,835
After three months
to six months 1,934
After six months
to one year 2,159
After twelve months 1,555
Total $ 9,483
Item 7. Financial Statements.
The information required to be furnished pursuant to this item is
contained in the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements in the Annual Report. Such information
and the Independent Auditors' Report in the Annual Report are incorporated
herein by reference to Exhibit No. (13) of this report.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance
With Section 16(a) of the Exchange Act.
The information required to be furnished pursuant to this item will be
set forth under the captions "Election of Directors" and "Executive
Officers" in the registrant's proxy statement (the "Proxy Statement") to be
furnished to stockholders in connection with the solicitation of proxies by
MCB Financial's Board of Directors for use at the 1997 Annual Meeting of
Shareholders to be held on May 21, 1997, and is incorporated herein by
reference.
Item 10. Executive Compensation
The information required to be furnished pursuant to this item will be
set forth under the caption "Executive Compensation of MCB Financial and
Metro Commerce" of the Proxy Statement, and is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this item will be
set forth under the captions "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management" of the Proxy Statement, and
is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required to be furnished pursuant to this item will be
set forth under the caption "Certain Relationships and Related Transactions
Regarding MCB Financial and Metro Commerce" of the Proxy Statement, and is
incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Executive Compensation Plans and Arrangements:
Stock Option Plan
Deferred Compensation Plan for Executives
Exhibits:
(2) -- Plan of acquisition, reorganization (incorporated by
reference to the
registrant's registration statement on Form S-4 (File No. 33-
76832).
(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).
(11) -- Statement re: computation of per share earnings (the
information required to
be furnished pursuant to this exhibit is contained in the
Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in the Annual Report, which are incorporated
herein by reference to Exhibit No. (13) of this report).
(13) -- 1996 Annual Report to Shareholders (only those portions
expressly incorporated by reference herein shall
be deemed filed with the Commission).
(21) -- Subsidiaries of the small business issuer (the
information required to be
furnished pursuant to this exhibit is contained in the Notes to
Consolidated Financial Statements in the Annual Report, which is
incorporated herein by reference to Exhibit No. (13) of this
report).
(27) -- Financial Data Schedule
(b) Reports on Form 8-K. MCB Financial filed the following Current
Report on Form 8-K during the last quarter of the period covering this
report:
(i) None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
18th day of March, 1997.
By /s/ John Cavallucci
John Cavallucci
Chairman, President and
Chief Executive Officer
(Principal Executive Officer);
Director
By /s/ Brian M. Riley
Brian M. Riley
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 18th day of March, 1997.
Name Title
/s/ John Cavallucci
John Cavallucci Chairman; Director
/s/ Robert E. Eklund
Robert E. Eklund Director
/s/ Timothy J. Jorstad
Timothy J. Jorstad Director
/s/ Catherine H. Munson
Catherine H. Munson Director
/s/ Gary T. Ragghianti
Gary T. Ragghianti Vice Chairman; Director
/s/ Michael J. Smith
Michael J. Smith Director
/s/ Edward P. Tarrant
Edward P. Tarrant Director
/s/ Randall J. Verrue
Randall J. Verrue Director
Exhibit 13
MCB FINANCIAL CORPORATION
1996 ANNUAL REPORT
Corporate Profile
MCB Financial Corporation, headquartered in San Rafael, California, is the
holding company of Metro Commerce Bank, N.A. ("Metro"). Metro is a full
service commercial bank specializing in the delivery of financial services
to local businesses within the communities it serves. Through its four
branch offices located in San Rafael, South San Francisco, Hayward and Upland,
Metro offers a broad range of deposit and loan products designed for small
businesses. The mission MCB Financial Corporation is to achieve superior
financial performance for our shareholders by ranking among the top 10% of all
banks within California as measured by return on equity and return on assets.
This objective will be accomplished by talented banking professionals
working with a firm commitment to community based lending, management of
credit risk, and the delivery of a unique service experience. Shares of
MCB Financial Corporation are traded over-the-counter under the ticker
symbol of MCBF.
Selected Financial Data for MCB Financial Corporation
(dollar amounts in thousands, except per share)
Years ended December 31,
1996 1995 1994 1993 1992
Interest income $10,385 $8,716 $5,525 $4,041 $3,436
Interest expense 4,018 3,841 1,806 1,526 1,387
Net interest income 6,367 4,875 3,719 2,515 2,049
Provision for possible
credit losses 220 100 100 125 115
Other income 2,768 1,344 3,070 4,522 1,892
Other expense 5,565 8,552 5,837 5,440 3,414
Income (loss) before income taxes3,350 (2,433) 852 1,472 412
Provision for income taxes 1,379 (935) 326 238 27
Net income (loss) $1,971 $(1,498) $526 $1,234 $385
Net income (loss) per share $ 2.08 $ (1.58) $0.57 $ 1.39 $0.46
Period End
Total assets $131,504 $122,316 $90,443 $64,247 $55,803
Total loans 80,122 58,612 46,622 24,440 23,371
Total deposits 119,858 110,263 76,043 55,052 48,199
Other borrowings 447 213 4,521 763 395
Shareholders' equity 10,185 8,271 9,197 8,076 6,842
Book value per share $ 10.80 $ 8.77 $ 9.63 $ 9.56 $ 8.10
Financial Ratios
For period:
Return on assets 1.56% (1.37%) 0.70% 1.96% 0.84%
Return on equity 20.97% (17.04%) 5.99% 16.31% 5.99%
At period end:
Equity to assets 7.75% 6.76% 10.17% 12.57% 12.26%
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
which may not otherwise be apparent from the financial statements and
related notes. This discussion should be read in conjunction with the
financial statements and notes found on pages 16 through 27 as well as
other information presented throughout this report. Within this
discussion, MCB Financial Corporation shall be referred to as "MCBF"
and Metro Commerce Bank, N.A. shall be referred to as "Metro." Average
balances, including balances used in calculating certain financial ratios,
are generally comprised of average daily balances.
OVERVIEW
Earnings Summary. MCBF reported net income of $1,971,093, or $2.08
per share, for 1996 as compared to a net operating loss of $1,498,227, or
$1.58 per share, in 1995 and net income of $526,313, or $0.57 per share, in
1994. Results for 1996 reflect a recovery of approximately $1.8 million
(pre-tax) in litigation expenses originally recorded in the prior year.
The net operating loss in 1995 is attributable to the creation of a $2.8
million litigation contingency reserve during the second quarter of that
year.
Return on average assets for 1996 was 1.56% as compared to (1.37%) in
1995 and 0.70% in 1994. Return on average equity for 1996 was 20.97% in
1996 as compared to (17.04%) in 1995 and 5.99% in 1994.
FINANCIAL CONDITION
Summary. Asset growth slowed during 1996 as Management implemented a
strategy to de-emphasize expansion in order to improve profit margins on
existing market share. Assets increased by 7.5% during 1996 versus 35.2%
and 40.8% in 1995 and 1994, respectively.
Loans. One method Management used to improve profit margins was to
continue its focus on quality loan development. Loans held for investment
increased by $21.5 million, or 36.7% in 1996, as compared to an increase of
$12.0 million, or 25.7%, during 1995. Commercial real estate loans
represented a majority of the 1996 increase (see note 3 to consolidated
financial statements). Metro lengthened the duration of its loan portfolio
and increased commercial real estate loans through offering a competitively
priced fixed rate, intermediate-term loan product.
In the normal practice of extending credit, the Metro accepts real
estate collateral on loans which have primary sources of repayment from
commercial operations. Loans secured by real estate totaled $66.2 million,
or 82.7% of all loans, at December 31, 1996 versus $48.1 million, or 76.5%
of all loans, a year earlier. Due to Metro's limited marketing area, its
real estate collateral is primarily concentrated in the San Francisco Bay
Area and Southern California. Management believes that its prudent
underwriting standards for real estate secured lending provide an adequate
safeguard against changing real estate prices.
