FORM 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _________________ to _____________________
Commission file number: 033-76832
MCB FINANCIAL CORPORATION
(exact name of small business issuer)
California 68-0300300
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1248 Fifth Avenue, San Rafael, California 94901
(Address of principal executive offices)
(415) 459-2265
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: August 7, 1998
Class
Common stock, no par value 1,384,553
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands June 30, December 31,
1998 1997
ASSETS (Unaudited)
Cash and due from banks $ 10,100 $ 6,557
Federal funds sold 10,650 4,900
Total cash and cash equivalents 20,750 11,457
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 14,009 10,314
Investment securities held to maturity; fair values
of $16,555 in 1998 and $25,197 in 1997 16,549 25,242
Loans held for investment (net of allowance for possible
credit losses of $1,026 in 1998 and $1,007 in 1997 102,102 87,179
Premises and equipment - net 2,595 2,586
Accrued interest receivable 1,080 1,070
Deferred income taxes 554 568
Other assets 995 1,175
Total assets $ 158,920 $ 139,877
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 34,424 $ 29,151
Interest-bearing:
Transaction accounts 88,073 75,488
Time certificates, $100,000 and over 11,862 11,565
Savings and other time deposits 9,827 9,928
Total interest-bearing deposits 109,762 96,981
Total deposits 144,186 126,132
Other borrowings 750 750
Accrued interest payable and other liabilities 1,153 1,028
Total liabilities 146,089 127,910
SHAREHOLDERS' EQUITY
Preferred stock, no par value: authorized 20,000,000 shares;
none issued or outstanding
Common stock, no par value: authorized 20,000,000 shares;
issued 1,401,575 shares in 1998 and 1,386,876 shares in 1997,
outstanding 1,384,553 shares in 1998 and
1,369,854 in 1997 10,400 10,310
Accumulated other comprehensive income 18 1
Retained earnings 2,413 1,656
Total shareholders' equity 12,831 11,967
Total liabilities and shareholders' equity $ 158,920 $ 139,877
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended For the Six Months
In thousands, June 30, Ended June 30,
except per share amounts 1998 1997 1998 1997
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $ 2,649 $ 2,107 $ 5,002 $ 4,105
Federal funds sold 138 98 216 170
Investment securities 498 642 1,065 1,208
Total interest income 3,285 2,847 6,283 5,483
INTEREST EXPENSE:
Interest-bearing transaction, savings
and other time deposits 1,002 930 1,893 1,794
Time certificates, $100,000
and over 163 127 319 250
Other interest 5 7 11 15
Total interest expense 1,170 1,064 2,223 2,059
NET INTEREST INCOME 2,115 1,783 4,060 3,424
PROVISION FOR POSSIBLE
CREDIT LOSSES 35 20 35 40
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 2,080 1,763 4,025 3,384
OTHER INCOME:
Gain on sale of loans 49 37 119 90
Service fees on deposit
accounts 120 122 244 236
Loan servicing fees 12 8 21 15
Other 75 37 147 69
Total other income 256 204 531 410
OTHER EXPENSES:
Salaries and employee benefits 901 756 1,785 1,546
Occupancy expense 218 190 434 382
Furniture and equipment expense 104 85 214 174
Professional services 66 41 113 102
Supplies 79 49 149 102
Promotional expenses 74 53 190 104
Data processing fees 75 76 162 147
Regulatory assessments 15 16 31 30
Other 115 99 243 188
Total other expenses 1,647 1,365 3,321 2,775
INCOME BEFORE INCOME TAXES 689 602 1,235 1,019
INCOME TAX PROVISION 285 247 508 417
NET INCOME $ 404 $ 355 $ 727 $ 602
BASIC EARNINGS PER SHARE $ 0.29 $ 0.27 $ 0.53 $ 0.45
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.26 $ 0.49 $ 0.44
See notes to condensed consolidated financial statements
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
Dollar amounts in thousands June 30, June 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Net income $ 404 $ 355 $ 727 $ 602
Other comprehensive income, net of tax:
Unrealized gain (loss) on available
for sale investments:
Unrealized holding gain (loss)
arising during period 51 56 17 (21)
Comprehensive income $ 455 $ 411 $ 744 $ 581
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Dollar amounts in thousands Ended June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income $ 727 $ 602
Adjustments to reconcile net income to net cash
provided by operating activities:
Settlement of mortgage loans sold 647
Provision for possible credit losses 35 40
Depreciation and amortization 229 169
Change in deferred income taxes (59)
Increase in accrued interest receivable (10) (89)
Decrease (increase) in other assets 173 (194)
Increase in accrued interest payable and
other liabilities 164 215
Net cash provided by operating activities 1,318 1,331
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 10,750 1,000
Purchases (2,055) (3,000)
Available for sale securities:
Maturities 1,522 2,572
Calls 1,000
Purchases (6,201) (5,000)
Net increase in loans held for investment (14,958) (841)
Purchases of premises and equipment (227) (109)
Net cash used by investing activities (10,169) (5,378)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing
demand deposits 5,273 2,738
