SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC
Form 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2003
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
(State of Incorporation) (I.R.S. Employer Identification No.)
201 Wren Dr., Hendersonville, N.C. 28792
(Address of principal executive offices)
(828) 697-0030
(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 ___
---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
Yes X No ___
---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
At May 13, 2003, the Company had 3,220,882 shares outstanding of its $4
par common stock.
MountainBank Financial Corporation
Form 10-Q
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
The financial statements of MountainBank Financial Corporation are set forth in the following pages.
Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 ................................. 3
Consolidated Statement of Operations for the Three Months Ended March 31, 2003 and 2002.............. 4
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December 31,
2001 and 2002 and for the Three Months Ended March 31, 03 ........................................ 5
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2003 and 2002 ............. 6
Notes to Financial Statements ....................................................................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .... 13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS .............................. 20
Item 4. INTERNAL CONTROLS AND PROCEDURES ......................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 22
Item 2. Changes in Securities and Use of Proceeds ................................................ 22
Item 3. Defaults Upon Senior Securities .......................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 22
Item 5. Other Information ........................................................................ 22
Item 6. Exhibits and Reports on Form 8-K ......................................................... 22
Signatures .......................................................................................... 24
2
MountainBank Financial Corporation
Balance Sheets
At March 31, 2003 (Unaudited) and December 31, 2002 (Audited)
(Dollars in thousands, except share data) March 31, 2003 December 31, 2002
-------------- -----------------
Assets
Cash and due from banks $ 15,798 $ 10,229
Interest bearing deposits with banks 1,682 16,393
Federal funds sold 30,196 -
Investment securities available for sale 43,008 64,738
Equity investment securities available for sale 9,453 8,993
Restricted equity securities 2,996 3,746
Loans, net of allowance for loan losses of $10,729 at
March 31, 2003 and $11,192 at December 31, 2002 687,476 666,432
Loans held for sale 19,345 32,857
Property and equipment, net 9,459 9,051
Accrued income 3,757 3,932
Intangible assets, net 4,162 4,244
Other assets 19,996 20,525
-------------- -----------------
Total assets $ 847,328 $ 841,140
============== =================
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits $ 61,380 $ 64,607
Interest-bearing deposits 635,442 612,662
-------------- -----------------
Total deposits 696,822 677,269
Federal funds purchased and securities
sold under agreements to repurchase 12,889 14,204
Short-term debt - 25,000
Long-term debt 57,480 46,210
Guaranteed preferred beneficial interests
in the Company's junior subordinated debentures 20,000 20,000
Obligations under capital lease 712 718
Accrued interest payable 3,861 3,787
Other liabilities 1,641 1,484
-------------- -----------------
Total liabilities 793,405 788,672
-------------- -----------------
Commitments and contingencies
Stockholders' equity
Preferred stock, Series A, 6%, non-cumulative, non-voting
no par value; 3,000,000 shares authorized;
419,243 shares issued and outstanding with liquidation
preferences of $10,061,832 at March 31, 2003 and
December 31, 2002 10,062 10,062
Common stock, $4 par value; 10,000,000 shares authorized;
3,220,657 and 3,200,364 shares issued and outstanding
at March 31, 2003 and December 31, 2002, respectively 12,883 12,802
Paid in capital 20,132 20,038
Retained earnings 10,898 9,397
Accumulated other comprehensive (loss) income (52) 169
-------------- -----------------
Total stockholders' equity 53,923 52,468
-------------- -----------------
Total liabilities and stock holders' equity $ 847,328 $ 841,140
============== =================
3
MountainBank Financial Corporation
Statement of Operations (Unaudited)
For the three months ended March 31, 2003 and March 31, 2002
Three Months Ended March 31,
------------------------------
(Dollars in thousands, except share data) 2003 2002
