FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: November 13, 2001
CLASS
Common stock, no par value 1,592,596
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands September 30, December 31,
2001 2000
---------------------- ---------------------
(Unaudited)
ASSETS
Cash and due from banks $20,414 $12,040
Federal funds sold 0 250
---------------------- ---------------------
Total cash and cash equivalents 20,414 12,290
Interest-bearing deposits with banks 286 286
Investment securities available for sale at fair value 25,963 25,100
Investment securities held to maturity at cost; fair value of
$1,999 in 2000 2,000
Loans held for investment (net of allowance for
loan losses of $2,236 in 2001 and $1,939 in 2000) 173,739 162,884
Premises and equipment, net 3,490 3,470
Accrued interest receivable 1,104 1,276
Deferred income taxes 644 1,019
Other assets 938 929
---------------------- ---------------------
Total assets $226,578 $209,254
====================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $52,612 $47,383
Interest-bearing:
Transaction accounts 118,074 105,284
Time certificates, $100,000 and over 24,235 25,153
Savings and other time deposits 11,581 10,765
---------------------- ---------------------
Total interest-bearing deposits 153,890 141,202
---------------------- ---------------------
Total deposits 206,502 188,585
Other borrowings 750 750
Accrued interest payable and other liabilities 1,695 1,813
---------------------- ---------------------
Total liabilities 208,947 191,148
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 1,592,596 shares in 2001 and 1,834,877 shares in 2000 8,252 9,501
Accumulated other comprehensive income 575 47
Retained earnings 5,804 5,558
---------------------- ---------------------
Total shareholders' equity 14,631 15,106
---------------------- ---------------------
Total liabilities and shareholders' equity $226,578 $209,254
====================== =====================
See notes to condensed consolidated financial statements.
2
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
Dollar amounts in thousands, except per share amounts September 30, September 30,
--------------------- ----------------------
2001 2000 2001 2000
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including fees $ 3,961 $ 4,167 $ 12,002 $ 11,554
Federal funds sold 92 156 258 473
Investment securities 468 414 1,217 1,331
------- ------- -------- --------
Total interest income 4,521 4,737 13,477 13,358
------- ------- -------- --------
INTEREST EXPENSE:
Interest-bearing transaction, savings and other time deposits 974 1,175 2,945 3,364
Time certificates, $100,000 and over 297 232 1,058 611
Other interest 4 9 35 25
------- ------- -------- --------
Total interest expense 1,275 1,416 4,038 4,000
------- ------- -------- --------
NET INTEREST INCOME 3,246 3,321 9,439 9,358
------- ------- -------- --------
PROVISION FOR LOAN LOSSES 200 100 300 320
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 3,046 3,221 9,139 9,038
------- ------- -------- --------
OTHER INCOME:
Gain on sale of loans 25 12 64 47
Service fees on deposit accounts 135 111 391 356
Loan servicing fees 15 14 47 41
Gain (loss) on sale of investment securities 228 228 (2)
Other 39 45 199 159
------- ------- -------- --------
Total other income 442 182 929 601
------- ------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 1,184 1,096 3,422 3,283
Occupancy expense 262 273 800 800
Furniture and equipment expense 126 119 362 343
Professional services 132 107 252 233
Supplies 52 56 171 177
Promotional expenses 92 69 247 217
Data processing fees 96 93 294 270
Regulatory assessments 16 16 46 46
Other 138 134 403 417
------- ------- -------- --------
Total other expenses 2,098 1,963 5,997 5,786
------- ------- -------- --------
INCOME BEFORE INCOME TAXES AND DIVIDENDS PAID ON
TRUST PREFERRED SECURITIES 1,390 1,440 4,071 3,853
INCOME TAX PROVISION 532 580 1,566 1,579
------- ------- -------- --------
INCOME BEFORE DIVIDENDS PAID ON TRUST PREFERRED
SECURITIES 858 860 2,505 2,274
DIVIDENDS PAID ON TRUST PREFERRED SECURITIES 80 21 238 21
------- ------- -------- --------
NET INCOME $ 778 $ 839 $ 2,267 $ 2,253
======= ======= ======== ========
BASIC EARNINGS PER SHARE $ 0.49 $ 0.41 $ 1.36 $ 1.10
======= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.46 $ 0.39 $ 1.29 $ 1.05
======= ======= ======== ========
See notes to condensed consolidated financial statements.
3
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
Dollar amounts in thousands September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
(Unaudited) (Unaudited)
Net income $ 778 $ 839 $ 2,267 $ 2,253
Other comprehensive income
Unrealized gains on securities:
Unrealized holding gains arising during period
(net of taxes of $356 and $121 in the three months ended
September 30, 2001 and 2000, and $458 and $151 in the nine
months ended September 30, 2001 and 2000, respectively) 521 175 663 214
Less: reclassification adjustment for gains (losses) included in net
income (net of taxes of $93 in the three months ended
September 30, 2001, and $93 and $(1) in the nine months
ended September 30, 2001 and 2000, respectively) 135 135 (1)
------- ------- ------- -------
Other comprehensive income 386 175 528 215
------- ------- ------- -------
Comprehensive income $ 1,164 $ 1,014 $ 2,795 $ 2,468
======= ======= ======= =======
See notes to condensed consolidated financial statements.
