SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC
Form 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
Or
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _________ to
MountainBank Financial Corporation
----------------------------------
(Exact name of the registrant as specified in its charter)
North Carolina 56-2237240
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(State of Incorporation) (I.R.S. Employer Identification No.)
201 Wren Dr., Hendersonville, N.C. 28792
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(Address of principal executive offices)
(828) 697-0030
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(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No __
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
At August 5, 2002, the Company had 3,136,731 shares outstanding of its $4
par common stock.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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MountainBank Financial Corporation
Form 10-QSB
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
The financial statements of MountainBank are set forth in the following pages.
Balance Sheets at June 30, 2002 and December 31, 2001 .................................. 3
Statement of Operations for the Three and Six Months Ended June 30, 2002 and 2001 ...... 4
Statement of Changes in Stockholders' Equity for the Years Ended December 31, 2000
And 2001 and for the Six Months Ended June 30, 2002 ................................ 5
Statement of Cash Flows for the Six Months Ended June 30, 2002 and 2001 ................ 6
Notes to Financial Statements .......................................................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 17
Item 2. Changes in Securities and Use of Proceeds ..................................... 17
Item 3. Defaults Upon Senior Securities ............................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ........................... 17
Item 5. Other Information ............................................................. 18
Item 6. Exhibits and Reports on Form 8-K .............................................. 18
Signatures ............................................................................. 20
Officer's Certifications ............................................................... 20
2
MountainBank Financial Corporation
Balance Sheets
At June 30, 2002 (Unaudited) and December 31, 2001 (Audited)
================================================================================
June 30, 2002 December 31, 2001
------------- -----------------
Assets
Cash and due from banks $ 19,004,272 $ 10,125,801
Interest bearing deposits with banks 36,389,577 524,767
Federal funds sold 7,644,000 -
Investment securities available for sale 42,203,711 34,626,207
Restricted equity securities 9,888,700 10,761,398
Loans, net of allowance for loan losses of $9,116,693 at
June 30, 2002 and $7,113,269 at December 31, 2001 553,627,652 483,871,913
Property and equipment, net 8,169,761 7,203,652
Accrued income 3,869,502 3,248,609
Intangible assets, net 2,654,779 2,820,307
Other assets 8,550,295 7,940,308
----------------- -----------------
Total assets $ 692,002,249 $ 561,122,962
================= =================
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits $ 48,878,534 $ 41,187,520
Interest-bearing deposits 524,621,656 426,319,154
----------------- -----------------
Total deposits 573,500,190 467,506,674
Federal funds purchased and
Securities sold under agreements to repurchase 7,662,644 5,239,949
Short-term debt - 1,250,000
Long-term debt 56,171,757 42,633,140
Obligations under capital lease 722,752 735,567
Accrued interest payable 3,846,223 4,778,290
Other liabilities 2,048,230 1,963,950
----------------- -----------------
Total liabilities 643,951,796 524,107,570
----------------- -----------------
Stockholders' equity
Preferred stock, no par value; 3,000,000 shares authorized;
and 419,243 and 92,667 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 10,061,832 2,224,008
Common stock, $4 par value; 10,000,000 shares authorized;
and 3,132,586 and 3,112,699 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 12,530,344 12,450,796
Surplus 18,750,989 18,584,215
Retained earnings 6,747,751 3,692,648
Acumulated other comprehensive income (loss) (40,463) 63,725
----------------- -----------------
Total stockholders' equity 48,050,453 37,015,392
----------------- -----------------
Total liabilities and stock holders' equity $ 692,002,249 $ 561,122,962
================= =================
3
MountainBank Financial Corporation
Statement of Operations (Unaudited)
For the three months ended June 30, 2002 and June 30, 2001
- --------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans and fees on loans $ 10,340,460 $ 6,418,697 $ 20,391,658 $ 11,671,352
Federal funds sold 89,932 97,909 98,183 189,403
Investment securities, taxable 331,488 438,303 739,681 965,177
Investment securities, nontaxable 958 15,778 25,003 24,719
Deposits with banks 1,379 95,111 2,781 146,905
Dividends 83,040 59,959 112,737 72,130
Other 15,925 - 31,850 -
------------ ------------ ------------ ------------