---- ----
Interest income
Loans and fees on loans $ 11,703 $ 10,051
Federal funds sold 15 8
Investment securities, taxable 636 408
Investment securities, nontaxable - 24
Deposits with banks 28 2
Dividends 40 30
Other 171 77
------------ ------------
Total interest and dividend income 12,593 10,600
------------ ------------
Interest expense
Deposits 4,012 3,680
Federal funds purchased and securities
sold under agreements to repurchase 52 41
Other borrowed funds 874 572
------------ ------------
Total interest expense 4,938 4,293
------------ ------------
Net interest income 7,655 6,307
Provision for loan losses 1,375 1,300
------------ ------------
Net interest income after provision for loan losses 6,280 5,007
------------ ------------
Noninterest income
Service charges on deposit accounts 685 492
Mortgage origination income 1,320 608
Gain on sale of loans - -
Net gain on sale of securities 167 245
Other service charges and fees 160 55
Other income 7 43
------------ ------------
Total noninterest income 2,339 1,443
------------ ------------
Noninterest expense
Salaries and employee benefits 2,826 2,019
Occupancy 394 225
Equipment 407 249
Data Processing 312 286
Amortization of intangible assets 83 83
Other general and administrative 1,932 924
------------ ------------
Total noninterest expense 5,954 3,786
------------ ------------
Income before income taxes 2,665 2,664
Income tax expense 1,013 1,125
------------ ------------
Net income 1,652 1,539
Preferred stock dividends declared 151 -
------------ ------------
Net income available to common stockholders $ 1,501 $ 1,539
============ ============
Basic earnings per share $ 0.47 $ 0.49
Diluted earnings per share $ 0.42 $ 0.41
Weighted average shares outstanding 3,211,255 3,112,522
Diluted weighted average shares outstanding 3,957,336 3,792,907
4
MountainBank Financial Corporation
Statement of Changes in Stockholders' Equity
For the two years ended December 31, 2002, 2001 and the three months
(unaudited) ended March 31, 2003
Stock Accumulated
----- Other
Preferred Common Retained Comprehensive
(Dollars in thousands) Amount Amount Surplus Earnings Income (Loss) Total
------ ------- ------- -------- ------------- -----
Balance December 31, 2000 $ - $ 7,488 $ 9,401 $ 1,182 $ 139 $ 18,210
Comprehensive income
Net Income - - - 2,510 - 2,510
Net change in unrealized
appreciation on investment
securities available for sale
net of taxes of $2 - - - - 5 5
Realized gains on securities,
net of taxes of $(41) - - - - (80) (80)
--------
Total comprehensive income 2,435
Shares sold 2,224 - - - - 2,224
Shares issued to acquire
PremierMortgage Associates, Inc. - 80 220 - - 300
Shares issued to acquire
First Western Bank - 2,751 11,006 - - 13,757
Stock options exercised - 57 32 - - 89
Stock split, effected in
the form of a dividend - 2,075 (2,075) - - -
--------------------------------------------------------------------------
Balance December 31, 2001 $ 2,224 $12,451 $ 18,584 $ 3,692 $ 64 $ 37,015
--------------------------------------------------------------------------
Comprehensive income
Net Income - - - 6,158 - 6,158
Net change in unrealized
appreciation on investment
securities available for sale
net of taxes of $144 - - - - 280 280
Realized gains on securities,
net of taxes of $(90) - - - - (175) (175)
--------
Total comprehensive income 6,263
Dividends Paid (453) (453)
Shares sold 7,838 - - - - 7,838
Shares issued to acquire
Trust Company of the South - 237 1,249 - - 1,486
Stock options exercised - 117 215 - - 332
Dissenters' Shares - (2) (8) - - (10)
Fractional shares purchased (1) (2) (3)
--------------------------------------------------------------------------
Balance December 31, 2002 $ 10,062 $12,802 $ 20,038 $ 9,397 $ 169 $ 52,468
--------------------------------------------------------------------------
Comprehensive income
Net Income
Net Income - - - 1,652 - 1,652
Net change in unrealized
appreciation on investment
securities available for sale
net of taxes of $(57) - - - - (111) (111)
Realized gains on securities,
net of taxes of $(57) - - - - (110) (110)
--------
Total comprehensive income 1,431
Dividends Paid (151) (151)
Stock options exercised - 81 94 - - 175
--------------------------------------------------------------------------
Balance March 31, 2003 $ 10,062 $12,883 $ 20,132 $ 10,898 $ (52) $ 53,923
==========================================================================
5
MountainBank Financial Corporation
Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(Dollars in thousands) March 31, 2003 March 31, 2002
-------------- --------------
Cash flows from operating activities
Net income 1,652 1,539
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amoritization 447 296