4
MCB FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Dollar amounts in thousands Ended September 30,
-----------------------------
2001 2000
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,267 $ 2,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300 320
Depreciation and amortization 485 288
(Gain) loss on sale of investment securities, net (228) 2
Gain on sale of loans (64) (47)
Deferred income taxes
Changes in:
Accrued interest receivable 172 (78)
Other assets (9) 505
Accrued interest payable and other liabilities 77 447
--------- --------
Net cash provided by operating activities 3,000 3,690
CASH FLOWS FROM INVESTING ACTIVITIES:
Held to maturity securities:
Calls 2,000
Available for sale securities:
Maturities 5,000
Purchases (10,152) (6,925)
Sales 10,366 11,957
Net increase in loans held for investment (11,091) (18,369)
Purchases of premises and equipment, net (451) (671)
--------- --------
Net cash used in investing activities (9,328) (9,008)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing demand deposits 5,229 12,081
Net increase (decrease) in interest-bearing transaction,
savings and other time deposits 12,688 (7,438)
Net decrease in other borrowings
Company obligated mandatorially redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures issued 3,000
Cash dividends paid (50) (61)
Proceeds from the exercise of stock options 332 87
Repurchases of common stock (3,747) (481)
--------- --------
Net cash provided by financing activities 14,452 7,188
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,124 1,870
CASH AND CASH EQUIVALENTS:
Beginning of period 12,290 16,956
--------- --------
End of period $ 20,414 $ 18,826
========= ========
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and other borrowings $ 4,105 $ 3,941
Income taxes $ 1,106 $ 1,575
See notes to condensed consolidated financial statements.
5
MCB FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
NOTE 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 nine months ended September 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.
NOTE 2 - BUSINESS COMBINATIONS
On August 15, 2001, we signed a definitive merger agreement with
Business Bancorp, the holding company for Business Bank of California. The
agreement provides for our shareholders to receive approximately 1.9 million
shares of Business Bancorp's stock in a tax-free exchange to be accounted for
using the purchase method of accounting. The transaction is expected to be
completed in December 2001, subject to MCB Financial Corporation and Business
Bancorp shareholders' and regulatory approvals. As of and for the nine months
ended September 30, 2001, Business Bancorp had $12.1 million in net interest
income, $1.9 million in net income, $364.6 million in assets, $296.0 million in
deposits and $26.2 million in shareholders' equity.
NOTE 3 - 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 September 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 1,592 $ 0.49 $ 839 2,040 $ 0.41
Effect of Dilutive Securities
Stock options 88 86
--------------- --------------- ------------- -------------- --------------- -----------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 778 1,680 $ 0.46 $ 839 2,126 $ 0.39
=============== =============== ============= ============== =============== ===========
Nine months ended September 30,
------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------- --------------- ------------- -------------- --------------- -----------
Basic EPS
Income available to common
shareholders $ 2,267 1,667 $ 1.36 $ 2,253 2,041 $ 1.10
Effect of Dilutive Securities
Stock options 85 99
--------------- --------------- ------------- -------------- --------------- -----------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 2,267 1,752 $ 1.29 $ 2,253 2,140 $ 1.05
=============== =============== ============= ============== =============== ===========
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination and SFAS No. 142 addresses
the initial recognition and measurement of intangibles assets acquired outside
of a business combination whether acquired individually or with a group of other
assets. SFAS No. 142 also addresses the recognition and measurement of goodwill
and other intangibles assets subsequent to their acquisition. SFAS No. 141 is
applicable to business combinations beginning July 1, 2001. The Company does not
expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material effect
on its financial position, results of operations and cash flows.
7
ITEM 2. 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 September 30, 2001, we had total assets of $226.6 million, total
loans, net, of $173.7 million and total deposits of $206.5 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 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.
8
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
(Dollars in thousands, September 30, September 30,
except per share amounts) 2001 2000
- ---------------------------------------------------------------------------
Income $778 $839
Income per share:
Basic $0.49 $0.41
Diluted $0.46 $0.39
Return on average assets 1.31% 1.64%
Return on average shareholders' equity 22.11% 20.85%
Dividend payout ratio 2.17% 2.56%
Net Income
--------------------------------
Nine Nine
months ended months ended
(Dollars in thousands, September 30, September 30,
except per share amounts) 2001 2000
- ---------------------------------------------------------------------------
Income $2,267 $2,253
Income per share:
Basic $1.36 $1.10
Diluted $1.29 $1.05
Return on average assets 1.37% 1.50%
Return on average shareholders' equity 21.26% 19.66%
Dividend payout ratio 2.33% 2.86%
Third Quarter
Our net income for the third quarter of 2001 decreased 7.3% to
$778,000, or $0.46 per diluted share, compared to net income of $839,000, or
$0.39 per diluted share, for the third quarter of 2000. Based on our net income
for the third quarter of 2001, our return on average shareholders' equity was
22.11% and our return on average assets was 1.31%. During the third quarter of
2000, our net income resulted in a return on average shareholders' equity of
20.85% and a return on average assets of 1.64%.
The 7.3% decrease in net income during the third quarter of 2001 as
compared to the third quarter of 2000 was the result of an increase in the
provision for loan losses, other expenses and dividends paid on trust preferred
securities partially offset by gains on the sale of investment securities. The
18% increase in diluted earnings per share during the third quarter of 2001 as
compared to the third quarter of 2000 was the result of our common stock
repurchases during the twelve months ended September 30, 2001. Due to these
repurchases, our weighted average diluted shares outstanding during the third
quarter of 2001 decreased 21.0% to 1,679,872 compared to 2,125,835 during the
third quarter of 2000.