Net increase in interest-bearing transaction,
savings and other time deposits 12,781 6,719
Net increase in other borrowings 282
Proceeds from the exercise of stock options 90 132
Net cash provided by financing activities 18,144 9,871
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,293 5,824
CASH AND CASH EQUIVALENTS:
Beginning of period 11,457 10,380
End of period $ 20,750 $ 16,204
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 2,247 $ 2,086
Income taxes 201 $ 356
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. Significant Accounting Policies
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, 1997. The
accompanying interim consolidated financial statements contained herein are
unaudited. However, in the opinion of the Company, all adjustments, consisting
of normal recurring items necessary for a fair presentation of the operating
results for the periods shown, have been made. The results of operations for
the six months ended June 30, 1998 may not be indicative of operating results
for the year ended December 31, 1998. 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.
Stock Split
In February 1998, the Company's outstanding shares of common stock were split
four-for-three. All shares and per share amounts reported have been restated to
reflect the split.
Recently Issued Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income." This statement establishes standards for
all entities for reporting comprehensive income and its components in financial
statements. This statement requires that all items which are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is equal to net income plus
the change in "other comprehensive income," as defined by SFAS No. 130. The
only component of other comprehensive income currently applicable to the Company
is the net unrealized gain or loss on available for sale investments. SFAS No.
130 requires that an entity: (a) classify items of other comprehensive income by
their nature in a financial statement, and (b) report the accumulated balance of
other comprehensive income separately from common stock and retained earnings in
the equity section of the balance sheet. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of this statement will not
impact the Company's consolidated financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. This statement is effective with the year-end 1998 financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company formally document, designate
and assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after 6/15/99. Initial application of SFAS No. 133 would be as of the beginning
of an entity's fiscal quarter. On that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter that begins after
issuance. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. The Company has no derivative or hedged
instruments and therefore the implementation of this statement is not expected
to have a material impact on the Company's financial position or results of
operations.
2. Earnings Per Share
The following is a reconciliation of basic earnings per share (EPS) to diluted
EPS for the three and six month periods ended June 30, 1998 and 1997.
Three months ended June 30, 1998:
Net Per Share
Income Shares Amount
In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited)
Basic EPS:
Income available to common shareholders $404 1,382 $0.29
Effect of Dilutive Securities:
Stock options 105
Diluted EPS:
Income available to common shareholders
plus assumed conversions $405 1,487 $0.27
Six months ended June 30, 1998:
Net Per Share
Income Shares Amount
In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited)
Basic EPS:
Income available to common shareholders $727 1,378 $0.53
Effect of Dilutive Securities:
Stock options 96
Diluted EPS:
Income available to common shareholders
plus assumed conversions $727 1,474 $0.49
Three months ended June 30, 1997:
Net Per Share
Income Shares Amount
In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited)
Basic EPS:
Income available to common shareholders $355 1,335 $0.27
Effect of Dilutive Securities:
Stock options 54
Diluted EPS:
Income available to common shareholders
plus assumed conversions $355 1,389 $0.26
Six months ended June 30, 1997:
Net Per Share
Income Shares Amount
In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited)
Basic EPS:
Income available to common shareholders $602 1,328 $0.45
Effect of Dilutive Securities:
Stock options 52
Diluted EPS:
Income available to common shareholders
plus assumed conversions $602 1,380 $0.44
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MCB Financial Corporation (the "Company") is the holding company for Metro
Commerce Bank in San Rafael, California. This discussion focuses primarily on
the results of operations of the Company on a consolidated basis for the three
and six months ended June 30, 1998 and the financial condition of the Company as
of that date.
The following discussion presents information pertaining to the financial
condition and results of operations of the Company and its subsidiary 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.