Total interest income 10,863,182 7,125,757 21,401,893 13,069,686
------------ ------------ ------------ ------------
Interest expense
Deposits 3,938,600 3,794,146 7,618,458 7,205,011
Federal funds purchased and securities sold under
agreements to repurchase 19,678 55,814 61,019 109,328
Other borrowed funds 481,241 332,403 1,052,915 346,612
------------ ------------ ------------ ------------
Total interest expense 4,439,519 4,182,363 8,732,392 7,660,951
------------ ------------ ------------ ------------
Net interest income 6,423,663 2,943,394 12,669,501 5,408,735
Provision for loan losses 950,000 865,000 2,250,000 1,492,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 5,473,663 2,078,394 10,419,501 3,916,735
------------ ------------ ------------ ------------
Noninterest income
Service charges on deposit accounts 612,490 202,590 1,104,627 351,475
Mortgage origination income 611,064 189,506 1,176,218 320,351
Gain on sale of securities 3,683 - 248,828 -
Other service charges and fees 222,576 110,984 320,208 198,338
------------ ------------ ------------ ------------
Other income 1,449,813 503,080 2,849,881 870,164
------------ ------------ ------------ ------------
Noninterest expense
Salaries and employee benefits 2,135,865 1,097,811 4,094,118 1,860,573
Occupancy expense 595,403 297,299 1,069,102 550,548
Other expense 1,477,054 684,748 2,726,833 1,158,847
------------ ------------ ------------ ------------
Total noninterest expense 4,208,322 2,079,858 7,890,053 3,569,968
------------ ------------ ------------ ------------
Income before income taxes 2,715,154 501,616 5,379,329 1,216,931
Income tax expense 1,048,298 210,000 2,173,298 420,000
------------ ------------ ------------ ------------
Net income $ 1,666,856 $ 291,616 $ 3,206,031 $ 796,931
============ ============ ============ ============
Basic earnings per share $ 0.53 $ 0.13 $ 1.03 $ 0.35
Diluted earnings per share $ 0.43 $ 0.11 $ 0.83 $ 0.31
Weighted average shares outstanding 3,125,237 2,248,153 3,118,652 2,248,153
4
MountainBank Financial Corporation
Statement of Changes in Stockholders' Equity
For the two years ended December 31, 2001, 2000 and the six months (unaudited)
ended June 30, 2002
- --------------------------------------------------------------------------------
Accumulated
Stock Other
-----
Preferred Common Retained Comprehensive
Amount Amount Surplus Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
Balance, December 31, 1999 $ - $ 5,769,730 $ 4,385,302 $ 126,541 $ (59,081) $ 10,222,492
Comprehensive income -
Net Income - - - 1,055,969 - 1,055,969
Net change in unrealized
appreciation on investment
securities available for sale - - - - 198,332 198,332
------------
Total comprehensive income 1,254,301
Fractional shares purchased - (323) 323 - - -
Shares sold - 1,705,325 5,005,128 - - 6,710,453
Stock options exercised - 13,020 10,153 23,173
---------------------------------------------------------------------------------------
Balance December 31, 2000 $ - $ 7,487,752 $ 9,400,906 $ 1,182,510 $ 139,251 $ 18,210,419
=======================================================================================
Comprehensive income
Net Income - - - 2,510,138 - 2,510,138
Net change in unrealized
appreciation on investment
securities available for sale - - - - (75,526) (75,526)
------------
Total comprehensive income 2,434,612
Shares sold 2,224,008 - - - - 2,224,008
Shares issued to acquire
PremierMortgage Associates, Inc. - 80,000 220,000 - - 300,000
Shares issued to acquire
First Western Bank - 2,751,364 11,005,456 - - 13,756,820
Stock options exercised - 56,548 32,985 - - 89,533
Stock split, effected in
the form of a dividend - 2,075,132 (2,075,132) - - -
---------------------------------------------------------------------------------------
Balance December 31, 2001 $ 2,224,008 $ 12,450,796 $ 18,584,215 $ 3,692,648 $ 63,725 $ 37,015,392
=======================================================================================
Comprehensive income
Net Income - - - 3,206,031 - 3,206,031
Net change in unrealized
appreciation on investment
securities available for sale - - - - (104,188) (104,188)
------------
Total comprehensive income 3,101,843
Dividends Paid (150,928) (150,928)
Shares sold 7,837,824 - - - - 7,837,824
Stock options exercised - 82,616 177,142 - - 259,758
Dissenters' Shares - (1,800) (7,889) - - (9,689)
Fractional shares purchased (1,268) (2,479) (3,747)
---------------------------------------------------------------------------------------
Balance June 30, 2002 $ 10,061,832 $ 12,530,344 $ 18,750,989 $ 6,747,751 $ (40,463) $ 48,050,453
=======================================================================================
5
MountainBank Financial Corporation
Statements of Cash Flows - Unaudited
For the Six Months Ended June 30, 2002 and 2001
- --------------------------------------------------------------------------------
Cash flows from operating activities June 30, 2002 June 30, 2001
------------- -------------
Net income $ 3,206,031 $ 796,931
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amoritization 648,516 225,844
Provision for loan losses 2,250,000 1,492,000
