FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: August 6, 2001
CLASS
Common stock, no par value 1,590,505
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands June 30, December 31,
2001 2000
----------- -----------
ASSETS (Unaudited)
Cash and due from banks $ 18,264 $ 12,040
Federal funds sold 0 250
--------- ----------
Total cash and cash equivalents 18,264 12,290
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 35,468 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) 165,606 162,884
Premises and equipment, net 3,620 3,470
Accrued interest receivable 1,213 1,276
Deferred income taxes 918 1,019
Other assets 905 929
--------- ----------
Total assets $226,280 $209,254
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 50,716 $ 47,383
Interest-bearing:
Transaction accounts 114,690 105,284
Time certificates, $100,000 and over 30,637 25,153
Savings and other time deposits 11,008 10,765
--------- ----------
Total interest-bearing deposits 156,335 141,202
--------- ----------
Total deposits 207,051 188,585
Other borrowings 750 750
Accrued interest payable and other liabilities 1,624 1,813
--------- ----------
Total liabilities 209,425 191,148
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trust holding soley junior subordinated debentures 3,000 3,000
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 and outstanding 1,633,516 shares in 2001 and 1,834,877 shares in 2000 8,431 9,501
Accumulated other comprehensive income 189 47
Retained earnings 5,235 5,558
--------- ---------
Total shareholders' equity 13,855 15,106
--------- ----------
Total liabilities and shareholders' equity $226,280 $209,254
========= ==========
See notes to condensed consolidated financial statements.
2
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
Dollar amounts in thousands, except per share amounts June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $3,974 $3,814 $8,041 $7,387
Federal funds sold 104 183 166 317
Investment securities 372 434 749 917
------ ------ ------ ------
Total interest income 4,450 4,431 8,956 8,621
------ ------ ------ ------
INTEREST EXPENSE:
Interest-bearing transaction, savings and other time deposits 953 1,119 1,971 2,189
Time certificates, $100,000 and over 372 200 761 379
Other interest 6 9 31 16
------ ------ ------ ------
Total interest expense 1,331 1,328 2,763 2,584
------ ------ ------ ------
NET INTEREST INCOME 3,119 3,103 6,193 6,037
------ ------ ------ ------
PROVISION FOR LOAN LOSSES 0 100 100 220
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,119 3,003 6,093 5,817
------ ------ ------ ------
OTHER INCOME:
Gain on sale of loans 15 20 39 35
Service fees on deposit accounts 133 116 256 245
Loan servicing fees 17 14 32 27
Gain (loss) on sale of investment securities (2)
Other 64 70 160 114
------ ------ ------ ------
Total other income 229 220 487 419
------ ------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 1,128 1,118 2,238 2,187
Occupancy expense 254 273 538 527
Furniture and equipment expense 123 114 236 224
Professional services 74 72 120 126
Supplies 61 62 119 121
Promotional expenses 54 19 155 148
Data processing fees 97 89 198 177
Regulatory assessments 15 15 30 30
Other 141 155 265 283
------ ------ ------ ------
Total other expenses 1,947 1,917 3,899 3,823
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND DIVIDENDS PAID ON
TRUST PREFERRED SECURITIES 1,401 1,306 2,681 2,413
INCOME TAX PROVISION 543 545 1,034 999
------ ------ ------ ------
INCOME BEFORE DIVIDENDS PAID ON TRUST PREFERRED
SECURITIES 858 761 1,647 1,414
DIVIDENDS PAID ON TRUST PREFERRED SECURITIES 80 158
------ ------ ------ ------
NET INCOME $ 778 $ 761 $1,489 $1,414
====== ====== ====== ======
BASIC EARNINGS PER SHARE $ 0.47 $ 0.37 $ 0.87 $ 0.69
====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 0.45 $ 0.36 $ 0.83 $ 0.66
====== ====== ====== ======
See notes to condensed consolidated financial statements.
3
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
Dollar amounts in thousands June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
(Unaudited) (Unaudited)
Net income $ 778 $ 761 $1,489 $1,414
Other comprehensive income (loss)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
(net of taxes of $(72) and $40 in the three months ended
June 30, 2001 and 2000, and $99 and $28 in the six months
ended June 30, 2001 and 2000, respectively) (104) 57 142 41
Less: reclassification adjustment for gains (losses) included in
net income (net of taxes of $(1) in the six months
ended June 30, 2000) (1)
----- ----- ------ ------
Other comprehensive income (loss) (104) 57 142 40
----- ----- ------ ------
Comprehensive income $ 674 $ 818 $1,631 $1,454
===== ===== ====== ======
See notes to condensed consolidated financial statements.
4
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Dollar amounts in thousands Ended June 30,
------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net income $ 1,489 $ 1,414
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 100 220
Depreciation and amortization 308 154
Loss on sale of investment securities, net 2
Gain on sale of loans (39) (35)
Deferred income taxes
Changes in:
Accrued interest receivable 63 (54)
Other assets 24 604
Accrued interest payable and other liabilities (175) 445
------- -------
Net cash provided by operating activities 1,770 2,750
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 2,000
Available for sale securities:
Maturities 3,000
Purchases (10,152) (6,925)
Sales 11,957
Net increase in loans held for investment (2,783) (9,596)
Purchases of premises and equipment, net (431) (383)
------- -------
Net cash used in investing activities (11,366) (1,947)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing demand deposits 3,333 7,624
Net increase (decrease) in interest-bearing trans-
action, savings and other time deposits 15,133 (2,615)
Net decrease in other borrowings
Cash dividends paid (34) (41)
Proceeds from the exercise of stock options 243 12
Repurchases of common stock (3,105) (481)
------- -------
Net cash provided by financing activities 15,570 4,499
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,974 5,302
CASH AND CASH EQUIVALENTS:
Beginning of period 12,290 16,956
------- -------
End of period $18,264 $22,258
======= =======
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 2,624 $ 2,539
Income taxes $ 951 $ 825
See notes to condensed consolidated financial statements.
