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| MCFI.OB > SEC Filings for MCFI.OB > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
Statements in this Report and its exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission from time to time. Copies of those reports are available directly through the SEC's Internet website at www.sec.gov or through our Internet website at www.midcarolinabank.com. Forward-looking statements may be identified by terms such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "forecasts," "potential" or "continue," or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of forward-looking statements include, but are not limited to, (a) pressures on the earnings, capital and liquidity of financial institutions resulting from current and future adverse conditions in the credit and capital markets and the banking industry in general, (b) the financial success or changing strategies of our customers, actions of government regulators, the level of market interest rates, and changes in general economic conditions and real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral). Although we believe that the expectations reflected in the forward-looking statements are reasonable, they represent our management's judgments only as of the date they are made, and we cannot guarantee future results, levels of activity, performance or. achievements. As a result, readers are cautioned not to place undue reliance on these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and do not intend, to update these forward-looking statements.
In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced:
The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Deposit Insurance Fund, such as the Bank, is specified in a schedule required to be issued by the FDIC. Prior to January 1, 2007, FDIC assessments for deposit insurance ranged from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. Effective January 1, 2009, the assessments range from 12 to 50 basis points per $100 of insured deposits. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are charged quarterly.
On February 27, 2009 the FDIC voted to amend the restoration of the Deposit Insurance Fund. The Board took action by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk- based assessment system, and increased regular premium rates for 2009, which banks must pay on top of the special assessment. The 20 basis point special assessment on the industry will be as of June 30, 2009, payable September 30, 2009. As a result of the special assessment and increased regular assessments the Company projects it will experience an increase in FDIC assessment by approximately $1.0 million from 2008 to 2009. The 20 basis point special assessment represents $940,000 of this increase.
On March 5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special assessment from 20 basis points to 10 basis points. The approval of the cutback is contingent on whether Congress
clears legislation that would expand the FDIC's line of credit with the Treasury to $100 billion. Legislation to increase the FDIC's borrowing authority on a permanent basis is also expected to advance to Congress, which should aid in reducing te burden on the industry. The assessment rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC.
The Company is currently evaluating the programs outlined above and the impact they may have on the organization. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC's deposit insurance fund, it is clear that our deposit insurance costs will increase significantly during 2009.
Although it is unknown whether further regulatory actions will arise as the Federal government attempts to address the economic situation, management is not aware of any further recommendations by regulatory authorities that, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital ratios or results of operations.
During the three-month period ending March 31, 2009, our total assets increased by $12.1 million to $552.9 million from $540.8 million at December 31, 2008. At March 31, 2009, loans totaled $447.4 million, an increase of $12.7 million, or 2.93%, for the three months. Our loan portfolio experienced increases in real estate and commercial loans in the amount of $13.6 million and $483,000 respectively. Consumer loans decreased by $1.3 million to $5.0 million. Federal funds sold and interest-earning deposits increased by $7.1 million, to $21.2 million.
Our total liquid assets, which include cash and due from banks, federal funds sold and interest-earning deposits at Federal Home Loan Bank ("FHLB") of Atlanta, investment securities and loans held for sale decreased by $113,000 during the three months, to $86.7 million or 15.69% of total assets at March 31, 2009 versus $86.9 million, or 16.05% of total assets, at December 31, 2008. At March 31, 2009, investment securities available for sale totaled $62.1 million, a decrease of $9.1 million, or 12.74% compared to December 31, 2008.
Deposits continue to be our primary funding source. At March 31, 2009, deposits totaled $480.8 million, an increase of $12.9 million, or 2.75%, from year-end 2008. Included in the deposit balances are $118.7 million of brokered certificates of deposit, a decrease of $4.7 million, or 3.83%, from year-end. We also utilize borrowings from the FHLB and Federal Reserve Bank ("FRB") to support balance sheet management and growth. Borrowings from the FHLB remained unchanged with a balance of $25 million at March 31, 2009 and year-end 2008. We had no outstanding balances with the FRB at March 31, 2009 or December 31, 2008.
Our capital position remains strong, with all of our regulatory capital ratios at levels that categorize us as "well capitalized" under federal bank regulatory capital guidelines. At March 31, 2009, our shareholders' equity totaled $36.9 million, a decrease of $286,000 from the December 31, 2008 balance. The decrease resulted from an accumulated other comprehensive loss increase in the amount of $1.1 million for the three-month period ended March 31, 2009, off set by net income available to common shareholders of $341,000 for the three month period. Accumulated other comprehensive loss in the amount of $1.1 million for the three-month period ended March 31, 2009 resulted from the illiquid securities markets affecting the Company's unrealized loss on available-for-sale Municipal securities portfolio and a $211,000 increase to retained earnings from the early adoption of FSP FAS 115-2.
Net Income. Our net income available for common shareholders for the three months ended March 31, 2009 was $341,000, a decrease of $471,000, or 58.00%, from net income available to common shareholders of $812,000 for the same three-month period in 2008. Net income per diluted share of $0.07 for the three month period ended March 31, 2009 decreased $0.09 when compared to the prior period. We have experienced strong balance sheet growth, with total assets averaging $545.6 million during the current three-month period compared to $480.2 million in the comparative prior year period, an increase of 13.61%. Our interest rate spread and net yield on average interest-earning assets increased 29 basis points and 15 basis points respectively. Net interest income increased $568,000, non-interest income for the quarter ended March 31, 2009 increased in the amount of $31,000, the provision for loan losses increased $1.3 million, and non-interest expenses increased $427,000 for the comparative period.