Metro 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, and 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 Metro's loan portfolio. As of December 31, 1996, the
two largest industry concentrations within the loan portfolio were real
estate and related services at 24.3% and the business/personal service
industry at 17.9% of the portfolio. Because credit concentrations increase
portfolio risk, Metro places significant emphasis on the purpose of each
loan and the related sources of repayment.
Mortgage Banking. Mortgage loans sold pending settlement totaled
$647,600 at December 31, 1996 versus $3.5 million a year earlier. Mortgage
origination volume decreased to $29.9 million in 1996 from $44.1 million in
1995 and $143.1 million in 1994. Due to production changes in the mortgage
industry and the unfavorable prospects for future improvement, Metro
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. Metro will
continue to offer limited retail mortgage lending through its commercial
bank operations. See note 15 to consolidated
financial statements for industry segmentation data on Mortgage Banking.
Nonperforming Assets. Metro 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 Metro's
policy to transfer loans which become 90 days or more past due, from either
delinquent principal or interest payments, to "nonaccrual" status.
Recognition of interest income ceases once a loan is classified as
nonaccrual. If previously accrued interest is deemed uncollectable, it is
reversed from interest income. At December 31, 1996, nonperforming assets
totaled $79,000, or 0.06% of total assets. There were no nonperforming
assets at December 31, 1995.
Allowance for Possible Credit Losses. Metro maintains an
allowance for possible credit losses (the "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 Metro's credit loss experience,
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, Metro 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.
The APCL totaled $944,105, or 1.16% of total loans, as of December 31, 1996
versus $752,358, or 1.27% of total loans, a year earlier. In both periods,
the APCL was determined to be an adequate allowance against foreseeable
future losses. Note 3 to the consolidated financial statements provides a
summary of the activity in the APCL for the three years ended December 31,
1996. The increase in net credit losses during 1995 resulted from the
charge-off of substandard loans acquired from the Bank of Hayward
("Hayward"). These loans were reflected in the $400,000 APCL acquired from
Hayward.
Investments. An analysis of the investment portfolio as of
December 31, 1996 and 1995 is contained in note 2 to the consolidated
financial statements. Metro continues to invest in callable government
agency debentures. These securities offer above market yields, but do not
offer the same investment performance as non-callable bonds. Market prices
for callable bonds decrease when interest rates rise; however, they remain
relatively unchanged when interest rates fall due to the increased probability
of a call option being exercised.
Deposits/Other Borrowings. Total deposits increased by $9.6 million,
or 8.7%, during 1996 as compared to an increase of $34.2 million, or 45.0%,
during 1995. As mentioned previously in this discussion, Management made a
decision during 1996 to slow Metro's rate of growth in order to concentrate
on improving profit margins. This included repositioning Metro's deposit
rates in the marketplace so as to limit non-relationship deposit growth.
As a result, Metro experienced a decrease of over $4.3 million in high cost
time deposits. These deposits were replaced by core money market and non-
interest bearing deposits. The following table summarizes the distribution
of average deposits and the average rates paid for the periods indicated
(dollar amounts in thousands):
For the Years Ended December 31,
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing
demand deposits $22,607 $16,691 $12,413
Interest-bearing transaction
deposits (includes money
market deposit accounts) 70,533 4.11% 55,927 4.46% 24,931 2.77%
Savings deposits 2,363 1.95% 2,430 2.22% 2,359 2.24%
Time deposits, $100,000
and over 9,023 5.50% 8,541 5.78% 9,048 3.91%
Other time deposits 10,009 5.40% 13,357 5.50% 16,228 4.12%
Total interest-bearing 91,928 4.34% 80,255 4.70% 52,566 3.36%
Total deposits $114,535 3.48% $96,946 3.89% $64,979 2.71%
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest income
increased by $1.5 million, or 30.6%, during 1996 to reach $6.4 million.
This compares to net interest income of $4.9 million in 1995 and $3.7
million in 1994. As in prior years, the increase in net interest income
during 1996 was due to growth in earning assets as well as improvement in
the net interest margin.
The following table sets forth average assets, liabilities, and
shareholders' equity; the amount of interest income or interest expense;
the average yield or rate for each category of interest-bearing assets
and interest-bearing liabilities; and the net interest margin for the
periods indicated (dollar amounts in thousands):
For the Years Ended December 31,
1996 1995
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $4,465 $ 233 5.22% $7,750 $ 450 5.81%
Interest-bearing deposits
with banks 656 41 6.25% 934 61 6.53%
Investment securities 38,736 2,375 6.18% 34,523 1,992 5.83%
Mortgage loans 1,433 117 8.16% 2,353 180 7.65%
Loans 70,082 7,619 10.87% 53,346 6,033 11.31%
Total Earning Assets 115,372 10,385 9.02% 98,906 8,716 8.83%
Total Non-earning Assets 11,014 10,087
Total Assets $126,386 $108,993
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $22,607 $16,691"
Interest-bearing
transaction accounts 70,533 2,902 4.11% 55,927 2,492 4.46%
Time deposits,
$100,000 or more 9,023 496 5.50% 8,541 493 5.77%
Savings and other time 12,372 587 4.74% 15,787 789 5.00%
Total interest-bearing deposits 91,928 3,985 4.33% 80,255 3,774" 4.70%
Other borrowings 729 33 4.53% 1,163 67 5.76%
Total interest-bearing
liabilities 92,657 4,018 4.34% 81,418 3,841 4.72%
Other liabilities 1,723 2,094
Shareholders' equity 9,399 8,790
Total Liabilities
and Stockholders' Equity $126,386 $108,993
Net interest income $6,367 $4,875
Net interest margin 5.52% 4.95%
For the Year Ended December 31, 1994
Average
Balance Interest Rate
Assets:
Federal funds sold $3,443 $135 3.92%
Interest-bearing deposits
with banks 1,004 43 4.28%
Investment securities 23,066 1,202 5.36%
Mortgage loans 6,718 449 6.68%
Loans 33,285 3,696 11.10%
Total Earning Assets 67,516 5,525 8.19%
Total Non-earning Assets 7,451
Total Assets $74,967
Liabilities and Shareholders' Equity:
Demand deposits $12,413
Interest-bearing
transaction accounts 24,931 691 2.77%
Time deposits, $100,000
or more 9,048 354 3.91%
Savings and other time 18,587 722 3.89%
Total interest-bearing
deposits 52,566 1,767 3.36%
Other borrowings 772 39 5.05%
Total interest-bearing
liabilities 53,338 1,806 3.39%
Other liabilities 430
Shareholders' equity 8,786
Total liabilities and
Shareholders' equity $74,967
Net interest income $3,719
Net interest margin 5.52%
Metro's net interest margin (net interest income divided by average
earning assets) increased to 5.52% during 1996. This compared to 4.95% in
1995 and 5.52% in 1994. The improvement in 1996 was due to higher
investment yields, increased loans, and lower deposit costs. The decrease
in 1995 principally resulted from an increase in the cost of funds as
depositors shifted balances away from lower yielding accounts to the
MetroFlex account.
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).
1996 Compared to 1995 1995 Compared to 1994
Increase (decrease) due to Increase (decrease) due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold ($191) ($46) $20 ($217) $169 $65 $81 $315
Interest-bearing
deposits with banks (18) (3) 1 (20) (3) 23 (2) 18
Investment securities246 121 16 383 614 108 68 790
Mortgage loans held
for sale (70) 12 (5) (63) (292) 65 (42) (269)
Loans 1,893 (235) (72) 1,586 2,227 70 40 2,337
Total Interest
Income 1,860 (151) (40) 1,669 2,715 331 145 3,191
Interest Expense:
Interest-bearing
transaction
accounts 651 (196) (45) 410 859 421 521 1,801
Time deposits,
$100,000 or more 28 (23) (2) 3 (20) 168 9 139
Savings and other
time (171) (41) 10 (202) (109) 206 (30) 67
Other borrowings (25) (14) 5 (34) 20 5 3 28
Total Interest
Expense 483 (274) (32) 177 750 800 485 2,035
Net Interest Income$1,377 $123 ($8) $1,492 $1,965($469)($340) $1,156
Provision for Possible Credit Losses. MCBF provided $220,000 to the
APCL during 1996 as compared to $100,000 in 1995 and 1994, respectively.