Provision for loan losses 1,375 1,300
Net realized gain on securities (167) (245)
Amortization of premiums on securities,
net of accretion of discount 11 (1)
Changes in assets and liabilities:
Accrued income 175 (127)
Loans held for sale 13,512 5,150
Other assets 641 25
Accrued interest payable 74 (136)
Other liabilities 154 (197)
-------------- --------------
Net cash provided by operating activities 17,874 7,604
-------------- --------------
Cash flows from investing activities
Net increase in federal funds sold (30,196) (5,344)
Net decrease in interest-bearing deposits with banks 14,711 253
Purchases of investment securities (13,146) (10,758)
Sales of investment securities 27,434 14,551
Maturities of investment securities 7,554 1,885
Net increase in loans (22,419) (45,078)
Purchases of property and equipment (772) (452)
Investment in BOLI 0 0
-------------- --------------
Net cash used in investing activities (16,834) (44,943)
-------------- --------------
Cash flows from financing activities
Net (decrease) increase in noninterest-bearing deposits (3,227) 7,458
Net increase in interest-bearing deposits 22,780 35,821
Net increase in federal funds purchased and
securities sold under agreements to repurchase (1,315) (85)
Net increase in notes payable 1,250 0
Net decrease in FHLB advances (14,980) 0
Net increase in junior subordinated debt 0 0
Repayment of obligations under capital lease (6) (6)
Proceeds from issuance of common stock, net 175 1
Common shares repurchased 0 (10)
Proceeds from the issuance of preferred stock, net 0 6,634
Dividends paid (148) 0
-------------- --------------
Net cash provided by financing activities 4,529 49,813
-------------- --------------
Net increase in cash and cash equivalents 5,569 12,474
Cash and cash equivalents, beginning 10,229 10,126
-------------- --------------
Cash and cash equivalents, ending 15,798 22,600
============== ==============
Supplemental disclosures of cash flow information
-------------- --------------
Interest paid 4,864 4,429
============== ==============
Income taxes paid 1,073 1,125
============== ==============
6
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Organization:
MountainBank Financial Corporation (the Company) was incorporated as
a North Carolina corporation on January 10, 2001 to acquire the stock of
MountainBank (the Bank). The Bank was acquired by the Company on March 30,
2001.
MountainBank was organized and incorporated under the laws of the
State of North Carolina on June 25, 1997 and commenced operations on June
26, 1997. The Bank currently serves ten western North Carolina counties and
surrounding areas through eighteen full service banking offices. As a state
chartered bank, MountainBank is subject to regulation by the State of North
Carolina Banking Commission and the Federal Deposit Insurance Corporation.
MountainBanc Mortgage Corporation was organized and incorporated
under the laws of the State of North Carolina on July 19, 2001.
MountainBanc Mortgage Corporation operates as a wholly-owned subsidiary of
MountainBank and provides mortgage banking services to its customers in
North and South Carolina. MountainBanc Mortgage Corporation commenced
operations on October 1, 2001.
TrustCo Holding, Inc., parent company of Trust Company of the South
and Asset Management of the South, was acquired effective December 31, 2002
and merged into the Company with Trust Company of the South and Asset
Management of the South becoming wholly-owned subsidiaries of the Company.
Trust Company of the South, a state chartered trust company, provides trust
and estate planning services to its customers in South Carolina. Asset
Management of the South is a registered investment advisor providing fee
only investment services to its customers.
The accounting and reporting policies of the Company and its
subsidiaries follow generally accepted accounting principles and general
practices within the financial services industry. All data presented in
these notes to consolidated financial statements are expressed in
thousands, except where specifically identified. Following is a summary of
the more significant policies.
Basis of Presentation:
The financial statements as of March 31, 2003 and for the periods
ended March 31, 2003 and 2002 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
7
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited)
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, 2002, included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
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 2002 Financial Statements incorporated in its 2002 Form
10-K.
Dollar amount totals, except share data, are presented in thousands.
