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 September 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: November 5, 1999
Class
Common stock, no par value 2,059,924
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands December 31, September 30,
1998 1999
ASSETS (Unaudited)
Cash and due from banks $ 8,804 $ 15,184
Federal funds sold 3,200
Total cash and cash equivalents 12,004 15,184
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 36,023 37,679
Investment securities held to maturity; fair values
of $6,081 in 1998 and $2,002 in 1999 6,055 2,000
Loans held for investment (net of allowance for possible
credit losses of $1,117 in 1998 and $1,406 in 1999 109,958 129,683
Premises and equipment - net 2,431 2,973
Accrued interest receivable 1,152 994
Deferred income taxes 547 855
Other assets 1,040 1,211
Total assets $ 169,496 $ 190,865
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 38,788 $ 46,195
Interest-bearing:
Transaction accounts 92,491 102,587
Time certificates, $100,000 and over 12,622 14,427
Savings and other time deposits 11,003 11,560
Total interest-bearing deposits 116,116 128,574
Total deposits 154,904 174,769
Other borrowings 356 750
Accrued interest payable and other liabilities 1,154 1,402
Total liabilities 156,414 176,921
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 2,094,031 shares in 1998 and 2,071,043
shares in 1999, outstanding 2,088,466
shares in 1998 and 2,071,043 in 1999 9,578 10,095
Accumulated other comprehensive income 191 (368)
Retained earnings 3,313 4,217
Total shareholders' equity 13,082 13,944
Total liabilities and shareholders' equity $ 169,496 $ 190,865
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended For the Nine Months
In thousands, September 30, Ended September 30,
except per share amounts 1998 1999 1998 1999
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $ 2,788 $ 3,336 $ 7,790 $ 9,365
Federal funds sold 154 185 370 274
Investment securities 511 387 1,576 1,342
Total interest income 3,453 3,908 9,736 10,981
INTEREST EXPENSE:
Interest-bearing transaction, savings
and other time deposits 1,050 990 2,943 2,755
Time certificates, $100,000
and over 173 167 492 472
Other interest 7 7 18 30
Total interest expense 1,230 1,164 3,453 3,257
NET INTEREST INCOME 2,223 2,744 6,283 7,724
PROVISION FOR POSSIBLE
CREDIT LOSSES 35 120 70 245
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 2,188 2,624 6,213 7,479
OTHER INCOME:
Gain on sale of loans 18 5 137 87
Service fees on deposit
accounts 129 149 373 465
Loan servicing fees 11 14 32 40
Gain (loss) on sale of investment
securities - net 12
Other 45 77 192 174
Total other income 203 245 734 778
OTHER EXPENSES:
Salaries and employee benefits 922 1,006 2,707 3,018
Occupancy expense 214 265 648 730
Furniture and equipment expense 99 107 313 306
Professional services 101 62 214 236
Supplies 66 67 215 201
Promotional expenses 57 58 247 226
Data processing fees 80 85 242 280
Regulatory assessments 18 12 49 31
Other 97 119 340 311
Total other expenses 1,654 1,781 4,975 5,339
INCOME BEFORE INCOME TAXES 737 1,088 1,972 2,918
INCOME TAX PROVISION 299 448 807 1,202
NET INCOME $ 438 $ 640 $ 1,165 $ 1,716
BASIC EARNINGS PER SHARE $ 0.20 $ 0.31 $ 0.54 $ 0.83
DILUTED EARNINGS PER SHARE $ 0.19 $ 0.30 $ 0.50 $ 0.79
See notes to condensed consolidated financial statements
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
Dollar amounts in thousands September 30, September 30,
1998 1999 1998 1999
(Unaudited) (Unaudited)
Net income $ 438 $ 640 $1,165 $1,716
Other comprehensive income (loss)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period, net of tax 422 18 439 (566)
Reclassification adjustment for gains
(losses) included in net income,
net of tax 7
Other comprehensive income (loss) 422 18 439 (559)
Comprehensive income $ 860 $ 658 $1,604 $1,157
See notes to condensed consolidated financial statements
MCB FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Dollar amounts in thousands Ended September 30,
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income $ 1,165 $ 1,716
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses 70 245
Depreciation and amortization 347 372
Gain on sale of investment securities, net (12)
Change in deferred income taxes 89
(Increase) decrease in accrued interest receivable (104) 158
Decrease (increase) in other assets (6) (171)
Increase in accrued interest payable and
other liabilities 149 337
Net cash provided by operating activities 1,621 2,734
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 16,750 4,055
Purchases (2,055)
Available for sale securities:
Maturities 2,880 1,076
Calls 1,000
Purchases (25,547) (14,913)
Sales 11,183
Net increase in loans held for investment (16,805) (19,970)
Purchases of premises and equipment (257) (873)
Net cash used by investing activities (24,034) (19,442)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing
demand deposits 3,875 7,407
Net increase in interest-bearing transaction,
savings and other time deposits 21,424 12,458
Net increase in other borrowings (444) 394
Cash dividends paid (19)
Payment for fractional shares resulting
from stock dividend (2)
Proceeds from the exercise of stock options 90 282
Purchases of common stock (632)
Net cash provided by financing activities 29,945 19,888
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,532 3,180
CASH AND CASH EQUIVALENTS:
Beginning of period 11,457 12,004
End of period $ 13,989 $ 15,184
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 3,497 $ 3,312
Income taxes 596 $ 1,088
NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock dividends paid on common stock $ 867
See notes to condensed consolidated financial statements.