The increased provision during 1996 was primarily due to growth in the loan
portfolio. The corresponding net credit losses for the same three year
period were $28,253 in 1996, $253,410 in 1995 and $94,842 in 1994. Net
credit losses in 1995 resulted from the write-off of substandard loans
acquired from the Bank of Hayward. These losses were reflected in the APCL
originally acquired from the Bank of Hayward.
Noninterest Income. The following table summarizes noninterest income
for the years 1996, 1995 and 1994 and expresses these amounts as a
percentage average assets (dollar amounts in thousands).
Years Ended December 31,
Components of Noninterest Income 1996 1995 1994
Gain on sale of mortgage loans $351 $465 $1,176
Gain on sale of mortgage servicing 1,253
Gain on sale of SBA loans 47 66
Service charge on deposit accounts 390 252 165
Loan servicing fees 21 404
Recovery of litigation expenses 1,825 452
Other income 135 109 72
Total $ 2,769 $ 1,344 $ 3,070
As a Percentage of Average Assets
Gain on sale of mortgage loans 0.28% 0.43% 1.57%
Gain on sale of mortgage servicing 1.67%
Gain on sale of SBA loans 0.04% 0.06%
Service charge on deposit accounts 0.31% 0.23% 0.22%
Loan servicing fees 0.02% 0.54%
Recovery of litigation expenses 1.44% 0.41%
Other income 0.11% 0.10% 0.10%
Total 2.19% 1.23% 4.10%
During the first quarter of 1996, MCBF recovered approximately $1.8
million in litigation expenses in conjunction with the complete settlement
and release of its outstanding litigation. MCBF reached a settlement with
its insurance carriers during 1995 and received a recovery of prior
litigation expenses in the amount of $452,000. Gains from the sale of
mortgage loans continued to decrease in 1996 due to changes within the
industry (see discussion of Mortgage Banking). All of the Metro's mortgage
servicing portfolio was sold near the end of 1994 resulting in a gain of
$1.3 million. No additional mortgage servicing income will be recognized
in future periods. Metro will continue to recognize income from servicing
SBA loans.
Noninterest Expenses. The following table summarizes noninterest
expenses and the associated ratios to average assets for the years 1996,
1995 and 1994 (dollar amounts in thousands).
Years Ended December 31,
Components of Noninterest Expenses 1996 1995 1994
Salaries and employee benefits $ 3,120 $ 3,010 $ 3,107
Occupancy expense 724 723 546
Furniture and equipment expense 388 343 288
Professional services 202 463 530
Supplies 236 247 310
Promotional 233 277 240
Data processing 276 230 158
Regulatory assessments 46 131 176
Provision for legal settlement 2,800
Other expense 340 328 482
Total $ 5,565 $ 8,552 $ 5,837
Average full-time equivalent staff 50 49 52
As a Percentage of Average Assets
Salaries and employee benefits 2.47% 2.76% 4.15%
Occupancy expense 0.57% 0.66% 0.73%
Furniture and equipment expense 0.31% 0.31% 0.38%
Professional services 0.16% 0.42% 0.71%
Supplies 0.19% 0.23% 0.41%
Promotional 0.18% 0.25% 0.32%
Data processing 0.22% 0.21% 0.21%
Regulatory assessments 0.04% 0.12% 0.24%
Provision for litigation settlement 2.57%
Other expense 0.27% 0.30% 0.64%
Total 4.40% 7.85% 7.79%
The increase in noninterest expense during 1995 was attributable to
the creation of a $2.8 million litigation settlement reserve during the
second quarter. The reserve was established after a Marin County Jury
awarded, in favor of a Southern California bank, a judgment of $795,000
against Metro and its Chief Executive Officer. The reserve included
estimates for the award of attorney's fees against the Metro. This
litigation was completely settled during the first quarter of 1996 and
resulted in a recovery of approximately $1.8 million from the reserve.
Income Taxes. MCBF's effective tax rate was 41.2% in 1996 as compared
to a tax benefit of 38.4% in 1995. The effective tax rate in 1994 was
38.3%. The increase in recent years is due to a reduction in the amount
municipal bond income earned by Metro. Note 5 to the consolidated
financial statements provides a reconciliation of the statutory tax rates
to the effective tax rate for each period.
Liquidity and Asset/Liability Management. Liquidity is Metro'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 include payments of principal and interest on loans and
investments, proceeds from the sale or maturity of loans and investments,
growth in deposits, and increases in other borrowings. Metro holds
overnight federal funds as a cushion for temporary liquidity needs. During
1996, federal funds sold averaged $4.5 million, or 3.5% of total assets.
In addition to its federal funds, Metro maintains various lines of
credit with correspondent banks, the Federal Reserve Bank, and the Federal
Home Loan Bank.
As of December 31, 1996, Metro had cash, time deposits with banks,
federal funds sold, and unpledged investment securities of approximately
$43.4 million, or 33.0% of total assets. This represented the total amount
of liquid assets available for sale and/or available to secure Metro's
lines of credit (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. As of December 31, 1996, the
loan-to-deposit ratio was 68.1% as compared to 53.8% a year earlier.
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. As of December 31, 1996, this ratio was
5.1% as compared 20.0% a year earlier.
As of December 31, 1996, the MCBF had no material commitments that
were expected to adversely impact liquidity.
Capital Resources. The principal source of capital for MCBF is and
will continue to be the retention of operating profits. Approximately
$1.1 million in common stock issued for the 1994 acquisition of Bank
of Hayward. Total shareholders' equity was $10.2
million as of December 31, 1996 as compared to $8.3 million a year earlier.
Regulatory authorities have established minimum capital adequacy
guidelines requiring that qualifying capital be 8% of risk-based assets, of
which at least 4% must be tier 1 capital (primarily Shareholders' equity).
As of December 31, 1996, MCBF's qualifying capital was 11.7%, of which
the tier 1 capital ratio was 10.7%. In addition, MCBF, 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 December 31, 1996, MCBF's leverage ratio was 7.6%.
Market Price of MCB Financial Corporation. MCBF is aware of two securities
dealers, A.G. Edwards in San Rafael, California and Black & Co. in Portland,
Oregon, which make a market in its common stock. There were approximately
469 shareholders as of December 31, 1996. The following high and low bid
prices reflect actual transactions which may not include retail markups,
markdowns, or commissions. Prices are adjusted to reflect stock dividends.
1994 1995 1996
High Low High Low High Low
First quarter $12.38 $11.67 $9.17 $8.33 $8.46 $7.15
Second quarter 12.38 11.67 8.57 8.57 8.46 7.62
Third quarter 12.38 10.48 8.57 8.57 8.58 8.10
Fourth quarter 11.79 8.33 8.57 7.14 11.44 8.10
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of MCB Financial Corporation:
We have audited the accompanying consolidated balance sheets of MCB
Financial Corporation and subsidiary (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MCB Financial Corporation
and its subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
January 31, 1997
MCB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
ASSETS
Cash and due from banks $9,609,584 $7,706,117
Federal funds sold 770,000 4,860,000
Total cash and cash equivalents 10,379,584 12,566,117
Interest-bearing deposits with banks 384,000 1,269,000
Investment securities (market value of
$34,873,402 and $39,332,581) (Note 2) 35,079,138 39,232,892
Mortgage loans sold spending settlement 647,600 3,515,620
Loans held for investment (net of
allowance for possible credit losses of
$944,105 in 1996 and $752,358 in 1995)
(Notes 3 and 6) 80,121,693 58,612,151
Premises and equipment - Net (Note 4) 2,278,163 2,550,871
Accrued interest receivable 1,003,016 983,158
Deferred income taxes 621,191 1,483,758
Other assets 989,921 2,102,508
TOTAL ASSETS $131,504,306 $122,316,075
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $26,265,743 $21,758,760
Interest-bearing:
Transaction accounts 73,532,399 64,160,115
Time certificates, $100,000 and over 9,483,134 9,106,755
Savings and other time deposits 10,577,186 15,237,740
Total interest-bearing deposits 93,592,719 88,504,610
Total deposits 119,858,462 110,263,370
Other borrowings 446,776 213,378
Accrued interest payable and other
liabilities (Note 8) 1,013,939 3,568,592
Total liabilities 121,319,177 114,045,340
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
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 955,399 shares in 1996 and 909,904 shares in 1995,
outstanding 942,842 shares in 1996 and 898,324 shares in 1995
9,398,574 8,908,876
Unrealized (loss) gain on investment
securities available for sale - net (45,378) 9,691
Retained earnings (accumulated deficit) 831,933 (647,832)
Total shareholders' equity 10,185,129 8,270,735
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $131,504,306 $122,316,075
See notes to consolidated financial statements.
