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| MCBI > SEC Filings for MCBI > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
Special Cautionary Notice Regarding Forward-looking Statements
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company's operations or performance. Words such as "believe", "expect", "anticipate", "estimate", "continue", "intend", "may", "will", "should", or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:
• changes in interest rates and market prices, which could reduce the Company's net interest margins, asset valuations and expense expectations;
• changes in the levels of loan prepayments and the resulting effects on the value of the Company's loan portfolio;
• changes in local economic and business conditions which adversely affect the ability of the Company's customers to transact profitable business with the Company, including the ability of borrowers to repay their loans according to their terms or a change in the value of the related collateral;
• increased competition for deposits and loans adversely affecting rates and terms;
• the Company's ability to identify suitable acquisition candidates;
• the timing, impact and other uncertainties of the Company's ability to enter new markets successfully and capitalize on growth opportunities;
• increased credit risk in the Company's assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio;
• the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;
• changes in the availability of funds resulting in increased costs or reduced liquidity;
• a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company's securities portfolio;
• increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;
• the Company's ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;
• the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; and
• changes in statutes and government regulations or their interpretations applicable to bank holding companies and our present and future banking and other subsidiaries, including changes in tax requirements and tax rates.
All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's Condensed Consolidated Financial Statements and accompanying notes and other detailed information appearing elsewhere in this document.
Overview
The Company recorded net income of $2.3 million for the three months ended June 30, 2008, down approximately $805,000 compared with net income of $3.1 million for the same quarter in 2007. The Company's diluted earnings per share ("EPS") for the three months ended June 30, 2008 was $0.21, a decrease of $0.07 per diluted share compared with diluted EPS of $0.28 for the same quarter in 2007. Net income for the six months ended June 30, 2008 was $4.5 million, a decrease of approximately $1.7 million compared with $6.2 million for the same period in 2007. The Company's diluted EPS for the six months ended June 30, 2008 was $0.41, a decrease of $0.14 compared with $0.55 for the same period in 2007. Details of the changes in the various components of net income are further discussed below.
Total assets were $1.58 billion at June 30, 2008, up approximately $118.8 million or 8.1% compared with $1.46 billion at December 31, 2007. Investment securities at June 30, 2008 were $115.6 million, down approximately $22.1 million or 16.1% compared with $137.7 million at December 31, 2007. Net loans at June 30, 2008 were $1.30 billion, up approximately $107.3 million or 9.0% compared with $1.19 billion at December 31, 2007. Total deposits at June 30, 2008 were $1.24 billion, up approximately $51.7 million or 4.3% compared with $1.19 billion at December 31, 2007. The Company's return on average assets ("ROAA") for the three months ended June 30, 2008 and 2007 was 0.59% and 0.91%, respectively. The Company's ROAA for the six months ended June 30, 2008 and 2007 was 0.60% and 0.95%, respectively.
Shareholders' equity at June 30, 2008 was $121.7 million compared with $117.4 million at December 31, 2007, an increase of approximately $4.3 million or 3.7%. The Company's return on average equity ("ROAE") for the three months ended June 30, 2008 and 2007 was 7.46% and 11.04%, respectively. The Company's ROAE for the six months ended June 30, 2008 and 2007 was 7.49% and 11.31%, respectively.
The Company recognized an other-than-temporary impairment charge of $1.5 million pre-tax, or $953,000 net of tax, on its $14.2 million investment in the AMF Ultra Short Mortgage Fund (the "Fund") as of June 30, 2008. The Fund is a mutual fund investing primarily in adjustable rate agency and private label mortgage backed securities. The Company reclassified the unrealized mark-to-market loss on these investment grade securities to an other-than-temporary impairment charge because of the significant decline in the net asset value of the Fund and because the Fund manager activated the redemption-in-kind provision on May 6, 2008 to protect shareholders against forced liquidation of Fund holdings to satisfy cash redemptions. In July 2008, the Company redeemed its shares in the Fund for approximately $2.2 million in cash, with the remaining value of approximately $10.5 million, net of a $57,000 loss distributed in the form of securities held by the Fund that approximates the Company's respective interest in each of the underlying securities.
In June 2008, the Company issued an aggregate of $4.0 million in subordinated debentures through a private placement to the Company's Chairman of the Board and an affiliate of a Company Director. The proceeds from issuance of the subordinated debentures were used to contribute capital to the Banks.
During the second quarter of 2008, the Company opened a new branch in Garland, Texas as a part of the strategy to expand its presence in the greater Dallas metropolitan area.