Certain matters discussed in this report are forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the competitive
environment and its impact on the Company's net interest margin, changes in
interest rates, asset quality risks, concentrations of credit and the economic
health of the San Francisco Bay Area and Southern California, volatility of rate
sensitive deposits, asset/liability matching risks, the dilutive impact which
might occur upon the issuance of new shares of common stock, liquidity risks,
and the impact of the Year 2000 problem. Therefore, the matters set forth below
should be carefully considered when evaluating the Company's business and
prospects. For additional information concerning these risks and uncertainties,
please refer to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
OVERVIEW
Earnings Summary. The Company reported net income of $404,000, or $0.29
per share basic and $0.27 per share diluted, for the second quarter of 1998.
This compares to net income of $355,000, or $0.27 per share basic and $0.26 per
share diluted, for the same period in 1997.
For the six months ended June 30, 1998, the Company reported net income of
$727,000, or $0.53 per share basic and $0.49 per share diluted. This compares
to net income of $602,000, or $0.45 per share basic and $0.44 per share diluted
for the same period in 1997. Growth in average loans as a percentage of earning
assets and the increase in average yields earned on loans continued to
positively impact the net interest margin during the three and six month periods
ended June 30, 1998.
Return on average assets and return on average equity for the second quarter of
1998 were 1.06% and 12.78%, respectively, as compared to 1.04% and 13.31%,
respectively, for the same period of 1997. Return on average assets and return
on average equity for the six months ended June 30, 1998 were 0.99% and 11.70%,
respectively, as compared to 0.90% and 11.44%, respectively, for the same period
of 1997.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $19.0 million, or 13.6%,
from the end of 1997 to reach $158.9 million at June 30, 1998. This increase
resulted primarily from growth in existing operations, largely due to improved
economic conditions in the Company's market areas.
Loans Held for Investment. Net loans held for investment increased by
$14.9 million, or 17.1%, during the first six months of 1998 as demand for
commercial real estate and construction loans continued to increase. The
following table sets forth the amount of total loans outstanding by category as
of the dates indicated (dollar amounts in thousands):
Total Loans June 30, December 31,
1998 1997
Commercial $ 22,609 $ 21,217
Real estate:
Commercial 66,152 57,385
Construction 9,215 3,757
Land 885 1,307
Home equity 2,049 2,314
Loans to consumers and individuals 2,315 2,331
Total 103,225 88,311
Deferred loan fees (97) (125)
Allowance for possible credit losses (1,026) (1,007)
Total net loans $ 102,102 $ 87,179
In the normal practice of extending credit, the Company accepts real estate
collateral for loans which have primary sources of repayment from commercial
operations. The total amount of loans secured by real estate equaled $85.3
million, or 82.6% of the total portfolio as of June 30, 1998. Due to the
Company's limited marketing areas, its real estate collateral is primarily
concentrated in the San Francisco Bay Area and Southern California. The Company
believes that its prudent underwriting standards for real estate secured loans
provides an adequate safeguard against declining real estate prices which may
effect a borrower's ability to liquidate the property and repay the loan.
The Company focuses its portfolio lending on commercial, commercial real
estate, and construction loans. These loans generally carry a higher level of
risk than conventional real estate loans; accordingly, yields on these loans are
typically higher than those of other loans. The performance of commercial and
construction loans is generally dependent upon future cash flows from business
operations (including the sale of products, merchandise and services) and the
successful completion or operation of large real estate projects. Risks
attributable to such loans can be significantly increased, often to a greater
extent than other loans, by regional economic factors, real estate prices, the
demand for commercial and retail office space, and the demand for products and
services of industries which are concentrated within the Company's loan
portfolio. As of June 30, 1998, the two largest industry concentrations within
the loan portfolio were real estate and related services at 25.2% and the
business/personal service industry at 21.6% 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.
Nonperforming Assets. The Company carefully monitors the quality of its
loan portfolio and the factors that effect it including regional economic
conditions, employment stability, and real estate values. The accrual of
interest on loans is discontinued when the payment of principal or interest is
considered to be in doubt, or when a loan becomes contractually past due by 90
days or more with respect to principal or interest, except for loans that are
well secured and in the process of collection.
