FORM 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________ to_____________
Commission file number: 033-76832
MCB FINANCIAL CORPORATION
(exact name of small business issuer)
California 68-0300300
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1248 Fifth Avenue, San Rafael, California 94901
(Address of principal executive offices)
(415) 459-2265
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
May 13, 1997
Class
Common stock, no par value 957,542
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
ASSETS (Unaudited)
Cash and due from banks $5,659,113 $ 9,609,584
Federal funds sold 7,780,000 770,000
Total cash and cash equivalents 13,439,113 10,379,584
Interest-bearing deposits with banks 384,000 384,000
Investment securities available for
sale at fair value 13,008,970 9,339,550
Investment securities held to maturity;
fair values of $24,159,695 in 1997
and $25,533,850 in 1996 24,740,150 25,739,588
Mortgage loans sold pending settlement 647,600
Loans held for investment (net of
allowance for possible credit losses
of $928,680 in 1997 and $944,105
in 1996 78,345,854 80,121,693
Premises and equipment - net 2,204,977 2,278,163
Accrued interest receivable 890,847 1,003,016
Deferred income taxes 735,139 621,191
Other assets 1,195,583 989,921
Total assets $ 134,944,633 $ 131,504,306
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 26,228,198 $ 26,265,743
Interest-bearing:
Transaction accounts 76,970,630 73,532,399
Time certificates, $100,000 and over 9,369,537 9,483,134
Savings and other time deposits 10,067,070 10,577,186
Total interest-bearing deposits 96,407,237 93,592,719
Total deposits 122,635,435 119,858,462
Other borrowings 743,913 446,776
Accrued interest payable and
other liabilities 1,174,300 1,013,939
Total liabilities 124,553,648 121,319,177
SHAREHOLDERS' EQUITY
Preferred stock, no par value: authorized 20,000,000 shares;
none issued or outstanding
Common stock, no par value: authorized 20,000,000 shares;
issued and outstanding 947,042 shares
in 1997 and 942,842 in 1996 9,434,568 9,398,574
Unrealized loss on investment securities
available for sale - net (122,446) (45,378)
Retained earnings 1,078,863 831,933
Total shareholders' equity 10,390,985 10,185,129
Total liabilities and shareholders' equity $ 134,944,633 $ 131,504,306
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1997 1996
(Unaudited)
INTEREST INCOME:
Loans, including fees $ 1,997,909 $ 1,611,547
Federal funds sold 72,030 123,393
Investment securities 565,798 577,750
Total 2,635,737 2,312,690
INTEREST EXPENSE:
Interest-bearing transaction,
savings and other time deposits 864,351 875,763
Time certificates, $100,000 and over 122,818 127,196
Other interest 8,231 5,821
Total 995,400 1,008,780
NET INTEREST INCOME 1,640,337 1,303,910
PROVISION FOR POSSIBLE CREDIT LOSSES 20,000 140,000
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 1,620,337 1,163,910
OTHER INCOME:
Gain on sale of loans 53,133 110,052
Service fees on deposit accounts 113,986 90,982
Recovery of litigation expenses 1,800,000
Other 39,420 108,470
Total 206,539 2,109,504
OTHER EXPENSES:
Salaries and employee benefits 789,525 965,166
Occupancy expense 191,689 174,317
Furniture and equipment expense 88,685 94,030
Professional services 60,793 52,021
Supplies 53,459 52,336
Promotional expenses 50,643 37,653
Data processing fees 71,296 65,260
Regulatory assessments 14,456 11,314
Other 88,996 82,618
Total 1,409,542 1,534,715
INCOME BEFORE INCOME TAXES 417,334 1,738,699
INCOME TAX EXPENSE 170,404 723,073
NET INCOME $ 246,930 $1,015,626
NET INCOME PER COMMON SHARE:
Primary and fully diluted $0.25 $ 1.08
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
1997 1996
OPERATING ACTIVITIES: (Unaudited)
Net income $ 246,930 $ 1,015,626
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Originations of loans for sale (9,531,000)
Settlement of mortgage loans sold 647,600 11,408,620
Provision for possible credit losses 20,000 140,000
Depreciation and amortization 87,707 137,247
Recovery of litigation expenses (1,800,000)
Change in deferred income taxes (59,186) 1,016,881
