FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _________________ to _____________________
COMMISSION FILE NUMBER: 033-76832
MCB FINANCIAL CORPORATION
_____________________________________
(exact name of small business issuer)
CALIFORNIA 68-0300300
__________ __________
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1248 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901
_______________________________________________
(Address of principal executive offices)
(415) 459-2265
___________________________
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
_____ _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: May 8, 2001
CLASS
Common stock, no par value 1,633,516
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited)
ASSETS
Cash and due from banks $ 11,936 $ 12,040
Federal funds sold 10,800 250
-------- --------
Total cash and cash equivalents 22,736 12,290
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 25,508 25,100
Investment securities held to maturity at cost; fair value
$1,999 in 2000 2,000
Loans held for investment (net of allowance for
loan losses of $2,039 in 2001 and $1,939 in 2000) 161,329 162,884
Premises and equipment, net 3,592 3,470
Accrued interest receivable 1,152 1,276
Deferred income taxes 844 1,019
Other assets 921 929
-------- --------
Total assets $216,368 $209,254
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 54,218 $ 47,383
Interest-bearing
Transaction accounts 103,909 105,284
Time certificates, $100,000 and over 26,859 25,153
Savings and other time deposits 11,148 10,765
-------- --------
Total interest-bearing deposits 141,916 141,202
-------- --------
Total deposits 196,134 188,585
Other borrowings 626 750
Accrued interest payable and other liabilities 1,710 1,813
-------- --------
Total liabilities 198,470 191,148
Company obligated mandatorily redeemable cumulative trust preferred
securities 3,000 3,000
SHAREHOLDERS' EQUITY
Preferred stock, no par value: authorized 20,000,000 shares;
non issued or outstanding
Common stock, no par value: authorized 20,000,000 shares;
issued and outstanding 1,775,182 shares in 2001 and 1,834,877 shares in 2000 9,139 9,501
Accumulated other comprehensive income 293 47
Retained earnings 5,466 5,558
-------- --------
Total shareholders' equity 14,898 15,106
-------- --------
Total liabilities and shareholders' equity $216,368 $209,254
======== ========
See notes to condensed consolidated financial statements.
2
MCB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
Dollar amounts in thousands, except per share amounts March 31,
-----------------------
2001 2000
(Unaudited)
INTEREST INCOME:
Loans, including fees $ 4,067 $ 3,573
Federal funds sold 62 134
Investment securities 377 483
----------- ----------
Total interest income 4,506 4,190
----------- ----------
INTEREST EXPENSE:
Interest-bearing transaction, savings and other
time deposits 1,018 1,070
Time certificates, $100,000 and over 389 179
Other interest 25 7
----------- ----------
Total interest expense 1,432 1,256
----------- ----------
NET INTEREST INCOME 3,074 2,934
----------- ----------
PROVISION FOR LOAN LOSSES 100 120
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,974 2,814
----------- ----------
OTHER INCOME:
Gain on sale of loans 24 15
Service fees on deposit accounts 123 129
Loan servicing fees 15 13
Gain (loss) on sale of investment securities (2)
Other 96 56
----------- ----------
Total other income 258 211
----------- ----------
OTHER EXPENSES:
Salaries and employee benefits 1,110 1,069
Occupancy expense 284 254
Furniture and equipment expense 113 110
Professional services 46 54
Supplies 58 71
Promotional expenses 101 129
Data processing fees 101 88
Regulatory assessments 15 15
Other 124 128
----------- ----------
Total other expenses 1,952 1,918
----------- ----------
INCOME BEFORE INCOME TAXES AND DIVIDENDS PAID ON
TRUST PREFERRED SECURITIES 1,280 1,107
INCOME TAX PROVISION 491 454
----------- ----------
INCOME BEFORE DIVIDENDS PAID ON TRUST PREFERRED
SECURITIES 789 653
DIVIDENDS PAID ON TRUST PREFERRED SECURITIES 78
----------- ----------
NET INCOME $ 711 $ 653
=========== ==========
BASIC EARNINGS PER SHARE $ 0.40 $ 0.32
=========== ==========
DILUTED EARNINGS PER SHARE $ 0.39 $ 0.30
=========== ==========
See notes to condensed consolidated financial statements.
