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, 1999
[ ] 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 5, 1999
Class
Common stock, no par value 1,972,257
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands December 31, June 30,
1998 1999
ASSETS (Unaudited)
Cash and due from banks $ 8,804 $ 7,516
Federal funds sold 3,200 8,650
Total cash and cash equivalents 12,004 16,166
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 36,023 23,116
Investment securities held to maturity; fair values
of $6,081 in 1998 and $1,986 in 1999 6,055 2,000
Loans held for investment (net of allowance for possible
credit losses of $1,117 in 1998 and $1,301 in 1999 109,958 126,640
Premises and equipment - net 2,431 2,996
Accrued interest receivable 1,152 1,010
Deferred income taxes 547 867
Other assets 1,040 1,171
Total assets $ 169,496 $ 174,252
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 38,788 $ 40,093
Interest-bearing:
Transaction accounts 92,491 94,606
Time certificates, $100,000 and over 12,622 13,165
Savings and other time deposits 11,003 10,979
Total interest-bearing deposits 116,116 118,750
Total deposits 154,904 158,843
Other borrowings 356 750
Accrued interest payable and other liabilities 1,154 1,371
Total liabilities 156,414 160,964
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 1,994,316 shares in 1998 and 1,967,457
shares in 1999, outstanding 1,989,016
shares in 1998 and 1,967,457 in 1999 9,578 9,226
Accumulated other comprehensive income 191 (386)
Retained earnings 3,313 4,448
Total shareholders' equity 13,082 13,288
Total liabilities and shareholders' equity $ 169,496 $ 174,252
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 1999 1998 1999
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $ 2,649 $ 3,165 $ 5,002 $ 6,029
Federal funds sold 138 55 216 89
Investment securities 498 417 1,065 955
Total interest income 3,285 3,637 6,283 7,073
INTEREST EXPENSE:
Interest-bearing transaction, savings
and other time deposits 1,002 889 1,893 1,765
Time certificates, $100,000
and over 163 150 319 305
Other interest 5 14 11 23
Total interest expense 1,170 1,053 2,223 2,093
NET INTEREST INCOME 2,115 2,584 4,060 4,980
PROVISION FOR POSSIBLE
CREDIT LOSSES 35 35 35 125
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 2,080 2,549 4,025 4,855
OTHER INCOME:
Gain on sale of loans 49 30 119 82
Service fees on deposit
accounts 120 153 244 316
Loan servicing fees 12 15 21 26
Gain (loss) on sale of investment
securities - net (7) 12
Other 75 51 147 97
Total other income 256 242 531 533
OTHER EXPENSES:
Salaries and employee benefits 901 1,037 1,785 2,012
Occupancy expense 218 238 434 465
Furniture and equipment expense 104 98 214 199
Professional services 66 44 113 174
Supplies 79 75 149 134
Promotional expenses 74 55 190 168
Data processing fees 75 85 162 195
Regulatory assessments 15 10 31 19
Other 115 101 243 192
Total other expenses 1,647 1,743 3,321 3,558
INCOME BEFORE INCOME TAXES 689 1,048 1,235 1,830
INCOME TAX PROVISION 285 433 508 754
NET INCOME $ 404 $ 615 $ 727 $ 1,076
BASIC EARNINGS PER SHARE $ 0.20 $ 0.31 $ 0.35 $ 0.54
DILUTED EARNINGS PER SHARE $ 0.18 $ 0.30 $ 0.33 $ 0.52
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 1999 1998 1999
(Unaudited) (Unaudited)
Net income $ 404 $ 615 $ 727 $1,076
Other comprehensive income (loss)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period, net of tax 51 (304) 17 (584)
Reclassification adjustment for gains
(losses) included in net income, (4) 7
net of tax
Other comprehensive income (loss) 51 (308) 17 (577)
Comprehensive income $ 455 $ 307 $ 744 $ 499
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 1999
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income $ 727 $ 1,076
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses 35 125
Depreciation and amortization 229 253
Gain on sale of investment securities, net (12)
Change in deferred income taxes 90
(Increase) decrease in accrued interest receivable (10) 142
Decrease (increase) in other assets 173 (131)
Increase in accrued interest payable and
other liabilities 164 285
Net cash provided by operating activities 1,318 1,828
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 10,750 4,055
Purchases (2,055)
Available for sale securities:
Maturities 1,522 695
Calls 1,000
Purchases (6,201)
Sales 11,183
Net increase in loans held for investment (14,958) (16,807)
Purchases of premises and equipment (227) (773)
Net cash used by investing activities (10,169) (1,647)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing
demand deposits 5,273 1,305
Net increase in interest-bearing transaction,
savings and other time deposits 12,781 2,634
Net increase in other borrowings 394
Proceeds from the exercise of stock options 90 207
Purchases of common stock (559)
Net cash provided by financing activities 18,144 3,981
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,293 4,162
CASH AND CASH EQUIVALENTS:
Beginning of period 11,457 12,004
End of period $ 20,750 $ 16,166
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 2,247 $ 2,139
Income taxes 201 $ 646
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. 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, 1998. 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, 1999 may not be indicative of
operating results for the year ending December 31, 1999. 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.
2. EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the number of weighted average common shares outstanding. Diluted
earnings per share reflects potential dilution from outstanding stock options,
using the treasury stock method. The number of weighted average shares used in
computing basic and diluted earnings per share are as follows:
In thousands Three months ended June 30,
1998 1999
Basic shares 2,073 1,967
Dilutive effect of stock options 157 81
Diluted shares 2,230 2,048
Six months ended June 30,
1998 1999
Basic shares 2,068 1,981
Dilutive effect of stock options 144 94
Diluted shares 2,212 2,075
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, 1999 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, 1998.
OVERVIEW
EARNINGS SUMMARY. The Company reported net income of $615,000, or $0.31 per
share basic and $0.30 per share diluted, for the second quarter of 1999. This
compares to net income of $404,000, or $0.20 per share basic and $0.18 per share
diluted, for the same period in 1998.
For the six months ended June 30, 1999, the Company reported net income of
$1,076,000, or $0.54 per share basic and $0.52 per share diluted. This compares
to net income of $727,000, or $0.35 per share basic and $0.33 per share diluted
for the same period in 1998. Growth in average loans as a percentage of earning
assets continued to positively impact the net interest margin during the three
and six month periods ended June 30, 1999.
Return on average assets and return on average equity for the second quarter
of 1999 were 1.45% and 18.51%, respectively, as compared to 1.06% and 12.78%,
respectively, for the same period of 1998. Return on average assets and return
on average equity for the six months ended June 30, 1999 were 1.28% and 16.26%,
respectively, as compared to 0.99% and 11.70%, respectively, for the same period
of 1998.
FINANCIAL CONDITION
SUMMARY. Total assets of the Company increased by $4.8 million, or 2.8%,
from the end of 1998 to reach $174.2 million at June 30, 1999.
LOANS HELD FOR INVESTMENT. Net loans held for investment increased by $16.7
million, or 15.2%, during the first six months of 1999 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 December 31, June 30,
1998 1999
Commercial $ 22,504 $ 22,064
Real estate:
Commercial 72,605 78,379
Construction 9,619 20,584
Land 2,592 3,399
Home equity 1,703 1,851
Loans to consumers and individuals 2,085 1,806
Total 111,108 128,083
Deferred loan fees (33) (142)
Allowance for possible credit losses (1,117) (1,301)
Total net loans $ 109,958 $ 126,640
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 $111.0
million, or 86.7% of the total portfolio as of June 30, 1999. 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
provide an adequate safeguard against declining real estate prices which may
effect a borrower's ability to liquidate the property and repay the loan.
However, no assurance can be given that real estate values will not decline and
impair the value of the security for loans held by the Company.
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, 1999 the two largest industry concentrations within
the loan portfolio were real estate and related services at 28.5% and the
business/personal service industry at 19.4% 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.
NONPERFORMING ASSETS. The Company carefully monitors the quality of its
loan portfolio and the factors that affect 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, 1999, the Company had nonperforming assets in the amount of
$287,000, of which $50,000 represented one nonaccrual loan. Had this nonaccrual
loan performed under its contractual terms, approximately $1,552 in additional
interest income would have been recognized during 1999. Also, as of June 30,
1999, the Company had two loans 90 days or more past due and still accruing in
the aggregate amount of $237,000. 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 December 31, June 30,
1998 1999
Nonaccrual loans $ 563 $ 50
Loans 90 days or more past due and
still accruing 404 237
Other real estate owned
$ 967 $ 287
As a percent of total loans 0.87% 0.22%
As a percent of total assets 0.57% 0.16%
The decrease in nonperforming assets was due to payoffs on nonaccrual loans
and certain past due loans becoming current during 1999.