5
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 six months ended June
30, 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:
6
Three months ended June 30,
--------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ---------
Basic EPS
Income available to common
shareholders $ 778 1,652 $ 0.47 $ 761 2,030 $ 0.37
Effect of Dilutive Securities
Stock options 80 92
---------- ------------ ---------- ---------- ------------ ---------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 778 1,732 $ 0.45 $ 761 2,122 $ 0.36
========== ============ ========== ========== ============ =========
Six months ended June 30,
--------------------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ------------- ---------- ----------- --------------- ---------
Basic EPS
Income available to common
shareholders $ 1,489 1,704 $ 0.87 $ 1,414 2,042 $ 0.69
Effect of Dilutive Securities
Stock options 85 105
---------- ------------ ---------- ---------- ------------ ---------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 1,489 1,789 $ 0.83 $ 1,414 2,147 $ 0.66
========== ============ ========== ========== ============ =========
3. ACCOUNTING PRONOUNCEMENTS
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 adopted by the Company effective April 1,
2001. 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. The adoption of SFAS No. 140 did not have a significant impact
on the financial position or results of operations, or cash flows of the
Company.
7
In June 2001, SFAS No. 142, "Accounting for Goodwill and Other Intangible
Assets," was issued. This standard is effective starting with fiscal years
beginning after December 15, 2001. This standard establishes new accounting
standards for goodwill and continues to require the recognition of goodwill as
an asset but does not permit amortization of goodwill as previously required by
the Accounting Principles Board Opinion ("APB") Opinion No. 17. The standard
also establishes a new method of testing goodwill for impairment. It requires
goodwill to be separately tested for impairment at a reporting unit level. The
amount of goodwill determined to be impaired would be expensed to current
operations. Management believes that the adoption of the statement will not have
a material effect on the Company's financial statements.
4. SUBSEQUENT EVENT
Pursuant to the April 2001 stock purchase agreement between the Company,
John Cavallucci and his family, on July 3, 2001, the Company repurchased the
remaining 43,011 shares of the Company's common stock owned by them at a price
of $12.00 per share. On the same date, the company repurchased an additional
10,500 shares from Mr. Cavallucci which he had acquired upon exercise of vested
options. Pursuant to the stock purchase agreement, Mr. Cavallucci resigned from
the board of directors on July 3, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
MCB Financial is a bank holding company with one bank subsidiary, Metro
Commerce Bank. We own MCB Statutory Trust I, which is a Connecticut statutory
trust formed for the exclusive purpose of issuing and selling trust preferred
securities.
We provide a wide range of commercial banking services to small and
medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. We operate in the San Francisco
Bay Area with 5 offices located in Hayward, Petaluma, San Francisco, San Rafael
and South San Francisco. We also operate an office in Upland, located in
Southern California.
At June 30, 2001, we had total assets of $226.3 million, total loans,
net, of $165.6 million and total deposits of $207.1 million.
The following discussion and analysis is intended to provide greater
details of our results of operations and financial condition. The following
discussion should be read in conjunction with our consolidated financial data
included elsewhere in this document. Certain statements under this caption
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in such
forward-looking statements. Factors that might cause such a
8
difference include but are not limited to economic conditions, competition in
the geographic and business areas in which we conduct our operations,
fluctuation in interest rates, credit quality and government regulation and
other factors discussed in our Annual Report on Form 10-KSB for the year ended
December 31, 2000.
RESULTS OF OPERATIONS
The following table summarizes income, income per share and key
financial ratios for the periods indicated:
Net Income
----------------------------
Three Three
months ended months ended
June 30, June 30,
(Dollars in thousands, except per share amounts) 2001 2000
- --------------------------------------------------------------------------------
Income $778 $761
Income per share:
Basic $0.47 $0.37
Diluted $0.45 $0.36
Return on average assets 1.43% 1.52%
Return on average shareholders' equity 22.54% 20.16%
Dividend payout ratio 2.22% 2.78%
Net Income
----------------------------
Six Six
months ended months ended
June 30, June 30,
(Dollars in thousands, except per share amounts) 2001 2000
- --------------------------------------------------------------------------------
Income $1,489 $1,414
Income per share:
Basic $0.87 $0.69
Diluted $0.83 $0.66
Return on average assets 1.39% 1.42%
Return on average shareholders' equity 20.81% 19.00%
Dividend payout ratio 2.41% 3.03%
Second Quarter
Our net income for the second quarter of 2001 increased 2.2% to
$778,000, or $0.45 per diluted share, compared to net income of $761,000, or
$0.36 per diluted share, for the second quarter of 2000. Based on our net income
for the second quarter of 2001, our return on average shareholders' equity was
22.54% and our return on average assets was 1.43%. During the second quarter of
2000, our net income resulted in a return on average shareholders' equity of
20.16% and a return on average assets of 1.52%.
9
The 2.2% increase in net income during the second quarter of 2001 as
compared to the second quarter of 2000 was the result of a decrease in the
provision for loan losses partially offset by an increase in dividends paid on
trust preferred securities. The 25% increase in diluted earnings per share
during the second quarter of 2001 as compared to the second quarter of 2000 was
the result of our common stock repurchases during the twelve months ended June
30, 2001. Due to these repurchases, our weighted average diluted shares
outstanding during the second quarter of 2001 decreased 18.4% to 1,731,934
compared to 2,121,723 during the second quarter of 2000.
Year to Date
Our net income for the six months ended June 30, 2001 increased 5.3% to
$1,489,000, or $0.83 per diluted share, compared to net income of $1,414,000, or
$0.66 per diluted share, for the six months ended June 30, 2000. Based on our
net income for the six months ended June 30, 2001, our return on average
shareholders' equity was 20.81% and our return on average assets was 1.39%.
During the six months ended June 30, 2000, our net income resulted in a return
on average shareholders' equity of 19.00% and a return on average assets of
1.42%.
The 5.3% increase in net income for the six months ended June 30, 2001
as compared to the six months ended June 30, 2000 was the result of growth in
loans and a decrease in the provision for loan losses partially offset by an
increase in dividends paid on trust preferred securities. The 25.8% increase in
diluted earnings per share for the six months ended June 30, 2001 as compared to
the six months ended June 30, 2000 was the result of our common stock
repurchases during the twelve months ended June 30, 2001. Due to these
repurchases, our weighted average diluted shares outstanding during the six
months ended June 30, 2001 decreased 16.6% to 1,789,346 compared to 2,146,664
during the six months ended June 30, 2000.