Decrease in accrued interest receivable 112,169 37,994
(Increase) in other assets (209,165) (608,113)
Increase (decrease) in accrued interest
payable and other liabilities 164,728 (1,844,485)
Net cash provided (used) by
operating activities 1,010,783 (27,230)
INVESTING ACTIVITIES:
Held to maturity securities:
Maturities 1,000,000 9,000,000
Purchases (14,238,750)
Available for sale securities:
Maturities 1,198,747 2,452,218
Purchases (5,000,000)
Decrease in interest-bearing deposits
with banks 491,000
Net decrease (increase) in loans
held for investment 1,755,839 (2,717,423)
Purchases of premises and equipment (15,944) (56,496)
Net cash used by investing activities (1,061,358) (5,069,451)
FINANCING ACTIVITIES:
Net (decrease) increase in
noninterest-bearing demand deposits (37,545) 656,100
Net increase in interest-bearing transaction,
savings and other time deposits 2,814,518 4,149,140
Net increase in other borrowings 297,137 528,920
Proceeds from the exercise of stock options 35,994
Net cash provided by financing activities 3,110,104 5,334,160
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,059,529 237,479
CASH AND CASH EQUIVALENTS:
Beginning of period 10,379,584 12,566,117
End of period $ 13,439,113 $ 12,803,596
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other
borrowings $ 1,019,264 $ 1,036,269
Income taxes 250,000
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
Item 1. Financial Statements
Introduction and Basis of Presentation
The unaudited consolidated financial information included
herein has been prepared in conformity with the accounting
principles and practices in MCB Financial Corporation's ("the
Company") consolidated financial statements included in the
Annual Report for the year ended December 31, 1996. The
accompanying interim consolidated financial statements contained
herein are unaudited. However, in the opinion of the Company,
all adjustments, consisting of normal recurring items necessary
for a fair presentation of the operating results for the periods
shown, have been made. The results of operations for the three
months ended March 31, 1997 may not be indicative of operating
results for the year ended December 31, 1997. Certain prior year
and prior quarter amounts have been reclassified to conform to
current classifications. Cash and cash equivalents consists of
cash, due from banks, and federal funds sold.
Recently Issued Accounting Pronouncements
In June 1996, Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued.
This Statement establishes standards for when transfers of
financial assets, including those with continuing involvement by
the transferor, should be considered a sale. SFAS No. 125 also
establishes standards for when a liability should be considered
extinguished. This statement is effective for transfers of
assets and extinguishments of liabilities after December 31,
1996. In December 1996, the Financial Accounting Standards Board
("FASB") reconsidered certain provisions of SFAS No. 125 and
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" to defer for one year the
effective date of implementation for transactions related to
repurchase agreements, dollar-roll repurchase agreements,
securities lending and similar transactions. Management
determined that the effect of adoption of SFAS No. 125 on the
Company's financial statements was not material and believes that
the effect of adoption of SFAS No. 127 will also not be material.
In February 1997, the FASB issued SFAS No. 128, "Earnings
per Share". This Statement simplifies the standards for
computing earnings per share ("EPS") and makes them comparable to
international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In
addition, all entities with complex capital structures are
required to provide a dual disclosure of basic and diluted EPS on
the face of the income statement and a reconciliation of the
numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. This
Statement applies to entities with publicly held common stock or
potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods, and requires restatement of all prior period EPS
data presented.
