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MCBI > SEC Filings for MCBI > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for METROCORP BANCSHARES, INC.

Form 10-Q for METROCORP BANCSHARES, INC.


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 concentration of the Company's loan portfolio in loans collateralized by real estate;

the Company's ability to raise additional capital;

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;

incorrect assumptions underlying the establishment of and provisions made to the allowance for loan losses;

increases in the level of nonperforming assets;

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;

an inability to fully realize the Company's net deferred tax asset;

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 the Company's capital levels and regulatory capital ratios;


potential environmental risk and associated cost on the Company's foreclosed real estate assets;

the Company's ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;

increases in FDIC deposit insurance assessments;

government intervention in the U.S. financial system;

the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;

changes in statutes and government regulations or their interpretations applicable to bank holding companies and the Company's present and future banking and other subsidiaries, including changes in tax requirements and tax rates;

the actual results of the pending merger with East West Bancorp, Inc. ("East West") could vary materially as a result of a number of factors, including the possibility that various closing conditions for the transaction may not be satisfied or waived and the merger agreement could be terminated under certain circumstances;

the potential payment of interest on commercial demand deposit accounts in order to effectively complete for clients;

adverse conditions in Asia;

potential interruptions or breaches in security of the Company's information systems; and

possible noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statues and regulations.

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 $3.4 million for the three months ended September 30, 2013, an increase of $567,000 compared with the same quarter in 2012. The Company's diluted earnings per common share for the three months ended September 30, 2013 were $0.18, compared with $0.15 for the same quarter in 2012. 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 at the end of the period. The Company recorded net income of $9.3 million for the nine months ended September 30, 2013 an increase of $996,000 compared with $8.3 million for the same period in 2012. The Company's diluted earnings per common share for the nine months ended September 30, 2013 were $0.49 compared with $0.47 for the same period in 2012. Details of the changes in the various components of net income are further discussed below.

Total assets were $1.63 billion at September 30, 2013, an increase of $114.6 million or 7.5% from $1.52 billion at December 31, 2012. Available-for-sale investment securities at September 30, 2013 were $183.7 million, an increase of $19.6 million or 12.0% from $164.0 million at December 31, 2012. Net loans, including loans held-for-sale, at September 30, 2013 were $1.16 billion, an increase of $88.3 million or 8.2% from $1.08 billion at December 31, 2012. Total deposits at September 30, 2013 were $1.35 billion, an increase of $85.4 million or 6.7% from $1.27 billion at December 31, 2012. Other borrowings at September 30, 2013 were $46.0 million, an increase of $21.0 million or 84.0% from $25.0 million at December 31, 2012. The Company's return on average assets ("ROAA") for the three months ended September 30, 2013 and 2012 was 0.85% and 0.76%, respectively. The Company's return on average equity ("ROAE") for the three months ended September 30, 2013 and 2012 was 7.66% and 6.61%, respectively. The Company's ROAA for the nine months ended September 30, 2013 and 2012 was 0.79% and 0.73%, respectively. The Company's ROAE for the nine months ended September 30, 2013 and 2012 was 6.91% and 6.28%, respectively. Shareholders' equity at September 30, 2013 was $180.1 million compared with $177.0 million at December 31, 2012, an increase of $3.1 million or 1.7%. Details of the changes in the various balance sheet items are further discussed below.

Recent Developments

Definitive Agreement for Merger - On September 18, 2013, East West and the Company announced that they have entered into a definitive agreement for the merger of the Company into East West. Under the terms of the definitive agreement, East West will acquire the outstanding shares of the Company for the lesser of $14.60 per share and 1.72 times the per share tangible equity, as adjusted, for an aggregate purchase price of approximately $273 million based on the 18,699,638 shares outstanding as of September 30, 3013. The shareholders of the Company will receive two-thirds of the merger consideration in shares of East West common stock and the remainder in cash. The exchange ratio for determining the number of shares of East West common stock deliverable to shareholders of the Company will be based on the weighted average closing price of East West's common stock over a 60 trading day measurement period ending five days prior to the effective time of the merger, subject to the limitation that if the average closing price of East West common stock is equal or greater than $32.00, the per share stock consideration will be calculated by dividing the stock portion of the per share merger consideration by $32.00. If the average closing price of East West common stock is less than or equal to $28.00, the per share stock consideration will be calculated by dividing the stock portion of the per share merger consideration by $28.00.