9
Year to Date
Our net income for the nine months ended September 30, 2001 increased
0.6% to $2,267,000, or $1.29 per diluted share, compared to net income of
$2,253,000, or $1.05 per diluted share, for the nine months ended September 30,
2000. Based on our net income for the nine months ended September 30, 2001, our
return on average shareholders' equity was 21.26% and our return on average
assets was 1.37%. During the nine months ended September 30, 2000, our net
income resulted in a return on average shareholders' equity of 19.66% and a
return on average assets of 1.50%.
The 0.6% increase in net income for the nine months ended September 30,
2001 as compared to the nine months ended September 30, 2000 was the result of
an increase in gains on the sale of investment securities partially offset by an
increase in other expenses and dividends paid on trust preferred securities. The
22.9% increase in diluted earnings per share for the nine months ended September
30, 2001 as compared to the nine months ended September 30, 2000 was the result
of our common stock repurchases during the twelve months ended September 30,
2001. Due to these repurchases, our weighted average diluted shares outstanding
during the nine months ended September 30, 2001 decreased 18.1% to 1,752,454
compared to 2,139,670 during the nine months ended September 30, 2000.
NET INTEREST INCOME - QUARTERLY
Net interest income decreased 3.0% to $3.2 million for the third
quarter of 2001 from $3.3 million for the third quarter of 2000. This was
primarily due to the $28.1 million, or 14.8%, increase in average
interest-earning assets which was offset by a 104 basis point decrease in our
net yield on interest-earning assets.
Net interest income increased 3.2% to $3.2 million for the third
quarter of 2001 from $3.1 million for the second quarter of 2001. This was
primarily due to the $16.3 million, or 8.0%, 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.
10
For the quarter ended For the quarter ended For the quarter ended
--------------------------- ----------------------------- -----------------------------
September 30, 2001 June 30, 2001 September 30, 2000
--------------------------- ----------------------------- -----------------------------
Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------- -------- ----------------- --------- ------------------ --------- ------------------
INTEREST-EARNING ASSETS:
Federal funds sold $ 10,345 $ 92 3.53% $ 9,681 $ 104 4.31% $ 9,563 $ 156 6.49%
Interest-bearing deposits with banks 286 4 5.55% 286 5 7.01% 286 4 5.56%
Investment securities:
Taxable 35,685 464 5.16% 26,306 367 5.60% 27,572 410 5.92%
Tax-exempt
Loans (1) (2) 172,504 3,961 9.11% 166,281 3,974 9.59% 153,272 4,167 10.82%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Total interest-earning assets 218,820 4,521 8.20% 202,554 4,450 8.81% 190,693 4,737 9.88%
Noninterest-earning assets 16,158 15,118 13,637
-------- --------- ---------
Total assets $ 234,978 $ 217,672 $ 204,330
======== ========= =========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing transaction
accounts $124,333 $ 868 2.77% $ 110,722 $ 835 3.02% $ 108,933 $ 1,050 3.83%
Time deposits, $100,000 or more 25,616 297 4.60% 28,883 372 5.17% 16,541 232 5.58%
Savings and other time 11,262 106 3.73% 10,938 118 4.33% 11,176 125 4.45%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Total interest-bearing
deposits 161,211 1,271 3.13% 150,543 1,325 3.53% 136,650 1,407 4.10%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Other borrowings 609 4 2.61% 544 6 4.42% 1,274 9 2.81%
-------- ------- ------- --------- ------- --------- --------- ------- --------
Total interest-bearing
liabilities 161,820 1,275 3.13% 151,087 1,331 3.53% 137,924 1,416 4.08%
Noninterest-bearing deposits 54,365 48,340 48,338
Other noninterest-bearing liabilities 1,832 1,441 1,972
Trust preferred securities 3,000 3,000
-------- --------- ---------
Shareholders' equity 13,961 13,804 16,096
-------- --------- ---------
Total liabilities and shareholders'
equity $234,978 $ 217,672 $ 204,330
======== ========= =========
------- ------- -------
Net interest income $ 3,246 $ 3,119 $ 3,321
======= ======= =======
Interest rate spread 5.07% 5.28% 5.80%
Contribution of interest free funds 0.81% 0.90% 1.13%
------- --------- --------
Net yield on interest-earning assets (3) 5.89% 6.18% 6.93%
======= ========= ========
<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 $343,000, $349,000 and $345,000 are included in loan
interest income for the three months ended September 30, 2001, June 30,
2001 and September 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 Quarter Ended
September 30, 2001 September 30, 2001
Compared with Compared with
Quarter Ended Quarter Ended
June 30, 2001 September 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 $ 7 $ (19) $ (12) $ 13 $ (77) $ (64)
Interest-bearing deposits with banks 0 (1) (1) 0 0 0
Investment securities:
Taxable 137 (40) 97 122 (68) 54
Tax-exempt
Loans 173 (186) (13) 531 (737) (206)
-------------------------------- -------------------------------
Total Interest Income 317 (246) 71 666 (882) (216)
-------------------------------- -------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing transaction accounts (99) 66 (33) (149) 331 182
Time deposits, $100,000 or more 40 35 75 (128) 63 (65)
Savings and other time (4) 16 12 (1) 20 19
-------------------------------- -------------------------------
Total interest-bearing deposits (63) 117 54 (278) 414 136
Other borrowings (1) 3 2 5 0 5
-------------------------------- -------------------------------
Total Interest Expense (64) 120 56 (273) 414 141
-------------------------------- -------------------------------
Net increase (decrease) in net
interest income $ 253 $ (126) $ 127 $ 393 $ (468) $ (75)
================================ ===============================
<FN>
(1) The rate/volume variance has been included in the rate variance.