Net gain on sales and calls of investment securities (248,828) -
Accretion of discount on securities, net of
amortization of premiums 5,088 (39)
Changes in assets and liabilities:
Accrued income (620,893) (506,023)
Other real estate owned (333,821) -
Other assets (197,631) (541,868)
Accrued interest payable (932,067) 2,639,509
Other liabilities (28,031) 258,445
------------- -------------
Net cash provided (used) by operating activities 3,748,364 4,364,799
------------- -------------
Cash flows from investing activities
Net (increase) decrease in federal funds sold (7,644,000) (819,000)
Net increase in interest-bearing deposits with banks (35,864,810) (18,532,083)
Purchases of investment securities (28,876,521) (17,316,055)
Maturities of investment securities 4,955,908 8,374,506
Sales of investment securities 17,276,824
Net increase in loans (72,005,739) (119,833,029)
Purchases of property and equipment (1,449,097) (734,783)
------------- -------------
Net cash used in investing activities (123,607,435) (148,860,444)
------------- -------------
Cash flows from financing activities
Net increase in demand, NOW and savings deposits 38,145,598 23,538,705
Net increase in time deposits 67,847,918 88,854,550
Net increase in Federal funds purchased and
securities sold under agreements to repurchase 2,422,695 458,338
Net (decrease) increase in notes payable (6,500,000) 5,000,000
Net (decrease) increase in FHLB advances (1,250,000) 25,000,000
Net increase in trust preferred debt 20,000,000 -
Repayment of obligations under capital lease (12,815) (11,818)
Proceeds from the exercise of stock options 259,758 9,252
Proceeds from the issuance of preferred stock, net 7,837,824 -
Fractional shares purchased (3,747) -
Purchase of dissenter's common stock shares (9,689) -
------------- -------------
Net cash provided by financing activities 128,737,542 142,849,027
------------- -------------
Net increase in cash and cash equivalents 8,878,471 (1,646,618)
Cash and cash equivalents, beginning 10,125,801 7,797,745
------------- -------------
Cash and cash equivalents, ending $ 19,004,272 $ 6,151,127
============= =============
Supplemental disclosures of cash flow information
------------- -------------
Interest paid $ 9,664,459 $ 5,021,442
============= =============
Income taxes paid $ 2,173,298 $ 420,000
============= =============
6
MountainBank Financial Corporation
Notes to Financial Statements
June 30, 2002
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Note 1. Organization and Summary of Significant Accounting Policies
Organization:
MountainBank Financial Corporation (the "Company") was incorporated on
January 10, 2001 by the Board of Directors of MountainBank (the "Bank") for
the sole purpose of acquiring the Bank and serving as the Bank's parent
bank holding company. Prior to its acquisition of the Bank, the company
conducted no business or operations other than those activities related to
the acquisition. On March 30, 2001, the Company acquired the Bank under
North Carolina law and in accordance with the terms of an Agreement and
Plan of Reorganization and Share Exchange dated January 11, 2001. The
Company is regulated by the Federal Reserve of Richmond.
On December 31, 2001, the Company acquired First Western Bank, located
in Burnsville, N.C. and merged it into MountainBank ("the Bank"). The first
quarter of 2002 represented the initial reporting period of operations for
the combined banks. Accordingly, operating results for the first six months
of 2002 includes combined operations of both banks, whereas results for the
first six months of 2001 include only operations of MountainBank.
MountainBank is a state chartered, full service commercial banking
institution, insured by the FDIC and incorporated under the laws of North
Carolina. The Bank currently operates sixteen full service banking offices
located in nine western North Carolina counties as well as a mortgage
brokerage operation headquartered in Greenwood, S.C. The Bank is subject to
regulation by the FDIC and the North Carolina State Banking Commission. As
MountainBank Financial Corporation is a single bank holding company, much
of the following discussion relates both to the Company and the Bank and
the following discussion will speak to both entities interchangeably.
Basis of Presentation:
The financial statements as of June 30, 2002 and for the periods ended
June 30, 2002 and 2001 have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the information furnished in
these interim financial statements reflects all adjustments necessary to
present fairly the Company's financial position, results of operations,
cash flows and changes in shareholders' equity for such interim periods.
Management believes that all interim period adjustments are of a normal
recurring nature. These financial statements should be read in conjunction
with the Company's audited financial statements and the notes thereto as of
December 31, 2001, included in the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31,
7
MountainBank Financial Corporation
Notes to Financial Statements
June 30, 2002
- --------------------------------------------------------------------------------
2001.
