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, 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: May 8, 1998
Class
Common stock, no par value 1,382,202
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands March 31, December 31,
1998 1997
ASSETS (Unaudited)
Cash and due from banks $ 7,602 $ 6,557
Federal funds sold 7,000 4,900
Total cash and cash equivalents 14,602 11,457
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 14,211 10,314
Investment securities held to maturity; fair values
of $17,976 in 1998 and $25,197 in 1997 17,993 25,242
Loans held for investment (net of allowance for possible
credit losses of $998 in 1998 and $1,007 in 1997 91,935 87,179
Premises and equipment - net 2,626 2,586
Accrued interest receivable 985 1,070
Deferred income taxes 591 568
Other assets 1,101 1,175
Total assets $ 144,330 $ 139,877
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 29,190 $ 29,151
Interest-bearing:
Transaction accounts 79,316 75,488
Time certificates, $100,000 and over 12,327 11,565
Savings and other time deposits 9,526 9,928
Total interest-bearing deposits 101,169 96,981
Total deposits 130,359 126,132
Other borrowings 545 750
Accrued interest payable and other liabilities 1,077 1,028
Total liabilities 131,981 127,910
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 1,399,224 shares in 1998 and 1,386,876 shares in 1997,
outstanding 1,382,202 shares in 1998 and
1,369,854 in 1997 10,385 10,310
Accumulated other comprehensive income (33) 1
Retained earnings 1,997 1,656
Total shareholders' equity 12,349 11,967
Total liabilities and shareholders' equity $ 144,330 $ 139,877
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
In thousands, except per share amounts 1998 1997
(Unaudited)
INTEREST INCOME:
Loans, including fees $ 2,353 $ 1,998
Federal funds sold 78 72
Investment securities 567 566
Total interest income 2,998 2,636
INTEREST EXPENSE:
Interest-bearing transaction, savings
and other time deposits 891 864
Time certificates, $100,000 and over 156 123
Other interest 6 8
Total interest expense 1,053 995
NET INTEREST INCOME 1,945 1,641
PROVISION FOR POSSIBLE CREDIT LOSSES 0 20
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 1,945 1,621
OTHER INCOME:
Gain on sale of loans 70 53
Service fees on deposit accounts 124 114
Loan servicing fees 9 7
Other 72 32
Total other income 275 206
OTHER EXPENSES:
Salaries and employee benefits 884 790
Occupancy expense 216 192
Furniture and equipment expense 110 89
Professional services 47 61
Supplies 70 53
Promotional expenses 116 51
Data processing fees 87 71
Regulatory assessments 16 14
Other 128 89
Total other expenses 1,674 1,410
INCOME BEFORE INCOME TAXES 546 417
INCOME TAX PROVISION 223 170
NET INCOME $ 323 $ 247
BASIC EARNINGS PER SHARE $ 0.23 $ 0.19
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.18
See notes to condensed consolidated financial statements
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
Dollar amounts in thousands March 31,
1998 1997
(Unaudited)
Net income $ 323 $ 247
Other comprehensive income, net of tax:
Unrealized gain (loss) on available for sale investments:
Unrealized holding loss arising during period (34) (77)
Other comprehensive income (34) (77)
Comprehensive income $ 289 $ 170
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Dollar amounts in thousands Ended March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income $ 323 $ 247
Adjustments to reconcile net income to net cash
provided by operating activities:
Settlement of mortgage loans sold 647
Provision for possible credit losses 20
Depreciation and amortization 117 88
Change in deferred income taxes (59)
Decrease in accrued interest receivable 85 112
Decrease (increase) in other assets 70 (209)
Increase in accrued interest payable and
other liabilities 71 165
Net cash provided by operating activities 666 1,011
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 7,250 1,000
Available for sale securities:
Maturities 1,240 1,199
Calls 1,000
Purchases (6,201) (5,000)
Net (increase) decrease in loans held for investment (4,756) 1,756
Purchases of premises and equipment (151) (16)
Net cash used by investing activities (1,618) (1,061)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease)in noninterest-bearing
demand deposits 39 (38)
Net increase in interest-bearing transaction,
savings and other time deposits 4,188 2,815
Net (decrease) increase in other borrowings (205) 297
Proceeds from the exercise of stock options 75 36
Net cash provided by financing activities 4,097 3,110
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,145 3,060
CASH AND CASH EQUIVALENTS:
Beginning of period 11,457 10,379
End of period $ 14,602 $ 13,439
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 1,054 $ 1,019
Income taxes $ 250
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three months ended March 31, 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, outstanding shares of common stock were split four-for-three.