MCB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
INTEREST INCOME:
Loans, including fees $7,735,541 $6,213,674 $4,144,927
Federal funds sold 233,079 449,803 135,103
Investment securities 2,416,079 2,052,777 1,245,429
Total interest income 10,384,699 8,716,254 5,525,459 "
INTEREST EXPENSE:
Interest-bearing transaction,
savings and other time deposits 3,488,495 3,281,317 1,412,774 "
Time certificates, $100,000 and over 496,368 493,276 354,055 "
Other interest 33,227 66,831 39,115
Total interest expense 4,018,090 3,841,425 1,805,944 "
NET INTEREST INCOME 6,366,609 4,874,829 3,719,515 "
PROVISION FOR POSSIBLE CREDIT
LOSSES (Note 3) 220,000 100,000 100,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 6,146,609 4,774,829 3,619,515 "
OTHER INCOME:
Gain on sale of loans 397,695 531,281 1,176,284
Gain on sale of mortgage servicing 1,252,901
Service fees on deposit accounts 389,829 251,637 164,706 "
Loan servicing fees 21,600 404,003
Loss on sale of investment securities (net) (1,483)
Recovery of litigation expenses (Note 8) 1,824,689 451,640
Other 134,941 110,830 72,053
Total other income 2,768,754 1,343,905 3,069,947 "
OTHER EXPENSES:
Salaries and employee benefits 3,120,007 3,009,856 3,106,726 "
Occupancy expense 724,166 723,449 546,331
Furniture and equipment expense 387,927 342,500 288,043
Professional services 201,535 462,799 530,350
Supplies 236,352 247,177 309,638 "
Promotional expenses 233,490 276,714 240,174
Data processing fees 275,944 229,560 158,422
Regulatory assessments 45,660 130,803 176,435
Provision for legal settlement (Note 8) 2,800,000
Other 340,276 329,316 480,787
Total other expenses 5,565,357 8,552,174 5,836,906 "
INCOME (LOSS) BEFORE INCOME TAXES 3,350,006 (2,433,440) 852,556
INCOME TAX PROVISION (BENEFIT) (Note 5) 1,378,913 (935,213) 326,243
NET INCOME (LOSS) $1,971,093$(1,498,227) $526,313
NET INCOME (LOSS) PER COMMON SHARE:
Primary and fully diluted $ 2.08 $(1.58) $ 0.57
See notes to consolidated financial statements.
MCB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Unrealized
Gain (Loss) on
Investment Retained
Securities Earnings
Common Stock Available (Accumulated
Shares Amount For Sale - Net Deficit) Total
BALANCE, DECEMBER
31, 1993 804,194 $7,761,352 $314,855 $8,076,207
Unrealized gain (loss)
on investment securities
available for sale at
January 1, 1994 - net (Note 2) $20,484 20,484
Net income 526,313 526,313
Bank of Hayward
acquisition 91,489 1,110,694 1,110,694
Issuance of shares under
stock option plan 14,221 141,800 141,800
Tax benefit from exercise
of certain stock options 9,227 9,227
Change in unrealized
loss - net (687,344) (687,344)
BALANCE, DECEMBER
31, 1994 909,904 9,013,846 (666,860) 850,395 9,197,381
Purchases of common
stock (11,580) (104,970) (104,970)
Change in unrealized
loss - net 676,551 676,551
Net loss (1,498,227)(1,498,227)
BALANCE, DECEMBER
31, 1995 898,324 8,908,876 9,691 (647,832)8,270,735
Change in unrealized
gain - net (55,069) (55,069)
Net income 1,971,093 1,971,093 "
Dividends on common stock (5%)
Cash payment (1,630) (1,630)
Stock issued 44,518 489,698 (489,698)
BALANCE, DECEMBER
31, 1996 942,842 $9,398,574 ($45,378) $831,933 $10,185,129
See notes to consolidated financial statements.
MCB FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
OPERATING ACTIVITIES:
Net income (loss) $1,971,093 $(1,498,227) $526,313
Adjustments to reconcile net income
to net cash provided by operating
activities:
Originations of loans for sale (29,865,000) (44,124,000) (143,120,000)
Settlement of mortgage loans sold 32,733,020 45,676,280 156,010,778
Provision for possible credit losses 220,000 100,000 100,000
Depreciation and amortization 498,398 302,243 553,555
Loss on sale of other real estate owned 9,972
Provision for legal settlement 2,800,000
Loss on sale of investment securities (net) 1,483
Recovery of litigation expenses (1,800,000)
Change in deferred income taxes 901,698 (816,006) 114,243
(Increase) in accrued
interest receivable (19,858) (325,812) (283,709)
Decrease (increase) in other assets 2,333,576 (915,400) (209,648)
(Decrease) increase in accrued
interest payable and other
liabilities (1,971,566) 107,106 100,624
Net cash provided by operating
activities 5,001,361 1,317,639 13,792,156
INVESTING ACTIVITIES:
Purchases of investment securities
available for sale (1,000,481) (933,469) (16,913,978)
Purchases of investment securities
held to maturity (19,238,750) (29,299,365) (100,775)
Proceeds from maturities of
investment securities
held to maturity 11,000,000 12,100,000 1,347,980
Proceeds from maturities of
investment securities
available for sale 13,171,684 1,585,967 3,500,000
Proceeds from sales of
investment securities
available for sale 3,798,082
Purchase of Bank of Hayward,
net of cash acquired 7,580,808
Decrease (increase) in interest
-bearing deposits with banks 885,000 (683,000) 678,000
Proceeds from sale of other
real estate owned 286,090 332,676
Net (increase) in loans held for
investment (21,729,542) (12,090,481) (13,791,479)
Purchases of premises and equipment (102,665) (385,393) (1,170,932)
Net cash used by
investing activities (17,014,754) (25,621,569) (18,537,700)
FINANCING ACTIVITIES:
Net increase (decrease)
in noninterest-bearing
demand deposits 4,506,983 5,939,587 (1,430,693)
Net increase in interest-bearing
transaction, savings and
other time deposits 5,088,109 28,280,513 5,092,641
Net increase (decrease) in other
borrowings 233,398 (4,307,979) 3,758,023
Cash dividends paid (1,630)
Proceeds from the exercise of
stock options 141,800
Purchases of common stock (104,970)
Net cash provided by financing
activities 9,826,860 29,807,151 7,561,771
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2,186,533) 5,503,221 2,816,227
CASH AND CASH EQUIVALENTS:
Beginning of year 12,566,117 7,062,896 4,246,669
End of year $10,379,584 $12,566,117 $7,062,896
CASH PAID DURING THE YEAR FOR:
Interest on deposits
and other borrowings $4,134,011 $3,703,312 $1,716,776
Income taxes $250,441 $1,000 $155,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to other
real estate owned $628,730
Issuance of common stock for Bank of Hayward acquisition $1,110,694
Stock Dividends paid on common stock $489,698
See notes to consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of MCB Financial Corporation (the
"Company") and its wholly owned subsidiary, Metro Commerce Bank, N.A.