The following table provides pro forma disclosure of basic
and diluted EPS in accordance with SFAS No. 128:
Three
Months
Ended
March 31,
1997 1996
Pro forma basic EPS........................ $0.25 $1.08
Pro forma diluted EPS...................... $0.25 $1.08
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion presents information pertaining to
the financial condition and results of operations of MCB
Financial Corporation and subsidiary ("Company") and should be
read in conjunction with the financial statements and notes
thereto presented in this 10-QSB. Average balances, including
balances used in calculating certain financial ratios, are
generally comprised of average daily balances.
This document may contain forward-looking statements that
are subject to risks and uncertainties that could cause actual
results to differ materially from those indicated. For a
discussion of factors that could cause actual results to differ,
please see the discussion contained herein and in the Company's
publicly available Securities and Exchange Commission filings and
press releases.
OVERVIEW
Earnings Summary. The Company reported net income of
$246,930 or $0.25 per share, for the first quarter of 1997. This
compares to net income of $1,015,626 or $1.08 per share, for the
same period in 1996 (which includes a pre-tax recovery of
approximately $1.8 million from the Company's litigation
contingency reserve in conjunction with the settlement of its
outstanding litigation). Excluding the litigation recovery, net
income for the first quarter of 1996 would have been
approximately $144,000, or $0.15 per share.
Return on average assets and return on average equity for
the first quarter of 1997 were 0.75% and 9.54%, respectively, as
compared to 3.32% and 48.43%, respectively, for the same period
of 1996.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $3.4
million, or 2.62%, from the end of 1996 to reach $134.9 million
at March 31, 1997. This increase resulted from growth in
existing operations.
Loans Held for Investment. Net loans held for investment
decreased by $1.8 million, or 2.2%, during the first quarter of
1997 as the construction loan portfolio experienced net paydowns
of $2.5 million. The following table sets forth the amount of
total loans outstanding by category as of the dates indicated:
Total Loans March 31, December 31,
(dollar amounts in thousands) 1997 1996
Commercial $ 17,290 $ 16,851
Real estate:
Commercial 51,209 49,856
Construction 4,813 7,348
Land 960 1,807
Home equity 2,501 2,809
Loans to consumers and individuals 2,571 2,458
Total 79,344 81,129
Deferred loan fees (69) (63)
Allowance for possible credit losses (929) (944)
Total net loans $ 78,346 $ 80,122
In the normal practice of extending credit, the Company
accepts real estate collateral on loans which have primary
sources of repayment from commercial operations. The total
amount of loans secured by real estate equaled $63.8 million, or
81.5% of the total portfolio as of March 31, 1997. Due to the
Company's limited marketing area, its real estate collateral is
primarily concentrated in the San Francisco Bay Area and Southern
California. The Company believes that its prudent underwriting
standards for real estate secured loans provides an adequate
safeguard against decreasing real estate prices.
The Company focuses its portfolio lending on commercial,
commercial real estate, and construction loans. These loans
generally carry a higher level of risk than conventional real
estate loans, accordingly, yields on these loans are typically
higher than those of other loans. The performance of commercial
and construction loans is generally dependent upon future cash
flows from business operations (including the sale of products,
merchandise and services) and the successful completion or
operation of large real estate projects. Risks attributable to
such loans can be significantly increased, often to a greater
extent than other loans, by regional economic factors, real
estate prices, the demand for commercial and retail office space,
and the demand for products and services of industries which are
concentrated within the Company's loan portfolio. As of March
31, 1997, the two largest industry concentrations within the loan
portfolio were real estate and related services at 24.2% and the
business/personal service industry at 18.4% of the portfolio.
Because credit concentrations increase portfolio risk, the
Company places significant emphasis on the purpose of each loan
and the related sources of repayment. The Company generally
limits unsecured commercial loans to maturities of three years
and secured commercial loans to maturities of five years.
Mortgage Loans. No mortgage loans sold pending settlement
existed at March 31, 1997 versus $647,600 at December 31, 1996.
Due to production changes in the mortgage industry and the
unfavorable prospects for future improvement, the Company decided
to wind down its wholesale Mortgage Banking operations at the end
1996. The mortgage industry continues to shift away from the use
of wholesalers in favor of direct lending. In addition,
competitive pressures continue to reduce the gross margins earned
by wholesalers.