All shares and per share amounts have been restated.
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.
2. Earnings Per Share
The following is a reconciliation of basic earnings per share (EPS) to diluted
EPS for the three month periods ended March 31, 1998 and 1997.
Three months ended March 31, 1998:
Net Per Share
Income Shares Amount
In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited)
Basic EPS:
Income available to common shareholders $323 1,375 $0.23
Effect of Dilutive Securities:
Stock options 88
Diluted EPS:
Income available to common shareholders
plus assumed conversions $323 1,463 $0.22
Three months ended March 31, 1997:
Net Per Share
Income Shares Amount
In thousands, except per share amounts (Unaudited) (Unaudited) (Unaudited)
Basic EPS:
Income available to common shareholders $247 1,321 $0.19
Effect of Dilutive Securities:
Stock options 50
Diluted EPS:
Income available to common shareholders
plus assumed conversions $247 1,371 $0.18
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 $323,000, or $0.23 per
share basic and $0.22 per share diluted, for the first quarter of 1998. This
compares to net income of $247,000, or $0.19 per share basic and $0.18 per share
diluted, for the same period in 1997. Improvement in net interest income, due
to growth in average loans, continued to positively impact the net interest
margin.
Return on average assets and return on average equity for the first quarter
of 1998 were 0.91% and 10.59%, respectively, as compared to 0.75% and 9.54%,
respectively, for the same period of 1997.
FINANCIAL CONDITION
Summary. Total assets of the Company increased by $4.5 million, or 3.2%,
from the end of 1997 to reach $144.3 million at March 31, 1998. This increase
resulted primarily from growth in existing operations.
Loans Held for Investment. Net loans held for investment increased by $4.8
million, or 5.5%, during the first three months of 1998 as demand for commercial
real estate and construction loans increased. The following table sets forth
the amount of total loans outstanding by category as of the dates indicated
(dollar amounts in thousands):
Total Loans March 31, December 31,
1998 1997
Commercial $ 20,740 $ 21,217
Real estate:
Commercial 60,883 57,385
Construction 5,533 3,757
Land 1,386 1,307
Home equity 2,145 2,314
Loans to consumers and individuals 2,338 2,331
Total 93,025 88,311
Deferred loan fees (92) (125)
Allowance for possible credit losses (998) (1,007)
Total net loans $ 91,935 $ 87,179
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 $75.2
million, or 80.8% of the total portfolio as of March 31, 1998. Due to the
Company's limited marketing area, its real estate collateral is primarily
concentrated in the San Francisco Bay Area and Southern California. The Company
believes that its prudent underwriting standards for real estate secured loans
provides an adequate safeguard against declining real estate prices which may
effect a borrower's ability to liquidate the property and repay the loan.
The Company focuses its portfolio lending on commercial, commercial real
estate, and construction loans. These loans generally carry a higher level of
risk than conventional real estate loans, accordingly, yields on these loans are
typically higher than those of other loans. The performance of commercial and
construction loans is generally dependent upon future cash flows from business
operations (including the sale of products, merchandise and services) and the
successful completion or operation of large real estate projects. Risks
attributable to such loans can be significantly increased, often to a greater
extent than other loans, by regional economic factors, real estate prices, the
demand for commercial and retail office space, and the demand for products and
services of industries which are concentrated within the Company's loan
portfolio. As of March 31, 1998, the two largest industry concentrations within
the loan portfolio were real estate and related services at 28.2% and the
business/personal service industry at 18.9% of the portfolio. Because credit
concentrations increase portfolio risk, the Company places significant emphasis
on the purpose of each loan and the related sources of repayment. The Company
generally limits unsecured commercial loans to maturities of three years and
secured commercial loans to maturities of five years.
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, 1998, the Company had nonperforming assets in the amount of
$613,000, of which $69,000 represented two nonaccrual loans. Had these
nonaccrual loans performed under their contractual terms approximately $1,300 in
additional interest income would have been recognized during 1998. The Company
had loans 90 days or more past due and still accruing in the amount of $544,000.