(the "Bank"), conform to generally accepted accounting principles and
general practice in the banking industry. The Company was incorporated
in California January 20, 1993 for the purpose of becoming a bank
holding company registered under the Bank Holding Company Act of 1956.
The following is a summary of the significant accounting policies and
reporting methods used by the Company:
Nature of Operations - The Bank operates three branches in the San
Francisco Bay Area and one branch in Upland, California. The Bank's
primary source of revenue is providing loans to small and middle-market
businesses.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Basis of Consolidation - The accompanying consolidated financial
statements include the Company and its wholly owned subsidiary, the
Bank. All intercompany amounts are eliminated in consolidation.
Cash and due from banks include balances with the Federal Reserve Bank.
The Bank is required by federal regulations to maintain certain minimum
average balances with the Federal Reserve, based primarily on the
Bank's average daily deposit balances. At December 31, 1996, the Bank
had required balances and compensating balances with the Federal
Reserve of $532,511 (1995 - $601,283).
Cash and cash equivalents include cash on hand, due from banks and
federal funds sold. Generally, federal funds are sold for one-day
periods.
Investment Securities - The Company classifies its qualifying
investments as trading, available for sale or held to maturity.
Management has reviewed the securities portfolio and classified
securities as either held to maturity or available for sale. The
Company's policy of classifying investments as held to maturity is
based upon its ability and management's intent to hold such securities
to maturity. Securities expected to be held to maturity are carried at
amortized historical cost. All other securities are classified as
available for sale and are carried at fair value. Fair value is
determined based upon quoted market prices. Unrealized gains and
losses on securities available for sale are included in shareholders'
equity on an after-tax basis.
Gains and losses on dispositions of investment securities are included in
noninterest income and are determined using the specific identification
method.
Loans which are held for investment are stated at the principal amount
outstanding, net of deferred loan origination fees and costs and the
allowance for possible credit losses. Interest income is recognized
using methods which approximate a level yield on principal amounts
outstanding. 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. Loan origination fees, net of certain
related direct loan origination costs, are deferred and amortized as
yield adjustments over the contractual lives of the underlying loans.
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. In December 1996,
the Financial Accounting Standards Board issued SFAS No. 127. SFAS 127
reconsiders certain provisions of SFAS 125 and defers for one year the
effective date of implementation for transactions related to repurchase
agreements, dollar-roll repurchase agreements, securities lending, and
similar transactions. 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. SFAS No.
125 is not expected to have a material effect on the Company's
financial statements.
Mortgage Banking Activities - The Bank originates mortgage loans for
investment and sale in the secondary market. During the period of
origination, mortgage loans are designated as held either for sale or
investment purposes. The Bank sells loans under purchase and sales
commitments, and on both a servicing retained and a servicing released
basis. The Bank recognizes servicing income as earned over the term of
the loans being serviced. Loan origination fees, net of certain
related direct loan origination costs, are deferred until the loans are
sold and are included as part of the gain or loss on sale. Gain or
loss on the sale of mortgage loans is recognized at the time loans are
transferred to the investor and in an amount equal to the difference
between the cash sales prices and the carrying value of the loans sold.
Mortgage loans held for sale are valued at the lower of cost or market
value applied on an aggregate basis. Transfers of loans held for sale
to the loan portfolio are recorded at the lower of cost or market on
the transfer date. Sales of mortgage loans are subject to certain
recourse provisions. However, management estimates that any losses
therefrom will be minimal.
Allowance for possible credit losses is maintained at a level deemed
appropriate by management to provide for known and inherent risks in
the loan portfolio and commitments to extend credit. The allowance is
based upon management's continuing assessment of various factors
affecting the collectibility of loans and commitments to extend credit,
including current and projected economic conditions, past credit
experience, the value of the underlying collateral, and such other
factors as in management's judgment deserve current recognition in
estimating potential credit losses. Loans deemed uncollectible are
charged-off and deducted from the allowance, while subsequent
recoveries are credited to the allowance.
A loan is considered impaired when management determines that it is probable
that the Company will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. Impaired loans are carried
at the estimated present value of total expected future cash flows, discounted
at the loan's effective rate, or the fair value of the collateral, if the loan
is collateral dependent, if less than the recorded investment in the loan
(including accrued interest, net deferred loan fees or costs and unamortized
premium or discount). An impairment is recognized by adjusting an allocation
of the existing allowance for credit losses.
Premises and equipment consist of leasehold improvements, furniture and
equipment, and automobiles which are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed on a straight-
line basis over the estimated useful lives of the assets, primarily
from three to thirty years. Leasehold improvements are amortized over
the terms of the lease or their estimated useful lives, whichever is
shorter.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which addresses the accounting for the impairment of long-lived assets, such
as premises, furniture and equipment, certain identifiable intangibles and
goodwill related to those assets. Long-lived assets and certain identifiable
intangibles are to be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the sum of the future
cash flows expected from the use of the asset and its eventual disposition
(undiscounted and without interest charges) is less than the carrying amount
of the asset. The Statement also requires that long-lived assets and
identifiable intangibles, except for assets of a discontinued operation
held for disposal, be accounted for at the lower of cost or fair value less
cost to sell. The Company has implemented SFAS No. 121 and has determined
that the measurement of impairment loss is not material.
Organization costs of the Company are included in other assets and
amortized over a 60 month period on a straight-line basis. At December
31, 1996, unamortized organization costs were $24,520 (1995 - $38,531).
Stock-based compensation - The Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" on January 1, 1996. SFAS No. 123 establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based compensation plans.
As allowed under the provisions of SFAS No. 123, the Company has chosen
to continue using the intrinsic value-based method of valuing stock options
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. Under the intrinsic
value-based method, compensation cost is measured as the amount by which
the quoted market price of the Company's stock at the date of grant exceeds
the stock option exercise price.
Income Taxes -The Company and its subsidiary file consolidated income
tax returns.
The Company provides a deferred tax expense or benefit equal to the net
change in deferred tax assets and liabilities during the year.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Stock Dividends - In December 1996, outstanding shares of common stock
were increased due to the payment of a 5% stock dividend. All per share
amounts have been restated to reflect the issuance of such shares.
Net Income Per Common Share - Primary and fully diluted income per
common share are computed by dividing net income by the weighted
average number of common shares outstanding during each period,
assuming exercise of all stock options having exercise prices less than
the average and ending market prices, respectively, of the common stock
using the treasury stock method.
The weighted average number of shares used for computing primary and
fully diluted income per common share was as follows:
1996 1995 1994
Primary 947,320 945,678 923,132
2. INVESTMENT SECURITIES
The amortized cost and approximate market value of investment
securities at December 31 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
1996:
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 "
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
1995:
Held to maturity securities:
U.S. Treasury " $ 1,997,050 " $ (570) "
$ 1,996,480 " " $ 1,997,050 "
U.S. Government agencies " 14,498,140 " " $ 101,161
" " (1,140) " " 14,598,161 " " 14,498,140
"
Corporate securities " 1,000,002 " 238
" 1,000,240 " " 1,000,002 "
Total held to maturity " 17,495,192 " "
101,399 " " (1,710) " " 17,594,881 " "
17,495,192 "
Available for sale securities:
U.S. Treasury " 11,331,030 " " 56,848 " "
(12,290) " " 11,375,588 " " 11,375,588 "
U.S. Government agencies " 5,079,663 " "
2,216 " " (5,639) " " 5,076,240 " "
5,076,240 "
Mortgage-backed securities " 5,145,430 " "
(24,564) " " 5,120,866 " " 5,120,866 "
Municipal bonds " 165,000 " 364
(358) " 165,006 " " 165,006 "
Total available for sale " 21,721,123 " "
59,428 " " (42,851) " " 21,737,700 " "
21,737,700 "
Total investment securities " $ 39,216,315 " " $ 160,827
" " $ (44,561) " " $ 39,332,581 " " $ 39,232,892 "
The following table shows the amortized cost and approximate fair value
of investment securities by contractual maturity at December 31, 1996:
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Within one year " $ 5,738,728 " " $
5,683,555 "
After one but within five years " 18,242,904 " "
18,144,190 " " 3,678,447 " " 3,655,995 "
Over five years " 7,496,684 " " 7,389,660 "
Total " $ 25,739,588 " " $ 25,533,850 " " $
9,417,175 " " $ 9,339,550 "
The Bank carries its Federal Reserve Bank stock and Federal Home Loan
Bank stock as other assets. These securities are not covered by the
provisions of SFAS No. 115 and are recorded at historical cost. The
total carrying value at December 31, 1996 and 1995 was $652,850 and
$517,450, respectively.