At June 30, 1999, the Company had loans identified as impaired in the amount
of $287,000. At June 30, 1999, 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, 1999 the APCL of $1,301,000, or
1.02% of total loans, was determined by management to be adequate against
foreseeable future losses. No assurance can be given that nonperforming loans
will not increase or that future losses will not exceed the amount of the APCL.
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):
At and For At and For the
the Year Ended Six Months Ended
December 31, June 30,
1998 1999
Balances:
Average loans during period $ 100,130 $ 118,216
Loans at end of period 111,075 127,941
Allowance for Possible Credit Losses:
Balance at beginning of period 1,007 1,117
Actual credit losses:
Commercial 53 11
Consumer
Total 53 11
Actual credit recoveries:
Commercial 9 70
Consumer 1
Total 10 70
Net credit losses (recoveries) 43 (59)
Provision charged to operating expenses 153 125
Balance at end of period $ 1,117 $ 1,301
Ratios:
Net credit losses (recoveries) to average loans 0.04% (0.05%)
Allowance for possible credit losses to loans
at end of period 1.01% 1.02%
Net credit losses (recoveries) to beginning of
period allowance for credit losses 4.27% (5.28%)
The Company provided $35,000 to the allowance for possible credit losses
during the second quarter of 1999 as compared to $35,000 during the second
quarter of 1998. For the six months ended June 30, 1999, the Company provided
$125,000 to the allowance for possible credit losses as compared to $35,000
during the same period of 1998. The provisions during the second quarter of
1999 and the six months ended June 30, 1999 were 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):
December 31, 1998 June 30, 1999
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 641 42.79% $ 659 47.78%
Real estate loans 245 53.27% 260 48.69%
Consumer loans 38 3.94% 37 3.53%
Not allocated 193 N/A 345 N/A
Total $ 1,117 100.00% $ 1,301 100.00%
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 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, 1999: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $ 2,000 $ $ (14) $ 1,986 $ 2,000
Total held to maturity 2,000 (14) 1,986 2,000
Available for sale securities:
U.S. Treasury 10,091 2 (241) 9,852 9,852
U.S. Government agencies 11,147 (393) 10,754 10,754
Mortgage-backed
Securities 577 (15) 562 562
Corporate securities 1,960 (12) 1,948 1,948
Total available for sale 23,775 2 (661) 23,116 23,116
Total investment
securities $25,775 $ 2 $ (675) $25,102 $25,116
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
December 31, 1998: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $ 6,055 $ 26 $ $ 6,081 $ 6,055
Total held to maturity 6,055 26 6,081 6,055
Available for sale securities:
U.S. Treasury 15,206 214 (6) 15,414 15,414
U.S. Government agencies 17,247 137 (60) 17,324 17,324
Mortgage-backed
Securities 1,172 5 1,177 1,177
Corporate securities 1,971 36 2,007 2,007
Municipal bonds 100 1 101 101
Total available for sale 35,696 393 (66) 36,023 36,023
Total investment
securities $41,751 $ 419 $ (66) $42,104 $42,078
DEPOSITS. Total consolidated deposits increased by $3.9 million, or 2.5%,
during the six months ended June 30, 1999.
Rates paid on deposits decreased during the six months ended June 30, 1999
contributing to the decrease in the cost of funds to 2.72% for the six months
ended June 30, 1999 as compared to 3.23% for the year ended December 31, 1999.
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated (dollar amounts in thousands):
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 31,371 $ 36,571
Interest-bearing demand deposits
(includes money market
deposit accounts) 88,255 3.93% 92,786 3.36%
Savings deposits 1,845 1.92% 2,185 1.85%
Time deposits, $100,000 and over 12,493 5.31% 12,406 4.92%
Other time deposits 8,194 5.06% 8,480 4.41%
Total interest-bearing 110,787 4.14% 115,857 3.57%
Total deposits $142,158 3.23% $152,428 2.72%
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):
December 31, June 30,
Time remaining to maturity 1998 1999
Three months or less $ 4,682 $ 7,697
After three months to six months 3,620 2,534
After six months to one year 3,620 2,534
After twelve months 700 400
Total $ 12,622 $ 13,165
RESULTS OF OPERATIONS
NET INTEREST INCOME / NET INTEREST MARGIN. Net interest income for the
quarter ended June 30, 1999 was $2,584,000, an increase of 22.2% over the net
interest income of $2,115,000 during the same period of 1998. Net interest
income for the six months ended June 30, 1999 was $4,980,000, an increase of
22.7% over the net interest income of $4,060,000 during the same period of 1998.