NET INTEREST INCOME - QUARTERLY
Net interest income remained at $3.1 million for the second quarter of
2001 as compared to $3.1 million for the second quarter of 2000. This was
primarily due to the $15.5 million, or 8.3%, increase in average
interest-earning assets which was offset by a 49 basis point decrease in our net
yield on interest-earnings assets.
Net interest income remained at $3.1 million for the second quarter of
2001 as compared to $3.1 million for the first quarter of 2001. This was
primarily due to the $7.6 million, or 3.9%, increase in average interest-earning
assets which was offset by a 21 basis point decrease in our net yield on
interest-earnings assets.
The following table presents, for the periods indicated, our condensed
average balance sheet information together with interest income and yields
earned on average interest-earning assets and interest expense and rates paid on
average interest-bearing liabilities. Average balances are average daily
balances.
10
For the quarter ended For the quarter ended For the quarter ended
--------------------------- ----------------------------- -----------------------------
June 30, 2001 March 31, 2001 June 30, 2000
--------------------------- ----------------------------- -----------------------------
Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------- -------- -------- ------ --------- -------- ------ ------- -------- -------
INTEREST-EARNING ASSETS:
Federal funds sold $ 9,681 $ 104 4.31% $ 4,724 $ 62 5.32% $ 11,744 $ 183 6.27%
Interest-bearing deposits with banks 286 5 7.01% 286 4 5.67% 286 4 5.63%
Investment securities:
Taxable 26,306 367 5.60% 26,378 373 5.73% 28,652 430 6.04%
Tax-exempt
Loans (1) (2) 166,281 3,974 9.59% 163,560 4,067 10.08% 146,388 3,814 10.48%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Total interest-earning assets 202,554 4,450 8.81% 194,948 4,506 9.37% 187,070 4,431 9.53%
Noninterest-earning assets 15,118 14,609 13,800
-------- --------- ---------
Total assets $ 217,672 $ 209,557 $ 200,870
======== ========= =========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing transaction
accounts $110,722 $ 835 3.02% $ 103,568 $ 895 3.50% $ 110,639 $ 997 3.62%
Time deposits, $100,000 or more 28,883 372 5.17% 27,456 389 5.75% 15,376 200 5.23%
Savings and other time 10,938 118 4.33% 10,686 123 4.67% 11,323 122 4.33%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Total interest-bearing
deposits 150,543 1,325 3.53% 141,710 1,407 4.03% 137,338 1,319 3.86%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Other borrowings 544 6 4.42% 1,760 25 5.76% 650 9 5.57%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Total interest-bearing
liabilities 151,087 1,331 3.53% 143,470 1,432 4.05% 137,988 1,328 3.87%
Noninterest-bearing deposits 48,340 46,478 46,065
Other noninterest-bearing liabilities 1,441 1,714 1,716
Trust preferred securities 3,000 3,000
-------- --------- ---------
Shareholders' equity 13,804 14,895 15,101
-------- --------- ---------
Total liabilities and shareholders'
equiy $217,672 $ 209,557 $ 200,870
======== ========= =========
------- ------- -------
Net interest income $ 3,119 $ 3,074 $ 3,103
======= ======= =======
Interest rate spread 5.28% 5.32% 5.66%
Contribution of interest free funds 0.90% 1.07% 1.01%
------- --------- --------
Net yield on interest-earning assets (3) 6.18% 6.39% 6.67%
======= ========= ========
<FN>
(1) Nonaccrual loans are excluded in the average balance and only collected interest on nonaccrual loans is included in the
interest column.
(2) Loan fees totaling $349,000, $278,000 and $258,000 are included in loan interest income for the three months ended
June 30, 2001, March 31, 2001 and June 30, 2000, respectively.
(3) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning
assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period.
</FN>
11
The most significant impact on our net interest income between periods
is derived from the interaction of changes in the volume of, and rate earned or
paid on, interest-earning assets and interest-bearing liabilities. The volume of
interest-earning asset dollars in loans and investments, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in the net interest income between
periods. The table below sets forth, for the periods indicated, a summary of the
changes in average asset and liability balances (volume) and changes in average
interest rates (rate).
Quarter Ended June 30, 2001 Quarter Ended June 30, 2001
Compared with Compared with
Quarter Ended March 31, 2001 Quarter Ended June 30, 2000
Favorable / (Unfavorable) Favorable / (Unfavorable)
------------------------------- ------------------------------
(Dollars in thousands) Volume Rate (1) Net Volume Rate (1) Net
------------------------------- ------------------------------
INTEREST EARNED ON INTEREST-EARNINGS ASSETS
Federal funds sold $66 ($24) $42 ($32) ($47) ($79)
Interest-bearing deposits with banks 0 1 1 0 1 1
Investment securities:
Taxable (1) (5) (6) (34) (29) (63)
Tax-exempt
Loans 65 (158) (93) 520 (360) 160
------------------------------- ------------------------------
Total Interest Income 130 (186) (56) 454 (435) 19
------------------------------- ------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing transaction accounts (58) 118 60 (1) 163 162
Time deposits, $100,000 or more (22) 39 17 (176) 4 (172)
Savings and other time (3) 8 5 4 0 4
------------------------------- ------------------------------
Total interest-bearing deposits (83) 165 82 (173) 167 (6)
Other borrowings 17 2 19 1 2 3
------------------------------- ------------------------------
Total Interest Expense (66) 167 101 (172) 169 (3)
------------------------------- ------------------------------
Net increase (decrease) in net interest income $64 ($19) $45 $282 ($266) $16
=============================== ==============================
<FN>
(1) The rate/volume variance has been included in the rate variance.
</FN>
The Quarter Ended June 30, 2001 Compared to June 30, 2000
Interest income in the second quarter ended June 30, 2001 increased to
$4.5 million from $4.4 million in the quarter ended June 30, 2000. This was
primarily due to the increase in average loans offset by a 72 basis point
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $15.5 million, or 8.3%, to $202.6 million in
the three months ended June 30, 2001, compared to $187.1 million in the same
period for 2000. Average loans increased $19.9 million, or 13.6%, to $166.3
million for three months ended June 30, 2001 from $146.4 million in the same
period for 2000. Average investment securities, federal funds sold and
interest-bearing deposits with banks, decreased 10.8% to $36.3 million in the
second quarter of 2001 from $40.7 million in the same period for 2000.