Nonperforming Assets. The Company carefully monitors the
quality of its loan portfolio and the factors that effect it
including regional economic conditions, employment stability, and
real estate values. The accrual of interest on loans is
discontinued when the payment of principal or interest is
considered to be in doubt, or when a loan becomes contractually
past due by 90 days or more with respect to principal or
interest, except for loans that are well secured and in the
process of collection.
As of March 31, 1997, the Company had nonperforming assets
in the amount of $626,000, of which $79,000 represented one
nonaccrual loan. Had this nonaccrual loan performed under its
contractual terms $3,114 in additional interest income would have
been recognized during 1997. The following table sets forth the
balance of nonperforming assets as of the dates indicated.
Nonperforming Assets March 31, December 31,
(dollar amounts in thousands) 1997 1996
Nonaccrual loans $ 79 $ 79
Loans 90 days or more past due and still accruing 547
Other real estate owned
$ 626 $ 79
As a percent of total loans 0.79% 0.10%
As a percent of total assets 0.46% 0.06%
At March 31, 1997, the Company had loans identified as
impaired in the amount of $626,000. At March 31, 1997, no
specific allowance for possible credit losses was required for
these impaired loans.
Allowance for Possible Credit Losses. The Company maintains
an allowance for possible credit losses ("APCL") which is reduced
by credit losses and increased by credit recoveries and
provisions to the APCL charged against operations. Provisions to
the APCL and the total of the APCL are based, among other
factors, upon the Company's credit loss experience, current and
projected economic conditions, the performance of loans within
the portfolio, evaluation of loan collateral value, and the
prospects or worth of respective borrowers and guarantors.
In determining the adequacy of its APCL and after carefully
analyzing each loan individually, the Company segments its loan
portfolio into pools of homogeneous loans that share similar risk
factors. Each pool is given a risk assessment factor which
largely reflects the expected future losses from each category.
These risk assessment factors change as economic conditions shift
and actual loan losses are recorded. As of March 31, 1997, the
APCL of $928,680, or 1.17% of total loans was determined to be
adequate against foreseeable future losses.
The following table summarizes, for the periods indicated,
loan balances at the end of each period and average balances
during the period, changes in the APCL arising from credit
losses, recoveries of credit losses previously incurred,
additions to the APCL charged to operating expense, and certain
ratios relating to the APCL (dollar amounts in thousands):
March 31, December 31,
1997 1996
Balances:
Average loans during period (includes
mortgage loans held for sale) $ 78,825 $ 72,393
Loans at end of period (includes mortgage
loans held for sale) 79,275 81,713
Allowance for Possible Credit Losses:
Balance at beginning of period 944 752
Actual credit losses:
Commercial loans 45 47
Loans to consumers and individuals 1
Total 46 47
Actual credit recoveries:
Commercial loans 11 16
Loans to consumers and individuals 3
Total 11 19
Net credit losses 35 28
Provision charged to operating expenses 20 220
Balance at end of period $ 929 $ 944
Ratios:
Net credit losses to average loans 0.04% 0.04%
Allowance for possible credit losses to
loans at end of period 1.17% 1.16%
Net credit losses to beginning of period
allowance for credit losses 3.71% 3.72%
The Company provided $20,000 to the allowance for possible
credit losses during the first quarter of 1997 as compared to
$140,000 during the same period of 1996. The $140,000 provision
during the first quarter of 1996 was recorded as a prudent
measure, based upon growth in the loan portfolio.