3
MCB FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
Dollar amounts in thousands March 31,
----------------------
2001 2000
(Unaudited)
Net income $ 711 $ 653
Other comprehensive income (loss)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period, net of taxes of $171 in 2001 and $(11) in 2000) 246 (16)
Less: reclassification adjustment for gains (losses)
included in net income, (net of taxes of $(1) in 2000) (1)
---------- ----------
Other comprehensive income (loss) 246 (17)
---------- ----------
Comprehensive income $ 957 $ 636
========== ==========
See notes to condensed consolidated financial statements.
4
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Dollar amounts in thousands Ended March 31,
----------------------------
2001 2000
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 711 $ 653
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 100 120
Depreciation and amortization 152 23
Loss on sale of investment securities, net 2
Gain on sale of loans (24) (15)
Deferred income taxes 89
Changes in:
Accrued interest receivable 124 (47)
Other assets 8 (40)
Accrued interest payable and other liabilities (89) 305
------------ ------------
Net cash provided by operating activities 982 1,001
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 2,000
Available for sale securities:
Maturities 3,000
Purchases (14,913) (6,925)
Sales 11,957
Net decrease (increase) in loans held for investment 1,479 (7,364)
Purchases of premises and equipment, net (261) (179)
------------ ------------
Net cash used in investing activities 3,218 489
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing demand deposits 6,835 9,003
Net increase (decrease) in interest-bearing transaction,
savings and other time deposits 714 4,619
Net increase in other borrowings (124)
Cash dividends paid (17) (21)
Proceeds from the exercise of stock options 243 12
Repurchases of common stock (1,405) (481)
------------ ------------
Net cash provided by financing activities 6,246 13,132
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,446 14,622
CASH AND CASH EQUIVALENTS:
Beginning of period 12,290 16,956
------------ ------------
End of period $ 22,736 $ 31,578
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 1,361 $ 1,214
Income taxes $ 264 $ 95
See notes to condensed consolidated financial statements.
5
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MCB Financial Corporation (the "Company" on a consolidated basis) is a bank
holding company with one bank subsidiary: Metro Commerce Bank (the "Bank"). MCB
Statutory Trust I (the "Trust"), which is a Connecticut statutory trust formed
for the exclusive purpose of issuing and selling trust preferred securities, is
also a subsidiary of the Company. The unaudited condensed consolidated financial
information included herein was prepared on the same basis as the audited
financial statements for the year ended December 31, 2000. The interim condensed
consolidated financial statements contained herein are not audited. However, in
the opinion of the Company, all adjustments, consisting only of normal recurring
items necessary for a fair presentation of the operating results for the periods
shown, have been made. The results of operations for the three months ended
March 31, 2001 should not be considered indicative of operating results to be
expected for the year ending December 31, 2001. 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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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:
Three months ended March 31,
--------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to common shareholders $711 1,757 $ 0.40 $653 2,054 $0.32
Effect of Dilutive Securities Stock options 90 118
----------- ------------- --------- ----------- ------------- ---------
Diluted EPS
Income available to common shareholders
plus assumed conversions $711 1,847 $ 0.39 $653 2,172 $0.30
3. ACCOUNTING PRONOUNCEMENTS
6
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was adopted by the Company
effective January 1, 2001. SFAS 133 as amended establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The adoption of SFAS No. 133 did not have a
significant impact on the financial position or results of operations, or cash
flows of the Company.
SFAS No. 140,"Accounting for Transfers and Servicing of Financial Assets
and Extinquishments of Liabilities," was issued in September 2000. SFAS No. 140
is a replacement of SFAS No. 125,"Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities". Most of the provisions of
SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the
Financial Standards Board ("FASB"), and some were changed only in minor ways. In
issuing SFAS No.140, the FASB included issues and decisions that had been
addressed and determined since the original publication of SFAS No. 125. SFAS
No. 140 is effective for transfers after March 31, 2001. Management does not
expect the adoption of SFAS No. 140 to have a significant impact on the
financial position or results of operations of the Company.