Net Interest Income. Net interest income increased by $568,000, or 17.39%, to $3.8 million for the three months ended March 31, 2009. Our total interest income benefited from growth in the level of average earning assets offset by a decrease in asset yields caused by decreases in interest rates charged on loans. The rates earned on a significant portion of our loans adjust immediately when index rates such as prime rate change. Conversely, most of our interest-bearing liabilities, including certificates of deposit and borrowings, have rates fixed until maturity. As a result, interest rate reductions will generally result in an immediate drop in our interest income on loans, with a more delayed impact on interest expense because reductions in interest costs will only occur upon renewals of certificates of deposit or fixed rate FHLB advances. Conversely, interest rate increases should result in an immediate increase in our interest income on loans, with a more delayed impact on interest expense because increases in interest costs will occur upon renewals of certificates of deposits or borrowings. Average interest-earning assets during the first quarter of 2009 increased $62.6 million, or 13.62%, as compared with the same period in 2008. Our average yield on total interest-earning assets decreased by 125 basis points from 6.56% to 5.31%. Our average total interest-bearing liabilities increased by $51.3 million, or 12.45%. Our average cost of total interest-bearing liabilities decreased 154 basis points from 4.17% to 2.63%. Our markets are extremely competitive for deposits. For the three months ended March 31, 2009, our net interest spread was 2.68% and our net interest margin was 2.98%. For the three months ended March 31, 2008, our net interest rate spread was 2.39% and our net interest margin was 2.83%.
Provision for Loan Losses. Based on the uncertainty of the local and national economy, trends in the level of delinquent and classified loans as well as the over all growth of the loan portfolio, the Bank made a $1.3 million provision for loan losses during the three months ended March 31, 2009. A $225,000 provision was made for loan losses during the three months ended March 31, 2008. Provisions for loan losses are charged to income to maintain the allowance for loan losses at a level deemed appropriate by management. Loan charge-offs of $576,000 during the three months ended March 31, 2009 were offset by recoveries of previously charged-off loans of $7,000. At March 31, 2009, we had non-accrual loans in the amount of $7.7 million of which $2.2 million is related to a commercial credit relationship with one borrower, while the allowance for loan losses increased $566,000 from December 31, 2008, to $6.2 million, or 1.38% of total loans. At March 31, 2008, we had non-accrual loans in the amount of $649,000, while the allowance for loan losses increased $188,000 from December 31, 2007 to $4.7 million, or 1.20% of total loans. The Bank holds secured positions in these non-accrual loans. At December 31, 2008, the Bank had non-accrual loans in the amount of $3.1 million, while the allowance for loan losses stood at $5.6 million, or 1.29% of total loans.
Non-Interest Income. For the first quarter of 2009, non-interest income increased $31,000, or 4.24%, to $762,000 from $731,000 for the same period the prior year. Changes for the three months ended March 31, 2009 include a decrease of $17,000 in service charges and fees on deposits, an increase of $117,000 in gain on sale of investments, an increase of $28,000 in gain on sale of other real estate, a decrease in
cash value of life insurance of $3,000, a decrease in mortgage brokerage activities of $22,000, a decrease in income from brokerage services of $34,000, net impairment losses on securities of $32,000 and a decrease in all other non-interest income of $6,000.
Non-Interest Expense. For the first quarter of 2009, non-interest expense increased $427,000, or 17.88%, to $2.8 million from $2.4 million for the same period the prior year. Changes for the three months ended March 31, 2009 include an increase of $184,000 in salaries and employee benefits, all of which is attributable to stock option valuation expense, an increase of $108,000 due to the increase in lease expense from the relocation of our Green Valley office in Greensboro, NC, a decrease in other outside service expense of $8,000, no change in data processing expense, an increase in deposit and other insurance expense of $84,000 primarily related to increases in FDIC premiums, an increase in professional and other services of $15,000, an increase in advertising expense of $47,000 reflecting increased activity in advertising campaigns and a decrease in all other non-interest expense of $5,000.
Provision for Income Taxes. Our provision for income taxes, as a percentage of income before income taxes, was 31.52% and 33.86%, respectively, for the three months ended March 31, 2009 and 2008.
Market and public confidence in our financial strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital resources.
Liquidity is defined as our ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. Management measures our liquidity position by giving consideration to both on-and off-balance sheet sources of, and demands for, funds on a daily and weekly basis.
Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from dealers and customers pursuant to securities sold under repurchase agreements; investments available for sale; loan repayments; loan sales; deposits; and borrowings from the FHLB and FRB and from correspondent banks under overnight federal funds credit lines. In addition to interest rate-sensitive deposits, the Bank's primary demand for liquidity is anticipated fundings under credit commitments to customers.
We have maintained an adequate position of liquidity in the form of cash, interest-bearing bank deposits, federal funds sold, investment securities and loans held for sale. These aggregated $86.7 million at March 31, 2009 compared to $86.9 million at December 31, 2008. Supplementing customer deposits as a source of funding, we have the ability to borrow up to $166 million from the FHLB, subject to collateral constraints, with $25.0 million outstanding at March 31, 2009 and at December 31, 2008. All borrowings with FHLB must be adequately collateralized. We also have the ability to borrow up to $81.6 million from the FRB, subject to collateral constraints. We had no borrowings outstanding with the FRB at March 31, 2009 or December 31, 2008. We believe that our combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.
At March 31, 2009, the Company's average equity to average asset ratio was 6.85%, and all of the Bank's capital ratios exceeded the minimums established for a well-capitalized bank by regulatory measures. The Bank's tier I risk-based capital ratio at March 31, 2009 was 11.14%.
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