12
The average yield on interest-earning assets decreased 72 basis points
to 8.81% in the second quarter of 2001 from 9.53% in the same period of 2000
primarily due to a decrease in the average yield on loans. We lowered our prime
rate by 275 basis points from 9.50% at June 30, 2000 to 6.75% at June 30, 2001
in response to the Federal Open Market Committee's decision to lower the target
level for the federal funds rate by the same magnitude. Our average yield on
loans declined by 89 basis points to 9.59% for the second quarter of 2001 from
10.48% in the same period of 2000. Loans represented approximately 82.1% of
total interest-earning assets in the second quarter of 2001 compared to 78.3%
for the same period in 2000.
Interest expense in the second quarter of 2001 was $1.3 million,
unchanged from interest expense of $1.3 million for the same period of 2000.
Lower interest rates paid on interest-bearing transaction accounts were offset
by the volume increase in time deposits of $100,000 or more. Average
interest-bearing liabilities increased 9.5% to $151.1 million in the second
quarter of 2001 from $138.0 million in the same period for 2000. The increase
was due primarily to the efforts of our relationship managers in generating
deposits from their client relationships.
During the second quarter of 2001, average noninterest-bearing deposits
increased to $48.3 million from $46.1 million in the same period of 2000.
As a result of the foregoing analyses, our interest rate spread
decreased to 5.28% in the second quarter of 2001 from 5.66% in the same period
of 2000. The net yield on interest-earning assets decreased in the second
quarter of 2001 to 6.18% from 6.67% in the same period of 2000.
THE QUARTER ENDED JUNE 30, 2001 COMPARED TO MARCH 31, 2001
Interest income in the second quarter ended June 30, 2001 remained at
$4.5 million as compared to $4.5 million for the first quarter of 2001. This was
primarily due to the increase in average interest-earning assets offset by a 56
basis point decline in the yield earned on average interest-earning assets.
Average interest-earning assets increased $7.6 million, or 3.9%, to $202.6
million in the three months ended June 30, 2001, compared to $194.9 million in
the previous quarter. Average loans increased $2.7 million, or 1.7%, to $166.3
million for the three months ended June 30, 2001 from $163.6 million in the
previous quarter. Average investment securities, federal funds sold and
interest-bearing deposits with banks, increased 15.6% to $36.3 million in the
second quarter of 2001 from $31.4 million in the previous quarter.
The average yield on interest-earning assets decreased 56 basis points
to 8.81% in the second quarter of 2001 from 9.37% in the previous quarter
primarily due to a decrease in the average yield on loans. We lowered our prime
rate by 125 basis points from 8.00% at March 31, 2001 to 6.75% at June 30, 2001
in response to the Federal Open Market Committee's decision to lower the target
level for the federal funds rate by the same magnitude. Our average yield on
loans declined by 49 basis points to 9.59% for the second quarter of 2001 from
10.08% in the prior quarter. Loans represented approximately 82.1% of total
interest-earning assets in the second quarter of 2001 compared to 83.9% for the
prior quarter.
13
Interest expense in the second quarter of 2001 was $1.3 million, a
decrease from interest expense of $1.4 million for the prior quarter. This was
primarily due to lower interest rates paid on interest-bearing transaction
accounts. Our average rate paid on interest-bearing transaction accounts
declined by 48 basis points to 3.02% for the second quarter of 2001 from 3.50%
in the prior quarter. Average interest-bearing liabilities increased 5.3% to
$151.1 million in the second quarter of 2001 from $143.5 million in the prior
quarter. The increase was due primarily to the efforts of our relationship
managers in generating deposits from their client relationships.
During the second quarter of 2001, average noninterest-bearing deposits
increased to $48.3 million from $46.5 million in the prior quarter.
As a result of the foregoing analyses, our interest rate spread
decreased to 5.28% in the second quarter of 2001 from 5.32% in the prior
quarter. The net yield on interest-earning assets decreased in the second
quarter of 2001 to 6.18% from 6.39% in the prior quarter.
NET INTEREST INCOME - YEAR TO DATE
Net interest income increased to $6.2 million for the six months ended
June 30, 2001 as compared to $6.0 million for the six months ended June 30,
2000. This was primarily due to the $14.0 million, or 7.0%, increase in average
interest-earning assets which was offset by a 29 basis point decrease in our net
yield on interest-earning assets.
The following table presents, for the periods indicated, our condensed
average balance sheet information together with interest income and yields
earned on average interest-earning assets and interest expense and rates paid on
average interest-bearing liabilities. Average balances are average daily
balances.
14
For the six months ended June 30,
---------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
INTEREST-EARNING ASSETS:
Federal funds sold $ 7,216 $ 166 4.64% $ 10,625 $ 317 6.00%
Interest-bearing deposits with banks 286 9 6.35% 286 8 5.63%
Investment securities:
Taxable 26,292 740 5.68% 31,457 909 5.81%
Tax-exempt
Loans (1) (2) 164,928 8,041 9.83% 142,312 7,387 10.44%
---------- ---------- --------- ---------- ---------- ---------
Total interest-earning assets 198,722 8,956 9.09% 184,680 8,621 9.39%
Noninterest-earning assets 14,885 14,308
---------- ----------
Total assets $ 213,607 $ 198,988
========== ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing transaction accounts $ 107,164 $ 1,730 3.26% $ 109,688 $ 1,951 3.58%
Time deposits, $100,000 or more 28,174 761 5.45% 14,792 379 5.15%
Savings and other time 10,813 241 4.49% 11,378 238 4.21%
---------- ---------- --------- ---------- ---------- ---------
Total interest-bearing deposits 146,151 2,732 3.77% 135,858 2,568 3.80%
---------- ---------- --------- ---------- ---------- ---------
Other borrowings 1,149 31 5.44% 615 16 5.23%
---------- ---------- --------- ---------- ---------- ---------
Total interest-bearing liabilities 147,300 2,763 3.78% 136,473 2,584 3.81%
Noninterest-bearing deposits 47,395 46,086
Other noninterest-bearing liabilities 1,599 1,545
Trust preferred securities 3,000
---------- ----------
---------- ----------
Shareholders' equity 14,313 14,884
---------- ----------
Total liabilities and shareholders' equity $ 213,607 $ 198,988
========== ==========
---------- ----------
Net interest income $ 6,193 $ 6,037
========== ==========
Interest rate spread 5.31% 5.58%
Contribution of interest free funds 0.98% 0.99%
--------- ---------
--------- ---------
Net yield on interest-earning assets (3) 6.28% 6.57%
========= =========
<FN>
(1) Nonaccrual loans are excluded in the average balance and only collected
interest on nonaccrual loans is included in the interest column.