</FN>
The Quarter Ended September 30, 2001 Compared to September 30, 2000
Interest income in the third quarter ended September 30, 2001 decreased
to $4.5 million from $4.7 million in the quarter ended September 30, 2000. This
was primarily due to the 168 basis point decline in the yield earned on average
interest-earning assetsoffset by an increase in average loans. Average
interest-earning assets increased $28.1 million, or 14.7%, to $218.8 million in
the three months ended September 30, 2001, compared to $190.7 million in the
same period for 2000. Average loans increased $19.2 million, or 12.5%, to $172.5
million for
12
the three months ended September 30, 2001 from $153.3 million in the same period
for 2000. Average investment securities, federal funds sold and interest-bearing
deposits with banks, increased 23.8% to $46.3 million in the third quarter of
2001 from $37.4 million in the same period for 2000.
The average yield on interest-earning assets decreased 168 basis points
to 8.20% in the third quarter of 2001 from 9.88% in the same period of 2000
primarily due to a decrease in the average yield on loans. We lowered our prime
rate by 350 basis points from 9.50% at September 30, 2000 to 6.00% at September
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 171 basis points to 9.11% for the third quarter of
2001 from 10.82% in the same period of 2000. Loans represented approximately
78.8% of total interest-earning assets in the third quarter of 2001 compared to
80.4% for the same period in 2000.
Interest expense in the third quarter of 2001 decreased to $1.3 million
from $1.4 million for the same period of 2000. Lower interest rates paid on
interest-bearing deposits were partially offset by the volume increase in
interest-bearing deposits. Average interest-bearing liabilities increased 17.3%
to $161.8 million in the third quarter of 2001 from $137.9 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 third quarter of 2001, average noninterest-bearing deposits
increased to $54.4 million from $48.3 million in the same period of 2000.
As a result of the foregoing analyses, our interest rate spread
decreased to 5.07% in the third quarter of 2001 from 5.80% in the same period of
2000. The net yield on interest-earning assets decreased in the third quarter of
2001 to 5.89% from 6.93% in the same period of 2000.
THE QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO JUNE 30, 2001
Interest income in the third quarter ended September 30, 2001 remained
at $4.5 million as compared to $4.5 million for the second quarter of 2001. This
was primarily due to the increase in average interest-earning assets offset by a
61 basis point decline in the yield earned on average interest-earning assets.
Average interest-earning assets increased $16.3 million, or 8.0%, to $218.8
million in the three months ended September 30, 2001, compared to $202.6 million
in the previous quarter. Average loans increased $6.2 million, or 3.7%, to
$172.5 million for the three months ended September 30, 2001 from $166.2 million
in the previous quarter. Average investment securities, federal funds sold and
interest-bearing deposits with banks, increased 27.7% to $46.3 million in the
third quarter of 2001 from $36.2 million in the previous quarter.
The average yield on interest-earning assets decreased 61 basis points
to 8.20% in the third quarter of 2001 from 8.81% in the previous quarter
primarily due to a decrease in the average yield on loans. We lowered our prime
rate by 75 basis points from 6.75% at June 30, 2001 to 6.00% at September 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
13
yield on loans declined by 48 basis points to 9.11% for the third quarter of
2001 from 9.59% in the prior quarter. Loans represented approximately 78.8% of
total interest-earning assets in the third quarter of 2001 compared to 82.1% for
the prior quarter.
Interest expense in the third quarter of 2001 was $1.3 million,
unchanged from the prior quarter. This was primarily due to an increase in
average interest-bearing deposits offset by a 40 basis point decline in the rate
paid on average interest-bearing deposits. Average interest-bearing deposits
increased 7.1% to $161.2 million in the third quarter of 2001 from $150.5
million in the prior quarter. The increase was due primarily to the efforts of
our relationship managers in generating deposits from their client
relationships. Our average rate paid on interest-bearing deposits declined to
3.13% for the third quarter of 2001 from 3.53% in the previous quarter.
During the third quarter of 2001, average noninterest-bearing deposits
increased to $54.4 million from $48.3 million in the prior quarter.
As a result of the foregoing analyses, our interest rate spread
decreased to 5.07% in the third quarter of 2001 from 5.28% in the prior quarter.
The net yield on interest-earning assets decreased in the third quarter of 2001
to 5.89% from 6.18% in the prior quarter.