As of June 30, 1998, the Company had nonperforming assets in the amount of
$621,000, of which $563,000 represented four nonaccrual loans. Had these
nonaccrual loans performed under their contractual terms approximately $9,494 in
additional interest income would have been recognized during 1998. Also, as of
June 30, 1998, the Company had two loans 90 days or more past due and still
accruing in the aggregate amount of $58,000. These loans are well secured and
in the process of collection. The following table sets forth the balance of
nonperforming assets as of the dates indicated (dollar amounts in thousands):
Nonperforming Assets June 30, December 31,
1998 1997
Nonaccrual loans $ 563 $ 69
Loans 90 days or more past due and
still accruing 58 40
Other real estate owned 0 0
$ 621 $ 109
As a percent of total loans 0.60% 0.12%
As a percent of total assets 0.39% 0.08%
At June 30, 1998, the Company had loans identified as impaired in the
amount of $621,000. At June 30, 1998, no specific allowance for possible credit
losses was required for these impaired loans because they were adequately
collateralized.
Allowance for Possible Credit Losses. The Company maintains an allowance
for possible credit losses ("APCL") which is reduced by credit losses and
increased by credit recoveries and provisions to the APCL charged against
operations. Provisions to the APCL and the total of the APCL are based, among
other factors, upon the Company's credit loss experience, current and projected
economic conditions, the performance of loans within the portfolio, evaluation
of loan collateral value, and the prospects or worth of respective borrowers and
guarantors.
In determining the adequacy of its APCL and after carefully analyzing each
loan individually, the Company segments its loan portfolio into pools of
homogeneous loans that share similar risk factors. Each pool is given a risk
assessment factor which largely reflects the expected future losses from each
category. These risk assessment factors change as economic conditions shift and
actual loan losses are recorded. As of June 30, 1998, the APCL of $1,026,000,
or 1.00% of total loans was determined to be adequate against foreseeable future
losses.
The following table summarizes, for the periods indicated, loan balances at
the end of each period and average balances during the period, changes in the
APCL arising from credit losses, recoveries of credit losses previously
incurred, additions to the APCL charged to operating expense, and certain ratios
relating to the APCL (dollar amounts in thousands):
June 30, December 31,
1998 1997
Balances:
Average loans during period (net of unearned income) $ 93,735 $ 82,893
Loans at end of period (net of unearned income) 103,128 88,186
Allowance for Possible Credit Losses:
Balance at beginning of period 1,007 944
Actual credit losses:
Commercial loans 17 105
Loans to consumers and individuals 3
Total 17 108
Actual credit recoveries:
Commercial loans 51
Loans to consumers and individuals 1
Total 1 51
Net credit losses 16 57
Provision charged to operating expenses 35 120
Balance at end of period $ 1,026 $ 1,007
Ratios:
Net credit losses to average loans 0.02% 0.07%
Allowance for possible credit losses to loans
at end of period 1.00% 1.14%
Net credit losses to beginning of period
allowance for credit losses 1.59% 6.04
The Company provided $35,000 to the allowance for possible credit losses
during the second quarter of 1998 as compared to $20,000 during the second
quarter of 1997. For the six months ended June 30, 1998, the Company provided
$35,000 to the allowance for possible credit losses as compared to $40,000
during the same period of 1997. The $35,000 provision in the second quarter of
1998 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):
The following table sets forth the allocation of the APCL as of the dates
indicated (dollar amounts in thousands):
June 30, 1998 December 31, 1997
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 618 44.03% $ 570 41.79%
Real estate loans 221 51.51% 245 52.39%
Consumer loans 40 4.46% 43 5.82%
Not allocated 147 N/A 149 N/A
Total $ 1,026 100.00% $ 1,007 100.00%
The APCL is available to absorb losses from all loans, although allocations
have been made for certain loans and loan categories. The allocation of the
APCL as shown above should not be interpreted as an indication that charge-offs
in future periods will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends. In addition to the most recent
analysis of individual loans and pools of loans, management's methodology also
places emphasis on historical loss data, delinquency and nonaccrual trends by
loan classification category and expected loan maturity. This analysis,
management believes, identifies potential losses within the loan portfolio and
therefore results in allocation of a large portion of the allowance to specific
loan categories.
Investments. The Company continues to invest in callable U.S. government
agency securities. These securities offer above market yields, but may be
called if interest rates fall below certain levels. If these securities are
called, the Company may not be able to reinvest the proceeds to obtain the same
yield.