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 March 31, December 31,
1998 1997
Nonaccrual loans $ 69 $ 69
Loans 90 days or more past due and
still accruing 544 40
Other real estate owned
$ 613 $ 109
As a percent of total loans 0.66% 0.12%
As a percent of total assets 0.42% 0.08%
At March 31, 1998, the Company had loans identified as impaired in the
amount of $613,000. At March 31, 1998, no specific allowance for possible
credit losses was required for these impaired loans since 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 March 31, 1998, the APCL of $998,000, or
1.07% 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,
1998 1997
Balances:
Average loans during period (net of unearned income) $ 89,349 $ 82,893
Loans at end of period (net of unearned income) 92,933 88,186
Allowance for Possible Credit Losses:
Balance at beginning of period 1,007 944
Actual credit losses:
Commercial loans 9 105
Loans to consumers and individuals 3
Total 9 108
Actual credit recoveries:
Commercial loans 51
Loans to consumers and individuals
Total 0 51
Net credit losses 9 57
Provision charged to operating expenses 0 120
Balance at end of period $ 998 $ 1,007
Ratios:
Net credit losses to average loans 0.01% 0.07%
Allowance for possible credit losses to loans
at end of period 1.07% 1.14%
Net credit losses to beginning of period
allowance for credit losses 0.89% 6.04
The Company provided no allowance for possible credit losses during the
first quarter of 1998 as compared to $20,000 during the same period of 1997.
The following table sets forth the allocation of the APCL as of the dates
indicated (dollar amounts in thousands):
March 31, 1998 December 31, 1997
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 559 42.06% $ 570 41.79%
Real estate loans 264 52.79% 245 52.39%
Consumer loans 41 5.15% 43 5.82%
Not allocated 134 N/A 149 N/A
Total $ 998 100.00% $ 1,007 100.00%
The allowance is available to absorb losses from all loans, although
allocations have been made for certain loans and loan categories. The
allocation of the allowance as shown above should not be interpreted as an
indication that charge-offs in future periods will occur in these amounts or
proportions, or that the allocation indicates future charge-off trends. In
addition to the most recent analysis of individual loans and pools of loans,
management's methodology also places emphasis on historical loss data,
delinquency and nonaccrual trends by loan classification category and expected
loan maturity. This analysis, management believes, identifies potential losses
within the loan portfolio and therefore results in allocation of a large portion
of the allowance to specific loan categories.
Investments. The Company continues to invest in callable U.S. government
agency securities. These securities offer above market yields, but may be
called if interest rates fall below certain levels. If these securites are
called, the Company may not be able to reinvest the proceeds to obtain the same
yield.
The following 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
March 31, 1998: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $17,993 $ 39 $ (56) $17,976 $17,993
Total held to maturity 17,993 39 (56) 17,976 17,993
Available for sale securities:
U.S. Treasury 10,206 28 (73) 10,161 10,161
Mortgage-backed
Securities 1,936 (19) 1,917 1,917
Corporate securities 1,987 5 1,992 1,992
Municipal bonds 140 1 141 141
Total available for sale 14,269 34 (92) 14,211 14,211
Total investment
securities $32,262 $ 73 $ (148) $32,187 $32,204
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/Other Borrowings. Total consolidated deposits increased by $4.2
million, or 3.4%, during the three months ended March 31, 1998. This increase
was primarily the result of growth in existing operations.