The following table sets forth the allocation of the APCL as
of the dates indicated (dollar amounts in thousands):
March 31, December 31,
1997 1996
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 567 40.06% $ 583 42.85%
Real estate loans 207 53.02% 202 50.27%
Consumer loans 60 6.92% 48 6.88%
Not allocated 95 N/A 111 N/A
Total $ 929 100% $ 944 100%
The allowance is available to absorb losses from all loans,
although allocations have been made for certain loans and loan
categories. The allocation of the allowance as shown above
should not be interpreted as an indication that charge-offs in
future periods will occur in these amounts or proportions, or
that the allocation indicates future charge-off trends. In
addition to the most recent analysis of individual loans and
pools of loans, management's methodology also places emphasis on
historical loss data, delinquency and nonaccrual trends by loan
classification category and expected loan maturity. This
analysis, management believes, identifies potential losses within
the loan portfolio and therefore results in allocation of a large
portion of the allowance to specific loan categories.
Investments. The Company continues to invest in callable
government agency debentures. These securities offer above
market yields, but do not offer the same investment performance
as non-callable bonds. Markets 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.
The following table sets forth the amortized cost and
approximate market value of investment securities as of the dates
indicated (dollar amounts in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
March 31, 1997: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $24,740 $(580) $24,160 $24,740
Total held to maturity 24,740 (580) 24,160 24,740
Available for sale
securities:
U.S. Treasury 3,977 $3 3,980 3,980
U.S. Government agencies 5,000 (53) 4,947 4,947
Mortgage-backed securities 4,077 (159) 3,918 3,918
Municipal bonds 165 165 165
Total available for sale 13,218 3 (213) 13,009 13,009
Total investment securities$37,959 $3 $(794) $37,169 $37,749
December 31, 1996:
Held to maturity securities:
U.S. Government agencies $25,739 $9 $(215) $25,534 $25,740
Total held to maturity 25,739 9 (215) 25,534 25,740
Available for sale securities:
U.S. Treasury 4,977 22 (1) 4,998 4,998
Mortgage-backed securities 4,275 (99) 4,176 4,176
Municipal bonds 165 1 166 166
Total available for sale 9,417 22 (100) 9,340 9,340
Total investment securities$35,157 $31 $(315) $34,873 $35,079
Deposits/Other Borrowings. Total consolidated deposits
increased by $2.8 million, or 2.3%, during the first quarter of
1997. This increase was primarily the result of growth in
existing operations.
During 1996, Management made a decision to slow the
Company's rate of growth in order to concentrate on improving
profit margins. This policy included repositioning the Company's
deposit rates in the marketplace so as to limit non-relationship
deposit growth. This policy continued during the first quarter
of 1997 resulting in lower interest rates paid on deposits during
the first quarter of 1997. Average noninterest-bearing demand
deposits increased 9.2% during the first quarter contributing to
the decrease in the cost of funds to 3.32% from 3.48% during
1996. The following table summarizes the distribution of average
deposits and the average rates paid for the periods indicated
(dollar amounts in thousands):
Three Months Ended Year Ended
March 31, 1997 December 31, 1996
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $24,694 $22,607
Interest-bearing demand deposits
(includes money market
deposit accounts) 74,602 4.02% 70,533 4.11%
Savings deposits 1,885 1.90% 2,363 1.95%
Time deposits, $100,000 and over 9,260 5.31% 9,023 5.50%
Other time deposits 8,523 4.98% 10,009 5.40%
Total interest-bearing 94,270 4.19% 91,928 4.34%
Total deposits $118,964 3.32% $114,535 3.48%
The following table sets forth the time remaining to
maturity of the Company's time deposits in amounts of $100,000 or
more (dollar amounts in thousands):
March 31, December 31,
Time remaining to maturity 1997 1996
Three months or less $ 3,292 $3,835
After three months to six months 2,306 1,934
After six months to one year 2,733 2,159
After twelve months 1,039 1,555
Total $ 9,370 $9,483
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest
income for the quarter ended March 31, 1997 was $1,640,337 an
increase of 25.8% over the net interest income of $1,303,910
during the same period of 1996. The increase was primarily due to
growth in average earning assets.