The following tables set 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
June 30, 1998: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $16,549 $ 35 $ (28) $16,556 $16,549
Total held to maturity 16,549 35 (28) 16,556 16,549
Available for sale securities:
U.S. Treasury 10,202 46 (24) 10,224 10,224
Mortgage-backed
Securities 1,655 (11) 1,644 1,644
Corporate securities 1,981 19 2,000 2,000
Municipal bonds 140 1 141 141
Total available for sale 13,978 66 (35) 14,009 14,009
Total investment
securities $30,527 $ 101 $ (63) $30,565 $30,558
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
December 31, 1997: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $25,242 $ 44 $ (89) $25,197 $25,242
Total held to maturity 25,242 44 (89) 25,197 25,242
Available for sale securities:
U.S. Treasury 5,004 29 5,033 5,033
U.S. Government agencies 1,000 (2) 998 998
Mortgage-backed
Securities 2,176 (30) 2,146 2,146
Corporate securities 1.992 5 (1) 1,996 1,996
Municipal bonds 140 1 141 141
Total available for sale 10,312 35 (33) 10,314 10,314
Total investment
securities $35,554 $ 79 $ (122) $35,511 $35,556
Deposits. Total consolidated deposits increased by $18.1 million, or
14.3%, during the six months ended June 30, 1998. This increase was primarily
the result of growth in existing operations, largely due to improved economic
conditions in the Company's market areas.
Average noninterest-bearing demand deposits increased 9.4% during the six months
ended June 30, 1998 contributing to the decrease in the cost of funds to 3.32%
from 3.36% for the year ended December 31, 1997. The following table summarizes
the distribution of average deposits and the average rates paid for the periods
indicated (dollar amounts in thousands):
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 29,559 $ 27,019
Interest-bearing demand deposits
(includes money market
deposit accounts) 81,802 4.09% 78,521 4.10%
Savings deposits 1,851 1.80% 1,928 1.93%
Time deposits, $100,000 and over 12,094 5.27% 10,214 5.42%
Other time deposits 7,818 5.18% 8,080 5.13%
Total interest-bearing 103,565 4.27% 98,743 4.28%
Total deposits $133,124 3.32% $125,762 3.36%
The following table sets forth the time remaining to maturity of the
Company's time deposits in amounts of $100,000 or more as of the dates indicated
below (dollar amounts in thousands):
June 30, December 31,
Time remaining to maturity 1998 1997
Three months or less 5,470 4,359
After three months to six months 1,940 3,388
After six months to one year 3,852 3,388
After twelve months 600 430
Total 11,862 11,565
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest income for the
quarter ended June 30, 1998 was $2,115,000, an increase of 18.6% over the net
interest income of $1,783,000 during the same period of 1997. Net interest
income for the six months ended June 30, 1998 was $4,060,000, an increase of
18.6% over the net interest income of $3,424,000 during the same period of 1997.
The increase in both periods was primarily due to the growth in average loans,
largely due to improved economic conditions in the Company's market areas.
The following table sets forth average assets, liabilities, and
shareholders' equity; the amount of interest income or interest expense; and the
average yield or rate for each category of interest-bearing assets and interest-
bearing liabilities and the net interest margin (net interest income divided by
average earning assets) for the periods indicated (dollar amounts in thousands):
For the quarter ended June 30,
1998 1997
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 10,310 $ 138 5.35% $ 7,225 $ 98 5.43%
Interest-bearing deposits
with banks 286 4 5.59% 384 6 6.25%
Investment securities 32,417 494 6.11% 39,385 636 6.46%
Loans 97,089 2,649 10.91% 78,806 2,107 10.69%
Total earning assets 140,102 3,285 9.38% 125,800 2,847 9.05%
Total non-earning assets 11,882 10,885
Total assets $151,984 $136,685
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 29,669 $ 25,519
Interest-bearing transaction
accounts 86,143 $ 891 4.13% 79,234 $ 818 4.13%
Time deposits, $100,000 or more 12,130 163 5.38% 9,512 126 5.30%
Savings and other time 9,716 111 4.57% 9,944 113 4.55%
Total interest-bearing deposits 107,989 1,165 4.32% 98,690 1,057 4.28%
Other borrowings 484 5 4.13% 589 7 4.75%
Total interest-bearing
Liabilities 108,473 1,170 4.31% 99,279 1,064 4.29%
Other liabilities 1,196 1,218
Shareholders' equity 12,646 10,669
Total liabilities
and shareholders' equity $151,984 $136,685
Net interest income $2,115 $1,783
Net interest margin 6.04% 5.67%
For the six months ended June 30,
1998 1997
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 8,115 $ 216 5.32% $ 6,424 $ 170 5.29%
Interest-bearing deposits
with banks 286 8 5.59% 384 12 6.25%