Results of Operations
Net Interest Income and Net Interest Margin. For the three months ended June 30, 2008, net interest income, before the provision for loan losses, was $14.5 million, up approximately $252,000 or 1.8% compared with $14.2 million for the same quarter in 2007. The increase was due primarily to increased loan volume partially offset by lower yields on average earning assets due to interest rate cuts by the Federal Reserve. The increase in net interest income reflects a $1.1 million decrease in interest income that was offset by a $1.3 million decrease in interest expense. Average interest-earning assets for the three months ended June 30, 2008 were $1.46 billion, up approximately $178.8 million or 14.0% compared with $1.28 billion for the same quarter in 2007. The weighted average yield on interest-earning assets for the three months ended June 30, 2008 was 6.80%, down 127 basis points compared with 8.07% for the same quarter in 2007. Average interest-bearing liabilities for the three months ended June 30, 2008 were $1.19 billion, up approximately $169.4 million or 16.6% compared with $1.02 billion for the same quarter in 2007. The weighted average rate paid on interest-bearing liabilities for the three months ended June 30, 2008 was 3.43%, down 108 basis points compared with 4.51% for the same quarter in 2007. Interest rate cuts by the Federal Reserve resulted in a decrease in all yields and costs for the three and six months ended June 30, 2008, compared with the same period in 2007.
For the six months ended June 30, 2008, net interest income, before the provision for loan losses, was $28.5 million, up approximately $611,000 or 2.2% compared with $27.9 million for the same period in 2007. The increase was due primarily to increased loan volume partially offset by lower yields on average earning assets. The increase reflects a $392,000 increase in interest income and a $219,000 decrease in interest expense. Average interest-earning assets for the six months ended June 30, 2008 were $1.42 billion, up approximately $179.1 million or 14.5% compared with $1.24 billion for the same period in 2007. The weighted average yield on interest-earning assets for the six months ended June 30, 2008 was 7.06%, down 98 basis points compared with 8.04% for the same period in 2007. Average interest-bearing liabilities for the six months ended June 30, 2008 were $1.16 billion, up approximately $182.4 million or 18.7% compared with $977.0 million for the same period in 2007. The weighted average rate paid on interest-bearing liabilities for the six months ended June 30, 2008 was 3.68%, down 74 basis points compared with 4.42% for the same period in 2007.
The net interest margin for the three months ended June 30, 2008 was 4.00%, down 47 basis points compared with 4.47% for the same quarter in 2007. The yield on average earning assets decreased 127 basis points, which was partially offset by a decrease in the cost of average earning assets of 80 basis points.
The net interest margin for the six months ended June 30, 2008 was 4.04%, down 50 basis points compared with 4.54% for the same period in 2007. For the six months ended June 30, 2008, the yield on average earning assets decreased 98 basis points, which was partially offset by a decrease in the cost of average earning assets of 48 basis points.
Total Interest Income. Total interest income for the three months ended June 30, 2008 was $24.6 million, down approximately $1.1 million or 4.2% compared with $25.7 million for the same period in 2007. Although total interest earning assets increased, the impact of interest rate cuts during the second quarter 2008 offset the effect of volume increases. Total interest income for the six months ended June 30, 2008 was $49.7 million, up approximately $392,000 or 0.8% compared with $49.3 million for the same period in 2007, primarily due to loan growth but partially offset by decreases in average yield.
Interest Income from Loans. Interest income from loans for the three months ended June 30, 2008 was $23.0 million, up approximately $112,000 or 0.5% compared with $22.9 million for the same quarter in 2007. The increase was the result of a higher volume of loans, partially offset by decreases in average yield. Average total loans for the three months ended June 30, 2008 were $1.29 billion compared with average total loans for the same quarter in 2007 of $1.03 billion, an increase of approximately $259.6 million or 25.2%. For the three months ended June 30, 2008, the yield on average total loans was 7.17%, down 173 basis points compared with 8.90% for the same quarter in 2007.
Interest income from loans for the six months ended June 30, 2008 was $46.4 million, up approximately $2.9 million or 6.6% compared with $43.5 million for the same period in 2007. The increase was the result of a higher volume of loans, partially offset by a lower yield on loans. Average total loans for the six months ended June 30, 2008 were $1.25 billion compared with average total loans for the same period in 2007 of $983.1 million, an increase of approximately $270.5 million or 27.5%. For the six months ended June 30, 2008, the yield on average total loans was 7.45%, down 148 basis points compared with 8.93% for the same period in 2007.
Approximately $926.7 million or 70.5% of the total loan portfolio at June 30, 2008 were variable rate loans that periodically reprice and are sensitive to changes in market interest rates. For the three months ended June 30, 2008, the yield on average total loans was approximately 209 basis points above the average prime rate over the period. To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors. At June 30, 2008, approximately $647.7 million in loans or 49.3% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.92%. At June 30, 2007, variable rate loans with interest rate floors carried a weighted average interest rate of 8.93% and comprised 47.2% of the total loan portfolio.