Average noninterest-bearing demand deposits increased 9.0% during the three
months ended March 31, 1998 contributing to the decrease in the cost of funds to
3.26% from 3.36% during 1997. 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, 1998 December 31, 1997
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 29,448 $ 27,019
Interest-bearing demand deposits
(includes money market
deposit accounts) 77,413 4.04% 78,521 4.10%
Savings deposits 1,918 1.80% 1,928 1.93%
Time deposits, $100,000 and over 12,059 5.18% 10,214 5.42%
Other time deposits 7,703 5.18% 8,080 5.13%
Total interest-bearing 99,093 4.23% 98,743 4.28%
Total deposits $128,541 3.26% $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 (dollar amounts in
thousands):
March 31, December 31,
Time remaining to maturity 1998 1997
Three months or less 3,060 4,359
After three months to six months 3,829 3,388
After six months to one year 4,808 3,388
After twelve months 630 430
Total 12,327 11,565
RESULTS OF OPERATIONS
Net Interest Income/Net Interest Margin. Net interest income for the
quarter ended March 31, 1998 was $1,945,000, an increase of 18.5% over the net
interest income of $1,641,000 during the same period of 1997
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,
1998 1997
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 5,896 $ 78 5.29% $ 5,614 $ 72 5.13%
Interest-bearing deposits
with banks 286 4 5.59% 384 6 6.25%
Investment securities 36,000 563 6.27% 35,499 560 6.32%
Mortgage loans held for sale 266 5 7.52%
Loans 88,346 2,353 10.65% 78,825 1,993 10.11%
Total earning assets 130,528 2,998 9.19% 120,588 2,636 8.75%
Total non-earning assets 11,661 10,546
Total assets $142,189 $131,134
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 29,448 $ 24,694
Interest-bearing transaction
accounts 77,413 783 4.04% 74,602 749 4.02%
Time deposits, $100,000 or more 12,059 156 5.18% 9,260 123 5.31%
Savings and other time 9,621 108 4.49% 10,408 115 4.42%
Total interest-bearing deposits 99,093 1,047 4.23% 94,270 987 4.19%
Other borrowings 445 6 5.39% 719 8 4.45%
Total interest-bearing
Liabilities 99,538 1,053 4.23% 94,989 995 4.19%
Other liabilities 1,002 1,101
Shareholders' equity 12,201 10,350
Total liabilities
and shareholders' equity $142,189 $131,134
Net interest income $1,945 $1,641
Net interest margin 5.96% 5.44%
The net interest margin increased to 5.96% during the first quarter of 1998 from
5.44% in the same quarter of 1997. The increase was primarily due to the
increase in average loans.
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, 1998
Compared to
Quarter Ended March 31, 1997
Change in
Rate/
Volume Rate Volume Total
Interest Income:
Federal funds sold $ 4 $ 2 $ 0 $ 6
Interest-bearing deposits
with banks (1) (1) 0 (2)
Investment securities 8 (5) 0 3
Mortgage loans held for sale (5) (5) 5 (5)
Loans 241 107 12 360
Total Interest Income 247 98 17 362
Interest Expense:
Interest-bearing
transaction accounts 28 6 0 34
Time deposits, $100,000 or more 37 (3) (1) 33
Savings and other time (9) 2 0 (7)
Other borrowings (3) 2 (1) (2)
Total Interest Expense 53 7 (2) 58
Net Interest Income $ 194 $ 91 $ 19 $ 304
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
March 31,
Components of Noninterest Income 1998 1997
Gain on sale of loans $ 70 $ 53
Service fees on deposit accounts 124 114
Loan servicing fees 9 7
Other 72 32
Total $ 275 $ 206
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.20% 0.16%
Service fees on deposit accounts 0.35% 0.35%
Loan servicing fees 0.02% 0.02%
Other 0.20% 0.10%
Total 0.77% 0.63%
Noninterest Expenses. The following table summarizes noninterest expenses
and the associated ratios to average assets for the periods indicated (dollar
amounts in thousands):
Quarter Ended
March 31,
Components of Noninterest Expense 1998 1997
Salaries and employee benefits $ 884 $ 790
Occupancy expense 216 192
Furniture and equipment expense 110 89
Professional services 47 61
Supplies 70 53
Promotional expenses 116 51
Data processing fees 87 71
Regulatory assessments 16 14
Other 128 89
Total $1,674 $1,410
Average full-time equivalent employees 55 50
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.49% 2.41%
Occupancy expense 0.61% 0.58%
Furniture and equipment expense 0.31% 0.27%
Professional services 0.13% 0.19%
Supplies 0.20% 0.16%
Promotional expenses 0.33% 0.16%
Data processing fees 0.24% 0.22%
Regulatory assessments 0.04% 0.04%
Other 0.36% 0.27%
Total 4.71% 4.30%
Noninterest expense increased to $1.7 million during the first quarter of 1998
from $1.4 million during the same period of the prior year.