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 September 30,
1998 1999
Basic shares 2,181 2,068
Dilutive effect of stock options 149 101
Diluted shares 2,330 2,169
Nine months ended September 30,
1998 1999
Basic shares 2,174 2,076
Dilutive effect of stock options 151 99
Diluted shares 2,325 2,175
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 nine months ended September 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 $640,000, or $0.31 per
share basic and $0.30 per share diluted, for the third quarter of 1999. This
compares to net income of $438,000, or $0.20 per share basic and $0.19 per share
diluted, for the same period in 1998.
For the nine months ended September 30, 1999, the Company reported net
income of $1,716,000, or $0.83 per share basic and $0.79 per share diluted.
This compares to net income of $1,165,000, or $0.54 per share basic and $0.50
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 nine month periods ended September 30, 1999.
Return on average assets and return on average equity for the third quarter
of 1999 were 1.39% and 18.66%, respectively, as compared to 1.09% and 13.11%,
respectively, for the same period of 1998. Return on average assets and return
on average equity for the nine months ended September 30, 1999 were 1.32% and
17.06%, respectively, as compared to 1.02% and 12.17%, respectively, for the
same period of 1998.
FINANCIAL CONDITION
SUMMARY. Total assets of the Company increased by $21.4 million, or 12.6%,
from the end of 1998 to reach $190.9 million at September 30, 1999.
LOANS HELD FOR INVESTMENT. Net loans held for investment increased by $19.7
million, or 17.9%, during the first nine 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, September 30,
1998 1999
Commercial $ 22,504 $ 20,999
Real estate:
Commercial 72,605 78,312
Construction 9,619 25,684
Land 2,592 2,782
Home equity 1,703 1,552
Loans to consumers and individuals 2,085 1,879
Total 111,108 131,208
Deferred loan fees (33) (119)
Allowance for possible credit losses (1,117) (1,406)
Total net loans $ 109,958 $ 129,683
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 $113.8
million, or 86.7% of the total portfolio as of September 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 September 30, 1999 the two largest industry concentrations
within the loan portfolio were real estate and related services at 28.3% and the
construction 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 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 September 30, 1999, the Company had nonperforming assets in the amount
of $1,777,000, of which $1,737,000 represented three nonaccrual loans. Had
these nonaccrual loans performed under their contractual terms, approximately
$24,000 in additional interest income would have been recognized during 1999.
Also, as of September 30, 1999, the Company had one loan 90 days or more past
due and still accruing in the aggregate amount of $40,000. This loan is 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, September 30,
1998 1999
Nonaccrual loans $ 563 $ 1,737
Loans 90 days or more past due and
still accruing 404 40
Other real estate owned
$ 967 $ 1,777
As a percent of total loans 0.87% 1.36%
As a percent of total assets 0.57% 0.93%
The increase in nonperforming assets was due to a loan in the amount of $1.7
million being placed on nonaccrual status during the third quarter of 1999. No
specific allowance for possible credit losses was applied to this loan because
it was adequately collateralized.