Interest Income from Investments. Interest income from investments (which includes investment securities, Federal Funds sold, and other investments) for the three months ended June 30, 2008 was $1.6 million, a decrease of approximately $1.2 million or 42.8% compared with $2.8 million for the same quarter in 2007. Average total investments for the three months ended June 30, 2008 were $163.7 million compared with average total investments for the same quarter in 2007 of $244.5 million, a decrease of approximately $80.8 million or 33.0%. The decreases in interest income from investments and in average total investments were primarily the result of declining interest rates, and maturities, sales and paydowns on the investment portfolio. For the three months ended June 30, 2008, the average yield on investments was 3.88% compared with 4.53% for the same quarter in 2007, a decrease of 65 basis points.
Interest income from investments for the six months ended June 30, 2008 was $3.3 million, down approximately $2.4 million or 43.5% compared with $5.7 million for the same period in 2007. Average total investments for the six months ended June 30, 2008 were $161.9 million compared with average total investments for the same quarter in 2007 of $253.3 million, a decrease of approximately $91.4 million or 36.1%. The decreases in interest income from investments and in average total investments were primarily the result of declining interest rates, and maturities, sales and paydowns on the investment portfolio. For the six months ended June 30, 2008, the average yield on investments was 4.04% compared with 4.58% for the same quarter in 2008, a decrease of 54 basis points.
Total Interest Expense. Total interest expense for the three months ended June 30, 2008 was $10.1 million, down approximately $1.4 million or 11.5% compared with $11.5 million for the same quarter in 2007. Total interest expense for the six months ended June 30, 2008 was $21.2 million, down approximately $219,000 or 1.0% compared with $21.4 million for the same period in 2007. Interest expense decreased for both the three and six months ended June 30, 2008 primarily due to decreases in interest rates paid on deposits, partially offset by growth in other borrowings and deposits.
Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended June 30, 2008 was $8.7 million, down approximately $2.0 million or 18.1% compared with $10.7 million for the same period in 2007. The decrease was primarily due to lower interest rates incurred for interest-bearing deposits partially offset by growth in savings and money market deposits. Average interest-bearing deposits for the three months ended June 30, 2008 were $1.0 billion compared with average interest-bearing deposits for the same quarter in 2007 of $960.9 million, an increase of $41.0 million or 4.3%. The average interest rate incurred on interest-bearing deposits for the three months ended June 30, 2008 was 3.51% compared with 4.45% for the same quarter in 2007, a decrease of 94 basis points. The decrease in interest rates primarily reflected the impact of market rate decreases.
Interest expense on interest-bearing deposits for the six months ended June 30, 2008 was $18.4 million, down approximately $1.4 million or 7.0% compared with $19.8 million for the same period in 2007. The decrease was primarily due to lower interest rates incurred for interest-bearing deposits partially offset by growth in savings and money market deposits. Average interest-bearing deposits for the six months ended June 30, 2008 were $991.4 million compared with average interest-bearing deposits for the same period in 2007 of $916.7 million, an increase of $74.7 million or 8.2%. The average interest rate incurred on interest-bearing deposits for the six months ended June 30, 2008 was 3.73% compared with 4.35% for the same period in 2007, a decrease of 62 basis points. The decrease in interest rates primarily reflected the impact of market rate decreases.
Interest Expense on Junior Subordinated Debentures. Interest expense on junior subordinated debentures for the three months ended June 30, 2008 and 2007 was $520,000, and $525,000, respectively. Interest expense on junior subordinated debentures for the six months ended June 30, 2008 and 2007 was $1.0 million. Average junior subordinated debentures for the three and six months ended June 30, 2008 and 2007 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three and six months ended June 30, 2008 and 2007 was 5.76%. The junior subordinated debentures accrue interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures will accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%.