4. SUBSEQUENT EVENT
In April, 2001 the Company entered into a stock purchase agreement with
John Cavallucci and his family to purchase the remaining 229,251 shares of the
Company's common stock owned by them at a price of $12.00 per share. The sale
will include any additional shares which the Cavallucci family acquires upon
exercise of vested options prior to July 3, 2001, the final closing of the sale
of the shares. The board of directors believes that the transaction is
appropriate and in the best interests of the Company and its shareholders to
allow Mr. Cavallucci to effect an orderly disposition of his holdings as he
transitions out of his positions with the Company. The Company expects to fund
the purchases from its operating income. As part of the agreement, Mr.
Cavallucci will resign from the board of directors upon the closing of the sale.
As of May 9, 2001, Mr. Cavallucci had sold 141,666 shares back to the Company
and 44,574 shares to members of the Company's board of directors and the
Company's Employee Stock Ownership Plan. The Company is obligated to purchase
the remaining 43,011 shares from Mr. Cavallucci on July 3, 2001 at a price of
$12.00 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The condensed consolidated financial statements include the accounts of
MCB Financial Corporation (the "Company" on a consolidated basis) and its wholly
owned subsidiaries, Metro Commerce Bank and MCB Statutory Trust I (the "Trust").
This discussion focuses primarily on the results of operations of the Company on
a consolidated basis for the three months ended March 31, 2001 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
subsidiaries 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
7
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 and liquidity risks. 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, 2000.
RESULTS OF OPERATIONS
The Company reported net income of $711,000, or $0.40 per share basic
and $0.39 per share diluted, for the first quarter of 2001. This compares to net
income of $653,000, or $0.32 per share basic and $0.30 per share diluted, for
the same period in 2000. Return on average assets and return on average equity
for the first quarter of 2001 were 1.36% and 19.09%, respectively, as compared
to 1.32% and 17.91%, respectively, for the same period of 2000.
The 8.9% increase in net income during the first quarter of 2001 as
compared to the first quarter of 2000 was largely due to the 17% growth in
average loans. Net income during the first quarter of 2001 included a $78,000
charge for dividends paid on trust preferred securities issued in September
2000. Earnings per share diluted increased 30% to $0.39 reflecting share
repurchases over the past year. The weighted average number of shares
outstanding for the three months ended March 31, 2001 was 1,756,867 as compared
to 2,054,135 for the three months ended March 31, 2000.
NET INTEREST INCOME
Net interest income for the quarter ended March 31, 2001 was
$3,074,000, an increase of 4.8% over the net interest income of $2,934,000
during the same period of 2000. The increase was primarily due to the 17% growth
in average loans.
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):
8
For the quarter ended March 31,
-------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
ASSETS
Federal funds sold $ 4,724 $ 62 5.25% $ 9,506 $ 134 5.64%
Interest-bearing deposits with banks 286 4 5.59 286 4 5.59%
Investment securities 26,378 373 5.66% 34,242 479 5.60%
Loans(1) 163,560 4,067 9.95% 139,942 3,573 10.21%
------- -------- ------ -------- -------- ------
Total earning assets 194,948 4,506 9.25% 183,976 4,190 9.11%
Total non-earning assets 14,609 13,115
-------- -------
Total assets $209,557 $197,091
======== =======
LIABILITIES & SHAREHOLDERS' EQUITY
Demand deposits $ 46,478 $ 46,108
Interest-bearing transaction accounts 103,568 $ 895 3.46% 108,821 $ 954 3.51%
Time deposits, $100,000 or more 27,456 389 5.66% 14,207 179 5.04%
Savings and other time 10,686 123 4.60% 11,434 116 4.06%
------- -------- ------ ------- -------- ------
Total interest-bearing deposits 141,710 1,407 3.97% 134,462 1,249 3.72%
------- -------- ------ ------- -------- ------
Other borrowings 1,760 25 5.68% 581 7 4.82%
------- -------- ------ ------- -------- ------
Total interest-bearing liabilities 143,470 1,432 3.99% 135,043 1,256 3.72%
Other liabilities 1,714 1,361
Trust preferred securities 3,000
Shareholders' equity 14,895 14,579
Total liabilities -------- --------
and shareholders' equity $209,557 $197,091
======== ========
-------- --------
Net interest income $3,074 $2,934
======== ========
Net interest margin 6.31% 6.38%
<FN>
(1) Nonaccrual loans are included in the average balance.