Investment securities 34,211 1,057 6.19% 37,472 1,196 6.39%
Mortgage loans held for sale 132 5 7.58%
Loans 92,734 5,002 10.79% 78,816 4,100 10.40%
Total earning assets 135,346 6,283 9.29% 123,228 5,483 8.90%
Total non-earning assets 11,808 10,708
Total assets $147,154 $133,936
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 29,559 $ 25,109
Interest-bearing transaction
accounts 81,802 1,674 4.09% 76,926 1,567 4.07%
Time deposits, $100,000 or more 12,094 319 5.28% 9,386 249 5.31%
Savings and other time 9,669 219 4.53% 10,175 228 4.48%
Total interest-bearing deposits 103,565 2,212 4.27% 96,487 2,044 4.24%
Other borrowings 465 11 4.73% 654 15 4.59%
Total interest-bearing
Liabilities 104,030 2,223 4.27% 97,141 2,059 4.24%
Other liabilities 1,140 1,160
Shareholders' equity 12,425 10,526
Total liabilities
and shareholders' equity $147,154 $133,936
Net interest income $4,060 $3,424
Net interest margin 6.00% 5.56%
The net interest margin increased to 6.04% during the second quarter of 1998
from 5.67% in the same quarter of 1997. For the six months ended June 30, 1998,
the net interest margin increased to 6.00% from 5.56% during the same period of
1997. The increase in both periods was primarily attributable to growth in
average loans as a percentage of earning assets and the increase in average
yields earned on loans. The increase in average loans was largely due to the
improved economic conditions in the Company's market areas.
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 for the periods
indicated. The variance attributable to both balance and rate fluctuations is
allocated to a combined rate/volume variance (dollar amounts in thousands):
Quarter Ended Six Months Ended
June 30, 1998 June 30, 1998
Compared to Compared to
Quarter Ended Six Months Ended
June 30, 1997 June 30, 1997
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold $42 ($1) ($1) $40 $45 $1 $0 $46
Interest-bearing deposits
with banks (1) (1) 0 (2) (3) (1) 0 (4)
Investment securities (114) (34) 6 (142) (105) (37) 3 (139)
Mortgage loans held
for sale (5) (5) 5 (5)
Loans 489 43 10 542 722 153 27 902
Total Interest Income 416 7 15 438 654 111 35 800
Interest Expense:
Interest-bearing
transaction accounts 73 0 0 73 99 8 0 107
Time deposits,
$100,000 or more 35 2 1 38 71 (1) 0 70
Savings and other time (3) 0 0 (3) (12) 3 0 (9)
Other borrowings (1) (1) 0 (2) (4) 0 0 (4)
Total Interest Expense 104 1 1 106 154 10 0 164
Net Interest Income $312 $6 $14 $332 $500 $101 $35 $636
Noninterest Income. The following table summarizes noninterest income for
the periods indicated and expresses the amounts as a percentage of average
assets (dollar amounts in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
Components of Noninterest Income 1998 1997 1998 1997
Gain on sale of loans $ 49 $ 37 $ 119 $ 90
Service fees on deposit accounts 120 122 244 236
Loan servicing fees 12 8 21 15
Other 75 37 147 69
Total $ 256 $ 204 $ 531 $ 410
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.13% 0.11% 0.16% 0.13%
Service fees on deposit accounts 0.32% 0.36% 0.33% 0.35%
Loan servicing fees 0.03% 0.02% 0.03% 0.02%
Other 0.20% 0.11% 0.20% 0.10%
Total 0.67% 0.60% 0.72% 0.61%
Noninterest Expense. The following table summarizes noninterest expenses
and the associated ratios to average assets for the periods indicated (dollar
amounts in thousands):
Quarter Ended Six Months Ended
June 30, June 30,
Components of Noninterest Expense 1998 1997 1998 1997
Salaries and employee benefits $ 901 $ 756 $ 1,785 $ 1,546
Occupancy expense 218 190 434 382
Furniture and equipment expense 104 85 214 174
Professional services 66 41 113 102
Supplies 79 49 149 102
Promotional expenses 74 53 190 104
Data processing fees 75 76 162 147
Regulatory assessments 15 16 31 30
Other 115 99 243 188
Total $ 1,647 $ 1,365 $ 3,321 $ 2,775
Average full-time equivalent employees 56 47 55 48
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.37% 2.21% 2.43% 2.31%
Occupancy expense 0.57% 0.56% 0.59% 0.57%
Furniture and equipment expense 0.27% 0.25% 0.29% 0.26%
Professional services 0.17% 0.12% 0.15% 0.15%
Supplies 0.21% 0.14% 0.20% 0.15%
Promotional expenses 0.19% 0.16% 0.26% 0.16%
Data processing fees 0.20% 0.22% 0.22% 0.22%
Regulatory assessments 0.04% 0.05% 0.04% 0.04%
Other 0.30% 0.29% 0.33% 0.28%
Total 4.33% 3.99% 4.51% 4.14%
Noninterest expense increased to $1.6 million during the second quarter of
1998 from $1.4 million during the same period of the prior year. For the six
months ended June 30, 1998, noninterest expense increased to $3.3 million from
$2.8 million during the same period of the prior year. In January, 1998, the
Company opened a branch office in San Francisco which contributed to the
increase in noninterest expense during the second quarter of 1998 and for the
six months ended June 30, 1998.