NET INTEREST INCOME - YEAR TO DATE
Net interest income remained unchanged at $9.4 million for the nine
months ended September 30, 2001 as compared to the nine months ended September
30, 2000. This was primarily due to the $18.1 million, or 9.7%, increase in
average interest-earning assets which was offset by a 53 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 nine months ended September 30,
---------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------- ---------- ---------- --------- ---------- ---------- ---------
INTEREST-EARNING ASSETS:
Federal funds sold $ 8,271 $ 258 4.17% $ 10,268 $ 473 6.15%
Interest-bearing deposits with banks 286 13 6.08% 286 12 5.60%
Investment securities:
Taxable 29,509 1,204 5.46% 30,173 1,319 5.84%
Tax-exempt
Loans (1) (2) 167,481 12,002 9.58% 146,676 11,554 10.52%
---------- ---------- --------- ---------- ---------- ---------
Total interest-earning assets 205,547 13,477 8.77% 187,403 13,358 9.52%
Noninterest-earning assets 15,292 13,398
---------- ----------
Total assets $ 220,839 $ 200,801
========== ==========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing transaction accounts $ 112,950 $ 2,598 3.08% $ 109,469 $ 3,001 3.66%
Time deposits, $100,000 or more 27,312 1,058 5.18% 15,379 611 5.31%
Savings and other time 10,964 347 4.23% 11,310 363 4.29%
---------- ---------- --------- ---------- ---------- ---------
Total interest-bearing deposits 151,226 4,003 3.54% 136,158 3,975 3.90%
---------- ---------- --------- ---------- ---------- ---------
Other borrowings 967 35 4.84% 837 25 3.99%
---------- ---------- --------- ---------- ---------- ---------
Total interest-bearing liabilities 152,193 4,038 3.55% 136,995 4,000 3.90%
Noninterest-bearing deposits 49,721 46,843
Other noninterest-bearing liabilities 1,667 1,683
Trust preferred securities 3,000
---------- ----------
Shareholders' equity 14,258 15,280
---------- ----------
Total liabilities and shareholders' equity $ 220,839 $ 200,801
========== ==========
---------- ----------
Net interest income $ 9,439 $ 9,358
========== ==========
Interest rate spread 5.22% 5.62%
Contribution of interest free funds 0.92% 1.05%
--------- ---------
Net yield on interest-earning assets (3) 6.14% 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 $970,000 and $924,000 are included in loan interest
income for the nine months ended September 30, 2001 and September 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 assets represented by 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).
Nine Months Ended September 30, 2001
Compared with
Nine Months Ended September 30, 2000
Favorable / (Unfavorable)
------------------------------------------
(Dollars in thousands) Volume Rate (1) Net
------------------------------------------
INTEREST EARNED ON INTEREST-EARNINGS ASSETS
Federal funds sold ($92) ($123) ($215)
Interest-bearing deposits with banks 0 1 1
Investment securities:
Taxable (30) (85) (115)
Tax-exempt
Loans 1,631 (1,183) 448
------------------------------------------
Total Interest Income 1,509 (1,390) 119
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing transaction accounts (98) 501 403
Time deposits, $100,000 or more (474) 27 (447)
Savings and other time 11 5 16
------------------------------------------
Total interest-bearing deposits (561) 533 (28)
Other borrowings (4) (6) (10)
------------------------------------------
Total Interest Expense (565) 527 (38)
------------------------------------------
Net increase (decrease) in net interest income $944 ($863) $81
==========================================
<FN>
(1) The rate/volume variance has been included in the rate variance.
</FN>
The Nine Months Ended September 30, 2001 Compared with the Nine Months Ended
September 30, 2000
Interest income for the nine months ended September 30, 2001 was $9.4
million unchanged from from the nine months ended September 30, 2000. This was
primarily due to the increase in average interest-earning assets offset by a 75
basis point decline in the yield earned on average interest-earning assets.
Average interest-earning assets increased $18.1 million, or 9.7%, to $205.5
million for the nine months ended September 30, 2001, compared to $187.4 million
in the same period for 2000. Average loans increased $20.8 million, or 14.2%, to
$167.5 million for the nine months ended September 30, 2001 from $146.7 million
in the same period for 2000. Average investment securities, federal funds sold
and interest-bearing deposits with banks,
16
decreased 6.5% to $38.1 million for the nine months ended September 30, 2001
from $40.7 million in the same period for 2000.
The average yield on interest-earning assets decreased 75 basis points
to 8.77% for the nine months ended September 30, 2001 from 9.52% in the same
period of 2000 primarily due to a decrease in the average yield on loans. We
lowered our prime rate by 350 basis points from 9.50% at September 30, 2000 to
6.00% at September 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 94 basis points to 9.58% for
the nine months ended September 30, 2001 from 10.52% in the same period of 2000.
Loans represented approximately 81.5% of total interest-earning assets for the
nine months ended September 30, 2001 compared to 78.3% for the same period in
2000.
Interest expense for the nine months ended September 30, 2001 was $4.0
million, unchanged from 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
11.1% to $152.2 million for the nine months ended September 30, 2001 from $137.0
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 nine months ended September 30, 2001, average
noninterest-bearing deposits increased to $49.7 million from $46.8 million in
the same period of 2000.
