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| MCBI > SEC Filings for MCBI > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
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 the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on the Company's loan portfolio and allowance for loan losses;
• 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;
• the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations;
• 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;
• government intervention in the U.S. financial system; 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 a net loss of $2.0 million for the three months ended March 31, 2009, a decrease of approximately $4.2 million compared with net income of $2.2 million for the same quarter in 2008. The Company's diluted loss per common share for the three months ended March 31, 2009 was $0.23, a decrease of $0.44 per diluted share compared with diluted earnings per share of $0.21 for the same quarter in 2008. Diluted earnings per share is computed by dividing net income (after deducting dividends on preferred stock) by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period.
Total assets were $1.62 billion at March 31, 2009, an increase of approximately $41.8 million or 2.6% from $1.58 billion at December 31, 2008. Available for sale investment securities at March 31, 2009 were $97.2 million, a decrease of approximately $4.9 million or 4.8% from $102.1 million at December 31, 2008. Net loans at March 31, 2009 were $1.31 billion, a decrease of approximately $10.1 million or 0.8% from $1.32 billion at December 31, 2008. Total deposits at March 31, 2009 were $1.38 billion, an increase of approximately $106.8 million or 8.4% from $1.27 billion at December 31, 2008. Other borrowings at March 31, 2009 were $29.4 million, a decrease of approximately $109.6 million or 78.8% from $139.0 million at December 31, 2008. The Company's return on average assets ("ROAA") for the three months ended March 31, 2009 and 2008 was (0.51%) and 0.61%, respectively. The Company's return on average equity ("ROAE") for the three months ended March 31, 2009 and 2008 was (5.18%) and 7.51%, respectively. Shareholders' equity at March 31, 2009 was $162.6 million compared to $119.2 million at December 31, 2008, an increase of approximately $43.4 million or 36.4%. Details of the changes in the various components of net income are further discussed below.
Capital Purchase Program
In connection with the Company's participation in the Capital Purchase Program
("CPP"), on January 16, 2009, the Company issued and sold to the U.S. Treasury
(i) 45,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series
A, par value $1.00 per share, with a liquidation value of $1,000 per share (the
"Series A Preferred Stock"), and (ii) a warrant ("Warrant") to purchase 771,429
shares of the Company's common stock, at an exercise price of $8.75 per share,
subject to certain anti-dilution and other adjustments, for an aggregate
purchase price of $45.0 million in cash. The Series A Preferred Stock and the
Warrant were issued in a private placement exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended. The Securities Purchase
Agreement, dated January 16, 2009, pursuant to which the securities issued to
the U.S. Treasury under the CPP were sold, prevents the Company for so long as
the Series A Preferred Stock remains outstanding, from declaring or paying any
dividend (other than regular quarterly cash dividends of not more than $0.04 per
share) without the consent of the U.S. Treasury until the third anniversary of
the U.S. Treasury's investment or until the U.S. Treasury has transferred all of
the Series A Preferred Stock to third parties, limits the Company's ability to
repurchase shares of its Common Stock (with certain exceptions), grants the
holders of the Series A Preferred Stock, the Warrant and the Company's common
stock to be issued upon exercise of the Warrant certain registration rights and
subjects the Company to certain executive compensation limitations included in
the Emergency Economic Stabilization Act of 2008, as amended.
In April 2009, the Company suspended regular cash dividends on its common stock for an indefinite period of time.