At September 30, 1999, the Company had loans identified as impaired in the
amount of $1,777,000. At September 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 September 30, 1999 the APCL of
$1,406,000, or 1.07% 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 Nine Months Ended
December 31, September 30,
1998 1999
Balances:
Average loans during period $ 100,130 $ 121,934
Loans at end of period 111,075 131,089
Allowance for Possible Credit Losses:
Balance at beginning of period 1,007 1,117
Actual credit losses:
Commercial 53 28
Consumer
Total 53 28
Actual credit recoveries:
Commercial 9 72
Consumer 1
Total 10 72
Net credit losses (recoveries) 43 (44)
Provision charged to operating expenses 153 245
Balance at end of period $ 1,117 $ 1,406
Ratios:
Net credit losses (recoveries) to average loans 0.04% (0.04%)
Allowance for possible credit losses to loans
at end of period 1.01% 1.07%
Net credit losses (recoveries) to beginning of
period allowance for credit losses 4.27% (3.94%)
The Company provided $120,000 to the allowance for possible credit losses
during the third quarter of 1999 as compared to $35,000 during the third quarter
of 1998. For the nine months ended September 30, 1999, the Company provided
$245,000 to the allowance for possible credit losses as compared to $70,000
during the same period of 1998. The provisions during the third quarter of 1999
and the nine months ended September 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 September 30, 1999
% of % of
Category Category
to Total to Total
APCL Loans APCL Loans
Commercial loans $ 641 42.79% $ 904 48.48%
Real estate loans 245 53.27% 260 46.74%
Consumer loans 38 3.94% 41 4.78%
Not allocated 193 N/A 201 N/A
Total $ 1,117 100.00% $ 1,406 100.00%
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
September 30, 1999: Cost Gains Losses Value Value
Held to maturity securities:
U.S. Government agencies $ 2,000 $ 2 $ $ 2,002 $ 2,000
Total held to maturity 2,000 2 2,002 2,000
Available for sale securities:
U.S. Treasury 25,017 3 (213) 24,807 24,807
U.S. Government agencies 11,140 (400) 10,740 10,740
Mortgage-backed
Securities 196 (6) 190 190
Corporate securities 1,955 (13) 1,942 1,942
Total available for sale 38,308 3 (632) 37,679 37,679
Total investment
securities $40,308 $ 5 $ (632) $39,681 $39,679
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 $19.9 million, or 12.8%,
during the nine months ended September 30, 1999.
Rates paid on deposits decreased during the nine months ended September 30,
1999 contributing to the decrease in the cost of funds to 2.73% for the nine
months ended September 30, 1999 as compared to 3.23% for the year ended December
31, 1998. The following table summarizes the distribution of average deposits
and the average rates paid for the periods indicated (dollar amounts in
thousands):
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
Average Average Average Average
Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 31,371 $ 38,413
Interest-bearing demand deposits
(includes money market
deposit accounts) 88,255 3.93% 95,603 3.40%
Savings deposits 1,845 1.92% 2,230 1.89%
Time deposits, $100,000 and over 12,493 5.31% 13,004 4.85%
Other time deposits 8,194 5.06% 8,662 4.41%
Total interest-bearing 110,787 4.14% 119,499 3.60%
Total deposits $142,158 3.23% $157,912 2.73%
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, September 30,
Time remaining to maturity 1998 1999
Three months or less $ 4,682 $ 6,522
After three months to six months 3,620 2,603
After six months to one year 3,620 4,545
After twelve months 700 757
Total $ 12,622 $ 14,427
RESULTS OF OPERATIONS
NET INTEREST INCOME / NET INTEREST MARGIN. Net interest income for the
quarter ended September 30, 1999 was $2,744,000, an increase of 23.4% over the
net interest income of $2,223,000 during the same period of 1998. Net interest
income for the nine months ended September 30, 1999 was $7,724,000, an increase
of 22.9% over the net interest income of $6,283,000 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 September 30,
1998 1999
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 11,382 $ 154 5.41% $ 14,702 $ 185 5.03%
Interest-bearing deposits
with banks 286 4 5.59% 286 4 5.59%
Investment securities 34,289 507 5.92% 27,782 383 5.51%
Loans 104,605 2,788 10.66% 129,241 3,336 10.32%
Total earning assets 150,562 3,453 9.18% 172,011 3,908 9.09%
Total non-earning assets 10,890 12,649
Total assets $161,452 $184,660
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 30,899 $ 42,035
Interest-bearing transaction
accounts 92,480 $ 936 4.04% 101,140 $ 879 3.48%
Time deposits, $100,000 or more 12,722 173 5.44% 14,181 167 4.71%
Savings and other time 10,168 114 4.48% 11,337 111 3.92%