</FN>
The net interest margin decreased to 6.31% during the first quarter of
2001 from 6.38% in the same quarter of 2000 as the 14 basis point increase in
the yield on earning assets was offset by the 27 basis point increase in the
rate paid on interest-bearing liabilities.
The following table presents the dollar amount of changes in interest
earned and interest paid for each major category of interest-earning asset and
interest-bearing liability and the amount of change attributable to average
balances (volume) fluctuations and average rate fluctuations for the periods
indicated. The variance attributable to both balance and rate fluctuations is
allocated to a combined rate/volume variance (dollar amounts in thousands):
9
Quarter Ended March 31, 2001
Compared to
Quarter Ended March 31, 2000
Change in
-----------------------------------
Rate/
Volume Rate Volume Total
-----------------------------------
Interest Income:
Federal funds sold ($ 68) ($9) $5 ($72)
Interest-bearing deposits with banks 0 0 0 0
Investment securities ( 110) 5 (1) (106)
Loans 600 (91) (15) 494
-----------------------------------
Total Interest Income 422 (95) (11) 316
-----------------------------------
Interest Expense:
Interest-bearing transaction accounts (46) (14) 1 (59)
Time deposits, $100,000 or more 167 22 21 210
Savings and other time (8) 16 (1) 7
Other borrowings 14 1 3 18
-----------------------------------
Total Interest Expense 127 25 24 176
-----------------------------------
Net Interest Income $295 ($120) ($35) $140
===================================
NONINTEREST INCOME
The following table summarizes noninterest income for the periods
indicated and expresses the amounts as a percentage of average assets (dollar
amounts in thousands):
Quarter Ended March 31,
---------------------------
Components of Noninterest Income 2001 2000
- --------------------------------------------------------------------------------
Gain on sale of loans $ 24 $ 15
Service fees on deposit accounts 123 129
Loan servicing fees 15 13
Loss on sale of investment securities-net (2)
Other 96 56
---------------------------
Total $258 $211
===========================
As a Percentage of Average Assets (Annualized)
- -----------------------------------------------------
Gain on sale of loans 0.05% 0.03%
Service fees on deposits accounts 0.23% 0.26%
Loan servicing fees 0.03% 0.03%
Gain (loss) on sale of investment securities-net 0.00%
Other 0.18% 0.11%
---------------------------
Total 0.49% 0.43%
===========================
10
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 March 31,
---------------------------
Components of Noninterest Income 2001 2000
- --------------------------------------------------------------------------------
Salaries and employee benefits $1,110 $1,069
Occupancy expense 284 254
Furniture and equipment expense 113 110
Professional services 46 54
Supplies 58 71
Promotional expenses 101 129
Data processing fees 101 88
Regulatory assessments 15 15
Other 124 128
---------------------------
Total $1,952 $1,918
===========================
Average full-time equivalent employees 58 58
As a Percentage of Average Assets (Annualized)
- -----------------------------------------------------
Salaries and employee benefits 2.12% 2.17%
Occupancy expense 0.54% 0.52%
Furniture and equipment expense 0.22% 0.22%
Professional services 0.09% 0.11%
Supplies 0.11% 0.14%
Promotional expenses 0.19% 0.26%
Data processing fees 0.19% 0.18%
Regulatory assessments 0.03% 0.03%
Other 0.24% 0.26%
---------------------------
Total 3.73% 3.89%
===========================
INCOME TAXES.
The Company's effective tax rate was 40.8% for the quarter ended March
31, 2001 compared to 41.0% in the same period of the prior year.
FINANCIAL CONDITION
Total assets of the Company increased by $7.1 million, or 3.4%, from
the end of 2000 to reach $216.4 million at March 31, 2001.