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 March 31, 2003 was
approximately $109.5 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.
8
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited)
Stock-based Compensation
The Company accounts for its stock-based compensation using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The Company is not required to adopt the fair
value based recognition provisions prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, but complies with the disclosure
requirements set forth in SFAS No. 148, which include disclosing pro forma
net income as if the fair value based method of accounting had been
applied. This information for the quarters ended March 31, 2003 and March
31, 2002 is as follows:
(Dollars in thousands) March 31,
---------------------------------
2003 2002
--------------- ------------
Compensation cost recognized in income for all
stock-based compensation awards $ - $ -
=============== ============
Pro forma net income/(1)/ $ 1,501 $ 1,539
=============== ============
Pro forma earnings per common share/(1)/ $ 0.47 $ .49
=============== ============
Pro forma earnings per diluted share/(1)/ $ 0.42 $ .41
=============== ============
/(1)/ As if the fair value based method prescribed by SFAS No. 123
had been applied
Reclassifications:
Certain reclassifications have been made to the prior years'
financial statements to place them on a comparable basis with the current
period. Net income and stockholders' equity previously reported were not
affected by these reclassifications.
Note 2. New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of SFAS 123, Accounting for Stock-Based Compensation," was
adopted by the Company on January 1, 2003. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value-based method
of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of SFAS 123, to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. See note 1 for more information.
9
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited)
Note 3. 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. 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. The following table sets forth
information for the computation of net income per share and net income per
share assuming dilution:
Three Months Ended
March 31,
------------------
(Dollars and shares in thousands) 2003 2002
------- -------
Numerator:
Net income $ 1,652 $ 1,539
======= =======
Net income available to common stockholders $ 1,501 $ 1,539
======= =======
Denominator:
Weighted average shares outstanding 3,211 3,113
------- -------
Effect of dilutive securities:
Common stock options 243 237
Series A Preferred Stock 503 443
------- -------
Potential dilutive common shares 746 680
------- -------
Denominator for net income per share assuming dilution 3,957 3,793
======= =======
Assuming conversion at the end of each period in 2003 and 2002, the
period end total of potentially dilutive securities, which are comprised of
stock options and preferred stock, would be 746 thousand shares for the
three months ended March 31, 2003, and 680 thousand shares for the same
period in 2002.
10
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
March 31, 2003 (Unaudited)
Note 4. Deposits
Interest-bearing deposit account balances at March 31, 2003 and 2002
are summarized as follows:
March 31, 2003 March 31, 2002
------------------------------- ---------------------------------
Percent Weighted Weighted
of Average Percent Average
(Dollars in thousands) Amount Total Rate Amount of Total Rate
-------- ----- ---- -------- -------- ----
NOW $ 93,094 14.7% 1.09% $ 51,334 11.1% 1.21%
Savings 11,280 1.8% 0.82% 8,999 1.9% 1.11%
Money Market 106,342 16.7% 1.84% 74,375 16.1% 2.36%
-------- ----- ---- -------- -------- ----
Transaction Deposits 210,716 33.2% 1.46% 134,708 29.1% 1.86%
-------- ----- ---- -------- -------- ----
CDs under $100,000 248,971 39.2% 3.09% 198,713 43.0% 4.01%
CDs over $100,000 175,755 27.6% 3.20% 128,719 27.9% 4.12%
-------- ----- ---- -------- -------- ----
Total CDs 424,726 66.8% 3.14% 327,432 70.9% 4.05%
-------- ----- ---- -------- -------- ----
Interest-Bearing Deposits $635,442 100.0% 2.61% $462,140 100.0% 3.44%
======== ===== ==== ======== ======== ====
Note 5. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
On June 27, 2002, a newly formed business trust subsidiary of the
Company, MountainBank Capital Trust I, privately sold $20.0 million in
preferred trust securities. The proceeds from that sale, together with the
proceeds from the Trust's sale of all its common securities to the Company,
were used to purchase an aggregate of $20.6 million in junior subordinated
debentures issued by the Company. The debentures call for interest payable
quarterly at a variable annual rate equal to the three-month LIBOR plus
3.65%, with principal payable in full on June 30, 2032. Subject to certain
limitations, the Company has fully and unconditionally guaranteed its trust
subsidiary's obligations under the preferred trust securities.