The increase in both periods was primarily due to the growth in average loans,
largely due to 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 1999
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 10,310 $ 138 5.35% $ 4,751 $ 55 4.63%
Interest-bearing deposits
with banks 286 4 5.59% 286 3 4.20%
Investment securities 32,417 494 6.11% 29,732 414 5.57%
Loans 97,089 2,649 10.91% 123,844 3,165 10.22%
Total earning assets 140,102 3,285 9.38% 158,613 3,637 9.17%
Total non-earning assets 11,882 11,380
Total assets $151,984 $169,993
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 29,669 $ 37,488
Interest-bearing transaction
accounts 86,143 $ 891 4.13% 93,624 $ 789 3.37%
Time deposits, $100,000 or more 12,130 163 5.38% 12,153 150 4.94%
Savings and other time 9,716 111 4.57% 10,801 100 3.70%
Total interest-bearing deposits 107,989 1,165 4.32% 116,578 1,039 3.56%
Other borrowings 484 5 4.13% 1,252 14 4.47%
Total interest-bearing
Liabilities 108,473 1,170 4.31% 117,830 1,053 3.57%
Other liabilities 1,196 1,386
Shareholders' equity 12,646 13,289
Total liabilities
and shareholders' equity $151,984 $169,993
Net interest income $2,115 $2,584
Net interest margin 6.04% 6.52%
For the six months ended June 30,
1998 1999
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 8,115 $ 216 5.32% $ 3,888 $ 89 4.58%
Interest-bearing deposits
with banks 286 8 5.59% 286 7 4.90%
Investment securities 34,211 1,057 6.19% 34,368 948 5.52%
Loans 92,734 5,002 10.79% 118,216 6,029 10.20%
Total earning assets 135,346 6,283 9.29% 156,758 7,073 9.03%
Total non-earning assets 11,808 11,315
Total assets $147,154 $168,073
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 29,559 $ 36,571
Interest-bearing transaction
accounts 81,802 1,674 4.09% 92,786 1,558 3.36%
Time deposits, $100,000 or more 12,094 319 5.28% 12,406 305 4.92%
Savings and other time 9,669 219 4.53% 10,665 207 3.88%
Total interest-bearing deposits 103,565 2,212 4.27% 115,857 2,070 3.57%
Other borrowings 465 11 4.73% 1,027 23 4.48%
Total interest-bearing
Liabilities 104,030 2,223 4.27% 116,884 2,093 3.58%
Other liabilities 1,140 1,385
Shareholders' equity 12,425 13,233
Total liabilities
and shareholders' equity $147,154 $168,073
Net interest income $4,060 $4,980
Net interest margin 6.00% 6.35%
The net interest margin increased to 6.52% during the second quarter of 1999
from 6.04% in the same quarter of 1998. For the six months ended June 30, 1999,
the net interest margin increased to 6.35% from 6.00% during the same period of
1998. The increase in both periods was primarily attributable to growth in
average loans as a percentage of earning assets. The increase in average loans
was largely due to the 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, 1999 June 30, 1999
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold ($74) ($19) $10 ($83) ($113) ($30) $16 ($127)
Interest-bearing deposits
with banks 0 (1) 0 (1) 0 (1) 0 (1)
Investment securities (41) (43) 4 (80) 5 (113) (1) (109)
Loans 729 (167) (46) 516 1,376 (274) (75) 1,027
Total Interest Income 614 (230) (32) 352 1,268 (418) (60) 790
Interest Expense:
Interest-bearing
transaction accounts 77 (165) (14) (102) 224 (299) (41) (116)
Time deposits,
$100,000 or more 0 (13) 0 (13) 8 (21) (1) (14)
Savings and other time 12 (21) (2) (11) 22 (32) (2) (12)
Other borrowings 8 0 1 9 14 (1) (1) 12
Total Interest Expense 97 (199) (15) (117) 268 (353) (45) (130)
Net Interest Income $517 ($31) ($17) $469 $1,000 ($65) ($15) $920
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 1999 1998 1999
Gain on sale of loans $ 49 $ 30 $ 119 $ 82
Service fees on deposit accounts 120 153 244 316
Loan servicing fees 12 15 21 26
Gain (loss) on sale of investment
securities - net (7) 12
Other 75 51 147 97
Total $ 256 $ 242 $ 531 $ 533
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.13% 0.07% 0.16% 0.10%
Service fees on deposit accounts 0.31% 0.36% 0.33% 0.38%
Loan servicing fees 0.03% 0.04% 0.03% 0.03%
Gain (loss) on sale of investment
securities - net (0.02) 0.01%
Other 0.20% 0.12% 0.20% 0.11%
Total 0.67% 0.57% 0.72% 0.63%
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 1999 1998 1999