Results of Operations

Net Interest Income and Net Interest Margin. For the three months ended September 30, 2013, net interest income, before the provision for loan losses, was $13.7 million, an increase of $43,000 or 0.3% compared with $13.6 million for the same period in 2012, primarily due to loan growth and lower cost of deposits partially offset by declines in the yields on loans and securities and an increase in the volume of borrowings. Average interest-earning assets for the three months ended September 30, 2013 were $1.52 billion, an increase of $107.4 million or 7.6% compared with $1.41 billion for the same period in 2012, primarily due to an increase in loans and securities, partially offset by a decrease in federal funds sold. The weighted average yield on interest-earning assets for the third quarter of 2013 was 4.19%, a decrease of 32 basis points compared with 4.51% for the same quarter in 2012. Average interest-bearing liabilities for the three months ended September 30, 2013 were $1.08 billion, an increase of $42.4 million or 4.1% compared with $1.04 billion for the same period in 2012, primarily due to an increase in time deposits and other borrowings partially offset by a decline in savings and money market accounts. The weighted average interest rate paid on interest-bearing liabilities for the third quarter 2013 was 0.87%, a decrease of four basis points compared with 0.91% for the same quarter in 2012.


For the nine months ended September 30, 2013, net interest income, before the provision for loan losses, was $39.5 million, a decrease of $1.4 million or 3.5% compared with $40.9 million for the same period in 2012, primarily due to declines in the yields on loans and securities, partially offset by an increase in the volume of loans and lower cost of deposits. Average interest-earning assets for the nine months ended September 30, 2013 were $1.48 billion, an increase of $68.0 million or 4.8% compared with $1.41 billion for the same period in 2012, primarily due to loan growth, partially offset by a decline in federal funds sold. The weighted average yield on interest-earning assets for the nine months ended September 30, 2013 was 4.18%, down 41 basis points compared with 4.59% for the same period in 2012. Average interest-bearing liabilities for the nine months ended September 30, 2013 were $1.06 billion, an increase of $5.6 million or 0.5% compared with $1.06 billion for the same period in 2012, primarily due to an increase in time deposits and other borrowings partially offset by a decline in savings and money market accounts. The weighted average rate paid on interest-bearing liabilities for the nine months ended September 30, 2013 was 0.86%, down 11 basis points compared with 0.97% for the same period in 2012.

The net interest margin for the three months ended September 30, 2013 was 3.57%, a decrease of 27 basis points compared with 3.84% for the same period in 2012. The yield on average earning assets decreased 32 basis points, and the cost of average earning assets decreased five basis points for the same periods. The net interest margin for the nine months ended September 30, 2013 was 3.56%, a decrease of 31 basis points compared with 3.87% for the same period in 2012. The yield on average earning assets decreased 41 basis points, and the cost of average earning assets decreased 10 basis points for the same periods.

Total Interest Income. Interest income for the three months ended September 30, 2013 was $16.1 million, an increase of $32,000 or 0.2% compared with $16.0 million for the same period in 2012, primarily due to increases in the volume of loans and securities, partially offset by decreases in the yield on earning assets. Average earning assets increased $107.4 million or 7.6% to $1.52 billion for the third quarter of 2013, compared with $1.41 billion for the same period in 2012. Average total loans increased $108.9 million or 10.2% to $1.18 billion for the third quarter of 2013 compared with $1.07 billion for the third quarter of 2012. The yield on average earning assets for the third quarter of 2013 was 4.19% compared with 4.51% for the third quarter of 2012.

Interest income for the nine months ended September 30, 2013 was $46.4 million, down $2.3 million or 4.6% compared with $48.6 million for the same period in 2012, primarily due to lower yield on loans and securities, partially offset by an increase in the volume of loans. Average earning assets increased $68.0 million or 4.8% to $1.48 billion for the nine months ended September 30, 2013, compared with $1.41 billion for the same period in 2012. Average total loans increased $79.8 million or 7.5% to $1.14 billion for the nine months ended September 30, 2013 compared with $1.06 billion for the same period of 2012. The yield on average earning assets for the nine months ended September 30, 2013 was 4.18% compared with 4.59% for the nine months ended September 30, 2012.