(2) Loan fees totaling $627,000 and $579,000 are included in loan interest
income for the six months ended June 30, 2001 and June 30, 2000,
respectively.
(3) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
</FN>
15
The most significant impact on our net interest income between periods
is derived from the interaction of changes in the volume of, and rate earned or
paid on, interest-earning assets and interest-bearing liabilities. The volume of
interest-earning asset dollars in loans and investments, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in the net interest income between
periods. The table below sets forth, for the periods indicated, a summary of the
changes in average asset and liability balances (volume) and changes in average
interest rates (rate).
Six Months Ended June 30, 2001
Compared with
Six Months Ended June 30, 2000
Favorable / (Unfavorable)
------------------------------------
(Dollars in thousands) Volume Rate (1) Net
------------------------------------
INTEREST EARNED ON INTEREST-EARNINGS ASSETS
Federal funds sold ($102) ($49) ($151)
Interest-bearing deposits with banks 0 1 1
Investment securities:
Taxable (151) (18) (169)
Tax-exempt
Loans 1,162 (508) 654
----------------------------------
Total Interest Income 909 (574) 335
----------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing transaction accounts 45 176 221
Time deposits, $100,000 or more (340) (42) (382)
Savings and other time 12 (15) (3)
----------------------------------
Total interest-bearing deposits (283) 119 (164)
Other borrowings (14) (1) (15)
----------------------------------
Total Interest Expense (297) 118 (179)
----------------------------------
Net increase (decrease) in net interest income $612 ($456) $156
==================================
<FN>
(1) The rate/volume variance has been included in the rate variance.
</FN>
The Six Months Ended June 30, 2001 Compared with the Six Months Ended June 30,
2000
Interest income for the six months ended June 30, 2001 increased to
$9.0 million from $8.6 million for the six months ended June 30, 2000. This was
primarily due to the increase in average loans offset by a 29 basis point
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $14.0 million, or 7.6%, to $198.7 million for
the six months ended June 30, 2001, compared to $184.7 million in the same
period for 2000. Average loans increased $22.6 million, or 15.9%, to $164.9
million for the six months ended June 30, 2001 from $142.3 million in the same
period for 2000. Average investment securities, federal funds sold and
interest-bearing deposits with banks, decreased 20.2% to $33.8 million for the
six months ended June 30, 2001 from $42.4 million in the same period for 2000.
16
The average yield on interest-earning assets decreased 30 basis points
to 9.09% for the six months ended June 30, 2001 from 9.39% in the same period of
2000 primarily due to a decrease in the average yield on loans. We lowered our
prime rate by 275 basis points from 9.50% at June 30, 2000 to 6.75% at June 30,
2001 in response to the Federal Open Market Committee's decision to lower the
target level for the federal funds rate by the same magnitude. Our average yield
on loans declined by 61 basis points to 9.83% for the six months ended June 30,
2001 from 10.44% in the same period of 2000. Loans represented approximately
83.0% of total interest-earning assets for the six months ended June 30, 2001
compared to 77.1% for the same period in 2000.
Interest expense for the six months ended June 30, 2001 was $2.8
million compared to $2.6 million for the same period of 2000. Lower interest
rates paid on interest-bearing transaction accounts were offset by the volume
increase in time deposits of $100,000 or more. Average interest-bearing
liabilities increased 7.9% to $147.3 million for the six months ended June 30,
2001 from $136.5 million in the same period for 2000. The increase was due
primarily to the efforts of our relationship managers in generating deposits
from their client relationships.
During the six months ended June 30, 2001, average noninterest-bearing
deposits increased to $47.4 million from $46.1 million in the same period of
2000.
As a result of the foregoing analyses, our interest rate spread
decreased to 5.31% for the six months ended June 30, 2001 from 5.58% in the same
period of 2000. The net yield on interest-earning assets decreased for the six
months ended June 30, 2001 to 6.28% from 6.57% in the same period of 2000.
17
NONINTEREST INCOME
The following table summarizes our noninterest income for the periods
indicated and expresses the amounts as a percentage of average assets (dollar
amounts in thousands):
Quarter Ended June 30, Six Months Ended June 30,
----------------------- -----------------------
Components of Noninterest Income 2001 2000 2001 2000
- -------------------------------------------------- ---------- ---------- ---------- ----------
Gain on sale of loans $ 15 $ 20 39 $ 35
Service fees on deposit accounts 133 116 256 245
Loan servicing fees 17 14 32 27
Loss on sale of investment securities - net (2)
Other 64 70 160 114
---------- ---------- ---------- ----------
Total $ 229 $ 220 487 $ 419
========== ========== ========== ==========
As a Percentage of Average Assets (Annualized)
- --------------------------------------------------
Gain on sale of loans 0.03% 0.04% 0.04% 0.03%
Service fees on deposit accounts 0.24% 0.23% 0.24% 0.25%
Loan servicing fees 0.03% 0.03% 0.03% 0.03%
Gain (loss) on sale of investment securities - net 0.00%
Other 0.12% 0.14% 0.15% 0.11%
---------- ---------- ---------- ----------
Total 0.42% 0.44% 0.46% 0.42%
========== ========== ========== ==========
18
NONINTEREST EXPENSE.