Results of Operations
Net Interest Income and Net Interest Margin. For the three months ended March 31, 2009, net interest income, before the provision for loan losses, was $12.8 million, a decrease of approximately $1.2 million or 8.6% compared with $14.0 million for the same period in 2008. Average interest-earning assets for the three months ended March 31, 2009 were $1.51 billion, an increase of approximately $135.1 million or 9.8% compared with $1.38 billion for the same period in 2008. The increase was primarily due to loan growth. The weighted average yield on interest-earning assets for the first quarter of 2009 was 5.83%, a decrease of 150 basis points compared with 7.33% for the same quarter in 2008. Average interest-bearing liabilities for the three months ended March 31, 2009 were $1.22 billion, an increase of approximately $90.9 million or 8.0% compared with $1.13 billion for the same period in 2008, primarily due to an increase in money market accounts and time deposits, partially offset by a decrease in other borrowings. The weighted average interest rate paid on interest-bearing liabilities for the first quarter 2009 was 2.96%, a decrease of 98 basis points compared with 3.94% for the same quarter in 2008. Interest rate cuts by the Federal Reserve resulted in a decrease in yields and costs for the three months ended March 31, 2009, compared with the same period in 2008.
The net interest margin for the three months ended March 31, 2009 was 3.44%, a decrease of 65 basis points compared with 4.09% for the same period in 2008. The decrease was primarily the result of a decline in the yield on earning assets of 150 basis points, partially offset by a decrease in the cost of earning assets of 85 basis points. The decrease in yield on earning assets and the cost of earning assets was due primarily to interest rate cuts and the effect of nonperforming assets.
Total Interest Income. Total interest income for the three months ended March 31, 2009 was $21.7 million, a decrease of approximately $3.4 million or 13.4% compared with $25.1 million for the same period in 2008. The decrease was primarily due to lower loan yields, an increase in nonperforming assets, and the reversal of loan interest income for nonaccrual loans during the first quarter of 2009.
Interest Income from Loans. Interest income from loans for the three months ended March 31, 2009 was $20.4 million, a decrease of approximately $3.0 million or 12.9% compared with $23.4 million for the same quarter in 2008. The decrease was the result of lower loan yields, an increase in nonperforming assets, and the reversal of loan interest income for nonaccrual loans during the first quarter of 2009. Average total loans for the three months ended March 31, 2009 were $1.34 billion compared to $1.22 billion for the same period in 2008, an increase of approximately $126.4 million or 10.4%. For the first quarter of 2009, the average yield on loans was 6.16% compared to 7.74% for the same quarter in 2008, a decrease of 158 basis points. The decline in yield for the three months ended March 31, 2009 was the result of interest rate cuts and other items mentioned above.
Approximately $918.7 million or 68.6% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates. At March 31, 2009, the average yield on total loans was approximately 291 basis points above the prime rate. 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 March 31, 2009, approximately $726.1 million in loans or 54.2% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.48%. At March 31, 2008, variable rate loans with interest rate floors carried a weighted average interest rate of 7.34% and comprised 45.6% 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 March 31, 2009 was $1.3 million, a decrease of approximately $350,000 or 21.0% compared to $1.7 million for the same period in 2008. The decrease in interest income from investments was primarily the result of declining interest rates, in addition to the effect of paydowns, sales, calls and maturities of securities. Average total investments for the three months ended March 31, 2009 were $168.7 million compared to average total investments for the same period in 2008 of $160.0 million, an increase of approximately $8.7 million or 5.4%. The increase was primarily the result of an increase in other investments and federal funds sold, partially offset by a decrease in taxable securities and tax-exempt securities. For the first quarter 2009, the average yield on total investments was 3.17% compared to 4.19% for the same quarter in 2008, a decrease of 102 basis points.
Total Interest Expense. Total interest expense for the three months ended March 31, 2009 was $8.9 million, a decrease of approximately $2.2 million or 19.5% compared to $11.1 million for the same period in 2008. The decrease primarily reflected interest rate cuts coupled with the effect of a decrease in other borrowings.
Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended March 31, 2009 was $8.1 million, a decrease of approximately $1.6 million or 16.2% compared to $9.7 million for the same period in 2008. Average interest-bearing deposits for the three months ended March 31, 2009 were $1.12 billion compared to average interest-bearing deposits for the same period in 2008 of $980.9 million, an increase of $140.7 million or 14.3%. The average interest rate paid on interest-bearing deposits for the first quarter of 2009 was 2.93% compared to 3.96% for the same quarter in 2008, a decrease of 103 basis points. The decline in interest expense and the average interest rate paid on interest bearing deposits was primarily due to interest rate cuts.
Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended March 31, 2009 was $292,000, a decrease of $596,000 compared to $888,000 for the same period in 2008. Average borrowed funds for the three months ended March 31, 2009 and 2008 were $63.8 million and $113.6 million, respectively. The average interest rate paid on borrowed funds for the first quarter of 2009 was 1.86% compared to 3.14% for the same quarter in 2008.
The following table presents, for each major category of interest-earning assets and interest-bearing liabilities, 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 table as loans having a zero yield, with income, if any, recognized at the end of the loan term.
For The Three Months Ended March 31,
2009 2008
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:
Loans $ 1,342,104 $ 20,390 6.16 % $ 1,215,736 $ 23,400 7.74 %
Taxable securities 97,468 1,084 4.51 128,524 1,372 4.29
Tax-exempt securities 3,977 48 4.89 5,936 73 4.95
Other investments (2) 24,443 143 2.37 7,561 87 4.63
Federal funds sold and
other short-term
investments 42,846 44 0.42 18,025 137 3.06
Total interest-earning
assets 1,510,838 21,709 5.83 1,375,782 25,069 7.33
Allowance for loan
losses (23,691 ) (13,933 )
Total interest-earning
assets, net of
allowance for loan
losses 1,487,147 1,361,849
Noninterest-earning
assets 117,842 108,614
Total assets $ 1,604,989 $ 1,470,463
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits $ 55,291 $ 71 0.52 % $ 58,994 $ 143 0.97 %
Savings and money
market accounts 363,912 2,163 2.41 272,486 1,922 2.84
Time deposits 702,400 5,865 3.39 649,452 7,601 4.71
Junior subordinated
debentures 36,083 520 5.76 36,083 520 5.76
Other borrowings 63,822 292 1.86 113,597 888 3.14
Total interest-bearing
liabilities 1,221,508 8,911 2.96 1,130,612 11,074 3.94
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits 206,622 199,816
Other liabilities 17,544 20,375
Total liabilities 1,445,674 1,350,803
Shareholders' equity 159,315 119,660
Total liabilities and
shareholders' equity $ 1,604,989 $ 1,470,463
Net interest income $ 12,798 $ 13,995
Net interest spread 2.87 % 3.39 %
Net interest margin 3.44 % 4.09 %
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(2) Other investments include CDARS, Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust.
The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three months ended March 31, 2009 compared with the three months ended March 31, 2008. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.
Three Months Ended March 31,
2009 vs 2008
Increase (Decrease)
Due to
Volume Rate Total
(Dollars in thousands)
Interest-earning assets:
Loans 2,218 $ (5,228 ) $ (3,010 )
Taxable securities (340 ) 52 (288 )
Tax-exempt securities (24 ) (1 ) (25 )
Other investments 192 (136 ) 56
Federal funds sold and other short-term investments 186 (279 ) (93 )
Total increase (decrease) in interest income 2,232 (5,592 ) (3,360 )
Interest-bearing liabilities:
Interest-bearing demand deposits (10 ) (62 ) (72 )
Savings and money market accounts 624 (383 ) 241
Time deposits 552 (2,288 ) (1,736 )
Junior subordinated debentures - - -
Other borrowings (393 ) (203 ) (596 )
Total increase (decrease) in interest expense 773 (2,936 ) (2,163 )
Increase (decrease) in net interest income $ 1,459 $ (2,656 ) $ (1,197 )
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Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company's allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended March 31, 2009 was $7.3 million, an increase of approximately $5.7 million, compared to $1.6 million for the same period in 2008. The increase was primarily due to higher net charge-offs for the first quarter of 2009. The allowance for loan losses as a percent of total loans was 1.81% at March 31, 2009 and 1.80% at December 31, 2008, and increased compared with 1.17% at March 31, 2008.