Note 6. Recent Developments
11
MountainBank Financial Corporation
Notes to Consolidated Financial Statements
March 31, 2002 (Unaudited)
- --------------------------------------------------------------------------------
During 2002, the Company entered into an agreement to merge with CNB
Holdings, Inc. CNB is headquartered in Pulaski, Virginia, and is the bank
holding company for Community National Bank, which operates two banking
offices in Pulaski. The transaction is structured whereby CNB will be
merged into the Company, Community National Bank will become a wholly-owned
subsidiary of the Company, and CNB's shareholders will receive a
combination of the Company's common stock and cash (approximately 50% each)
valued at approximately $13.50 for each of their shares of CNB common
stock, with the actual number of shares of the Company's common stock to be
issued for each CNB share to be based on the market value of the Company's
common stock immediately prior to completion of the merger. The transaction
was approved by CNB's shareholders on March 7, 2003. The merger is expected
to be completed during the second quarter of 2003.
During 2002, the Company also entered into an agreement to merge with
Cardinal Bankshares Corporation. Cardinal is headquartered in Floyd,
Virginia, and is the holding company for Bank of Floyd, which operates five
banking offices in five southwestern Virginia communities. The Company's
shareholders approved the proposed merger at a special meeting held on
February 26, 2003. However, at Cardinal's special meeting held on the same
date, Cardinal's shareholders failed to approve the transaction. Cardinal
terminated the merger agreement on March 5, 2003.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management has provided the following discussion and analysis 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. The following
discussion and analysis should be read in conjunction with the consolidated
financial statements of MountainBank Financial Corporation (the "Company")
and the notes thereto located herein and in the Company's 2002 Annual
Report and filing on Form 10-K.
The following discussion contains certain forward-looking statements
about the Company's financial condition and results of operations, which
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's judgment only as of
the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events and circumstances that
arise after the date hereof.
Factors that may cause actual results to differ materially from those
contemplated by such forward looking statements include, among others, the
following possibilities: (1) projected business increases in connection
with the implementation of our business plan are lower than expected; (2)
competitive pressure among financial services companies increases
significantly; (3) costs or difficulties related to the integration of
acquisitions, or expenses in general, are greater than expected; (4)
general economic conditions, in the markets in which the company does
business, are less favorable than expected; (5) risks inherent in making
loans, including repayment risks and risks associated with collateral
values, are greater than expected; (6) changes in the interest rate
environment reduce interest margins and affect funding sources; (7) changes
in market rates and prices may adversely affect the value of financial
products; (8) any inability to generate liquidity necessary to meet loan
demand or other cash needs; (9) any inability to accurately predict the
adequacy of the loan loss allowance needs; (10) legislation or regulatory
requirements or changes adversely affect the businesses in which the
company is engaged; and (11) decisions to change the business mix of the
company.
Changes in Financial Condition March 31, 2003 Compared with December 31,
2002
Total assets increased $6.2 million or 0.7% from December 31, 2002 to
March 31, 2003. Cash and cash equivalents increased $21.1 million or 79.3%
due to increases in federal funds sold and cash and due from banks of $30.2
million and $5.6 million, respectively, offset by decreases in interest
bearing deposits with banks of $14.7 million
13
at March 31, 2003 as compared with December 31, 2002. Investment securities
decreased $22.0 million or 28.4% due to a reconfiguration of the Company's
security portfolio. Loans and loans held for sale, the largest category of
total assets increased $7.1 million, or 1.0%.
Total liabilities increased $4.7 million or 0.6% from December 31, 2002
to March 31, 2003. Deposits, the largest category of total liabilities,
increased $19.5 million, or 2.9%, at March 31, 2003 as compared to December
31, 2002. Noninterest-bearing demand deposits decreased $3.2 million, or
5.0%, over the same period. One of management's ongoing goals is to
increase NOW, savings and money market totals as a percent of total
deposits over prior year totals. As a result, NOW's increased $10.3 million
or 12.4% and savings and money market deposit accounts increased $18.2
million or 18.3% during the first three months of 2003. Certificates of
deposit decreased $5.7 million or 1.3% during the period. Due to deposit
growth, management decreased other borrowings $15.1 million. Overnight
borrowings at the FHLB of $25.0 million were repaid, while adding a $10.0
million FHLB advance with a longer maturity. Other long-term borrowings
increased $1.3 million, while securities sold under agreements to
repurchase decreased $1.3 million during the period.