Mortgage-backed securities are classified, in the table above, based on
final maturity dates. These securities are issued by the Federal
National Mortgage Association, $1,525,518, ($1,671,703 in 1995), and
the Federal Home Loan Mortgage Corporation, $2,650,732 ($3,449,163 in
1995), and may be prepaid at the option of the issuer.
The Bank has purchased U.S. government agency securities totaling
$25,740,000 that contain certain issuer call option features. These
securities have a weighted average yield of 6.54% and may be called if
interest rates fall below certain levels. If these securities are
called the Bank may not be able to reinvest the proceeds to obtain the
same weighted average yield.
Securities with an amortized cost of approximately $2,455,284 as of
December 31, 1996, and $6,889,756 as of December 31, 1995, were pledged
to secure other borrowings.
3. LOANS AND ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Loans at December 31, consisted of the following:
1996 1995
Commercial " $ 16,851,393 " " $ 16,145,047 "
Real estate:
Commercial " 49,855,398 " " 32,161,287 "
Construction " 7,347,878 " " 4,388,034 "
Land " 1,807,036 " " 1,881,853 "
Home equity " 2,809,135 " " 2,902,903 "
Loans to consumers and individuals " 2,457,658 " "
1,959,911 "
Total " 81,128,498 " " 59,439,035 "
Deferred loan fees " (62,700) " " (74,526) "
Allowance for possible credit losses " (944,105) " "
(752,358) "
Total " $ 80,121,693 " " $ 58,612,151 "
The Bank is principally engaged in commercial banking in the San
Francisco Bay Area of California and Upland, California. The Bank
primarily grants commercial loans, the majority of which are secured by
commercial properties. Although the Bank has a diversified portfolio,
a substantial portion of its debtors' ability to honor their contracts
is dependent upon the economic sector of Northern California, including
the real estate markets of the San Francisco Bay Area. Approximately
45% of the Bank's loans have interest rates that are variable and tied
to the prime rate, whereas the remaining are fixed rate loans.
The Bank sells the majority of originated residential mortgage loans
with servicing released. A substantial portion of these loans are sold
to the Federal Home Loan Mortgage Association. In late 1996, the Bank
decided to wind down its wholesale mortgage banking operations. The Bank
will continue to offer limited retail mortgage lending through its
commercial bank operations. During 1994 the Bank
sold all mortgage servicing rights at a gain of $1,252,901.
Following is a schedule of the activity in the allowance for possible
credit losses on loans for the years ended December 31:
1996 1995 1994
"Balances, January 1" " $ 752,358 " " $ 905,768 " " $
500,610 "
Provision for possible credit losses " 220,000 " "
100,000 " " 100,000 "
Acquisition of Hayward allowance " 400,000 "
Loans charged-off " (47,418) " " (262,542) " "
(101,508) "
Recoveries " 19,165 " " 9,132 " " 6,666
"
Total " $ 944,105 " " $ 752,358 " " $ 905,768 "
At December 31, 1996, the Company had one nonperforming loan in the
amount $78,731. Had this loan performed under its contractual terms
$9,692 in additional interest income would have been recognized during
the year.
At December 31, 1996, the Company had one loan identified as
impaired in the amount of $78,731.
The Company provided no allowance for possible credit losses at
December 31, 1996 for this impaired loan.
At December 31, 1995, the Company had no loans outstanding for which
the accrual of interest had been discontinued and had no loans deemed
to be impaired.
4. PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, are as
follows:
1996 1995
Leasehold improvements " $ 1,994,718 " " $ 1,990,731 "
Furniture and equipment " 1,508,575 " " 1,451,937 "
Automobiles " 200,818 " " 143,422 "
Construction in progress " 24,775 "
Total " 3,704,111 " " 3,610,865 "
Less accumulated depreciation and amortization " (1,425,948) " "
(1,059,994) "
"Premises and equipment, net" " $ 2,278,163 " " $ 2,550,871 "
The amount of depreciation and amortization was $375,373 in 1996,
$345,584 in 1995 and $255,158 in 1994.
5. INCOME TAXES
The components of the provision (benefit) for income taxes for the
years ended December 31 are as follows:
1996 1995 1994
Current payable (benefit):
Federal " $ 362,338 " " $ (98,235) " " $ 172,744 "
State " 114,835 " " (21,040) " "
39,256 "
Total current payable (benefit) " 477,173 " "
(119,275) " " 212,000 "
Deferred:
Federal " 633,662 " " (579,630) " " 66,019
"
State " 268,078 " " (236,308) " " 48,224
"
Total deferred " 901,740 " "
(815,938) " " 114,243 "
Total " $ 1,378,913 " " $ (935,213) " " $ 326,243 "
A reconciliation of the statutory federal income tax rates with the
Company's effective income tax rates is as follows:
1996 1995 1994
Statutory federal tax rate 34.0 % 34.0 % 34.0 %
"State income taxes, net of federal income"
tax benefit 7.5 7.6 7.5
Municipal interest (0.1) (0.5) (3.2)
Other (0.2) (2.7)
Effective tax rate 41.2 % 38.4 % 38.3 %
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. Temporary
differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows:
December 31
1996 1995
Deferred tax assets:
Net operating loss carryforwards " $ 366,198 " " $ 402,681
"
Reserves not currently deductible " 416,812 " "
1,422,335 "
Unrealized loss on securities available for sale "
32,247 "
State income taxes " 5,416 " " 1,007 "
Other " 7,446 " " 16,590 "
Total " 828,119 " " 1,842,613 "
Deferred tax liabilities:
Accrual to cash " 44,710 " " 122,760 "
Tax over book depreciation " 120,272 " " 84,883 "
Unrealized gain on investment securities available for sale
" 6,886 "
State taxes " 124,774 "
Other " 41,946 " " 19,552 "
Total " 206,928 " " 358,855 "
Net deferred tax asset " $ 621,191 " " $ 1,483,758 "
The Company has acquired net operating loss carryforwards ("NOL") in
connection with the acquisition of the Bank of Hayward. The
utilization of NOLs acquired through acquisition is limited by certain
state and federal tax laws. The Company has determined that the annual
limitation on its ability to utilize NOLs is $78,130 for the fifteen-
year period. The following table presents the remaining NOLs (after
limitation) at December 31, 1996, by expiration date:
Expiration Date Federal Amount State Amount
" December 31, 2004 " " $ 541,989 "
" December 31, 2005 " " 125,666 "
" December 31, 2006 " " 11,342 " " $
120,841 "
" December 31, 2007 " " 180,433 " "
62,533 "
" December 31, 2008 " " 78,130 " "
5,271 "
" December 31, 2009 " " 329,021 "
The Company reduced its 1996 federal and state current tax liability by
approximately $64,000 and $9,000 by utilizing $188,814 and $78,130 in
net operating loss carryforwards, respectively.
6. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has made loans and
advances under lines of credit to directors and their related
interests. All such loans and advances were made under terms that are
consistent with the Bank's normal lending policies.
At December 31, 1996, loans outstanding to related parties were
$2,607,234 and loan commitments to related parties amounted to
$3,594,907.
7. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") for certain of its
directors, organizers and key employees under which up to 226,432
shares of common stock have been authorized to be granted. Up to 10%
of the number of outstanding shares of the Company's common stock is
available for granting solely to the directors and organizers of the
Company, provided, however, that the sum of all shares granted to
directors, organizers and key employees of the Company does not exceed
the maximum number of options that may be granted by the Plan.