Interest Income from Loans. Interest income from loans for the three months ended September 30, 2013 was $14.7 million, an increase of $102,000 or 0.7% compared with $14.6 million for the same quarter in 2012. The increase for the three months ended September 30, 2013 was the result of higher loan volume. Average total loans for the three months ended September 30, 2013 were $1.18 billion compared with $1.07 billion for the same period in 2012, an increase of $108.9 million or 10.2%. For the third quarter of 2013, the average yield on loans was 4.96%, a decrease of 48 basis points compared with 5.44% for the same quarter in 2012. Interest income from loans for the nine months ended September 30, 2013 was $42.5 million, a decrease of $1.8 million or 4.1% compared with $44.3 million for the same period in 2012. The decrease for the nine months ended September 30, 2013 was the result of lower loan yields offset by higher loan volume. Average total loans for the nine months ended September 30, 2013 were $1.14 billion, an increase of $79.8 million or 7.5% compared with average total loans for the same period in 2012 of $1.06 billion. For the nine months ended September 30, 2013, the yield on average total loans was 4.99%, a decrease of 60 basis points compared with 5.59% for the same period in 2012.

Approximately $750.3 million or 63.2% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates. To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors. For the nine months ended September 30, 2013, the average yield on total loans was approximately 175 basis points above the prime rate primarily because of interest rate floors and credit spreads. At September 30, 2013, approximately $615.1 million in loans or 51.8% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 5.25%. At September 30, 2012, variable rate loans with interest rate floors comprised 57.0% of the total loan portfolio and carried a weighted average interest rate of 5.79%.

Interest Income from Investments. Interest income from investments (which includes investment securities, Federal funds sold and other investments) for the three months ended September 30, 2013 was $1.4 million, a decrease of $70,000 or 4.9% from the same period in 2012. Average total investments for the three months ended September 30, 2013 were $344.8 million compared with average total investments for the same period in 2012 of $346.4 million, a decrease of $1.6 million or 0.5%. The decrease in average total investments was primarily the result of a decrease in federal funds sold which provided for loan growth. For the third quarter of 2013, the average yield on total investments was 1.57% compared with 1.65% for the same quarter in 2012, a decrease of eight basis points primarily due to decline in the yields of all investments.


Interest income from investments for the nine months ended September 30, 2013 was $3.8 million, a decrease of $439,000 or 10.3% compared with $4.3 million for the same period in 2012, primarily due to a decline in the yield and volume of taxable investment securities and federal funds sold. Average total investments for the nine months ended September 30, 2013 were $344.2 million compared with the same quarter in 2012 of $355.9 million, a decrease of $11.8 million or 3.3%. The decrease was primarily the result of a decrease in taxable securities and federal funds sold which provided for loan growth. For the nine months ended September 30, 2013, the average yield on investments was 1.48% compared with 1.60% for the same quarter in 2012, a decrease of 12 basis points.

Total Interest Expense. Interest expense for the three months ended September 30, 2013 was $2.4 million, down $11,000 or 0.5% compared with $2.4 million for the same period in 2012, primarily due to lower cost on both deposits and other borrowings, partially offset by an increase in other borrowings and time deposits. Interest expense for the nine months ended September 30, 2013 was $6.9 million, down $812,000 or 10.6% compared with $7.7 million for the same period in 2012, primarily due to lower cost on both deposits and other borrowings, partially offset by an increase in other borrowings.

Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended September 30, 2013 was $1.7 million, a decrease of $59,000 or 3.3% compared with $1.8 million for the same period in 2012. Average interest-bearing deposits for the three months ended September 30, 2013 were $1.00 billion compared with $977.8 million for the same period in 2012, an increase of $22.4 million or 2.3%. The average interest rate paid on interest-bearing deposits for the third quarter of 2013 was 0.69% compared with 0.73% for the same quarter in 2012, a decrease of four basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.

Interest expense on interest-bearing deposits for the nine months ended September 30, 2013 was $5.1 million, a decrease of $835,000 or 14.1% compared with $5.9 million for the same period in 2012. Average interest-bearing deposits for the nine months ended September 30, 2013 were $988.7 million compared with the same period in 2012 of $994.0 million, a decrease of $5.2 million or 0.5%. The average interest rate incurred on interest-bearing deposits for the nine months ended September 30, 2013 was 0.69% compared with 0.80% for the same period in 2012, a decrease of 11 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to lower deposit volume and declining interest rates in the deposit market.