Common stock outstanding increased by 20,293 shares or 0.6% at March
31, 2003 as compared to December 31, 2002. This increase was attributable
to options exercised. Earnings for the first three months of $1.7 million,
offset by preferred stock dividends of $0.2 million, were retained, which
resulted in an increase of $1.5 million in retained earnings. Accumulated
other comprehensive income, net of deferred income taxes, decreased $0.2
million or 130.8% due to the reconfiguration of the securities portfolio.
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 as
well as providing funds to meet the basic needs for on-going operations of
the Bank and regulatory requirements. Management's liquidity 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 March
31, 2003, the Company's liquidity position was higher than at December 31,
2002 as a result of deposit campaigns that resulted in overall increases in
the Company's deposit base. At March 31, 2003, management deemed the
Company's liquidity to be adequate 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
14
becomes increasingly important as the Company continues to grow and expand
into other markets. One of management's primary goals for the foreseeable
future is 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. While management has been successful during
the first three months of 2003 in attracting additional transaction
accounts, it expects to continue to have deposits more heavily weighted
toward certificates of deposit for the foreseeable future.
The Company 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 to be
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 result of the Company's
interest rate modeling at March 31, 2003 indicated that the Company's
balance sheet was liability-sensitive over the short term (approximately
one year), and then shifted to asset-sensitive in future periods. This
balance sheet configuration indicates that in the near term, more
liabilities than assets are subject to immediate repricing as market rates
change. Therefore, the Company should experience a modest decrease in net
interest income in a rising rate environment and a modest increase in net
interest income in a falling rate environment. Because most of the Bank's
securities portfolio, all overnight investments and over one-half 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.
The Bank's legal lending limit on loans to the Company are governed by
Federal Reserve Act 23A, and differ from legal lending limits on loans to
external customers. Generally, a bank may lend up to 10% of its capital and
surplus to its Parent, if the loan is secured. If collateral is in the form
of stocks, bonds, debentures or similar obligations, it must have a market
value when the loan is made of at least 20% more than the amount of the
loan, and if obligations of a state or political subdivision or agency
thereof, it must have a market value of at least 10% more than the amount
of the loan. If such loans are
15
secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for
rediscount or purchase by a Federal Reserve Bank, requirements for
collateral in excess of the loan amount do not apply. Under this
definition, the legal lending limit for the Bank on loans to the Company
was approximately $6.7 million at March 31, 2003. No 23A transactions were
deemed to exist between the Company and the Bank at March 31, 2003.
At March 31, 2003, the Company's equity to assets ratio was 6.36%.
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 7.88%, 8.94% and 10.66%,
respectively. For the Bank, Tier I Leverage and Risk Based capital ratios
were 7.73% and 8.78% and its Total Risk Based capital ratio was 10.03%. At
March 31, 2003, both the Company's and the Bank's equity exceeded the
minimum requirements of a "well capitalized" institution as defined by
federal banking regulations.
The following table illustrates the Company's Capital position and
ratios along with minimum regulatory ratios at March 31, 2003.
Risk-Based Capital
--------------------------------------------------------------------
Leverage Capital Tier 1 Capital Total Capital
--------------------------------- --------------------------------- ---------------------------------
(Dollars in thousands) Amount Percentage(1) Amount Percentage(2) Amount Percentage(2)
- ---------------------- ------------ ------------------- ------------ ------------------- ------------ -------------------
Actual $ 66,041 7.88% $ 66,041 8.94% $ 78,783 10.66%
Required 33,526 4.00 29,548 4.00 59,097 8.00
Excess 32,515 3.88 36,493 4.94 19,686 2.66
(1) Percentage of total adjusted average assets. The FRB minimum leverage ratio
requirement is 3 percent to 5 percent, depending (1) on the institution's
composite rating as determined by its regulators. The FRB has not advised
the Corporation of any specific requirements applicable to it.