Under the Plan, options may not be granted at a price less than the
fair market value at the date of grant. Options for key employees are
exercisable as determined at the sole discretion of the Stock Option
Plan Committee (the "Committee"), but not exceeding 10 years from the
date of grant. All options granted to nonemployee directors of the
Bank are nonstatutory options that have a term of 10 years.
Furthermore, 20% of the nonstatutory options granted to a director are
immediately vested and exercisable, and the remainder of the options
vest at 20% annually for each of the four years from the date of grant.
Each option granted to an organizer is exercisable as determined at the
sole discretion of the Committee, but not exceeding five years from the
date of grant.
The following is a summary of change's in options outstanding:
Weighted
Number Average
of Exercise
Shares Price
"Outstanding, January 1, 1994" "162,087 " $9.10
Granted "7,350 " 10.21
Exercised "(14,932)" 9.49
Expired "(6,930)" 9.52
"Outstanding at December 31, 1994"
" (101,683 exercisable at a weighted average price of $9.10)"
"147,575 " 9.09
Granted (weighted average fair value of $3.78) "19,950 " 8.57
Canceled "(6,825)" 8.57
"Outstanding at December 31, 1995"
" (121,728 exercisable at a weighted average price of $9.07)"
"160,700 " 9.05
Granted (weighted average fair value of $3.45) "11,025 " 7.82
Canceled "(14,700)" 8.57
"Outstanding at December 31, 1996" "157,025 " $9.01
Additional information regarding options outstanding as of December 31,
1996 is as follows:
Options Options
Outstandin Exercisa
g ble
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractua Average Number Average
l
Exercise Outstand Life Exercise ExercisaExercise
Prices ing (Yrs.) Price ble Price
$7.14 - 93,958 5.6 $8.53 75,270 $8.63
$8.78
9.05 - 53,092 3.8 9.40 50,449 9.42
9.52
10.48 - 9,975 7.4 11.38 6,825 11.50
12.38
$7.14 - 157,025 5.1 $9.01 132,544 $9.08
$12.38
At December 31, 1996, 54,475 shares were available for future grants
under the Plan.
Additional Stock Option Plan Information
As discussed in Note 1, the Company continues to account for its stock-
based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements
for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro
forma net income and earnings per share had the Company adopted the
fair value method as of the beginning of fiscal 1995. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility
and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions:
expected life, 36 months following full vesting; stock volatility, 26%
in 1996 and 26% in 1995; risk free interest rates, 6.5% in 1996 and
6.5% in 1995; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur.
If the computed fair values
of the 1995 and 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net income (loss) would have
been ($1,507,507) ($1.59 per share) in 1995 and $1,957,752 ($2.07 per
share) in 1996. However, the impact of outstanding non-vested stock
options granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 1995 and 1996 pro forma adjustments are
not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
8. COMMITMENTS AND CONTINGENCIES
The Bank leases its premises under noncancelable operating leases
expiring through January 31, 1999 with options to extend the leases for
four additional five-year terms. Future minimum lease commitments are
$500,571 in 1997, $516,151 in 1998, $532,226 in 1999, $548,811 in 2000,
$372,162 in 2001 and $3,407,009, thereafter.
Rental expense for premises under operating leases included in
occupancy expense was $463,779, $447,451 and $349,575 in 1996, 1995 and
1994, respectively.
There are various legal actions pending against the Company arising
from the normal course of business. The Company is also named as
defendant in various lawsuits in which damages are sought. Management,
upon the advice of legal counsel handling such actions, believes that
the ultimate resolution of these actions will not have a material
effect on the financial position of the Company.
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.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to various financial instruments with on-balance
sheet and off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. Financial instruments
include commitments to extend credit, standby letters-of-credit and
financial guarantees. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters-of-credit and financial guarantees is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Bank
controls the credit risk of these transactions through credit
approvals, credit limits and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
varies, but may include marketable securities, accounts receivable,
inventory, property, plant and equipment.
Standby letters-of-credit and financial guarantees are written
conditional commitments issued by the Bank to guarantee the performance
of a customer to a third party. Those guarantees are primarily issued
to support public and private borrowing arrangements. Most guarantees
extend for less than five years and expire in decreasing amounts. The
credit risk involved in issuing letters-of-credit is essentially the
same as that involved in extending loan facilities to customers.
The following table summarizes these financial instruments and other
commitments and contingent liabilities at December 31:
1996 1995
Financial instruments whose credit risk is represented
by contract amounts:
Commitments to extend credit - loans " $ 16,950,350 " " $
15,686,541 "
Standby letters-of-credit and financial guarantees "
1,142,566 " " 926,633 "
Total " $ 18,092,916 " " $ 16,613,174 "
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value
amounts have been determined using the available market information and
appropriate valuation methodologies consistent with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments".
However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the bank could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
"December 31, 1996"
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and due from banks " $ 9,609,584 " " $
9,609,584 "
Federal funds sold " 770,000 " " 770,000 "
Interest-bearing deposits with banks " 384,000 " "
384,000 "
Available for sale securities " 9,339,550 " "
9,339,550 "
Held to maturity securities " 25,739,588 " "
25,533,850 "
" Loans, net" " 80,769,293 " " 80,258,000 "
Financial liabilities:
Noninterest-bearing deposits " 26,265,743 " "
26,265,743 "
Interest-bearing deposits " 93,592,719 " "
93,618,914 "
Other borrowings " 446,776 " " 446,776 "
December 31, 1995
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and due from banks " $ 7,706,117 " " $
7,706,117 "
Federal funds sold " 4,860,000 " " 4,860,000 "
Interest-bearing deposits with banks " 1,269,000 " "
1,269,000 "
Available for sale securities " 21,737,700 " "
21,737,700 "
Held to maturity securities " 17,495,192 " "
17,594,881 "
" Loans, net" " 62,127,771 " " 61,431,000 "
Financial liabilities:
Noninterest-bearing deposits " 21,758,760 " "
21,758,760 "
Interest-bearing deposits " 88,504,611 " "
88,546,342 "
Other borrowings " 213,378 " " 213,378 "
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Short-Term Financial Assets - This category includes cash and due from
banks, federal funds sold and interest-bearing deposits with banks.
Because of their relatively short maturities, the fair value of these
financial instruments is considered to be equal to book value.
Available-For-Sale and Held-To-Maturity Securities - For these
securities, fair value is quoted market price if available. If a
quoted market price is not available, fair value is estimated using
quoted market prices for similar instruments.
Loans - The fair value of floating rate loans is deemed to approximate
book value. The fair value of all other performing loans is determined
by discounting expected future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
In addition to the above, the allowance for credit losses is considered
a reasonable adjustment for credit risk relating to the entire credit
portfolio, including obligations to extent credit and other off-balance-
sheet transactions.
Deposits - The fair value of demand, savings and money market deposits
is equal to the amount payable on demand at the reporting date. For
other types of deposits with fixed maturities, fair value is estimated
by discounting contractual cash flows at interest rates currently being
offered on deposits with similar characteristics and maturities. A
fair value for the deposits base intangible has not been estimated.
Other Borrowings - The fair value of the other borrowings is determined
by discounting contractual cash flows at current market interest rates
for similar instruments.
Off-Balance-Sheet Financial Instruments - The Company has not estimated
the fair value of off-balance-sheet commitments to extend credit,
standby letters of credit and financial guarantees. Because of the
uncertainty involved in attempting to assess the likelihood and timing
of a commitment being drawn upon, coupled with the lack of an
established market and the wide diversity of fee structures, the
Company does not believe it is practicable to provide a meaningful
estimate of fair value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1996. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein. Management
does not intend to dispose of a significant portion of its financial
instruments.