Year 2000. The Year 2000 Issue is a computer programming situation that may
affect many electronic data processing systems. In order to minimize the length
of data fields, most computer programs eliminate the first two digits in the
year date field. This problem may affect date sensitive calculations if "00" is
treated as the year 1900, rather than 2000. Also, years that end in "00" are
not leap years, except when it is a millenium year. These anomalies could
result in miscalculations in the processing of critical date-sensitive
information after December 31, 1999.
The Company has prepared a project plan, identified all the major application
systems that are not Year 2000 compliant, and sought external and internal
resources to replace, or develop and test the software. The Company plans to
complete the Year 2000 project well in advance of December 31, 1999. The total
remaining cost of the Year 2000 project is not expected to have a material
effect on the results of operations. As with all financial institutions, there
is a high degree of reliance being placed on the systems of other financial
institutions to properly settle transactions. Their inability to process
transactions properly could have a significant adverse impact on the Company.
The cost of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing a number of assumptions of future events including the
continued availability of internal and external resources, third party
modifications and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ.
Income Taxes. The Company's effective tax rate was 41.4% for the quarter
ended June 30, 1998 compared to 41.0% in the same period of the prior year. For
the six months ended June 30, 1998, the effective tax rate was 41.1% compared to
40.9% in the same period of the prior year.
Liquidity and Asset/Liability Management. Liquidity is the Company's
ability to absorb fluctuations in deposits while simultaneously providing for
the credit needs of its borrowers. The objective in liquidity management is to
balance the sources and uses of funds. Primary sources of liquidity for the
Company include payments of principal and interest on loans and investments,
proceeds from the sale or maturity of loans and investments, growth in deposits,
and other borrowings. The Company holds overnight federal funds as a cushion
for temporary liquidity needs. During the six months ended June 30, 1998,
federal funds sold averaged $8.1 million, or 5.5% of total assets. In addition
to its federal funds, the Company maintains various lines of credit with
correspondent banks, the Federal Reserve Bank, and the Federal Home Loan Bank.
At June 30, 1998, the Company had cash, time deposits with banks, federal
funds sold, and unpledged investment securities of approximately $49.1 million,
or 30.9% of total assets. This represented all available liquid assets,
excluding other assets.
Several methods are used to measure liquidity. One method is to measure
the balance between loans and deposits (gross loans divided by total deposits).
In general, the closer this ratio is to 100%, the more reliant an institution
becomes on its illiquid loan portfolio to absorb temporary fluctuations in
deposit levels. At June 30, 1998, the loan-to-deposit ratio was 71.5% as
compared to 69.9% at December 31, 1997.
Another frequently used method is the relationship between short-term
liquid assets (federal funds sold and investments maturing within one year) and
short-term liabilities (total deposits and other borrowings) as measured by the
liquidity ratio. The Company targets a minimum ratio of 5%. At June 30, 1998,
this ratio was 8.8% as compared to 6.3% at December 31, 1997.