As a result of the foregoing analyses, our interest rate spread
decreased to 5.22% for the nine months ended September 30, 2001 from 5.62% in
the same period of 2000. The net yield on interest-earning assets decreased for
the nine months ended September 30, 2001 to 6.14% from 6.67% 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 September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
Components of Noninterest Income 2001 2000 2001 2000
- -------------------------------------------------------- --------------- -------------- --------------- --------------
Gain on sale of loans $ 25 $ 12 $ 64 $ 47
Service fees on deposit accounts 135 111 391 356
Loan servicing fees 15 14 47 41
Gain (loss) on sale of investment securities - net 228 228 (2)
Other 39 45 199 159
--------------- -------------- --------------- --------------
Total $ 442 $ 182 $ 929 $ 601
=============== ============== =============== ==============
As a Percentage of Average Assets (Annualized)
- --------------------------------------------------------
Gain on sale of loans 0.04% 0.02% 0.04% 0.03%
Service fees on deposit accounts 0.23% 0.21% 0.23% 0.24%
Loan servicing fees 0.03% 0.03% 0.03% 0.03%
Gain (loss) on sale of investment securities - net 0.38% 0.14% 0.00%
Other 0.07% 0.09% 0.12% 0.10%
--------------- -------------- --------------- --------------
Total 0.75% 0.35% 0.56% 0.40%
=============== ============== =============== ==============
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 September 30, Nine Months Ended September 30,
------------------------------------- ------------------------------------
Components of Noninterest Expense 2001 2000 2001 2000
- ---------------------------------------------------- ----------------- ----------------- ---------------- ----------------
Salaries and employee benefits $ 1,184 $ 1,096 $ 3,422 $ 3,283
Occupancy expense 262 273 800 800
Furniture and equipment expense 126 119 362 343
Professional services 132 107 252 233
Supplies 52 56 171 177
Promotional expenses 92 69 247 217
Data processing fees 96 93 294 270
Regulatory assessments 16 16 46 46
Other 138 134 403 417
----------------- ----------------- ---------------- ----------------
Total $ 2,098 $ 1,963 $ 5,997 $ 5,786
================= ================= ================ ================
Average full-time equivalent employees 61 58 59 58
As a Percentage of Average Assets (Annualized)
- ----------------------------------------------------
Salaries and employee benefits 2.00% 2.13% 2.07% 2.18%
Occupancy expense 0.44% 0.53% 0.49% 0.53%
Furniture and equipment expense 0.21% 0.23% 0.22% 0.23%
Professional services 0.22% 0.21% 0.15% 0.16%
Supplies 0.09% 0.11% 0.10% 0.12%
Promotional expenses 0.16% 0.14% 0.15% 0.14%
Data processing fees 0.16% 0.18% 0.18% 0.18%
Regulatory assessments 0.03% 0.03% 0.03% 0.03%
Other 0.23% 0.26% 0.24% 0.28%
----------------- ----------------- ---------------- ----------------
Total 3.54% 3.82% 3.63% 3.85%
================= ================= ================ ================
INCOME TAXES.
Our effective tax rate was 40.6% for the quarter ended September 30,
2001 compared to 40.9% in the same period of the prior year. For the nine months
ended September 30, 2001, our effective tax rate was 40.9% compared to 41.2% in
the same period of the prior year.
FINANCIAL CONDITION
Our total assets increased by $20.4 million, or 9.9%, from the end of
2000 to reach $226.6 million at September 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
September 30, 2001: Cost Gains Losses Value Value
- ------------------------------------------------------------------------------------------------------
Available for sale securities:
U.S. Treasury $ 13,979 $ 533 $ $ 14,512 $ 14,512
U.S. Government agencies 9,089 405 9,494 9,494
Corporate securities 1,913 44 1,957 1,957
-------- ----- ------- -------- --------
Total investment securities $ 24,981 $ 982 $ $ 25,963 $ 25,963
======== ===== ======= ======== ========
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
September 30, 2000 Cost Gains Losses Value Value
- ------------------------------------------------------------------------------------------------------
Held to maturity securities:
U.S. Government agencies $ 2,000 $ (17) $ 1,983 $ 2,000
-------- ----- ------ -------- --------
Total held to maturity 2,000 (17) 1,983 2,000
-------- ----- ------ -------- --------
Available for sale securities:
U.S. Treasury 13,985 $ 75 (181) 13,879 13,879
U.S. Government agencies 9,114 (396) 8,718 8,718
Corporate securities 1,934 (16) 1,918 1,918
-------- ----- ------ -------- --------
Total available for sale 25,033 75 (593) 24,515 24,515
-------- ----- ------ -------- --------
Total investment securities $ 27,033 $ 75 $ (610) $ 26,498 $ 26,515
======== ===== ====== ======== ========
The maturities and weighted average yields of our investment securities
at September 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 $5,997 6.21% $13,026 5.42% $4,045 5.61% $23,068 5.66%
Corporate securities 1,609 6.33% 304 6.25% 1,913 6.32%
---------- --------- ---------- --------- ----------- -------- ----------- --------
Total $7,606 6.23% $13,330 5.44% $4,045 5.61% $24,981 5.71%
========== ========= ========== ========= =========== ======== =========== ========
LOANS HELD FOR INVESTMENT
Our net loans held for investment increased by $10.9 million, or 6.7%,
during the first nine 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 September 30, December 31, September 30,
2001 2000 2000
------------------ ------------------ ------------------
Commercial $ 25,528 $ 27,137 $ 23,947
Real estate:
Commercial 112,430 108,557 102,663
Construction 29,194 24,157 23,658
Land 4,662 1,675 2,974
Home equity 2,009 1,581 1,519
Loans to consumers and individuals 2,302 1,936 1,826
------------------ ------------------ ------------------
Total 176,125 165,043 156,587
Deferred loan fees (150) (220) (168)
Allowance for loan losses (2,236) (1,939) (1,849)
------------------ ------------------ ------------------
Total net loans $ 173,739 $ 162,884 $ 154,570
================== ================== ==================
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 $148.3
million, or 84.2% of the total portfolio as of September 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 September 30,
2001 the two largest industry concentrations within the loan portfolio were real
estate and related services at 29.5% and the services - personal/business
industry at 22.0% 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 September 30, 2001 (dollar amounts in thousands):
Time remaining to maturity Fixed rate Adjustable rate Total
----------------- ----------------- -----------------
One year or less $ 10,008 $ 45,462 $ 55,470
After one year to five years 63,440 19,157 82,597
After five years 10,554 27,504 38,058
----------------- ----------------- -----------------
Total $ 84,002 $ 92,123 $ 176,125
================= ================= =================
As of September 30, 2001, the percentage of loans held for investment
with fixed and floating interest rates was 47.7% and 52.3%, 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 September 30, 2001, we had no nonperforming assets. The following
table sets forth the balance of nonperforming assets as of the dates indicated
(dollar amounts in thousands):
Nonperforming Assets September 30, June 30, March 31, December 31, September 30,
2001 2001 2001 2000 2000
-------------- -------------- --------------- --------------- ---------------
Nonaccrual loans $ 0 $ 0 $ 0 $ 0 $ 0
Loans 90 days or more
past due and still accruing 0 40 40 40 78
-------------- -------------- --------------- --------------- ---------------
$ 0 $ 40 $ 40 $ 40 $ 78
============== ============== =============== =============== ===============
As a percent of total loans 0.00% 0.02% 0.02% 0.02% 0.05%
As a percent of total assets 0.00% 0.02% 0.02% 0.02% 0.04%
At September 30, 2001, we had no loans identified as impaired and,
therefore, no specific allowance for loan losses was required for impaired
loans.