The following table sets forth average assets, liabilities,
and shareholders' equity; the amount of interest income or
interest expense; and the average yield or rate for each category
of interest-bearing assets and interest-bearing liabilities and
the net interest margin (net interest income divided by average
earning assets) for the periods indicated (dollar amounts in
thousands):
For the quarter ended March 31,
1997 1996
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $5,614 $72 5.13% $9,401 $123 5.23%
Interest-bearing
deposits with banks 384 6 6.25% 1,108 18 6.50%
Investment securities 35,499 560 6.32% 37,458 560 5.99%
Mortgage loans held
for sale 266 5 7.52% 2,066 44 8.52%
Loans 78,825 1,992 10.11% 60,070 1,568 10.44%
Total earning assets 120,588 2,635 8.74% 110,103 2,313 8.41%
Total non-earning assets 10,546 12,242
Total assets $ 131,134 $ 122,345
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $24,694 $19,657
Interest-bearing
transaction accounts 74,602 749 4.02% 66,533 691 4.15%
Time deposits, $100,000
or more 9,260 123 5.31% 8,894 127 5.71%
Savings and other time 10,408 115 4.42% 14,755 185 5.02%
Total interest-bearing
deposits 94,270 987 4.19% 90,182 1,003 4.45%
Other borrowings 719 8 4.45% 513 6 4.68%
Total interest-bearing
liabilities 94,989 995 4.19% 90,695 1,009 4.45%
Other liabilities 1,101 3,605
Shareholders' equity 10,350 8,388
Total liabilities and
shareholders' equity$131,134 $122,345
Net interest income $ 1,640 $ 1,304
Net interest margin 5.44% 4.74%
The net interest margin increased to 5.44% during the first
quarter of 1997 from 4.74% in the same quarter of 1996. The
increase was due to increased loans and lower deposit costs.
The following table presents the dollar amount of changes in
interest earned and interest paid for each major category of
interest-earning asset and interest-bearing liability and the
amount of change attributable to average balances (volume)
fluctuations and average rate fluctuations. The variance
attributable to both balance and rate fluctuations is allocated
to a combined rate/volume variance (dollar amounts in thousands).
Quarter Ended March 31, 1997
Compared to
Quarter Ended March 31, 1996
Increase (decrease) due to
Rate/
Volume Rate Volume Total
Interest Income:
Federal funds sold ($50) ($2) $1 ($51)
Interest-bearing deposits
with banks (12) (1) 1 (12)
Investment securities (29) 31 (2) 0
Mortgage loans held for sale (38) (5) 4 (39)
Loans 490 (50) (16) 424
Total Interest Income 361 (27) (12) 322
Interest Expense:
Interest-bearing transaction
accounts 84 (22) (4) 58
Time deposits, $100,000 or
more 5 (9) 0 (4)
Savings and other time (55) (22) 7 (70)
Other borrowings 2 0 0 2
36 (53) 3 (14)
Net Interest Income $325 $26 ($15) $336
Noninterest Income. The following table summarizes
noninterest income for periods indicated and expresses the
amounts as a percentage of average assets (dollar amounts in
thousands).
Quarter Ended March 31,
Components of Noninterest Income 1997 1996
Gain on sale of loans $ 53 $ 110
Service fees on deposit accounts 114 91
Recovery of litigation expenses 1,800
Other 39 109
Total $ 206 $ 2,110
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.16% 0.36%
Service fees on deposit accounts 0.35% 0.30%
Recovery of litigation expenses 5.88%
Other 0.12% 0.36%
Total 0.63% 6.90%
During the first quarter of 1996, the Company recovered
approximately $1.8 million in litigation expenses in conjunction
with the settlement and release of its litigation involving Chino
Valley Bank.
Noninterest Expenses. The following table summarizes
noninterest expenses and the associated ratios to average assets
for the periods indicated.