Statements in this report as to the Company's projections for
expansion, capital expenditures, earnings and other such issues as well as
for future financial or economic performance of the Company are "forward
looking" statements, and are being provided in reliance upon the "safe
harbor" provision of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results or events to differ
materially from those projected, estimated, assumed or anticipated in any
such forward looking statements include changes in general economic
conditions in the Company's markets, loan losses, including loan losses
resulting from adverse economic conditions, increased competition, any loss
of the Company's key management personnel, changes in governmental
regulations and other factors.
The accounting and reporting policies of the Company follow generally
accepted accounting principles and general practices within the financial
services industry. The accounting policies followed are set forth in Note 1
to the Company's 2001 Financial Statements incorporated in its 2001 Form
10-KSB.
Commitments and Other Contingencies:
In the normal course of business there are various commitments and
contingent liabilities such as commitments to extend credit, which are not
reflected on the financial statements. Management does not anticipate any
significant losses to result from these transactions. The unfunded portion
of loan commitments and standby letters of credit as of June 30, 2002 was
approximately $82.7 million.
Properties and Equipment:
Company properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed by the straight-line method over
periods of two to thirty-five years for capital leases and leasehold
improvements and from two to twenty years for furniture and equipment.
Note 2. Net Income Per Share
Basic net income per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the year.
Diluted net income per share reflects the potential dilution that could
occur if the Corporation's potential common stock and contingently issuable
shares, which consist of dilutive stock options and Series A Preferred
Convertible stock, had been issued.
The numerators of the basic net income per share computations are the
same as the numerators of the diluted net income per share computations for
all periods presented.
8
MountainBank Financial Corporation
Notes to Financial Statements
June 30, 2002
- --------------------------------------------------------------------------------
The effect of potential common stock is excluded from the computation of
diluted earnings per common share in periods in which the effect would be
antidilutive. A reconciliation of the basic average common shares
outstanding to the diluted average common shares outstanding is as follows:
Six Months
Ended June 30,
------------------------
2002 2001
------------------------
Basic weighted average number of common shares outstanding 3,118,652 2,248,153
Dilutive effect arising from potential common stock 766,668 295,776
------------------------
Diluted weighted average number of common shares outstanding 3,885,320 2,543,929
========================
Note 3. Recent Developments:
During the second quarter of 2002, the Company announced agreements to
acquire two bank holding companies in Virginia, Cardinal Bankshares
Corporation, located in Floyd, Virginia and CNB Holdings, Inc., located in
Pulaski, Virginia. The Company reported the execution of these merger
agreements via filings on Form 8-K on May 31, 2002 and June 27, 2002,
respectively, copies of which are attached hereto as exhibits 2.1 and 2.2.
Additionally, on July 23, 2002, the Company filed a Form 8-K regarding the
signing of a merger agreement with TrustCo Holding, Inc., located in
Greenville, South Carolina. TrustCo Holding, Inc. is the parent company for
Trust Company of the South, a non-depository Trust Company and Asset
Management of the South, a Registered Investment Advisory company.
Management expects all of these mergers to be completed in the fourth
quarter of 2002.
9
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis is provided to address
information about the Company's financial condition and results of
operations which is not otherwise apparent from the financial statements
included in this report. Reference should be made to those statements for
an understanding of the following discussion and analysis.
Changes in Financial Condition June 30, 2002 Compared with December 31,
2001
The Company's growth continued during the second quarter of 2002,
albeit at a slower pace than that which was experienced through portions of
2001. Asset growth for the quarter amounted to $80.1 million or 13.1%,
bringing total asset growth for the first six months of 2002 to $130.9
million or 23.3%. This level of growth is within management's plan for
internal growth for fiscal 2002. Management expects internal growth rates
comparable to those experienced during the first six months of the year to
continue through the remainder of 2002. However, if general economic
conditions in the Company's primary market areas decline from current
levels, asset growth may slow further. In any event, with the anticipated
closing of the recently announced mergers with Cardinal Bankshares
Corporation and CNB Holdings, Inc., management expects the Company's total
assets to exceed $1 billion by the end of 2002.