Total interest-bearing deposits 115,370 1,223 4.24% 126,658 1,157 3.65%
Other borrowings 514 7 5.45% 593 7 4.72%
Total interest-bearing
Liabilities 115,884 1,230 4.25% 127,251 1,164 3.66%
Other liabilities 1,308 1,645
Shareholders' equity 13,361 13,729
Total liabilities
and shareholders' equity $161,452 $184,660
Net interest income $2,223 $2,744
Net interest margin 5.91% 6.38%
For the nine months ended September 30,
1998 1999
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold $ 9,216 $ 370 5.35% $ 7,532 $ 274 4.85%
Interest-bearing deposits
with banks 286 13 6.06% 286 11 5.13%
Investment securities 34,293 1,563 6.09% 32,195 1,331 5.52%
Loans 97,396 7,790 10.66% 121,934 9,365 10.24%
Total earning assets 141,191 9,736 9.20% 161,947 10,981 9.04%
Total non-earning assets 10,810 11,745
Total assets $152,001 $173,692
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 30,010 $ 38,413
Interest-bearing transaction
accounts 85,402 2,609 4.07% 95,603 2,437 3.40%
Time deposits, $100,000 or more 12,306 492 5.33% 13,004 472 4.84%
Savings and other time 9,837 334 4.53% 10,892 318 3.89%
Total interest-bearing deposits 107,545 3,435 4.26% 119,499 3,227 3.60%
Other borrowings 481 18 4.99% 881 30 4.54%
Total interest-bearing
Liabilities 108,026 3,453 4.26% 120,380 3,257 3.61%
Other liabilities 1,197 1,482
Shareholders' equity 12,768 13,417
Total liabilities
and shareholders' equity $152,001 $173,692
Net interest income $6,283 $7,724
Net interest margin 5.93% 6.36%
The net interest margin increased to 6.38% during the third quarter of 1999
from 5.91% in the same quarter of 1998. For the nine months ended September 30,
1999, the net interest margin increased to 6.36% from 5.93% 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 Nine Months Ended
September 30, 1998 September 30, 1998
Compared to Compared to
Quarter Ended Nine Months Ended
September 30, 1999 September 30, 1999
Change in Change in
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Federal funds sold $45 ($11) ($3) $31 ($67) ($35) $6 ($96)
Interest-bearing deposits
with banks 0 0 0 0 0 (2) 0 (2)
Investment securities (96) (35) 7 (124) (96) (145) 9 (232)
Loans 658 (89) (21) 548 1,960 (308) (77) 1,575
Total Interest Income 607 (135) (17) 455 1,797 (490) (62) 1,245
Interest Expense:
Interest-bearing
transaction accounts 86 (131) (12) (57) 310 (431) (51) (172)
Time deposits,
$100,000 or more 20 (23) (3) (6) 28 (45) (3) (20)
Savings and other time 13 (14) (2) (3) 36 (47) (5) (16)
Other borrowings 1 (1) 0 0 15 (2) (1) 12
Total Interest Expense 120 (169) (17) (66) 389 (525) (60) (196)
Net Interest Income $487 $34 $0 $521 $1,408 $35 ($2) $1,441
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 Nine Months Ended
September 30, September 30,
Components of Noninterest Income 1998 1999 1998 1999
Gain on sale of loans $ 18 $ 5 $ 137 $ 87
Service fees on deposit accounts 129 149 373 465
Loan servicing fees 11 14 32 40
Gain (loss) on sale of investment
securities - net 12
Other 45 77 192 174
Total $ 203 $ 245 $ 734 $ 778
As a Percentage of Average Assets (Annualized)
Gain on sale of loans 0.04% 0.01% 0.12% 0.07%
Service fees on deposit accounts 0.32% 0.32% 0.32% 0.36%
Loan servicing fees 0.03% 0.03% 0.03% 0.03%
Gain (loss) on sale of investment
securities - net 0.01%
Other 0.11% 0.17% 0.17% 0.13%
Total 0.50% 0.53% 0.64% 0.60%
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 Nine Months Ended
September 30, September 30,
Components of Noninterest Expense 1998 1999 1998 1999
Salaries and employee benefits $ 922 $ 1,006 $ 2,707 $ 3,018
Occupancy expense 214 265 648 730
Furniture and equipment expense 99 107 313 306
Professional services 101 62 214 236
Supplies 66 67 215 201
Promotional expenses 57 58 247 226
Data processing fees 80 85 242 280
Regulatory assessments 18 12 49 31
Other 97 119 340 311
Total $ 1,654 $ 1,781 $ 4,975 $ 5,339
Average full-time equivalent employees 56 57 55 56
As a Percentage of Average Assets (Annualized)
Salaries and employee benefits 2.28% 2.18% 2.37% 2.32%
Occupancy expense 0.53% 0.57% 0.57% 0.56%
Furniture and equipment expense 0.25% 0.23% 0.27% 0.24%
Professional services 0.25% 0.13% 0.19% 0.18%
Supplies 0.16% 0.15% 0.19% 0.15%
Promotional expenses 0.14% 0.13% 0.22% 0.17%
Data processing fees 0.20% 0.18% 0.21% 0.22%
Regulatory assessments 0.04% 0.03% 0.04% 0.02%
Other 0.24% 0.26% 0.30% 0.24%
Total 4.10% 3.86% 4.36% 4.10%
Noninterest expense increased to $1.8 million during the third quarter of
1999 from $1.7 million during the same period of the prior year. For the nine
months ended September 30, 1999, noninterest expense increased to $5.3 million
from $5.0 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.