Quarter Ended March 31,
Components of Noninterest Expense 1997 1996
Salaries and employee benefits $ 790 $ 965
Occupancy expense 192 174
Furniture and equipment expense 89 94
Professional services 61 52
Supplies 53 53
Promotional expenses 51 38
Data processing fees 71 65
Regulatory assessments 14 11
Other 89 83
Total $ 1,410 $ 1,535
Average full-time equivalent employees 50 50
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.41% 3.16%
Occupancy expense 0.59% 0.57%
Furniture and equipment expense 0.27% 0.31%
Professional services 0.19% 0.17%
Supplies 0.16% 0.17%
Promotional expenses 0.16% 0.12%
Data processing fees 0.22% 0.21%
Regulatory assessments 0.04% 0.04%
Other 0.27% 0.27%
Total 4.30% 5.02%
Noninterest expense decreased to $1.4 million during the
first quarter of 1997 from $1.5 million during the same period of
the prior year.
Income Taxes. The Company's effective tax rate for the
quarter ended March 31, 1997 was 40.8% as compared to 41.6% in
the same period of the prior year.
Liquidity and Asset/Liability Management. Liquidity is the
Company's ability to absorb fluctuations in deposits while
simultaneously providing for the credit needs of its borrowers.
The objective in liquidity management is to balance the sources
and uses of funds. Primary sources of liquidity for the Company
include payments of principal and interest on loans and
investments, proceeds from the sale or maturity of loans and
investments, growth in deposits, and other borrowings. The
Company holds overnight federal funds as a cushion for temporary
liquidity needs. During the three months ended March 31, 1997,
federal funds sold averaged $5.6 million, or 4.3% of total
assets. In addition to its federal funds, the Company maintains
various lines of credit with correspondent banks, the Federal
Reserve Bank, and the Federal Home Loan Bank.
At March 31, 1997, the Company had cash, time deposits with
banks, federal funds sold, and unpledged investment securities of
approximately $49.2 million, or 36.5% of total assets. This
represented all available liquid assets, excluding other assets.
Several methods are used to measure liquidity. One method
is to measure the balance between loans and deposits (gross loans
divided by total deposits). In general, the closer this ratio is
to 100%, the more reliant an institution becomes on its illiquid
loan portfolio to absorb temporary fluctuations in deposit
levels. At March 31, 1997, the loan-to-deposit ratio was 64.6%
as compared to 68.1% at December 31, 1996.
Another frequently used method is the relationship between
short-term liquid assets (federal funds sold and investments
maturing within one year) and short-term liabilities (total
deposits and other borrowings) as measured by the liquidity
ratio. The Company targets a minimum ratio of 5%. At March 31,
1997, this ratio was 10.6% as compared to 5.1% at December 31,
1996.
As of March 31, 1997, the Company had no material
commitments that were expected to adversely impact liquidity.
Net interest income and the net interest margin are largely
dependent on the Company's ability to closely match interest-
earning assets with interest-bearing liabilities. As interest
rates change, the Company must constantly balance maturing and
repricing liabilities with maturing and repricing assets. This
process is called asset/liability management and is commonly
measured by the maturity/repricing gap. The maturity/repricing
gap is the dollar difference between maturing or repricing assets
and maturing or repricing liabilities at different intervals of
time.