Salaries and employee benefits $ 901 $ 1,037 $ 1,785 $ 2,012
Occupancy expense 218 238 434 465
Furniture and equipment expense 104 98 214 199
Professional services 66 44 113 174
Supplies 79 75 149 134
Promotional expenses 74 55 190 168
Data processing fees 75 85 162 195
Regulatory assessments 15 10 31 19
Other 115 101 243 192
Total $ 1,647 $ 1,743 $ 3,321 $ 3,558
Average full-time equivalent employees 56 55 55 55
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.37% 2.44% 2.43% 2.39%
Occupancy expense 0.57% 0.56% 0.59% 0.55%
Furniture and equipment expense 0.27% 0.23% 0.29% 0.24%
Professional services 0.17% 0.10% 0.15% 0.21%
Supplies 0.21% 0.18% 0.20% 0.16%
Promotional expenses 0.20% 0.13% 0.26% 0.20%
Data processing fees 0.20% 0.20% 0.22% 0.23%
Regulatory assessments 0.04% 0.02% 0.04% 0.02%
Other 0.30% 0.24% 0.33% 0.23%
Total 4.33% 4.10% 4.51% 4.23%
Noninterest expense increased to $1.7 million during the second quarter of
1999 from $1.6 million during the same period of the prior year. For the six
months ended June 30, 1999, noninterest expense increased to $3.6 million from
$3.3 million during the same period of the prior year.
YEAR 2000. The Year 2000 creates challenges with respect to the automated
systems used by financial institutions and other companies. Many software
programs are not able to recognize the year 2000, since most programs and
systems were designed to store calendar years in the 1900's by assuming the "19"
and storing only the last two digits of the year. For example, these automated
systems would recognize a year stored as "00" as the year "1900", rather than as
the year "2000". If these automated systems are not appropriately re-coded,
updated or replaced before the year 2000, they will likely crash or fail in some
manner. In addition, many software programs and automated systems will fail to
recognize the year 2000 as a leap year. The problem is not limited to computer
systems. Year 2000 issues will potentially affect every system that has an
embedded microchip, such as automated teller machines, elevators and vaults.
The year 2000 challenge is especially problematic for financial institutions,
since many transactions such as interest accruals and payments are date
sensitive. It also may affect the operations of third parties with whom the
Company does business, including the Company's vendors, suppliers, utility
companies and customers.
The Company's State of Readiness. The Company is committed to addressing these
year 2000 challenges in a prompt and responsible manner and has dedicated
resources to do so. Management has completed an assessment of its automated
systems and has implemented a plan to resolve these issues, including purchasing
appropriate computer technology. The Company's year 2000 compliance plan
("Plan") has five phases. These phases are (1) project management, (2)
awareness, (3) assessment, (4) testing, and (5) renovation and implementation.
The Company has substantially completed these phases, although appropriate
follow-up activities are continuing to occur.
Project Management. The Company's senior management provides periodic reports
to its board of directors in order to assist them in overseeing the Company's
year 2000 readiness.
Awareness. The Company has completed several projects designed to promote
awareness of year 2000 issues throughout the Company and the Company's customer
base. These projects include mailing information to deposit and loan customers,
providing training for lending officers and other staff, and responding to
vendor, customer, and shareholder inquiries.
Assessment. Assessment is the process of identifying all mission-critical
applications that could potentially be negatively affected by dates in the year
2000 and beyond. The Company's assessment phase is complete. Systems examined
during this phase included telecommunications systems, account-processing
applications, and other software and hardware used in connection with customer
accounts. The Company's operations, like those of many other companies, are
intertwined with the operations of certain of its business partners.