TESTING. Updating and testing of the Company's mission-critical automated
systems is complete. Testing of modified or new systems will continue as
needed.
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. 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 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 could 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 41.2% for the quarter
ended September 30, 1999 compared to 40.6% in the same period of the prior year.
For the nine months ended September 30, 1999, the effective tax rate was 41.2%
compared to 40.9% in the same period of the prior year.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT. Liquidity is the Company's
ability to absorb fluctuations in deposits while simultaneously providing for
the credit needs of its borrowers. The objective in liquidity management is to
balance the sources and uses of funds. Primary sources of liquidity for the
Company include payments of principal and interest on loans and investments,
proceeds from the sale or maturity of loans and investments, growth in deposits,
and other borrowings. The Company holds overnight federal funds as a cushion
for temporary liquidity needs. During the nine months ended September 30, 1999,
federal funds sold averaged $7.5 million, or 4.3% of total assets. In addition
to its federal funds, the Company maintains various lines of credit with
correspondent banks, the Federal Reserve Bank of San Francisco, and the Federal
Home Loan Bank of San Francisco.
At September 30, 1999, the Company had cash, time deposits with banks,
federal funds sold, and unpledged investment securities of approximately $45.3
million, or 23.7% 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 September 30, 1999, the loan-to-deposit ratio was 75.0% 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 September 30,
1999, this ratio was 11.6% as compared to 3.1% at December 31, 1998.
As of September 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 September 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, 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):
September 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):
Interest-bearing deposits
with other banks $ 196 $ 90 $ 286
Investment securities 17,131 3,006 $ 2,001 $13,098 $ 5,072 40,308
Loans, gross of allowance
for possible losses 69,747 1,684 3,062 39,490 17,106 131,089
Total 87,074 4,780 5,063 52,588 22,178 171,683
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing
transaction deposits 45,043 57,544 102,587
Time deposits, $100,000
or more 6,522 2,603 4,545 757 14,427
Savings and other
time deposits 5,755 865 2,391 2,549 11,560
Other borrowings 750 750
Total 13,027 3,468 51,979 60,850 $129,324
Period GAP $74,047 $ 1,312 $(46,916) $(8,262)$22,178
Cumulative GAP $74,047 $75,359 $ 28,443 $20,181 $42,359
Interest Sensitivity
GAP Ratio 85.04% 27.45% (926.64%) (15.71%)100.00%
Cumulative Interest
Sensitivity 85.04% 82.04% 29.35% 13.50% 24.67%
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.
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1999
8.40% 7.72%
During the third quarter of 1999, the Company commenced the payment of a
regular cash dividend. The regular cash dividends will be paid on a quarterly
basis.
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 September 30, 1999, 70,019 shares had been repurchased for a total of
$584,988 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 September 30, 1999,
the Company's total capital was 11.03% and its Tier 1 capital ratio was 10.03%.
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 September 30, 1999, the Company's
leverage ratio was 7.55%. 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
None
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) 1989 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)(a)(3) 1999 Stock Option Plan (incorporated by reference from Exhibit A of
the registrant's Proxy Statement on Schedule 14A filed with the SEC
on April 27, 1999).
(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. The Company filed the following Current Reports on
Form 8-K:
(i) A Current Report on Form 8-K filed with the SEC on September 15, 1999,
pertaining to a press release announcing the commencement of a quarterly
cash dividend and a five percent stock dividend.
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: November 9, 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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