The following table summarizes our noninterest expenses and the
associated ratios to average assets for the periods indicated (dollar amounts in
thousands):
Quarter Ended June 30, Six Months Ended June 30,
------------------------------------- -----------------------------------
Components of Noninterest Expense 2001 2000 2001 2000
- ---------------------------------------------------- ----------------- ----------------- ---------------- ---------------
Salaries and employee benefits $ 1,128 $ 1,118 2,238 $ 2,187
Occupancy expense 254 273 538 527
Furniture and equipment expense 123 114 236 224
Professional services 74 72 120 126
Supplies 61 62 119 121
Promotional expenses 54 19 155 148
Data processing fees 97 89 198 177
Regulatory assessments 15 15 30 30
Other 141 155 265 283
----------------- ----------------- ---------------- ---------------
Total $ 1,947 $ 1,917 3,899 $ 3,823
================= ================= ================ ===============
Average full-time equivalent employees 59 59 59 58
As a Percentage of Average Assets (Annualized)
- ----------------------------------------------------
Salaries and employee benefits 2.08% 2.22% 2.11% 2.20%
Occupancy expense 0.47% 0.54% 0.51% 0.53%
Furniture and equipment expense 0.23% 0.23% 0.22% 0.22%
Professional services 0.14% 0.14% 0.11% 0.13%
Supplies 0.11% 0.12% 0.11% 0.12%
Promotional expenses 0.10% 0.04% 0.15% 0.15%
Data processing fees 0.18% 0.18% 0.19% 0.18%
Regulatory assessments 0.03% 0.03% 0.03% 0.03%
Other 0.26% 0.31% 0.25% 0.28%
----------------- ----------------- ---------------- ---------------
Total 3.59% 3.82% 3.68% 3.84%
================= ================= ================ ===============
INCOME TAXES.
Our effective tax rate was 41.1% for the quarter ended June 30, 2001
compared to 41.7% in the same period of the prior year. For the six months ended
June 30, 2001, our effective tax rate was 41.0% compared to 41.4% in the same
period of the prior year.
FINANCIAL CONDITION
Our total assets increased by $17.0 million, or 8.1%, from the end of
2000 to reach $226.3 million at June 30, 2001.
19
INVESTMENTS
The following tables set forth the amortized cost and approximate
market value of our investment securities as of the dates indicated (dollar
amounts in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
June 30, 2001: Cost Gains Losses Value Value
- ------------------------------------------------------------------------------------------------------
Available for sale securities:
U.S. Treasury $ 24,131 $ 301 (80) $ 24,352 $ 24,352
U.S. Government agencies 9,095 96 (27) 9,164 9,164
Corporate securities 1,918 34 1,952 1,952
Total investment securities $ 35,144 $ 431 $ (107) $ 35,468 $ 35,468
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 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
20
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
June 30, 2000 Cost Gains Losses Value Value
- ------------------------------------------------------------------------------------------------------
Held to maturity securities:
U.S. Government agencies $ 2,000 $ (21) $ 1,979 $ 2,000
Total held to maturity 2,000 (21) 1,979 2,000
Available for sale securities:
U.S. Treasury 13,987 $ 27 (265) 13,749 13,749
U.S. Government agencies 11,120 (546) 10,574 10,574
Corporate securities 1,939 (34) 1,905 1,905
Total available for sale 27,046 27 (845) 26,228 26,228
Total investment securities $ 29,046 $ 27 $ (866) $ 28,207 $ 28,228
The maturities and weighted average yields of our investment securities
at June 30, 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 $5,002 6.14% $24,177 4.91% $4,047 5.61% $33,226 5.18%
Corporate securities 808 6.33% 1,110 6.30% 1,918 6.32%
---------- --------- ---------- --------- ----------- -------- ----------- --------
Total $5,810 6.16% $25,287 4.97% $4,047 5.61% $35,144 5.24%
========== ========= ========== ========= =========== ======== =========== ========
LOANS HELD FOR INVESTMENT
Our net loans held for investment increased by $2.7 million, or 1.7%,
during the first six months of 2001 as increases in commercial real estate,
land, home equity and loans to consumers and individuals were offset by
decreases in commercial and construction loans. The following table sets forth
the amount of our total loans outstanding by category as of the dates indicated
(dollar amounts in thousands):
21
Total Loans June 30, December 31, June 30,
2001 2000 2000
----------- ------------ ---------
Commercial $ 24,068 $ 27,137 $ 24,043
Real estate:
Commercial 110,903 108,557 95,697
Construction 22,313 24,157 21,076
Land 5,179 1,675 3,600
Home equity 2,780 1,581 1,602
Loans to consumers and individuals 2,593 1,936 1,721
---------- ----------- ----------
Total 167,836 165,043 147,739
Deferred loan fees (191) (220) (112)
Allowance for loan losses (2,039) (1,939) (1,742)
----------- ----------- ----------
Total net loans $ 165,606 $ 162,884 $ 145,885
========== =========== ==========
In the normal practice of extending credit, we accept real estate
collateral for loans which have primary sources of repayment from commercial
operations. The total amount of loans secured by real estate equaled $141.1
million, or 84.1% of the total portfolio as of June 30, 2001. Due to our limited
marketing areas, our real estate collateral is primarily concentrated in the San
Francisco Bay Area and Southern California. We believe that our 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 us.
We focus our 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 our loan portfolio. As of June 30, 2001
the two largest industry concentrations within the loan portfolio were real
estate and related services at 30.1% and the services - personal/business
industry at 22.7% of the portfolio. Because credit concentrations increase
portfolio risk, we place significant emphasis on the purpose of each loan and
the related sources of repayment. We generally limit unsecured commercial loans
to maturities of three years and secured commercial loans to maturities of five
years.
22
Maturities of Loans at June 30, 2001 (dollar amounts in thousands):
Time remaining to maturity Fixed rate Adjustable rate Total
---------- --------------- ----------
One year or less $ 9,779 $ 34,748 $ 44,527
After one year to five years 62,652 23,774 86,426
After five years 10,288 26,595 36,883
----------- --------------- ---------
Total $82,719 $ 85,117 $167,836
=========== =============== =========
As of June 30, 2001, the percentage of loans held for investment with
fixed and floating interest rates was 49.3% and 50.7%, respectively.
NONPERFORMING ASSETS
We carefully monitor the quality of our loan portfolio and the factors
that affect it, including regional economic conditions, employment stability,
and real estate values. The accrual of interest on loans is discontinued when
the payment of principal or interest is considered to be in doubt, or when a
loan becomes contractually past due by 90 days or more with respect to principal
or interest, except for loans that are well secured and in the process of
collection.