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 portfolio, evaluation
of loan collateral value, and the prospects or worth of respective borrowers and
guarantors.
23
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 September 30, 2001, the ALL of $2,236,000, or
1.27% 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 Nine Months the Year Ended
Ended September 30, December 31,
2001 2000
------------------ -----------------
Balances:
Average loans during period $ 167,481 $ 149,645
Loans at end of period 175,975 164,823
Allowance for Loan Losses:
Balance at beginning of period 1,939 1,492
Charge-offs:
Commercial 3 9
Consumer 1
------------------ -----------------
Total charge-offs 3 10
Recoveries:
Commercial 37
------------------ -----------------
Total recoveries 0 37
------------------ -----------------
Net charge-offs (recoveries) 3 (27)
------------------ -----------------
Provision charged to operating expense 300 420
------------------ -----------------
Balance at end of period $ 2,236 $ 1,939
================== =================
Ratios:
Net charge-offs (recoveries) to average loans 0.00% -0.02%
Allowance for loan losses to loans at end of period 1.27% 1.18%
Net charge-offs (recoveries) to beginning of period
allowance for loan losses 0.15% -1.81%
We made a provision of $200,000 to the allowance for loan losses during
the third quarter of 2001 as compared to a provision of $100,000 during the
third quarter of 2000. For the nine months ended September 30, 2001, we provided
$300,000 to the ALL as compared to $320,000 during the same period of 2000. The
provisions in both periods were recorded due to growth in the loan portfolio and
deteriorating economic conditions in our market areas. We believe the $300,000
provision to the ALL during the first nine months of 2001 is adequate given our
net loan growth of 6.7% during that same period.
24
The following table sets forth the allocation of the ALL as of the
dates indicated (dollar amounts in thousands):
September 30, December 31, September 30,
2001 2000 2000
---------------------------- ---------------------------- ----------------------------
% of % of % of
Category Category Category
to Total to Total to Total
ALL Loans ALL Loans ALL Loans
Commercial loans $ 895 45.22% $ 793 43.34% $ 660 43.72%
Real estate loans 1,014 51.22% 978 53.47% 315 53.09%
Consumer loans 78 3.56% 65 3.19% 33 3.19%
Not allocated 249 N/A 103 N/A 841 N/A
------------ ------------ ------------ ------------ ------------ ------------
Total $ 2,236 100.00% $ 1,939 100.00% $ 1,849 100.00%
============ ============ ============ ============ ============ ============
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 $17.9 million, or 9.50%,
during the nine months ended September 30, 2001.
Rates paid on deposits decreased along with market interest rates
during the nine months ended September 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):
Nine Months Ended Year Ended Nine Months Ended
September 30, 2001 December 31, 2000 September 30, 2000
-------------------------- -------------------------- -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------- ----------- ------------ ----------- ------------ -----------
Noninterest-bearing demand deposits $ 49,721 $ 47,329 $ 46,843
Interest-bearing demand deposits (includes
money market deposit accounts) 112,950 3.08% 108,708 3.70% 109,469 3.66%
Savings deposits 2,177 1.53% 2,146 1.95% 2,094 1.94%
Time deposits, $100,000 and over 27,312 5.18% 17,730 5.46% 15,379 5.31%
Other time deposits 8,787 4.90% 9,086 4.96% 9,216 4.83%
------------- ----------- ------------ ----------- ------------ -----------
Total interest-bearing 151,226 3.54% 137,670 3.98% 136,158 3.90%
------------- ----------- ------------ ----------- ------------ -----------
Total deposits $ 200,947 2.66% $ 184,999 2.96% $ 183,001 2.90%
============= =========== ============ =========== ============ ===========
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):
September 30, December 31, September 30,
Time remaining to maturity 2001 2000 2000
----------------- ----------------- -----------------
Three months or less $ 13,987 $ 14,456 $ 8,822
After three months to six months 3,554 4,519 4,287
After six months to one year 5,094 5,678 5,222
After twelve months 1,600 500 802
----------------- ----------------- -----------------
Total $ 24,235 $ 25,153 $ 19,133
================= ================= =================
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 nine months ended September 30, 2001,
federal funds sold averaged $8.3 million, or 3.7% 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 September 30, 2001, we had cash, time deposits with banks, federal
funds sold, and unpledged investment securities of approximately $22.6 million,
or 10.0% 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 September 30, 2001, the loan-to-deposit ratio
was 83.4% 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 September 30, 2001, this ratio was
7.5% as compared to 1.3% at December 31, 2000.