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):
11
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
MARCH 31, 2000: COST GAINS LOSSES VALUE VALUE
- -----------------------------------------------------------------------------------------------------
Available for sale securities:
U.S. Treasury 13,982 $ 350 14,332 14,332
U.S. Government agencies 9,101 121 9,222 9,222
Corporate securities 1,923 31 1,954 1,954
-------- ------- -------- -------- --------
Total investment securities $ 25,006 $ 502 $ 25,508 $ 25,508
======== ======= ======== ======== ========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 2000 COST GAINS LOSSES VALUE VALUE
- -----------------------------------------------------------------------------------------------------
Held to maturity securities:
U.S. Government agencies $ 2,000 $ ( 1) $ 1,999 $ 2,000
-------- ------- -------- -------- --------
Total held to maturity 2,000 ( 1) 1,999 2,000
-------- ------- -------- -------- --------
Available for sale securities:
U.S. Treasury 13,983 188 (42) 14,129 14,129
U.S. Government agencies 9,108 5 (75) 9,038 9,038
Corporate securities 1,929 4 (29) 1,933 1,933
-------- ------- -------- -------- --------
Total available for sale 25,020 197 (117) 25,100 25,100
-------- ------- -------- -------- --------
Total investment securities $ 27,020 $ 197 $ (118) $27,099 $ 27,100
======== ======= ======== ======== ========
The maturities and weighted average yields of investment securities at
March 31, 2001 are presented in the following table (at amortized cost) (dollar
amounts in thousands):
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years Total
---------------- ---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury and other
U.S. government agencies $2,006 5.58% $17,028 5.68% $4,049 5.61% $23,083 5.66%
Corporate securities 811 6.33% 1,112 6.30% 1,923 6.32%
------ ----- ------- ----- ------ ----- ------- -----
Total $2,817 5.80% $18,140 5.72% $4,049 5.61% $25,006 5.71%
====== ===== ======= ===== ====== ===== ======= =====
12
LOANS HELD FOR INVESTMENT
Net loans held for investment decreased by $1.6 million, or 1.0%,
during the first three months of 2001 as repayments of commercial loans exceeded
originations during the period. The following table sets forth the amount of
total loans outstanding by category as of the dates indicated (dollar amounts in
thousands):
March 31, December 31,
2001 2000
--------- -----------
Total Loans $ 23,477 $ 27,137
Commercial
Real estate:
Commercial 108,823 108,557
Construction 25,900 24,157
Land 2,032 1,675
Home equity 1,423 1,581
Loans to consumers and individuals 1,905 1,936
--------- ---------
Total 163,560 165,043
Deferred loan fees (192) (220)
Allowance for loan losses (2,039) (1,939)
--------- ---------
Total net loans $ 161,329 $ 162,884
========= =========
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
$138.2 million, or 84.5% of the total portfolio as of March 31, 2001. 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 underwriting standards for real estate secured loans are
prudent and 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 March 31, 2001 the two largest industry concentrations within
the loan portfolio were real estate and related services at 28.2% and the
services - personal/business industry at 23.4% 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.
Maturities of Loans at March 31, 2001 (dollar amounts in thousands):
13
Time remaining to maturity Fixed rate Adjustable rate Total
----------------- ------------------------------------
One year or less $ 7,778 $ 37,409 $ 45,187
After one year to five years 60,586 19,891 80,477
After five years 12,943 24,953 37,896
----------------- ----------------- -----------------
Total $ 81,307 $ 82,253 $ 163,560
================= ================= =================
As of March 31, 2001, the percentage of loans held for investment with
fixed and floating interest rates was 49.7% and 50.3%, respectively.
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 March 31, 2001, the Company had nonperforming assets in the
amount of $40,000. The following table sets forth the balance of nonperforming
assets as of the dates indicated (dollar amounts in thousands):
Nonperforming Assets March 31, December 31,
2001 2000
------------------ ------------------
Nonaccrual loans $ 0 $ 0
Loans 90 days or more past due
and still accruing 40 40
------------------ ------------------
$ 40 $ 40
================== ==================
As a percent of total loans 0.02% 0.02%
As a percent of total assets 0.02% 0.02%
At March 31, 2001, the Company had loans identified as impaired in the
amount of $40,000. At March 31, 2001, no specific allowance for loan losses was
required for these impaired loans because they were adequately collateralized.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses ("ALL") which is
reduced by credit losses and increased by credit recoveries and by the provision
to the ALL which is charged against operations. Provisions to the ALL and the
total of the ALL are based, among other factors, upon the Company's credit loss
experience, current 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 ALL and after carefully analyzing
each loan individually, the Company segments its loan portfolio into pools of
homogeneous loans that share similar risk factors. Each pool is given a risk
assessment factor which largely reflects the expected future losses from each
category. These risk assessment factors change as economic conditions shift and
actual loan losses are recorded. As of March 31,
14
2001, the ALL of $2,039,000, or 1.25% 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 ALL.