As of June 30, 2001, we 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 June 30, March 31, December 31, September 30, June 30,
2001 2001 2000 2000 2000
-------- --------- ------------ ------------- ---------
Nonaccrual loans $ 0 $ 0 $ 0 $ 0 $ 126
Loans 90 days or more
past due and still accruing 40 40 40 78 40
-------- --------- ------------ ------------- ---------
$ 40 $ 40 $ 40 $ 78 $ 166
======== ========= ============ ============= =========
As a percent of total loans 0.02% 0.02% 0.02% 0.05% 0.11%
As a percent of total assets 0.02% 0.02% 0.02% 0.04% 0.08%
At June 30, 2001, we had loans identified as impaired in the amount of
$40,000. At June 30, 2001, no specific allowance for loan losses was required
for these impaired loans because they were adequately collateralized.
ALLOWANCE FOR LOAN LOSSES
We maintain 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 our credit loss experience, current
economic conditions, the performance of loans within the
23
portfolio, evaluation of loan collateral value, and the prospects or worth of
respective borrowers and guarantors.
In determining the adequacy of our ALL and after carefully analyzing
each loan individually, we segment the loan portfolio into pools of homogeneous
loans that share similar risk factors. Each pool is given a risk assessment
factor which largely reflects the expected future losses from each category.
These risk assessment factors change as economic conditions shift and actual
loan losses are recorded. As of June 30, 2001, the ALL of $2,039,000, or 1.22%
of total loans, was determined by us 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 Six Months the Year Ended
Ended June 30, December 31,
2001 2000
------------------ ---------------
Balances:
Average loans during period $ 164,928 $ 149,645
Loans at end of period 167,645 164,823
Allowance for Loan Losses:
Balance at beginning of period 1,939 1,492
Charge-offs:
Commercial 9
Consumer 1
--------------- --------------
Total charge-offs 0 10
Recoveries:
Commercial 37
--------------- --------------
Total recoveries 0 37
--------------- --------------
Net charge-offs (recoveries) 0 (27)
--------------- --------------
Provision charged to operating expense 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 1.22% 1.18%
Net charge-offs (recoveries) to beginning of period allowance for loan losses 0.00% -1.81%
We did not make a provision to the allowance for loan losses during the
second quarter of 2001 as compared to a provision of $100,000 during the second
quarter of 2000. For the six months ended June 30, 2001, we provided $100,000 to
the ALL as compared to $220,000 during the same period of 2000. We believe the
$100,000 provision to the ALL during the first six months of 2001 is adequate
given our net loan growth of 1.7% during that same period.
24
The following table sets forth the allocation of the ALL as of the
dates indicated (dollar amounts in thousands):
June 30, December 31, June 30,
2001 2000 2000
---------------------------- ---------------------------- ----------------------------
% of % of % of
Category Category Category
to Total to Total to Total
ALL Loans ALL Loans ALL Loans
Commercial loans $ 860 44.40% $ 793 43.34% $ 636 43.22%
Real estate loans 1,000 51.69% 978 53.47% 294 53.37%
Consumer loans 84 3.91% 65 3.19% 32 3.41%
Not allocated 95 N/A 103 N/A 780 N/A
---------- ------------ ---------- ------------ ------------ ------------
Total $ 2,039 100.00% $ 1,939 100.00% $ 1,742 100.00%
========== ============ ========== ============ ============ ============
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, our methodology also
places emphasis on historical loss data, delinquency and nonaccrual trends by
loan classification category and expected loan maturity. This analysis, we
believe, identifies potential losses within the loan portfolio and therefore
results in allocation of a large portion of the allowance to specific loan
categories.
25
DEPOSITS
Our total consolidated deposits increased by $18.5 million, or 9.79%,
during the six months ended June 30, 2001.
Rates paid on deposits decreased along with market interest rates
during the six months ended June 30, 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):
Six Months Ended Year Ended Six Months Ended
June 30, 2001 December 31, 2000 June 30, 2000
-------------------------- -------------------------- -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------- ----------- ------------ ----------- ------------ -----------
Noninterest-bearing demand deposits $ 47,395 $ 47,329 $ 46,086
Interest-bearing demand deposits (includes
money market deposit accounts) 107,164 3.26% 108,708 3.70% 109,688 3.59%
Savings deposits 2,094 1.74% 2,146 1.95% 2,088 1.93%
Time deposits, $100,000 and over 28,174 5.45% 17,730 5.46% 14,792 5.15%
Other time deposits 8,719 5.16% 9,086 4.96% 9,290 4.71%
------------- ----------- ------------ ----------- ------------ -----------
Total interest-bearing 146,151 3.77% 137,670 3.98% 135,858 3.81%
Total deposits $ 193,546 2.85% $ 184,999 2.96% $ 181,944 2.85%
============= =========== ============ =========== ============ ===========
The following table sets forth the time remaining to maturity of our
time deposits in amounts of $100,000 or more as of the dates indicated below
(dollar amounts in thousands):
June 30, December 31, June 30,
Time remaining to maturity 2001 2000 2000
----------------- ----------------- -----------------
Three months or less $ 20,328 $ 14,456 $ 8,447
After three months to six months 6,108 4,519 4,594
After six months to one year 2,601 5,678 2,862
After twelve months 1,600 500 410
----------------- ----------------- -----------------
Total $ 30,637 $ 25,153 $ 16,313
================= ================= =================
LIQUIDITY
Liquidity is our ability to absorb fluctuations in deposits while
simultaneously providing for the credit needs of our borrowers. The objective in
liquidity management is to balance the sources and uses of funds. Primary
sources of liquidity for us 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. We hold overnight federal funds as a
cushion for
26
temporary liquidity needs. During the six months ended June 30, 2001, federal
funds sold averaged $7.2 million, or 3.4% of total assets. In addition to our
federal funds, we maintain various lines of credit with correspondent banks, the
Federal Reserve Bank of San Francisco, and the Federal Home Loan Bank of San
Francisco.
At June 30, 2001, we had cash, time deposits with banks, federal funds
sold, and unpledged investment securities of approximately $30.6 million, or
13.5% 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 we become on our
illiquid loan portfolio and our securities portfolio to absorb temporary
fluctuations in deposit levels. At June 30, 2001, the loan-to-deposit ratio was
81.0% 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. We target a minimum ratio of 5%. At June 30, 2001, this ratio was 6.1% as
compared to 1.3% at December 31, 2000.