During the first six months of 2002, earning assets increased $122.0
million, or 22.7%. Loans continue to represent the Company's single largest
class of earning assets. During the first six months of 2002, outstanding
loans increased $71.8 million, or 14.6%. Cash and cash equivalents (Federal
funds sold and deposits with banks) increased substantially from $10.7
million at December 31, 2001 to $63.0 million at June 30, 2002, an increase
of $52.3 million or 488.8%. Several events transpired which resulted in
increased levels of cash and cash equivalents at the end of the second
quarter. Two new branch offices were brought into full production during
the quarter. This coupled with deposit acquisition campaigns executed
during the quarter and the funding of $20 million in Trust Preferred
securities at the end of June resulted in the substantial increase reported
in the period. Management expects to convert this excess liquidity into
loans and investments during the third quarter to improve the yield on
these assets. In conjunction with the overall growth of the Company's
balance sheet, investment securities increased $7.6 million or 21.9% during
the first six months of 2002 from $34.6 million to $42.2 million.
Deposits increased $106.0 million, or 22.7%, from December 31, 2001 to
June 30, 2002. Noninterest-bearing demand deposits increased $7.7 million,
or 18.7%, over the same period. Management has established a goal of
increasing demand, NOW, savings and money market totals as a percent of
total deposits over fiscal 2002. As a result, NOW's increased during the
first six months of 2002 in the amount of $25.3
10
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
million or 80.0% and savings and money market deposit accounts increased
$5.1 million or 6.9%. Certificates of deposit increased $67.8 million or
21.2% during the period.
The Company's long-term debt increased by $13.5 million during the
first six months of the year. As noted above, the Company completed its
first issuance of Trust Preferred securities in late June 2002 in the
amount of $20 million. This issuance is accounted for as long-term debt in
the accompanying financial statements, however, for regulatory capital
purposes, the majority of this issuance is considered Tier I capital with
the remainder qualifying as Tier II capital. A portion of the proceeds of
this issuance amounting to $5 million was used to extinguish the Company's
existing debt with a correspondent institution. The remaining long-term
debt reported on the Company's balance sheet represents long-term
borrowings by MountainBank from the Federal Home Loan Bank of Atlanta. The
Company's equity increased $11.0 million during the first six months of
2002, principally through the Company issuance of an additional $7.8
million in Preferred Stock as noted above. The Series A Preferred Stock
offering that was begun in the later part of December 2001was concluded
during the period, bringing the total outstanding amount of Series A
Preferred Convertible Stock to $10.1million. The remaining increase in
equity resulted from retention of earnings and exercise of stock options.
Liquidity, Interest Rate Sensitivity, Capital Adequacy and Market Risks
The objectives of the Company's liquidity management policy include
providing adequate funds to meet the needs of depositors and borrowers at
all times, as well as providing funds to meet the basic needs for on-going
operations of the Bank and regulatory requirements. Management's goal is to
maintain sufficient liquidity for these purposes while limiting the market
volatility of the Bank's available for sale securities portfolio and
returning a positive spread to the Federal funds rate over time. At June
30, 2002, the Company's liquidity position was significantly higher than at
December 31, 2001 or March 31, 2002 and was deemed adequate by management
to meet all known liquidity demands.
Management and the Board of Directors view the monitoring and managing
of the Company's asset/liability position to be of strategic importance.
Managing interest rate risk, net interest margin and the overall leverage
of the Company's balance sheet becomes increasingly important as the
Company continues to grow and expand into other markets. As the Company's
growth begins to slow as a percentage of its existing balance sheet, it is
management's goal to increase transactional deposits and reduce, to a
degree, the Bank's reliance on certificates of deposits. Over time, this
process should enhance the Bank's interest margin and allow for additional
flexibility in managing overall funding costs. However, management expects
to continue to have deposits more heavily weighted toward certificates of
deposit for the foreseeable future.
11
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
The Bank uses several modeling techniques to measure interest rate
risk. Its primary method is the simulation of net interest income under
varying interest rate scenarios. Management believes this methodology is
preferable in that it takes into account the pricing strategies management
would undertake in response to rate changes, whereas other methods such as
interest rate shock analysis do not take these into consideration.
Periodically, the Bank also utilizes traditional gap analysis to
measure interest rate sensitivity. Gap analysis measures the difference or
gap between the volume of interest-earning assets and interest-bearing
liabilities repricing over a specific time period. This method, however,
addresses only the magnitude of funding mismatches and does not address the
magnitude or relative timing of rate changes and is not considered as
accurate as the Bank's simulation model. The Bank's balance sheet remains
asset-sensitive over the short term (approximately one year), and then
shifts to liability-sensitive in future periods. The result of this is that
in the near term, more assets than liabilities are subject to immediate
repricing as market rates change. Because most of the Bank's securities
portfolio, all overnight investments and approximately one-third of its
loan portfolio, bear variable rates, they reprice more rapidly than rate
sensitive interest-bearing deposits. During periods of rising rates, this
results in increased net interest income. However, in periods of sustained
rising rates, the fixed rate component of the Bank's loan portfolio would
begin to negatively impact net interest income after the first year of such
conditions and would result in lower net interest income as compared with a
flat rate scenario. The opposite would be expected during periods of
declining rates.