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 ALL arising from credit losses, recoveries of credit losses
previously incurred, additions to the ALL charged to operating expense, and
certain ratios relating to the ALL (dollar amounts in thousands):
At and For At and For
The Three Months The Year Ended
March 31, 2001 December 31, 2000
----------------- -----------------
Balances:
Average loans during period $163,560 $149,645
Loans at end of period 163,368 164,823
Allowance for Loan Losses:
Balance at beginning of period 1,939 1,492
Charge-offs:
Commercial 9
Consumer 1
-------- --------
Total charge-offs
Recoveries:
Commercial 37
-------- --------
Total charge-offs 0 37
-------- --------
Net charge-offs (recoveries) 0 (27)
-------- --------
Provision charged to operating expenses 100 420
-------- --------
Balance at end of period $ 2,039 $ 1,939
======== ========
Ratios:
Net charge-offs(recoveries) to average loans 0.00% -0.02%
Allowance for loan losses to loans at end of period 1.25% 1.18%
Net charge-offs (recoveries) to beginning of period allowance for loan losses 0.00% -1.81
The Company provided $100,000 to the allowance for loan losses during
the first quarter of 2001 as compared to $120,000 during the first quarter of
2000. The provision in the first quarter of 2001 was recorded in view of the
increasing uncertainties regarding general economic and business conditions in
our primary market areas and the provision in the first quarter of 2000 was
recorded as a prudent measure, based upon growth in the loan portfolio.
The following table sets forth the allocation of the ALL as of the
dates indicated (dollar amounts in thousands):
15
March 31, 2001 December 31, 2000 March 31, 2000
----------------------------------------------------------
% of % of % of
Category Category Category
to Total to Total to Total
All Loans All Loans All Loans
Commercial loans $ 805 43.48% $ 793 43.34% $ 897 44.79%
Real estate loans 982 53.03% 978 53.47% 287 51.80%
Consumer loans 72 3.49% 65 3.19% 32 3.41%
Not allocated 180 N/A 103 N/A 426 N/A
------ ------- ------ ------- ------ -------
Total $2,039 100.00% $1,939 100.00% $1,642 100.00%
====== ======= ====== ======= ====== =======
The ALL is available to absorb losses from all loans, although
allocations have been made for certain loans and loan categories. The allocation
of the ALL 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.
16
DEPOSITS
Total consolidated deposits increased by $7.5 million, or 4.0%, during
the three months ended March 31, 2001.
Rates paid on deposits remained the same during the three months ended
March 31, 2001 as compared to the year ended December 31, 2000. The following
table summarizes the distribution of average deposits and the average rates paid
for the periods indicated (dollar amounts in thousands):
Three Months Ended Year Ended
March 31, 2001 December 31, 2000
---------------------------------- ----------------------------------
Average Average Average Average
Balance Rate Balance Rate
-------------- ---------------- ------------ ------------------
Noninterest-bearing demand deposits $ 46,478 $ 47,329
Interest-bearing demand deposits (includes
money market deposit accounts) 103,568 3.45% 108,708 3.70%
Savings deposits 2,131 1.88% 2,146 1.95%
Time deposits, $100,000 and over 27,456 5.66% 17,730 5.46%
Other time deposits 8,555 5.28% 9,086 4.96%
-------------- ---------------- ------------ ------------------
Total interest-bearing 141,710 3.97% 137,670 3.98%
-------------- ---------------- ------------ ------------------
Total deposits $ 188,188 2.99% $ 184,999 2.96%
============== ================ ============ ==================
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):
March 31, 2001 December 31, 2000
-------------- -----------------
Time remaining to maturity
Three months or less $12,443 $14,456
After three months to six months 9,438 4,519
After six months to one year 3,378 5,678
After twelve months 1,600 500
------- -------
Total $26,859 $25,153
======= =======
LIQUIDITY
Liquidity is the Company's ability to absorb fluctuations in deposits
while simultaneously providing for the credit needs of its borrowers. The
objective in liquidity management is to balance the sources and uses of funds.