11.REGULATORY MATTERS
The Company and Bank are subject to various regulations issued by Federal
banking agencies, including minimum capital requirements. Failure to meet
minimum regulatory capital requirements could result in regulators
requiring prompt corrective action to be taken which could have a material
effect on the financial statements. As of December 31, 1996, the Company
and Bank exceeded the capital adequacy requirements for a well capitalized
institution.
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1996, the Bank had available $1,747,490 for the payment of dividends.
The Bank is subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates.
In particular, the Company is prohibited from borrowing from the Bank
unless the loans are secured by specified types of collateral. Such
secured loans and other advances from the Bank are limited to 10% of
the Bank's shareholders' equity on a per affiliate basis. There were
no such extensions of credit by the Bank in 1996 and 1995.
12.EMPLOYEE BENEFIT PLAN
In 1991 the Company approved a defined contribution plan covering all
eligible salaried employees. Employees may, up to prescribed limits,
contribute to the plan. The Company may also elect to make
discretionary contributions to the plan based on the Company's
earnings. No contributions were made by the Company in 1996 or 1995.
In 1994 the Company established a Deferred Compensation Plan for
Executives (the "Deferred Plan"). Participation in the Plan is limited
to a select group of management and other employees as determined by
the Board of Directors. Under the terms of the plan, participants may
defer a portion of their cash compensation and receive minimum 50%
matching contributions from the Company, which vest over the employee's
remaining years of employment to retirement. The Company has
guaranteed participants a certain minimum return on their contributions
and on the Bank's matching contributions. Contributions made by the
Company for the years ended December 31, 1996, 1995 and 1994 were
$15,000, $13,000 and $11,125, respectively.
13.PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial information for MCB Financial Corporation
(parent company only) at December 31, 1996 and 1995, and the results of
its operations and cash flows for the years then ended, is summarized
as follows:
1996 1995
Financial Condition
Assets:
Cash and due from banks " $ 70,696 " " $ 38,739
"
Investment in the Bank " 10,064,977 " " 8,172,834
"
Other " 50,443 " " 60,149 "
Total " $ 10,186,116 " " $ 8,271,722 "
Liabilities and shareholders' equity:
Other liabilities $ 987 $ 987
Shareholders' equity:
Common stock " 9,398,574 " " 8,908,876 "
Unrealized gain (loss) on investment securities available
for sale - net " (45,378) " " 9,691 "
Retained earnings (accumulated deficit) " 831,933 " "
(647,832) "
Total shareholders' equity " 10,185,129 " "
8,270,735 "
Total " $ 10,186,116 " " $ 8,271,722 "
1996 1995
Results of Operations:
Dividend income from Bank " $ 50,000 "
Income - interest from investments " 1,464 " " $
3,186 "
Expenses - general and administrative " 52,181 " "
52,645 "
Income (loss) before equity in net income of the Bank
(717) " (49,459) "
Equity in undistributed net income (loss) of the Bank "
1,947,212 " " (1,469,385) "
Income (loss) before income tax provision " 1,946,495 " "
(1,518,844) "
Income tax benefit " 24,598 " " 20,617 "
Net income (loss) " $ 1,971,093 " " $ (1,498,227) "
Net income (loss) per common share:
Primary and fully diluted $ 2.08 $
(1.58)
1996 1995
Cash Flows
Operating activities:
Net income (loss) " $ 1,971,093 " " $ (1,498,227) "
Reconciliation to cash used in operating activities:
(Increase) decrease in equity in undistributed net income
of Bank " (1,997,212) " " 1,469,385 "
Amortization " 14,011 " " 14,011 "
Increase in other assets " (4,305) " "
(2,651) "
Cash used in operating activities " (16,413) " "
(17,482) "
Investing activities:
Dividend received from Bank " 50,000 "
Cash provided by investing activities " 50,000 "
-
Cash provided by financing activities:
Purchase of common stock "
(104,970) "
Cash dividends paid " (1,630) "
Cash used in financing activities " (1,630) " "
(104,970) "
Net increase (decrease) in cash and equivalents " 31,957 "
" (122,452) "
Cash and equivalents:
Beginning of period " 38,739 " " 161,191 "
End of period " $ 70,696 " " $ 38,739 "
14.INDUSTRY SEGMENT DATA
The Bank operates in two principal industry segments, mortgage banking
and commercial banking. Operations in mortgage banking relate to the
origination, sale, and servicing of single family residential
mortgages. Operations in commercial banking involve the acceptance of
checking and savings deposits, the origination of portfolio loans, and
the offering of other customary banking services. Revenue for mortgage
banking activities is defined as interest income on loans held for
sale, gains on the sale of loans and income from loan servicing
activities. Revenue for commercial banking includes interest income on
loans and investments and service fee income. As of January 1, 1997,
the Company has decided to wind down its mortgage banking operations
and continue only limited retail mortgage lending functions within its
commercial banking operations.
Operating profit for both segments excludes general corporate expenses
and income taxes. Identifiable assets by industry are those assets that
are used in the Bank's operations within each industry segment.
Adjustments to interest income and identifiable assets represent the
elimination of inter-segment borrowing activity.
"Year Ended December 31, 1996"
Corporate
Mortgage Commercial Items and
Banking Banking Eliminations Consolidated
Interest income " $ 117,224 " " $ 10,267,475 "
" $ 10,384,699 "
Other income " 353,251 " " 2,415,503 "
" 2,768,754 "
Total revenue " $ 470,475 " " $ 12,682,978 " $
" $ 13,153,453 "
Operating profits " $ (46,871) " " $ 3,116,481 "
" $ 3,069,610 "
General corporate expenses
" $ (1,098,517) " " (1,098,517) "
Income (loss) before income taxes " $ (46,871) " " $
3,116,481 " " $ (1,098,517) " " $ 1,971,093 "
Identifiable assets " $ 700,964 " " $ 122,403,155 " "
$ 8,400,187 " " $ 131,504,306 "
During 1996, depreciation and amortization expense for mortgage banking
and commercial banking, respectively, was $48,789 and $302,068.
Capital expenditures for commercial banking were $9,748.
"Year Ended December 31, 1995"
Corporate
Mortgage Commercial Items and
Banking Banking Eliminations Consolidated
Interest income " $ 180,278 " " $ 8,535,976 "
" $ 8,716,254 "
Other income " 617,793 " " 782,355 "
" 1,400,148 "
Total revenue " $ 798,071 " " $ 9,318,331 " $
" $ 10,116,402 "
Operating profits " $ 59,490 " " $ 2,209,402 "
" $ 2,268,892 "
General corporate expenses
" $ (4,702,332) " " (4,702,332) "
Income (loss) before income taxes " $ 59,490 " " $
2,209,402 " " $ (4,702,332) " " $ (2,433,440) "
Identifiable assets " $ 3,661,771 " " $ 111,939,349 " " $
6,714,955 " " $ 122,316,075 "
During 1995, depreciation and amortization expense for mortgage banking
and commercial banking, respectively, was $48,593 and $278,859.
Capital expenditures for these industry segments were $2,873 and
$379,326, respectively.
"Year Ended December 31, 1994"
Corporate
Mortgage Commercial Items and
Banking Banking Eliminations Consolidated
Interest income " $ 448,627 " " $ 5,595,816 "
" $ (518,984) " " $ 5,525,459 "
Other income " 2,833,261 " " 236,686 "
" 3,069,947 "
Total revenue " $ 3,281,888 " " $ 5,832,502 " " $
(518,984) " " $ 8,595,406 "
Operating profits " $ 1,028,947 " " $ 1,764,609 "
" $ 2,793,556 "
General corporate expenses
" (1,941,000) " " (1,941,000) "
Income before income taxes " $ 1,028,947 " " $
1,764,609 " " $ (1,941,000) " " $ 852,556 "
Identifiable assets " $ 5,299,492 " " $ 77,322,929 " "
$ 7,821,021 " " $ 90,443,442 "
During 1994, depreciation and amortization expense for mortgage banking
and commercial banking, respectively, was $79,500 and $460,044.
Capital expenditures for these industry segments were $34,791 and
$1,136,141, respectively.
******