While the Bank's balance sheet has continued to grow over the first
six months of 2002, management has begun to shorten the overall duration of
the balance sheet. This is being initiated in anticipation of the
possibility of rising interest rates over the next eighteen to twenty-four
months. However, at June 30, 2002, the Company's mix of rate-sensitive
assets and liabilities had not changed sufficiently to result in a material
change in its interest rate sensitivity as compared to that reported at
December 31, 2001.
At June 30, 2002, the Company's equity to assets ratio was 6.94%.
Additionally, risk based capital ratios for the Company and the Bank were
as follows. The Company's Tier I Leverage and Risk Based capital ratios
along with its Total Risk Based capital ratio were 9.55%, 10.39% and
12.48%, respectively. For the Bank, Tier I Leverage and Risk Based capital
ratios were 8.37% and 9.12% and its Total Risk Based capital ratio was
10.37%. The Preferred Stock issuance conducted by the Company during the
first six months of 2002 enhanced total and primary equity ratios for both
the Company and the Bank. It is expected that this issuance will be
sufficient to support the Company's projected 2002 growth. At June 30,
2002, both the Company's and the Bank's equity exceeded the minimum
requirements of a "well capitalized" institution as defined by federal
banking regulations.
12
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
Results of Operations for the Three-Month Periods Ended June 30, 2002 and
2001
Net interest income increased $3.5 million or 118.2% over the second
quarter of 2001. Total interest income increased $3.7 million or 52.5% from
$7.1 million for the three months ended June 30, 2001 to $10.9 million for
the three months ended June 30, 2002. This change reflects increases in the
average balances of interest-earning assets along with a decrease in the
yield on average interest-earning assets. Average earning assets increased
$280 million while yields decreased 153 basis points from 8.67% to 7.14%.
Interest and fees on loans increased $3.9 million or 61.1% from $6.4
million to $10.3 million as a result of a $271 million or 97.8% increase in
average loans outstanding from $278 million to $549 million. Interest on
securities, fed funds sold and interest on deposits with other banks
decreased $122 thousand, $8 thousand and $94 thousand respectively,
partially offset by increases of $23 thousand in dividends and $16 thousand
in other income. These decreases in interest income on securities, federal
funds sold and deposits with other banks can be attributed to excess cash
being used to fund loan growth during the period. Interest expense
increased $257 thousand or 6.1% from $4.2 million for the three months
ended June 30, 2001 to $4.4 million for the three months ended June 30,
2002. This increase was the result of higher volumes of interest-bearing
liabilities combined with a decrease in the average cost of funds. Average
interest-bearing liabilities increased $249 million from $287 million to
$536 million while the cost of funds decreased 253 basis points from 5.85%
to 3.32%.
The provision for loan losses for the three-month period ended June
30, 2002 was $950 thousand compared to $865 thousand for the three-month
period ended June 30, 2001.
Other income increased $947 thousand or 188.1% from $503 thousand for
the three months ended June 30, 2001 to $1.4 million for the same period in
2002. The increase was attributable to higher service charges and fees
earned on deposit accounts, mortgage origination income and other service
charges and fees. The increase in service charges on deposit accounts can
be attributed to a higher number of deposit accounts compared to the same
period in 2001 in addition to the offering of a new checking account
overdraft product that was introduced during the fourth quarter of 2001.
The increase in other service charges and fees can be attributed primarily
to increases in commissions on the sale of credit life & accident & health
insurance commissions.
Other expenses increased $2.1 million or 102.3% from 2.1 million to
$4.2 million for the three months ended June 30, 2002 compared to the same
period in the prior year. The increase in non-interest expenses is
attributed to increases in salaries and wages of $1.0 million or 94.6% as
well as increases in occupancy expense of $298 thousand or 100.3%. These
increases were primarily a result of the Company's continued expansion both
through de novo branching and through the acquisition of First Western
Bank, which is reflected only in 2002 expense totals. Other expenses
increased $792 thousand or 115.7% primarily due to increases in telecom,
data processing and professional services, the majority of which were
associated with expansion of the Company's branch banking network. These
increases were also due to
13
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
the overall expansion of the Company's business locations and volume.
Income before income taxes totaled $2.7 million for the three-month
period ended June 30, 2002 representing an increase of $2.2 million or
441.3% compared to $502 thousand for the comparable period in 2001. Income
tax expense for the second quarter totaled $1.0 million compared to $210
thousand during the same period in 2001, an increase of $838 thousand or
399.2%. The Company's net income for the quarter increased to $1.7 million
as compared with $292 thousand, an increase of $1.4 million or 471.6%.