As of September 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 September 30, 2001, the analysis
indicates that our net income for the next 12 months would increase 6% 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 September 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
September 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 1,002 $ 1,804 $ 4,800 $ 13,330 $ 4,045 24,981
Loans, excluding allowance for
possible losses 93,258 1,607 3,774 65,412 12,074 176,125
----------- ----------- ------------ ----------- ----------- -----------
Total 94,546 3,411 8,574 78,742 16,119 201,392
----------- ----------- ------------ ----------- ----------- -----------
Interest-Bearing Liabilities (Rate Sensitive):
Interest-bearing transaction deposits 51,855 66,219 118,074
Time deposits, $100,000 or more 13,987 3,554 5,094 1,600 24,235
Savings and other time deposits 3,812 2,048 318 5,403 11,581
Other borrowings 750 750
Trust preferred securities 3,000 3,000
----------- ----------- ------------ ----------- ----------- -----------
Total 18,549 5,602 57,267 73,222 3,000 $ 157,640
----------- ----------- ------------ ----------- ----------- -----------
Period GAP $ 75,997 $ (2,191) $ (48,693) $ 5,520 $ 13,119
=========== =========== ============ =========== ===========
Cumulative GAP $ 75,997 $ 73,806 $ 25,113 $ 30,633 $ 43,752
=========== =========== ============ =========== ===========
Interest Sensitivity GAP Ratio 80.38% (64.23%) (567.91%) 7.01% 81.39%
=========== =========== ============ =========== ===========
Cumulative Interest Sensitivity 80.38% 75.35% 23.57% 16.53% 21.72%
=========== =========== ============ =========== ===========
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 $14.6 million as of September 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 nine months of 2001. For
the nine months ended September 30, 2001, we repurchased 316,000 shares of our
common stock at a total cost of $3.7 million. We paid dividends of $0.03 per
share during the nine months ended September 30, 2001.
The ratios of average equity to average assets for the periods
indicated are set forth below.
29
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
6.46% 7.61%
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 September 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 September
30, 2001, our total capital ratio was 10.41% and our Tier 1 capital ratio was
9.19%. In addition, under the guidelines established for adequately capitalized
institutions, we must also maintain a
30
minimum leverage ratio (Tier 1 capital divided by total assets) of 4%. As of
September 30, 2001, our leverage ratio was 7.12%. 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.
RECENT ACCOUNTING DEVELOPMENTS
Derivative Instruments and Hedging Activities
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.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments 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.
Business Combinations, Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination and SFAS No. 142 addresses
the initial recognition and measurement of intangibles assets acquired outside
of a business combination whether acquired individually or with a group of other
assets. SFAS No. 142 also addresses the recognition and measurement of goodwill
and other intangibles assets subsequent to their acquisition. SFAS No. 141 is
applicable to business combinations beginning July 1, 2001. The Company does not
expect the adoption of SFAS No. 141 and SFAS No. 142 to have a material effect
on its financial position, results of operations and cash flows.
31
Selected Loan Loss Allowance Methodology and Documentation Issues
A Staff Accounting Bulletin No. 102 "Selected Loan Loss Allowance
Methodology and Documentation Issues" ("SAB No. 102") was released on July 10,
2001. It expresses certain of the staff's views on the development,
documentation, and application of a systematic methodology as required by
Financial Reporting Release No. 28, Accounting for Loan Losses by Registrants
Engaged in Lending Activities, for determining allowances for loan and lease
losses in accordance with generally accepted accounting principals. In
particular, SAB No. 102 focuses on the documentation the staff normally would
expect registrants to prepare and maintain in support of their allowances for
loan losses. We have a systematic methodology for determining an appropriate
allowance for loan losses, consistently followed and supported by written
documentation and policies and procedures. None-the-less, in light of SAB No.
102, our methodology and documentation is currently in the process of review.
However, any resulting changes are not expected to have a material impact on the
financial statements.
32
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.
During the quarter ended September 30, 2001, the Registrant filed the
following Current Reports on Form 8-K: (1) Form 8-K dated August 15, 2001 Item
5, (containing a press release regarding the signing of a definitive agreement
between the Registrant and Business Bancorp). (2) Form 8-K dated August 15, 2001
Item 5, (containing an amendment to the Rights Agreement dated January 19, 1999
between the Registrant and U.S. Stock Transfer Corporation).
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: November 13, 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
2 Agreement and Plan of Reorganization among MCB Financial
Corporation, Metro Commerce Bank and Business Bancorp,
Business Bank of California, dated as of August 15, 2001
(incorporated by reference to Annex A of Registrant's Proxy
Statement on Schedule 14A filed with the SEC on November 2,
2001).
10.1 Stock Option Agreement dated as of August 15, 2001 between
Business Bancorp and MCB Financial Corporation (incorporated
by reference to Exhibit A of Registrant's Proxy Statement on
Schedule 14A filed with the SEC on November 2, 2001).
35