(2) Percentage of risk-weighted assets.
Results of Operations for the Three-Month Periods Ended March 31, 2003 and
2002
Net interest income increased $1.4 million or 22.2% over the first
three months of 2002. Total interest income increased $2.0 million or 18.9%
from $10.6 million for the three months ended March 31, 2002 to $12.6
million for the three months ended March 31, 2003. 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
interest-earning assets increased $253.8 million while yields decreased 137
basis points from 7.62% to 6.25%. Interest and fees on loans increased $1.6
million or 15.8% from $10.1 million to $11.7 million as a result of a
$200.0 million or 39.0% increase in average loans outstanding
16
from $512.8 million to $712.8 million. Interest on securities, fed funds
sold, interest on deposits with other banks and other interest/dividend
income increased $204 thousand, $7 thousand, $26 thousand and $104 thousand
respectively. These increases resulted from higher average balances
partially offset by lower yields. Interest expense increased $0.6 million
or 14.0% from $4.3 million for the three months ended March 31, 2002 to
$4.9 million for the three months ended March 31, 2003. 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 $238.3 million from $487.8 million to $726.1 million
while the cost of funds decreased 81 basis points from 3.57% to 2.76%.
During the first three months of 2003, the Company provided $1.4
million for possible loan losses as compared to $1.3 million for the
three-month period ended March 31, 2002. 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 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. The
Company's ratio of allowance for loan losses to loans decreased 6 basis
points from 1.56% at March 31, 2002 to 1.50% at March 31, 2003. This
decrease is due to significant increases in net charge-offs during the
first three months of 2003 as compared to the first three months of 2002.
Net charge-offs increased $1.7 million during the period, of which $1.5
million was attributable to one relationship.
17
Allowance For Loan Losses
(Dollars in thousands)
Three Months Ended
March 31,
--------------------
2003 2002
---- ----
Balance, beginning of period $ 11,192 $ 7,113
-------- --------
Loan charge-offs:
Commercial 211 25
Construction 50 -
Real estate mortgage 50 -
Real estate non-farm non-residential 1,525 78
Consumer 97 -
Other 19 121
-------- --------
Total loans charged-off 1,952 224
-------- --------
Recoveries of loans previously charged-off:
Commercial 19 -
Construction 29 -
Real estate mortgage 1 -
Consumer 62 6
Other 3 100
-------- --------
Total recoveries of loans previously charged-off 114 106
-------- --------
Net charge-offs 1,838 118
-------- --------
Provision for loan losses 1,375 1,300
-------- --------
Balance, March 31 $ 10,729 $ 8,295
======== ========
Average Loans 712,803 512,839
Net charge-offs to average loans (annualized) 1.03% 0.09%
Allowance for loan losses to loans at March 31 1.50% 1.56%
Due in large part to a weaker economy, the Company's non-performing assets
increased from $2.2 million at March 31, 2002 to $5.7 million at March 31, 2003.
Loans past due 30 to 89 days increased from $3.5 million at March 31, 2002 to
$11.2 million at March 31, 2003 and represented 1.55% of gross loans at the end
of the first quarter. The following table summarizes the Company's nonperforming
assets over the past five quarters.
18
Nonperforming and Problem Assets
(Dollars in thousands) 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02
------- -------- ------- ------- -------
Nonaccrual loans $ 4,203 $ 2,876 $ 3,893 $ 4,181 $ 1,905
Loans 90 days or more past due and
still accruing interest 225 18 21 - 164
--------- ---------- --------- --------- ---------
Total nonperforming loans 4,428 2,894 3,914 4,181 2.069
--------- ---------- --------- --------- ---------
Other real estate and repossessed
personal property 1,274 1,426 319 - 159
--------- ---------- --------- ---------
Total nonperforming assets $ 5,702 $ 4,320 $ 4,233 $ 4,181 $ 2,228
========= ========== -======== ========= =========
Nonperforming assets as a percentage of:
Total assets 0.67% 0.51% 0.56% 0.60% 0.34%
Total loans and other real estate 0.79% 0.62% 0.69% 0.75% 0.39%
Non-interest income increased $0.9 million or 64.3% from $1.4 million for
the three months ended March 31, 2002 to $2.3 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 and increases in other service charges and fees. Service charges on
deposit accounts continue to grow as the overall number of deposit accounts
increase. Mortgage origination income increased $0.7 million due to continued
strong demand for refinancings. The increase in other service charges and fees
can be attributed primarily to trust and investment advisory fees of $97
thousand dollars due to the acquisition of TrustCo Holding, Inc. at December 31,
2002.