The following tables sets forth rate sensitive interest-
earning assets and interest-bearing liabilities as of March 31,
1997, the interest rate sensitivity gap (i.e. interest sensitive
assets minus interest sensitive liabilities), the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap
ratio (interest sensitive assets divided by interest sensitive
liabilities) and the cumulative interest rate sensitivity gap
ratio. For the purposes of the following table, an asset or
liability is considered rate sensitive within a specified period
when it matures or can be repriced within that period pursuant to
its original contractual terms (dollar amounts in thousands):
March 31, 1997
Over 90 Over 180 After One After
90 days days to days to Year to Five
or less 180 days 365 days Five Yrs Years Total
Earning Assets (Rate Sensitive):
Federal funds sold $7,780 $7,780
Interest-bearing deposits
with other banks $98 $286 384
Investment securities 1,261 1,230 2,456 $21,515 $11,497 37,959
Loans, gross of allowance
for possible losses 36,063 1,585 2,278 23,238 16,111 79,275
Total 45,104 2,913 5,020 44,753 27,608 125,398
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing transaction
deposits 10,059 33,456 33,456 76,971
Time deposits, $100,000
or more 3,292 2,306 2,733 1,039 9,370
Savings and other time
deposits 2,674 1,763 2,868 2,762 10,067
Other borrowings 744 744
Total 16,769 4,069 39,057 37,257 97,152
Period GAP $ 28,335 $(1,156)$(34,037) $7,496 $27,608
Cumulative GAP $ 28,335 $27,179 $ (6,858) $638 $28,246
Interest Sensitivity GAP Ratio62.82% (39.68%)(678.03%) 16.75% 100.00%
Cumulative Interest
Sensitivity 62.82% 56.60% (12.93%) 0.65% 22.53%
The Company classifies its money market accounts and savings
accounts into the over 180 days to 365 days time period as well
as the after one year to five years time period. This is done to
adjust for the insensitivity of these accounts to changes in
interest rates. Although rates on these accounts can
contractually be reset at the Company's discretion, historically
these accounts have not demonstrated strong correlation to
changes in the prime rate. Generally, a positive gap at one year
indicates that net interest income and the net interest margin
will increase if interest rates rise in the future. The Company
neither currently utilizes financial derivatives to hedge its
asset/liability position nor has any plans to employ such
strategies in the near future.
Capital Resources. The principal source of capital for the
Company is and will continue to be the retention of operating
profits. The ratios of average equity to average assets for the
periods indicated are set forth below.
Three Months Ended Year Ended
March 31, 1997 December 31, 1996
7.89% 7.44%
Regulatory authorities have issued guidelines to implement
risk-based capital requirements. The guidelines establish a
systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among
banking organizations. Capital is classified into two
components: Tier 1 (primarily shareholder's equity) and Tier 2
(supplementary capital including allowance for possible credit
losses, certain preferred stock, eligible subordinated debt, and
other qualifying instruments). The guidelines require that
qualifying capital be 8% of risk-based assets, of which at least
4% must be Tier 1 capital. As of March 31, 1997, the Company's
qualifying capital was 12.1%, 11.1% of which was Tier 1 capital.
In addition, the Company, under the guidelines established for
adequately capitalized institutions, must also maintain a minimum
leverage ratio (Tier 1 capital divided by total assets) of 4%.
As of March 31, 1997, the Company's leverage ratio was 7.8%.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
(3)(a) -- Articles of incorporation (incorporated by
reference to the registrant's registration statement
on Form S-4 (File No. 33-76832).
(3)(b) -- By-laws (incorporated by reference to the registrant's
registration statement on Form S-4 (File No. 33-76832).
(10)(a)(1) -- Stock Option Plan (incorporated by reference to
the registrant's registration statement on Form S-4
(File No. 33-76832).
(10)(a)(2) -- Deferred Compensation Plan for Executives
(incorporated by reference to Exhibit (10)(a)(2)
to the registrant's Annual Report on Form 10-
KSB for its fiscal year ended December 31, 1994).
(10)(b) -- Leases
(10)(b)(1) -- San Rafael Office Lease (incorporated by
reference to Exhibit (10)(b)(1) to the registrant's
Annual Report on Form 10- KSB for its fiscal
year ended December 31, 1994).
(10)(b)(2) --South San Francisco Office Lease
(incorporated by reference to Exhibit (10)(b)(2)
to the registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1994).
(10)(b)(3) -- Hayward Office Lease (incorporated by reference
to Exhibit (10)(b)(3) to the registrant's
Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1994).
(10)(b)(4) -- Upland Office Lease (incorporated by reference
to Exhibit (10)(b)(4) to the registrant's
Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1994).
(27) -- Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCB FINANCIAL CORPORATION
(Registrant)
Date: May 14, 1997 /s/ Brian M. Riley
Brian M. Riley
Chief Financial Officer
(Principal Accounting Officer)
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