Accordingly, the Company's operations could be materially affected if the
operations of those companies who provide the Company with mission critical
applications, systems, and services are materially affected. For example, the
Company depends upon vendors who provide equipment, technology, and software to
it in connection with its business operations. Failure of these software
vendors to achieve year 2000 readiness could substantially affect the operations
of the Company. In addition, lawsuits and other financial challenges materially
affecting the financial viability of these vendors could materially affect the
Company. In response to this concern, the Company has identified and contacted
those vendors who provide our mission-critical applications. The Company has
received year 2000 compliance assurance from its primary mission-critical
vendors and is continuing to assess the efforts of other vendors for year 2000
compliance.
Testing. Updating and testing of the Company's mission-critical automated
systems is complete. Testing of modified or new systems will continue
throughout 1999.
Renovation and Implementation. This phase involves obtaining and implementing
renovated software applications provided by our vendors. As these applications
were received and implemented, the Company tested them for year 2000 compliance.
At this time there are no mission-critical systems that remain unimplemented or
untested.
The Costs to Address the Company's Year 2000 Issues. The total financial effect
of these year 2000 challenges on the Company cannot be predicted with certainty
at this time. In fact, in spite of all efforts being made to rectify these
problems, the success of these efforts cannot be predicted until the year 2000
actually arrives. The Company upgraded and replaced its data processing and
network system in 1997. The Company spent a total of approximately $500,000 on
this conversion. The Company will continue to upgrade or replace certain
automated systems before the year 2000, if necessary; however some of these
systems would have been replaced before the year 2000 without regard to year
2000 compliance issues, due to technology updates and Company expansion.
Management does not believe that future expenses related to meeting the
Company's year 2000 challenges will have a material effect on the operations or
financial performance of the Company. However, factors beyond the control of
management, such as the effects on vendors of our mission-critical software and
systems, the effects of year 2000 issues on the economy, and the development of
the risks identified below under "The Risks of the Company's Year 2000 Issues,"
among other things, could have a material effect on the operations or financial
performance of the Company.
The Risks of the Company's Year 2000 Issues. The year 2000 presents certain
risks to the Company and its operations. Some of these risks are present
because the Company purchases technology applications from other parties who
face year 2000 challenges. Other of these risks are inherent in the business of
banking or are risks faced by many other companies in other industries.
Although it is impossible to identify every possible risk that the Company may
face moving into the new millennium, management has to date identified the
following potential risks:
1. Commercial banks may experience a contraction in their deposit base if a
significant amount of deposited funds are withdrawn by customers prior to the
year 2000. Also, interest rates may increase in the latter part of 1999. This
potential deposit contraction could make it necessary for the Company to change
its sources of funding and could materially impact future earnings. The Company
has developed a contingency plan for addressing this situation, should it occur.
2. The Company lends significant amounts to businesses in its market areas. If
these businesses are adversely affected by year 2000 issues, their ability to
repay loans could be impaired. This increased credit risk could affect the
Company's financial performance. As part of the Company's Plan, its primary
borrowers were identified and the assessment of their year 2000 readiness and
risk to the Company continues to be monitored.
3. The Company's operations, like those of many other companies, can be affected
by the year 2000 triggered failures of other companies upon whom the Company
depends for the functioning of its automated systems. Accordingly, the
Company's operations could be materially affected if the operations of those
companies who provide the Company with mission critical systems and services are
materially affected. As described above, the Company has identified its
mission-critical vendors and is monitoring their year 2000 compliance progress.
4. All companies with publicly traded stock, including the Company, could
experience a drop in stock price as investors change their investment portfolios
or sell stock prior to the new millennium. At this time, it is impossible to
predict whether or not this will in fact be the case with respect to the stock
of the MCB Financial Corporation or any other company.
5. The Company's ability to operate effectively in the year 2000 could be
affected by communications abilities and access to utilities, such as
electricity, water and telephone. To the extent access is interrupted due to
the effects of year 2000 issues on these and other utilities, the operations of
the Company will be disrupted. The Company has adopted a contingency plan for
addressing this situation, to the extent possible, should it occur; however,
normal operations could be seriously affected.
The Company's Contingency Plans. The Company has completed the development of a
contingency plan related to year 2000 issues, including cash reserves, liquidity
and operational issues. Additions to the plan may be made as events unfold in
1999.
INCOME TAXES. The Company's effective tax rate was 41.3% for the quarter
ended June 30, 1999 compared to 41.4% in the same period of the prior year. For
the six months ended June 30, 1999, the effective tax rate was 41.2% compared to
41.1% 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, 1999,
federal funds sold averaged $3.9 million, or 2.3% of total assets. In addition
to its federal funds, the Company maintains various lines of credit with
correspondent banks, the Federal Reserve Bank of San Francisco, and the Federal
Home Loan Bank of San Francisco.