Interest Expense on Other Borrowings. Interest expense on other borrowed funds for the three months ended June 30, 2008 was $880,000, up approximately $615,000 compared with $265,000 for the same period in 2007. Interest expense on other borrowed funds for the six months ended June 30, 2008 was $1.8 million, up approximately $1.2 million compared with $589,000 for the same period in 2007. The increase in interest expense for both the three and six months ended June 30, 2008 was due to increases in Federal Home Loan Bank ("FHLB") advances and security repurchases agreements, which were partially offset by lower interest rates paid. As part of its strategy to control interest expense, the Company took advantage of lower cost wholesale funding in lieu of higher cost deposits. Average other borrowed funds for the three months ended June 30, 2008 were $150.1 million compared with average other borrowed funds for the same quarter in 2007 of $21.7 million, an increase of $128.4 million. The average interest rate incurred on borrowed funds for the three months ended June 30, 2008 was 2.36%, compared with 4.89% for the same quarter in 2007, a decrease of 253 basis points. Average other borrowed funds for the six months ended June 30, 2008 were $131.9 million compared with average other borrowed funds for the same period in 2007 of $24.2 million, an increase of $107.7 million. The average interest rate incurred on borrowed funds for the six months ended June 30, 2008 was 2.70%, compared with 4.91% for the same period in 2007, a decrease of 221 basis points.
The following tables present for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates for the periods indicated. No tax-equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the tables as loans having a zero yield with income, if any, recognized at the end of the loan term.
For The Three Months Ended June 30,
2008 2007
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
(Dollars in thousands)
Assets
Interest-earning
assets:
Total loans $ 1,291,494 $ 23,020 7.17 % $ 1,031,921 $ 22,908 8.90 %
Taxable securities 119,572 1,276 4.29 167,679 1,768 4.23
Tax-exempt securities 5,202 64 4.95 6,205 76 4.91
Other investments (2) 8,801 95 4.34 4,856 70 5.78
Federal funds sold and
other short-term
investments 30,155 146 1.95 65,774 850 5.18
Total interest-earning
assets 1,455,224 24,601 6.80 1,276,435 25,672 8.07
Allowance for loan
losses (15,065 ) (12,490 )
Total interest-earning
assets, net of
allowance for loan
losses 1,440,159 1,263,945
Noninterest-earning
assets 109,378 86,565
Total assets $ 1,549,537 $ 1,350,510
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits $ 58,892 114 0.78 % $ 64,065 187 1.17 %
Savings and money
market accounts 281,310 1,788 2.56 237,231 2,316 3.92
Time deposits 661,655 6,830 4.15 659,576 8,162 4.96
Junior subordinated
debentures 36,083 520 5.76 36,083 525 5.76
Other borrowings 150,136 880 2.36 21,748 265 4.89
Total interest-bearing
liabilities 1,188,076 10,132 3.43 1,018,703 11,455 4.51
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits 219,318 203,075
Other liabilities 19,935 17,057
Total liabilities 1,427,329 1,238,835
Shareholders' equity 122,208 111,675
Total liabilities and
shareholders' equity $ 1,549,537 $ 1,350,510
Net interest income $ 14,469 $ 14,217
Net interest spread 3.37 % 3.56 %
Net interest margin 4.00 % 4.47 %
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(1) Annualized.
(2) Other investments include Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust.
For The Six Months Ended June 30,
2008 2007
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(1) Balance Paid Rate(1)
(Dollars in thousands)
Assets
Interest-earning
assets:
Total loans $ 1,253,615 $ 46,420 7.45 % $ 983,146 $ 43,529 8.93 %
Taxable securities 124,048 2,648 4.29 171,236 3,632 4.28
Tax-exempt securities 5,569 137 4.95 6,548 161 4.96
Other investments (2) 8,181 182 4.47 4,897 138 5.68
Federal funds sold and
other short-term
investments 24,090 283 2.36 70,598 1,818 5.19
Total interest-earning
assets 1,415,503 49,670 7.06 1,236,425 49,278 8.04
Allowance for loan
losses (14,499 ) (12,068 )
Total interest-earning
assets, net of
allowance for loan
losses 1,401,004 1,224,357
Noninterest-earning
assets 108,996 81,917
Total assets $ 1,510,000 $ 1,306,274
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits $ 58,943 257 0.88 % $ 66,191 392 1.19 %
Savings and money
market accounts 276,898 3,710 2.69 204,557 3,636 3.58
Time deposits 655,553 14,431 4.43 645,923 15,763 4.92
Junior subordinated
debentures 36,083 1,040 5.76 36,083 1,045 5.76
Other borrowings 131,867 1,768 2.70 24,208 589 4.91
Total interest-bearing
liabilities $ 1,159,344 21,206 3.68 $ 976,962 21,425 4.42
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits 209,567 202,668
Other liabilities 20,155 16,725
Total liabilities 1,389,066 1,196,355
Shareholders' equity 120,934 109,919
Total liabilities and
shareholders' equity $ 1,510,000 $ 1,306,274
Net interest income $ 28,464 $ 27,853
Net interest spread 3.38 % 3.61 %
Net interest margin 4.04 % 4.54 %
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(1) Annualized.
(2) Other investments include Federal Reserve Bank stock, Federal Home Loan Bank . . .
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