Primary sources of liquidity for the Company include payments of principal and
interest on loans and investments, proceeds from the sale or maturity of loans
and investments, growth in deposits, and other borrowings. The Company holds
overnight federal funds as a cushion for temporary liquidity needs. During the
three months ended March 31, 2001, federal funds sold averaged $4.7 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.
17
At March 31, 2001, the Company had cash, time deposits with banks,
federal funds sold, and unpledged investment securities of approximately $34.9
million, or 16.1% of total assets. This represented all available liquid assets,
excluding other assets.
Several methods are used to measure liquidity. One method is to measure
the balance between loans and deposits (gross loans divided by total deposits).
In general, the closer this ratio is to 100%, the more reliant an institution
becomes on its illiquid loan portfolio and its securities portfolio to absorb
temporary fluctuations in deposit levels. At March 31, 2001, the loan-to-deposit
ratio was 83.3% as compared to 87.4% at December 31, 2000.
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), or the liquidity
ratio. The Company targets a minimum ratio of 5%. At March 31, 2001, this ratio
was 7.1% as compared to 1.3% at December 31, 2000.
As of March 31, 2001, the Company had no material commitments that were
expected to adversely impact liquidity.
INTEREST RATE RISK MANAGEMENT
Net Income Simulation
The Company's management utilizes the results of a net income
simulation model to quantify the estimated exposure to net income of changes in
interest rates. The various products in the Company's balance sheet are modeled
to simulate their income (and cash flow) behavior in relation to interest rates.
Income for the next 12 months is calculated for current interest rates and for
immediate and sustained rate shocks.
The income simulation model includes various assumptions regarding the
repricing relationships for each product. Many of the Company's assets are
floating rate loans, which are assumed to reprice immediately, and to the same
extent as the change in market rates according to their contracted index. The
Company's nonmaturity deposit products reprice more slowly, usually changing
less than the change in market rates and at our discretion. As of March 31,
2001, the analysis indicates that our net income for the next 12 months would
increase 8% if rates increased 200 basis points, and decrease by 7% if rates
decreased 200 basis points.
This analysis indicates the impact of the change in net income for a
given set of rate changes and assumptions. It assumes no growth in the balance
sheet and does not account for all the factors that impact this analysis
including changes by management to mitigate the impact of interest rate changes
or secondary impacts such as changes to our credit risk profile as interest
rates change. Furthermore loan prepayment rate estimates and spread
relationships change regularly. Interest rate changes create changes in actual
loan prepayment rates that will differ from the estimates incorporated in the
analysis. In addition, the proportion of adjustable-rate loans in the portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels. Changes that vary significantly from the assumptions may
have significant effects on our net income.
The results of this sensitivity analysis should not be relied upon as
indicative of actual future results.
Gap Analysis
18
In addition to the above analysis, the Company also performs a gap
analysis as part of the overall interest rate risk management process. Net
interest income and the net interest margin are largely dependent on the
Company's ability to closely match interest-earning assets with interest-bearing
liabilities. As interest rates change, the Company must constantly balance
maturing and repricing liabilities with maturing and repricing assets. This
process is called asset/liability management and is commonly measured by the
maturity/repricing gap. The maturity/repricing gap is the dollar difference
between maturing or repricing assets and maturing or repricing liabilities at
different intervals of time.