Interest Expense on Junior Subordinated Debentures. Interest expense on junior subordinated debentures for the three months ended September 30, 2013 was $328,000, a decrease of $10,000 or 3.0% from $338,000 at September 30, 2012. Interest expense on junior subordinated debentures for the nine months ended September 30, 2013 was $973,000, a decrease of $34,000 or 3.4% from $1.0 million at September 30, 2012. Average junior subordinated debentures for the three and nine months ended September 30, 2013 and 2012 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three and nine months ended September 30, 2013 and 2012 was 3.56% and 3.67%, respectively.

The junior subordinated debentures accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%. Related to these debentures, the Company entered into a forward-starting interest rate swap contract. Under the swap, beginning December 15, 2010, the Company began paying a fixed interest rate of 5.38% and receiving a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements that began March 2011. The interest rate swap contract was entered into with the objective of protecting a portion of the quarterly interest payments from the risk of variability resulting from changes in the three-month LIBOR interest rate. See Note 10, "Derivative Financial Instruments," to the Condensed Consolidated Financial Statements for additional information related to this interest rate swap.

Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended September 30, 2013 was $305,000, an increase of $58,000 compared with $247,000 for the same period in 2012. Average borrowed funds, consisting of security repurchase agreements and Federal Home Loan Bank ("FHLB") advances, for the three months ended September 30, 2013 were $46.0 million an increase of $20.0 million compared with $26.0 million for the same period in 2012. Other borrowings increased primarily due to advances issued from the FHLB of Dallas and FHLB of San Francisco. The average interest rate paid on borrowed funds for the third quarter of 2013 was 2.63% compared with 3.78% for the same quarter in 2012. The cost decreased due primarily to the issuance of FHLB advances with lower market rates compared to the existing long-term debt.

Interest expense on other borrowed funds for the nine months ended September 30, 2013 was $798,000, an increase of $57,000 compared with $741,000 for the same period in 2012. Average borrowed funds for the nine months ended September 30, 2013 were $36.8 million, an increase of $10.8 million compared with $26.0 million for the same period in 2012, primarily due to advances issued from the FHLB of Dallas and FHLB San Francisco. The average interest rate paid on borrowed funds for the nine months ended September 30, 2013 was 2.90% compared with 3.81% for the same period in 2012.


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 September 30,
                                             2013                                           2012
                            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                     $  1,175,296     $   14,695           4.96 %   $  1,066,352     $   14,593           5.44 %
Taxable securities             170,814            892           2.07          156,216          1,020           2.60
Tax-exempt securities           24,199            186           3.05           16,523            145           3.49

Other investments (2)            5,998             70           4.63            5,825             42           2.87
Federal funds sold and
other short-term
investments                    143,791            218           0.60          167,811            229           0.54
Total interest-earning
assets                       1,520,098         16,061           4.19        1,412,727         16,029           4.51
Allowance for loan
losses                         (21,918 )                                      (27,214 )
Total interest-earning
assets, net of
allowance for loan
losses                       1,498,180                                      1,385,513
Noninterest-earning
assets                         110,131                                        125,064
Total assets              $  1,608,311                                   $  1,510,577

Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits                  $     76,448     $       23           0.12 %   $     67,545     $       20           0.12 %
Savings and money
market accounts                373,067            353           0.38          446,282            488           0.44
Time deposits                  550,656          1,361           0.98          463,947          1,288           1.10
Junior subordinated
debentures                      36,083            328           3.56           36,083            338           3.67
Other borrowings                46,000            305           2.63           26,000            247           3.78
Total interest-bearing
liabilities                  1,082,254          2,370           0.87        1,039,857          2,381           0.91
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits                327,445                                        277,707
Other liabilities               20,003                                         19,643
Total liabilities            1,429,702                                      1,337,207

Shareholders' equity           178,609                                        173,370
Total liabilities and
shareholders' equity      $  1,608,311                                   $  1,510,577

Net interest income                        $   13,691                                     $   13,648
Net interest spread                                             3.32 %                                         3.60 %
Net interest margin                                             3.57 %                                         3.84 %



(1) Annualized.
(2) Other investments include Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust.

. . .

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