As of June 30, 2001, we had no material commitments that were expected
to adversely impact liquidity.
INTEREST RATE RISK MANAGEMENT
Net Income Simulation
We utilize 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 our 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 our 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. Our nonmaturity
deposit products reprice more slowly, usually changing less than the change in
market rates and at our discretion. As of June 30, 2001, the analysis indicates
that our net income for the next 12 months would increase 3% if rates increased
200 basis points, and decrease by 1% 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 us to mitigate the impact of interest rate changes or
secondary impacts such as changes to our credit risk profile as interest
27
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
In addition to the above analysis, we also perform 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 our ability to closely
match interest-earning assets with interest-bearing liabilities. As interest
rates change, we must constantly balance maturing and repricing liabilities with
maturing and repricing assets. This process is called asset/liability management
and is commonly measured by the maturity/repricing gap. The maturity/repricing
gap is the dollar difference between maturing or repricing assets and maturing
or repricing liabilities at different intervals of time.
The following table sets forth rate sensitive interest-earning assets
and interest-bearing liabilities as of June 30, 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):
28
June 30, 2001 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 $ 0 $ 0
Interest-bearing deposits with other banks $ 286 286
Investment securities 1,005 $ 4,805 $ 25,287 $ 4,047 35,144
Loans, excluding allowance for possible losses 87,723 2,117 2,548 65,160 10,288 167,836
----------- ----------- ------------ ----------- ----------- -----------
Total 87,723 3,408 7,353 90,447 14,335 203,266
----------- ----------- ------------ ----------- ----------- -----------
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing transaction deposits 50,684 64,006 114,690
Time deposits, $100,000 or more 20,328 6,108 2,601 1,600 30,637
Savings and other time deposits 3,517 2,003 2,103 3,385 11,008
Other borrowings 750 750
Trust preferred securities 3,000 3,000
----------- ----------- ------------ ----------- ----------- -----------
Total 24,595 8,111 55,388 68,991 3,000 $ 160,085
----------- ----------- ------------ ----------- ----------- -----------
Period GAP $ 63,128 $ (4,703) $ (48,035)$ 21,456 $ 11,335
=========== =========== ============ =========== ===========
Cumulative GAP $ 63,128 $ 58,425 $ 10,390 $ 31,846 $ 43,181
=========== =========== ============ =========== ===========
Interest Sensitivity GAP Ratio 71.96% (138.00%) (653.27%) 23.72% 79.07%
=========== =========== ============ =========== ===========
Cumulative Interest Sensitivity 71.96% 64.11% 10.55% 16.86% 21.24%
=========== =========== ============ =========== ===========
We classify our 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 relative
insensitivity of these accounts to changes in interest rates. Although rates on
these accounts can contractually be reset at our 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. We neither currently
utilize financial derivatives to hedge our asset/liability position nor do we
plan to employ such strategies in the near future.
CAPITAL RESOURCES
Our total shareholders' equity was $13.9 million as of June 30, 2001
compared to $15.1 million at December 31, 2000. The decrease was primarily due
to the repurchase of common stock during the first six months of 2001. For the
six months ended June 30, 2001, we repurchased 263,000 shares of our common
stock at a total cost of $3.1 million. We paid dividends of $0.02 per share
during the six months ended June 30, 2001.
The ratios of average equity to average assets for the periods
indicated are set forth below.
29
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
---------------------------- ----------------------------
6.70% 7.48%
Trust Preferred Securities
On September 7, 2000, we completed an offering of 10.60% capital
securities in an aggregate amount of $3.0 million through MCB Statutory Trust I,
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 us 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 us 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 us 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.
We have 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. As of June
30, 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 June 30,
2001, our total capital ratio was 10.56% and our Tier 1 capital ratio was 9.40%.
In addition, under the guidelines established for adequately capitalized
institutions, we must also maintain a minimum
30
leverage ratio (Tier 1 capital divided by total assets) of 4%. As of June 30,
2001, our leverage ratio was 7.50%. It is our 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.
31
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
(a) MCB Financial Corporation held its annual meeting of
shareholders on May 16, 2001.
(b) The following directors were elected at the annual meeting to
serve for a one-year term:
John Cavallucci*
Charles O. Hall
Timothy J. Jorstad
Catherine H. Munson
Patrick E. Phelan
Gary T. Ragghianti
Edward P. Tarrant
Randall J. Verrue
* Pursuant to a stock purchase agreement between MCB Financial
Corporation, John Cavallucci and his family, Mr. Cavallucci
subsequently resigned from the board of directors on July 3,
2001.
(c) At the annual meeting, shareholders voted on
(1) the election of MCB Financial Corporation's directors
(2) the ratification of the selection of Deloitte &
Touche LLP as MCB Financial Corporation's
independent public accountants for the fiscal
year ending December 31, 2001.
32
The results of the voting were as follows:
Votes Votes Broker
Matter For Against Withheld Abstentions Non-Votes
- --------------------------------------------------------------------------------
Election of Directors
John Cavallucci 1,487,757 0 12,672 0 0
Charles O. Hall 1,499,642 0 787 0 0
Timothy J. Jorstad 1,499,642 0 787 0 0
Catherine H. Munson 1,499,642 0 787 0 0
Patrick E. Phelan 1,499,642 0 787 0 0
Gary T. Ragghianti 1,499,642 0 787 0 0
Edward P. Tarrant 1,499,642 0 787 0 0
Randall J. Verrue 1,499,642 0 787 0 0
Independent Public
Accountants 1,486,915 9,245 0 4,269 0
(d) Not applicable
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 Registrant filed the following Current
Reports on Form 8-K:
None
33
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MCB FINANCIAL CORPORATION
-------------------------
(REGISTRANT)
Date: August 10, 2001 /s/ PATRICK E. PHELAN
----------------------------------------------
Patrick E. Phelan
Chief Financial Officer
(Principal Accounting Officer and officer
authorized to sign on behalf of the
registrant)
34
Exhibit Index
EXHIBIT DESCRIPTION
- ------- -----------
Not applicable
35