Other expenses increased $2.2 million or 57.9% from $3.8 million to $6.0
million for the three months ended March 31, 2003 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
and overall growth of the Company. Other expenses increased $1.0 million or
111.1% primarily due to increased marketing costs, professional services and
merger expenses. These increases were also due to the overall expansion of the
Company's business locations and volume. During the first quarter of 2003, the
Company expensed $0.4 million in merger related expenses due to the failed
acquisition of Cardinal Bankshares Corporation. The major components of
noninterest expense are as follows:
19
(Dollars in thousands) Three Months Ended March 31,
------------------------------
2003 2002
---- ----
Noninterest Expense
Salaries and benefits $ 2,826 $ 2,019
Occupancy expenses 394 225
Furniture/equipment expenses 407 249
Professional service fees 265 197
Data processing fees 312 286
Advertising and business promotion 155 86
Printing and related supplies 81 87
Amortization of intangibles 83 83
Other expenses 1,431 554
-------- --------
Total noninterest expense $ 5,954 $ 3,786
======== ========
Income before income taxes remained constant at $2.7 million for the
three-month periods ended March 31, 2003 and March 31, 2002. Income tax expense
amounted to $1.0 million for the three months ended March 31, 2003 compared to
$1.1 million during the same period in 2002 and the Company's net income for the
period increased $0.2 million or 13.3% to $1.7 million from $1.5 million.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 13 and the sections referenced therein
for quantitative and qualitative disclosures about market risk.
ITEM 4. Internal Controls and Procedures.
We maintain a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. Our Board of
Directors, operating through its audit committee which is composed entirely of
independent outside directors, provides oversight to our financial reporting
process.
Within the 90-day period prior to the date of this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based
upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material
20
information relating to MountainBank Financial Corporation (including its
consolidated subsidiaries) required to be included in this quarterly report on
Form 10-Q.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At the date of this filing, the registrant was a party to no legal
proceedings other than those occurring in the normal course of business.
Management was unaware of any pending material matters for which
litigation was considered likely.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following is the result of voting on proposals presented at the
Bank's Special Meeting of Shareholders' Meeting held February 26, 2003,
at which 3,200,364 shares were entitled to vote. The meeting was held
for the purpose of voting on the Agreement and Plan of Reorganization
and Merger of Cardinal Bankshares Corporation with MountainBank
Financial Corporation.
Proposal 1 - Approval of Plan of Merger
For - 1,781,663; Against - 21,265; Abstain - 8,254
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
------------- ----------------------------------------------------
99.1 Certification pursuant to 18 U.S.C. Section 1350
99.2 Certification pursuant to 18 U.S.C. Section 1350
99.3 Certification pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the Corporation during
the quarter ended March 31, 2003:
Current report on Form 8-K dated January 3, 2003 and filed January 3,
2003, Item 5.
22
Current report on Form 8-K dated January 27, 2003 and filed January 27,
2003, Items 5 and 7.
Current report on Form 8-K dated February 26, 2003 and filed February
27, 2003, Items 5 and 7.
Current report on Form 8-K dated March 4, 2003 and filed March 6, 2003,
Item 5
Current report on Form 8-K dated March 7, 2003 and filed March 7, 2003,
Items 5 and 7.
23
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: May 14, 2003 /s/ J. W. Davis
---------------
J. W. Davis
President & Chief Executive Officer
(Duly Authorized Officer)
Date: May 14, 2003 /s/ Gregory L. Gibson
---------------------
Gregory L. Gibson
Chief Financial Officer
24