The following table sets forth rate sensitive interest-earning assets
and interest-bearing liabilities as of March 31, 2001, 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):
Over 90 Over 180 After One After
90 days days to days to Year to Five
or less 180 days 365 days Five Years Years Total
------- -------- -------- ---------- ------- --------
Earning Assets (Rate Sensitive):
Federal funds sold $10,800 $ 10,800
Interest-bearing deposits with other banks 90 $ 196 286
Investment securities $ 2,817 $18,140 $ 4,049 25,006
Loans, excluding allowance for possible losses 83,856 2,405 2,488 61,868 12,943 163,560
------- ------ -------- ------- ------- --------
Total 94,746 2,601 5,305 80,008 16,992 199,652
------- ------ -------- ------- ------- --------
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing transaction deposits 45,230 58,679 103,909
Time deposits, $100,000 or more 12,443 9,438 3,378 1,600 26,859
Savings and other time deposits 3,727 2,529 1,118 3,774 11,148
Other borrowings 626 626
Trust preferred securities 3,000 3,000
------- ------ -------- ------- ------- --------
Total 16,796 11,967 49,726 64,053 3,000 $145,542
------- ------ -------- ------- ------- -------
Period GAP $77,950 $(9,366) $(44,421) $15,955 $13,992
======= ======= ======== ======= =======
Cumulative GAP $77,950 $68,584 $ 24,163 $40,118 $54,110
======= ======= ======== ======= =======
Interest Sensitivity GAP Ratio 82.27% (360.09%) (837.34%) 19.94% 82.34%
======= ======= ======== ======= =======
Cumulative Iterest Sensitivity 82.27% 70.45% 23.54% 21.96% 27.10%
======= ======= ======== ======= =======
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
Total shareholders' equity was $14.9 million as of March 31, 2001
compared to $15.1 million at December 31, 2000. The decrease was primarily due
to the repurchase of common stock during the first quarter
19
of 2001. During the quarter, the Company repurchased 121,000 shares at a total
cost of $1.4 million. The Company paid dividends of $0.01 per share during the
three months ended March 31, 2001.
The ratios of average equity to average assets for the periods
indicated are set forth below.
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
7.11% 7.40%
Trust Preferred Securities
On September 7, 2000, the Company completed an offering of 10.60%
capital securities in an aggregate amount of $3.0 million through the Trust, a
wholly owned trust subsidiary formed for the purpose of the offering. The
securities issued in the offering were sold by the Trust in a private
transaction pursuant to an applicable exemption from registration under the
Securities Act. The entire proceeds of the issuance were invested by the Trust
in $3,000,000 of 10.60% Junior Subordinated Deferrable Interest Debentures due
2030 issued by the Company under a similar exemption from registration. The
debentures represent the sole assets of the Trust. Interest on the debentures is
payable semi-annually and the principal is redeemable by the Company at a
premium beginning on or after September 7, 2010 through September 6, 2020 plus
any accrued and unpaid interest to the redemption date. On or after September 7,
2020, the principal is redeemable by the Company at 100% of the principal
amount. The trust preferred securities are subject to mandatory redemption to
the extent of any early redemption of the debentures and upon maturity of the
debentures on September 7, 2030. The debentures bear the same terms and interest
rates as the trust preferred securities.
The Company has guaranteed, on a subordinated basis, distributions and other
payments due on the trust preferred securities.
The debentures and related Trust investment in the debentures have been
eliminated in consolidation and the trust preferred securities are reflected as
outstanding in the accompanying condensed consolidated financial statements.
Under applicable regulatory guidelines, the trust preferred securities currently
qualify as Tier 1 capital up to a maximum of 25% of Tier I capital. Any
additional portion of trust preferred securities would currently qualify as Tier
2 capital. As of March 31, 2001, the entire $3.0 million outstanding of trust
preferred securities qualified as Tier I capital.
Risk Based Capital
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 March 31,
2001, the Company's total capital was 11.16% and its Tier 1 capital ratio was
9.99%. In addition, the Company, under the guidelines established for
20
adequately capitalized institutions, must also maintain a minimum leverage ratio
(Tier 1 capital divided by total assets) of 4%. As of March 31, 2001, the
Company's leverage ratio was 8.24%. 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.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
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) Exhibits: The Exhibit Index is incorporated by reference.
(b) Reports on Form 8-K. The Company filed the following Current Reports
on Form 8-K:
None
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MCB FINANCIAL CORPORATION
_________________________
(REGISTRANT)
Date: May 14, 2001 /s/ PATRICK E. PHELAN
-----------------------------------------------
Patrick E. Phelan
Chief Financial Officer
(Principal Accounting Officer and officer
authorized to sign on behalf of the
registrant)
23
Exhibit Index
EXHIBIT DESCRIPTION
10.1 Stock Purchase Agreement, dated as of April 2, 2001, by and
between John Cavallucci, John Cavallucci and Elizabeth L.
Cavallucci as Trustees for The Cavallucci Family Trust and MCB
Financial Corporation
24