As of June 30, 1998, 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 table sets forth rate sensitive interest-earning assets and
interest-bearing liabilities as of June 30, 1998, the interest rate sensitivity
gap (i.e. interest sensitive assets minus interest sensitive liabilities), the
cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio (interest sensitive assets divided by interest sensitive liabilities) and
the cumulative interest rate sensitivity gap ratio. For the purposes of the
following table, an asset or liability is considered rate sensitive within a
specified period when it matures or can be repriced within that period pursuant
to its original contractual terms (dollar amounts in thousands):
June 30, 1998 After
One
Over 90 Over 180 Year After
90 days days to days to to Five Five
or less 180 days 365 days Years Years Total
Earning Assets (Rate Sensitive):
Federal funds sold $10,650 $ 10,650
Interest-bearing deposits
with other banks $ 196 $ 90 286
Investment securities 1,217 96 477 $25,578 $ 3,160 30,528
Loans, gross of allowance
for possible losses 47,186 744 1,901 35,275 18,022 103,128
Total 59,053 1,036 2,468 60,853 21,182 144,592
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 38,564 49,509 88,073
Time deposits, $100,000
or more 5,470 1,940 3,852 600 11,862
Savings and other
time deposits 1,838 1,780 3,587 2,622 9,827
Other borrowings 750 750
Total 8,058 3,720 46,003 52,731 $110,512
Period GAP $50,995 $(2,684) $(43,535) $ 8,122 $21,182
Cumulative GAP $50,995 $48,311 $ 4,776 $12,898 $34,080
Interest Sensitivity
GAP Ratio 86.35% (259.07%)(1763.98%) 13.35% 100.00%
Cumulative Interest
Sensitivity 86.35% 80.40% 7.63% 10.45% 23.57%
The Company classifies its interest-bearing transaction 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. A negative gap at one year indicates that net interest income
and the net interest margin will decrease if interest rates rise in the future.
The Company neither currently utilizes financial derivatives to hedge its
asset/liability position nor has any plans to employ such strategies in the near
future.
Capital Resources. The principal source of capital for the Company is and
will continue to be the retention of operating profits. The ratios of average
equity to average assets for the periods indicated are set forth below.
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
8.44% 7.96%
Regulatory authorities have issued guidelines to implement risk-based
capital requirements. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Capital is classified
into two components: Tier 1 (primarily shareholder's equity) and Tier 2
(supplementary capital including allowance for possible credit losses, certain
preferred stock, eligible subordinated debt, and other qualifying instruments).
The guidelines require that qualifying capital be 8% of risk-based assets, of
which at least 4% must be Tier 1 capital. As of June 30, 1998, the Company's
qualifying capital was 11.59%, 10.71% of which was Tier 1 capital. In addition,
the Company, under the guidelines established for adequately capitalized
institutions, must also maintain a minimum leverage ratio (Tier 1 capital
divided by total assets) of 4%. As of June 30, 1998, the Company's leverage
ratio was 8.19%. It is the Company's intention to maintain risk-based capital
ratios at levels characterized as "well-capitalized" for banking organizations:
Tier 1 risk-based capital of 6 percent or above and total risk-based capital at
10 percent or above.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on May 20, 1998.
A quorum was established with the presence of 784,988 shares out of 1,382,202
shares of common stock outstanding. The following matters were voted upon at
the annual meeting with the voting results as indicated:
Proposal 1. - Election of Directors - The following persons were elected as
directors:
Name Votes For Votes Withheld
John Cavallucci 784,988 0
Robert E. Eklund 784,988 0
Timothy J. Jorstad 784,988 0
Catherine H. Munson 784,988 0
Gary T. Ragghianti 784,988 0
Michael J. Smith 784,988 0
Edward P. Tarrant 784,988 0
Randall J. Verrue 784,988 0
Proposal 2. - Ratification of Independent Auditors - The firm of Deloitte &
Touche LLP was ratified to serve as the Company's independent auditors for the
fiscal year 1998. There were 778,374 votes cast for the proposal, 734 votes
cast against the proposal, and 5,880 abstentions.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
(3)(a) -- Restated Articles of Incorporation (incorporated by reference to
Exhibit (3)(a) to the registrant's Quarterly Report on Form 10-
QSB for its quarterly period ended March 31, 1998).
(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).
(10)(b)(5) -- San Francisco Office Lease (incorporated by reference to
Exhibit (10)(b)(5) to the registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1997).
(27) -- Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MCB FINANCIAL CORPORATION
(Registrant)
Date: August 13, 1998 /s/ Patrick E. Phelan
Patrick E. Phelan
Chief Financial Officer
(Principal Accounting Officer and officer
authorized to sign on behalf of the
registrant)
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