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 eliminated the first two digits in the year date
field. This problem could affect date sensitive calculations that would treat
"00" as the year 1900, rather than 2000. Secondly, years that end in "00" are
not leap years, except when it is a millenium year. This anomaly 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 40.8% for the quarter
ended March 31, 1998 and 1997.
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, 1998,
federal funds sold averaged $5.9 million, or 4.1% 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, 1998, the Company had cash, time deposits with banks, federal
funds sold, and unpledged investment securities of approximately $43.4 million,
or 30.1% 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, 1998, the loan-to-deposit ratio was 71.3% 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 March 31, 1998,
this ratio was 6.8% as compared to 6.3% at December 31, 1997.
As of March 31, 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 March 31, 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):
March 31, 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 $ 7,000 $ 7,000
Interest-bearing deposits
with other banks $ 286 286
Investment securities 126 $ 1,349 192 $27,436 $ 3,159 32,262
Loans, gross of allowance
for possible losses 40,629 2,642 1,196 30,146 18,320 92,933
Total 47,755 3,991 1,674 57,582 21,479 132,481
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 34,418 44,898 79,316
Time deposits, $100,000
or more 3,060 3,829 4,808 630 12,327
Savings and other
time deposits 2,682 486 3,822 2,536 9,526
Other borrowings 545 545
Total 6,287 4,315 43,048 48,064 $101,714
Period GAP $41,468 $ (324) $(41,374) $ 9,518 $21,479
Cumulative GAP $41,468 $41,144 $ (230) $ 9,288 $30,767
Interest Sensitivity
GAP Ratio 86.83% (8.12%)(2471.57%) 16.53% 100.00%
Cumulative Interest
Sensitivity 86.83% 79.51% (0.43%) 8.37% 23.22%
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.
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
8.58% 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 March 31, 1998, the Company's
qualifying capital was 12.35%, 11.41% 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, 1998, the Company's leverage
ratio was 8.43%.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
On January 22, 1998, the Company's Board of Directors declared a
4-for-3 stock split of the Company's common stock. On March 24, 1998,
the Company amended and restated its Articles of Incorporation to
effect this stock split.
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) -- Restated Articles of Incorporation
(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: May 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)
Exhibit 3(a)
RESTATED ARTICLES OF INCORPORATION OF
MCB FINANCIAL CORPORATION
ARTICLE I
The name of this corporation is:
MCB FINANCIAL CORPORATION
ARTICLE II
The purpose of this corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
(a) This corporation is authorized to issue two classes of shares designated
"Preferred Stock" and "Common Stock," no par value per share, respectively. The
number of shares of Preferred Stock authorized to be issued is 20,000,000 and
the number of shares of Common Stock authorized to be issued is 20,000,000.
Upon the amendment of this Article III as set forth herein, each outstanding
share of Common Stock is divided into one and one-third shares of Common Stock.
(b) The Preferred Stock may be divided into such number of series as the Board
of Directors may determine. The Board of Directors is authorized to determine
and alter the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of Preferred Stock, and to fix the
number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that
series.
ARTICLE IV
(a) The liability of directors of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law.
(b) The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through Bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible under California law.
(c) Any amendment, repeal or modification of any provision of this Article IV
shall not adversely affect any right or protection of an agent of this
corporation existing at the time of such amendment, repeal or modification.
<TABLE> <S> <C>
<ARTICLE> 9
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,602
<INT-BEARING-DEPOSITS> 286
<FED-FUNDS-SOLD> 7,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,211
<INVESTMENTS-CARRYING> 17,993
<INVESTMENTS-MARKET> 17,976
<LOANS> 92,933
<ALLOWANCE> 998
<TOTAL-ASSETS> 144,330
<DEPOSITS> 130,359
<SHORT-TERM> 545
<LIABILITIES-OTHER> 1,077
<LONG-TERM> 0
0
0
<COMMON> 10,385
<OTHER-SE> 1,964
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<INTEREST-TOTAL> 2,998
<INTEREST-DEPOSIT> 1,047
<INTEREST-EXPENSE> 1,053
<INTEREST-INCOME-NET> 1,945
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<EXPENSE-OTHER> 1,674
<INCOME-PRETAX> 546
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<NET-INCOME> 323
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<EPS-DILUTED> .22
<YIELD-ACTUAL> 9.19
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<LOANS-PAST> 544
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