At June 30, 1999, the Company had cash, time deposits with banks, federal
funds sold, and unpledged investment securities of approximately $39.6 million,
or 22.7% 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, 1999, the loan-to-deposit ratio was 80.5% as
compared to 71.7% at December 31, 1998.
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, 1999,
this ratio was 7.8% as compared to 3.1% at December 31, 1998.
As of June 30, 1999, 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, 1999, 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, 1999 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 $ 8,650 $ 8,650
Interest-bearing deposits
with other banks $ 196 $ 90 286
Investment securities 33 544 3,010 $17,114 $ 5,074 25,775
Loans, gross of allowance
for possible losses 65,693 2,093 3,848 38,824 17,483 127,941
Total 74,376 2,833 6,948 55,938 22,557 162,652
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 42,249 52,357 94,606
Time deposits, $100,000
or more 7,697 2,534 2,534 400 13,165
Savings and other
time deposits 3,163 778 4,089 2,949 10,979
Other borrowings 750 750
Total 11,610 3,312 48,872 55,706 $119,500
Period GAP $62,766 $ (479) $(41,924) $ 232 $22,557
Cumulative GAP $62,766 $62,287 $ 20,363 $20,595 $43,152
Interest Sensitivity
GAP Ratio 84.39% (16.91%) (603.40%) 0.41% 100.00%
Cumulative Interest
Sensitivity 84.39% 80.67% 24.20% 14.70% 26.53%
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 Six Months Ended
June 30, 1998 June 30, 1999
8.44% 7.87%
In March 1999, the Board of Directors authorized the Company to repurchase
$2,000,000 of the Company's common stock. This authorization was in addition to
the $1,000,000 authorized pursuant to repurchase programs announced in 1994 and
1998. As of February 1999, the Company had repurchased the maximum amount
authorized under the 1994 and 1998 repurchase programs. The 1999 repurchase
program authorizes the Company to repurchase and retire up to $2,000,000 of its
common stock in open market and private transactions during the next five years.
As of June 30, 1999, 61,719 shares had been repurchased under the 1999 program.
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. Total 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 total capital be 8% of risk-based
assets, of which at least 4% must be Tier 1 capital. As of June 30, 1999, the
Company's total capital was 10.57% and its Tier 1 capital ratio was 9.64%. 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, 1999, the Company's
leverage ratio was 7.89%. 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
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 1999 the Company adopted a shareholder rights plan designed to
maximize the long-term value of the Company and to protect the Company's
shareholders from certain takeover tactics and takeover bids that are not fair
to all shareholders. The plan limits or qualifies the rights of holders of the
Company's common stock who may wish to acquire shares in excess of the trigger
amount under the plan. A Rights Agreement was filed with the SEC on Form 8-A12G
on January 25, 1999.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on May 19, 1999.
A quorum was established with the presence of 1,178,965 shares out of 2,011,858
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 1,178,710 255
Charles O. Hall 1,178,710 255
Timothy J. Jorstad 1,178,710 255
Catherine H. Munson 1,178,710 255
Gary T. Ragghianti 1,178,710 255
Michael J. Smith 1,178,710 255
Edward P. Tarrant 1,178,710 255
Randall J. Verrue 1,178,710 255
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 1999. There were 1,175,992 votes cast for the proposal, 1,101 votes
cast against the proposal, and 1,872 abstentions.
Proposal 3. - 1999 Stock Option Plan - The 1999 Stock Option Plan was approved.
There were 1,148,349 votes cast for the proposal, 26,372 votes cast against the
proposal, and 4,244 abstentions.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
(3)(a) Restated Articles of Incorporation (incorporated by reference to the
registrant's Quarterly Report on Form 10-QSB for its quarter
ended September 30, 1998).
(3)(b) By-laws (incorporated by reference to the registrant's registration
statement on Form S-4 (File No. 33-76832)).
(4) Rights Agreement (incorporated by reference from the registrant's
Form 8-A12G filed with the SEC on January 25, 1999).
(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).
(10)(b)(6) Petaluma Office Lease (incorporated by reference to Exhibit
(10)(b)(6) to the registrant's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1998).
(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 12, 1999 /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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