Noninterest Income. Noninterest income for the three months ended March 31, 2009 was $1.9 million, down $199,000 or 9.3% compared with the same period in 2008. The decrease for the three months ended March 31, 2009 was primarily due to a decline in service fees, partially offset by an increase in other noninterest income that was the result of rental income received on other real estate property and an increase in the cash value of bank owned life insurance.
Noninterest Expense. Noninterest expense for the three months ended March 31, 2009 was $10.6 million, a decrease of $392,000 or 3.6% compared with the same period in 2008. Decreases in salaries and employee benefit expenses further described below, were partially offset by increases in expenses related to foreclosed assets and an other-than-temporary impairment charge of $240,000 realized on various private label securities.
Salaries and employee benefits expense for the three months ended March 31, 2009 was $5.4 million, a decrease of $1.1 million compared with $6.5 million for the same period in 2008, primarily due to a reduction in the number of employees and decreases in amount of bonus accrual, employee health care benefits, stock-based compensation expense and severance expenses. The number of full-time equivalent employees at March 31, 2009 was 309, a decrease of 27 or 8.0% compared with 336 at March 31, 2008.
Occupancy and equipment expense of $2.0 million and other noninterest expense of $2.5 million for the three months ended March 31, 2009 were approximately the same compared with the first quarter of 2008.
Other noninterest expense for the three months ended March 31, 2009 and 2008 was unchanged at $2.5 million. Included in this are FDIC insurance premiums which increased by $186,000 due to higher FDIC assessment rates, the utilization of available credits to offset assessments during the first quarter of 2008, and participation in the FDIC's Temporary Liquidity Guarantee Program.
In addition, the FDIC has proposed an emergency special assessment of 20 basis points on deposits as of June 30, 2009. However, legislation has been proposed in Congress that could lower the special assessment to 10 basis points if the FDIC's borrowing authority is increased. Further, the special assessment could drop below 10 basis points if the recently proposed surcharge on longer-term guaranteed debt issued under the FDIC's Temporary Liquidity Guarantee Program is approved. The special assessment will be payable on September 30, 2009.
The Company's efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions and impairment on securities, by net interest income plus noninterest income. The efficiency ratio for the three months ended March 31, 2009 was 70.15%, an increase from 67.99% for the same quarter in 2008, and was primarily the result of decreased net interest income.
Income Taxes. Income tax benefit for the three months ended March 31, 2009 was $1.1 million, compared with income tax expense of $1.3 million for the same period in 2008. The Company's effective tax rate was 35.0% and 37.5% for the three months ended March 31, 2009 and 2008, respectively. The decrease in the effective tax rate was due primarily to a reduction in the California state tax benefit related to the current period loss.
Financial Condition
Loan Portfolio. Total loans at March 31, 2009 were $1.34 billion, a decrease of $10.2 million or 0.8% compared with $1.35 billion at December 31, 2008. Compared to the loan level at December 31, 2008, real estate loans increased $11.6 million or 1.3% during the three months ended March 31, 2009. At March 31, 2009 and December 31, 2008, the ratio of total loans to total deposits was 97.09%, and 106.06%, respectively. Total loans represented 82.4% and 85.2% of total assets at March 31, 2009 and December 31, 2008, respectively.
The following table summarizes the loan portfolio by type of loan at the dates indicated:
As of March 31, 2009 As of December 31, 2008
Amount Percent Amount Percent
(Dollars in thousands)
Commercial and industrial $ 445,063 33.24 % $ 467,546 34.65 %
Real estate mortgage
Residential 12,826 0.96 12,399 0.92
Commercial 732,477 54.71 720,052 53.37
745,303 55.67 732,451 54.29
Real estate construction
Residential 40,716 3.04 43,242 3.20
Commercial 102,403 7.65 101,125 7.50
143,119 10.69 144,367 10.70
Consumer and other 5,311 0.40 4,864 0.36
Gross loans 1,338,796 100.00 % 1,349,228 100.00 %
. . .
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