Results of Operations for the Six-Month Periods Ended June 30, 2002 and
2001
Net interest income increased $7.3 million or 134.2% over the first
six months of 2001. Total interest income increased $8.3 million or 63.8%
from $13.1 million for the six months ended June 30, 2001 to $21.4 million
for the six months ended June 30, 2002. This change reflects increases in
the average balances of interest-earning assets along with a decrease in
the yield on average interest-earning assets. Average earning assets
increased $251 million while yields decreased 148 basis points from 8.86%
to 7.38%. Interest and fees on loans increased $8.7 million or 74.7% from
$11.7 million to $20.4 million as a result of a $281 million or 112.8%
increase in average loans outstanding from $250 million to $531 million.
Interest on securities, fed funds sold and interest on deposits with other
banks decreased $225 thousand, $91 thousand and $144 thousand respectively,
partially offset by increases of $41 thousand in dividends and $32 thousand
in other income. These decreases in interest income on securities, federal
funds sold and deposits with other banks resulted from reallocation of cash
from short-term investments to the Company's loan portfolio. Interest
expense increased $1.1 million or 14.0% from $7.7 million for the six
months ended June 30, 2001 to $8.7 million for the six months ended June
30, 2002. This increase was the result of higher volumes of
interest-bearing liabilities combined with a decrease in the average cost
of funds. Average interest-bearing liabilities increased $252 million from
$260 million to $512 million while the cost of funds decreased 251 basis
points from 5.95% to 3.44%.
During the first six months of 2002, the Company provided $2.3 million
for possible loan losses as compared to $1.5 million for the six-month
period ended June 30, 2001. Management determines the adequacy of the
Bank's allowance for loan losses based on a number of factors including
reviewing and evaluating its loan portfolio in order to identify potential
problem loans, credit concentrations and other risk factors connected to
the loan portfolio as well as current and projected economic conditions
locally and nationally. Upon loan origination, management evaluates the
relative quality of each loan and assigns a corresponding loan grade. All
loans are periodically reviewed to determine both the initial and ongoing
accuracy of these loan grades. The loan grading system assists management
in determining the overall risk in the loan portfolio.
Management realizes that general economic trends greatly affect loan
losses and
14
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
no assurances can be made that further charges to the loan loss allowance
may not be significant in relation to the amount provided during a
particular period or that further evaluation of the loan portfolio based on
conditions then prevailing may not require sizable additions to the
allowance, thus necessitating similarly sizable charges to operations. As a
result of management's assessment of general economic conditions and
specific economic conditions in the markets in which the Bank operates, the
Company's provision for loan losses was increased by more than 50% as
compared with the same period during 2001, increasing $758 thousand to $2.3
million. While a portion of this increase was attributable to increased
loan volume, a sizeable portion of this increase resulted from management's
assessment of a weak economy and the additional risk to the loan portfolio
presented by such an economy. Accordingly, management has deemed it prudent
to increase the Company's ratio of allowance for loan losses to loans in
the event the domestic economy does not recover during 2002. Consequently,
management has increased this ratio by 17 basis points during the first six
months of 2002, from 1.45% to 1.62%.
Due in large part to the weakened economy, the Company's
non-performing assets increased from $1.5 million at December 31, 2001 to
$4.5 million at June 30, 2002. While this increase of $3 million is
substantial, $2.5 million of the increase is attributable to one
relationship that was placed on non-accruing status during the second
quarter. This client is an operating company and the credit is secured by
real estate. Management views this to be a work out situation and has made
a special allocation to this credit in its calculation of the adequacy of
the allowance for loan losses at June 30, 2002. Currently, management
believes any potential losses associated with this credit to be adequately
covered by the Company's allowance without need for material additional
provisions. Loans past due 30 to 89 days were reduced from $4.6 million at
December 31, 2001 to $4.0 million at June 30, 2002 and represented 0.70% of
gross loans at the end of the second quarter.
Non-interest income increased $2.0 million or 227.51% from $870
thousand for the six months ended June 30, 2001 to $2.8 million for the
same period in 2002. The increase was attributable to higher service
charges and fees earned on deposit accounts, increased fees associated with
additional mortgage origination volume, gain on sale of securities, and
other service charges and fees. The increase in service charges on deposit
accounts can be attributed to a higher number of deposit accounts compared
to the same period in 2001 in addition to the offering of a new checking
account overdraft product that was introduced during the fourth quarter of
2001. The Bank's securities portfolio was restructured during the first six
months of 2002, resulting in gains on the sale of securities in the amount
of $249 thousand. The increase in other service charges and fees can be
attributed primarily to increases in commissions on the sale of credit life
& accident & health insurance commissions.
Other expenses increased $4.3 million or 121.0% from $3.6 million to
$7.9 million
15
MountainBank Financial Corporation
Management Discussion and Analysis
June 30, 2002
- --------------------------------------------------------------------------------
for the six months ended June 30, 2002 compared to the same period in the
prior year. The increase in other expenses can be attributed to increases
in salaries and wages, occupancy expense and other expenses. Salaries and
wages expense and occupancy expense increased primarily due to the
continued expansion of the Bank. Other expenses increased $1.6 million or
135.3% primarily due to increases in telecom, data processing and
professional services. These increases were also due to the overall
expansion of the Company's business locations and volume.
Income before income taxes was $5.4 million for the six-month period
ended June 30, 2002 compared to $1.2 million for the comparable period in
2001, representing an increase of $4.2 million or 342.0%. Income tax
expense amounted to $2.2 million for the six months ended June 30, 2002
compared to $420 thousand during the same period in 2001 and the Company's
net income for the period increased $2.4 million or 302.3% to $3.2 million
from $797 thousand.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At the date of this filing, the registrant was a party to no legal
proceedings and management was unaware of any pending matters for
which litigation was considered likely.
ITEM 2. CHANGES IN SECURITIES
During the second quarter of 2002, the Company issued 50,162 shares of
its Series A Preferred Stock through a private placement. This
issuance generated additional capital of $1.2 million during the
period.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2002 Annual Shareholders meeting was held on June 17,
2002 with a quorum of 2,233,040 or 71.3% of outstanding shares being
represented at the meeting. The proposals submitted to shareholders
for a vote and the results of that vote are as follows:
Proposal 1: Election of Directors. To elect six directors for various
terms, or until their respective successors are duly elected and
qualified.
Results of Proposal 1 Voting:
Director Votes for Votes withheld
-------- --------- --------------
William A. Banks 2,227,392 5,648
Ken C. Feagin 2,221,449 11,591
J. Ed Jones 2,227,692 5,348
Ronald R. Lamb 2,228,292 4,748
H. Steve McManus 2,227,992 5,048
Van F. Phillips 2,227,782 5,258
17
Proposal 2: Approval of 2002 Employee Stock Purchase Plan. To consider
a proposal to approve a proposed Employee Stock Purchase Plan.
Results of Proposal 2 Voting:
For Against Abstain
--------- ------- -------
Stock Purchase Plan 1,641,037 53,923 538,080
Proposal 3: Ratification of Appointment of Independent Accountants. To
ratify the action of our Board of Directors in selecting Larrowe and
Company, PLLC as our independent accountants for 2002.
Results of Proposal 3 Voting:
For Against Abstain
--------- ------- -------
Accountants 2,200,386 5,910 26,744
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
-------------------------------------------------------------------------
Exhibit No.
(per Exhibit Table in item
601 of Regulation S-K) Description of Exhibits
-------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization and
Merger By and Between the Registrant and
Cardinal Bankshares Corporation Dated
June 20, 2002
-------------------------------------------------------------------------
2.2 Agreement and Plan of Reorganization and
Merger By and Between the Registrant and
CNB Holdings, Inc. Dated June 20, 2002
-------------------------------------------------------------------------
4.1 Trust Preferred Indenture
-------------------------------------------------------------------------
4.2 Trust Preferred Guarantee
-------------------------------------------------------------------------
(b) Reports on Form 8-K.
18
The following reports on Form 8-K were filed by the Corporation during
the quarter ended June 30, 2002:
Current report on Form 8-K dated May 31, 2002 and filed May 31,
2002, Items 5 and 7.
Current report on Form 8-K dated June 21, 2002 and filed June 27,
2002, Items 5 and 7.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MountainBank Financial Corporation
Date: August 12, 2002 /s/ J.W. Davis
--------------
J. W. Davis
President & Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 2002 /s/ Gregory L. Gibson
---------------------
Gregory L. Gibson
Chief Financial Officer
CERTIFICATION
The undersigned hereby certifies that, (i) the Form 10-Q filed by
MountainBank Financial Corporation ("the Issuer") for the quarter ended
June 30, 2002, fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in that report fairly presents, in all material respects, the
financial condition and results of operations of the Issuer on June 30,
2002 and for the periods presented therein.
Date: August 12, 2002 /s/ J.W. Davis
--------------
J.W. Davis
President and CEO
Date: August 12, 2002 /s/ Gregory L. Gibson
---------------------
Gregory L. Gibson
Chief Financial Officer
20