PART I
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and by the section captioned “Special Cautionary Notice Regarding Forward-Looking Statements” in Item 7 of this Annual Report on Form 10-K and other cautionary statements set forth elsewhere in this report.
General
MetroCorp Bancshares, Inc. (the “Company”) was incorporated as a business corporation under the laws of the State of Texas in 1998 to serve as a holding company for MetroBank, National Association (“MetroBank”). On October 5, 2005, the Company acquired Metro United Bank (“Metro United”) (formerly known as First United Bank), with its locations in San Diego and Los Angeles, California. The Company’s headquarters are located at 9600 Bellaire Boulevard, Suite 252, Houston, Texas 77036, and its telephone number is (713) 776-3876.
The Company’s mission is to be the premier commercial bank in each of the community that it serves. By emphasizing outstanding service to its customers, profitability is maximized and shareholder value is enhanced. The Company operates branches in niche markets through its subsidiary banks, MetroBank and Metro United (collectively, the “Banks”), by providing personalized service to the communities in the Houston, Dallas, San Diego, Los Angeles, and San Francisco metropolitan areas. Historically, the Company has strategically opened banking offices in areas with large multicultural and Asian concentrations and intends to pursue branch opportunities in multicultural markets with significant small and medium-sized business activity. As a part of the Company’s business development strategy, MetroBank opened and commenced operations of representative offices in Xiamen, China during the fourth quarter of 2006, and Chongqing, China during the first quarter 2008. The representative offices do not conduct banking activities but were established to cultivate business relationships with customers that have the potential of expanding their business in the United States.
MetroBank, National Association
MetroBank was organized in 1987 by Don J. Wang, the Company’s current Chairman of the Board, and five other Asian-American small business owners, three of whom currently serve as directors of the Company and MetroBank. The organizers perceived that the financial needs of various ethnic groups in Houston were not being adequately served and sought to provide modern banking products and services that accommodated the cultures of the businesses operating in these communities. In 1989, MetroBank expanded its service philosophy to Houston’s Hispanic community by acquiring from the Federal Deposit Insurance Corporation (the “FDIC”) the assets and liabilities of a community bank located in a primarily Hispanic section of Houston. This acquisition broadened MetroBank’s market and increased its assets from approximately $30.0 million to approximately $100.0 million. Other than this acquisition, MetroBank has accomplished its growth internally through the establishment of de novo branches in various market areas. Since MetroBank’s formation in 1987, it has established numerous branches in the greater Houston metropolitan area and currently has nine banking offices in Houston. In 1996, MetroBank expanded into the Dallas metropolitan area, and currently has four banking offices in that market.
Metro United Bank
Metro United, which was acquired in October 2005, was originally founded in 1990 in San Diego, California to meet the banking needs of the local business communities. Metro United caters its services to various businesses, professionals and individuals with diversified cultural backgrounds and focuses its lending activities primarily on commercial real estate and commercial and industrial loans. In 1999, Metro United opened its Los Angeles branch in Alhambra to serve the community along the Monterey Park/San Gabriel Valley corridor. During 2006, Metro United added four new locations to better serve its customers. It acquired a branch in Irvine from Omni Bank, N.A., opened loan production offices in San Mateo and San Francisco that were upgraded to full service branches in 2007, and established an executive office in City of Industry, which also began functioning as a full service branch in the first quarter of 2007. The City of Industry branch relocated to Rowland Heights in the third quarter of 2011.
MCBI Statutory Trust I
MCBI Statutory Trust I (“MCBI Trust I”) is a business trust formed in 2005 for the purpose of issuing $35.0 million in trust preferred securities and lending the proceeds to the Company. The Company guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities.
MCBI Trust I is a variable interest entity for which the Company is not the primary beneficiary. As such, the accounts of MCBI Trust I are not included in the Company’s consolidated financial statements. See the Company’s accounting policy related to consolidation in Note 1—Summary of Significant Accounting Policies in the notes to consolidated financial statements included in this Annual Report on Form 10K.
Although the accounts of MCBI Trust I are not included in the Company’s consolidated financial statements, the $35.0 million in trust preferred securities issued by this subsidiary trust is included in the Tier 1 capital of the Company for regulatory capital purposes. The aggregate amount of restricted core capital elements (which includes trust preferred securities, among other things) that may be included in the Tier 1 capital of most bank holding companies, including the Company’s, is limited to 25% of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The quantitative limits do not currently preclude the Company from including the $35.0 million in trust preferred securities in Tier 1 capital under the Dodd-Frank Act.
Available Information
The Company’s internet website is available through MetroBank, at www.metrobank-na.com. The Company makes available, free of charge, on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) of 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is filed electronically with or furnished to the Securities and Exchange Commission. The information found on the Company’s website is not a part of this or any other report.
Regulatory Agreements
On August 10, 2009, MetroBank entered into a written agreement (the “Agreement”) with the Office of the Comptroller of the Currency (“OCC”). The Agreement is based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009, and is primarily focused on matters related to MetroBank’s asset quality. Pursuant to the Agreement, the Board of Directors of MetroBank has appointed a compliance committee to monitor and coordinate MetroBank’s performance under the Agreement. The Agreement provides for, among other things, the development and implementation of written programs to reduce MetroBank’s credit risks, monitor and reduce the level of criticized assets and manage commercial real estate loan concentrations in light of current adverse commercial real estate market conditions generally and in its market areas.
Management and the Boards of Directors of the Company and MetroBank have taken steps to address the findings of the exam and are working with the OCC to comply with the requirements of the Agreement.
The Board of Directors of Metro United was officially informed on July 20, 2012 by the FDIC and the California Department of Financial Institutions ("CDFI") that the Consent Order entered into on July 22, 2010 had been terminated effective as of July 20, 2012.
Business
Management believes that quality products and services, cross-selling initiatives, relationship building, and outstanding customer service are all key elements to a successful commercial and retail banking endeavor. The Company continues to focus on optimizing its Texas and California operations to strengthen its platform for future growth. Specific goals include, but are not limited to: (i) improving asset quality and diversifying the loan portfolio; (ii) building solid customer relationships through cross-selling initiatives, enhancing product mix, and optimizing pricing structures; and (iii) streamlining operational processes of the Company’s two subsidiary banks in an effort to increase efficiencies in the delivery of products and services.
In connection with the Company’s approach to community banking, it offers products designed to appeal to its niche markets. Operating within these niche markets allows the Company to enhance profitability. The Company believes that it has developed a reputation as the premier provider of financial products and services to small and medium-sized businesses and consumers located in the communities that it serves. The primary lending focus of the Company is to small and medium-sized businesses in a variety of industries. Each of its product lines is an outgrowth of the Company’s expertise in meeting the particular needs of its customers. The Company’s principal lines of business are the following:
Commercial and Industrial Loans.
The Company’s commercial lending emphasis includes loans to wholesalers, manufacturers and business service companies. The Company makes available to businesses a broad array of short and medium-term commercial lending products for working capital (including inventory and accounts receivable), purchases of equipment and machinery and business expansion (including acquisitions of real estate and improvements). As of December 31, 2012, the Company’s commercial and industrial loan portfolio, including short-term loans to foreign correspondent banks, was $383.6 million or 34.8% of the gross loan portfolio.
Real Estate Mortgage - Commercial and Residential Mortgage Loans.
The Company originates commercial mortgage loans to finance the purchase of real property, which generally consists of developed real estate. The Company’s commercial mortgage loans are collateralized by first liens on real estate. For MetroBank, these loans typically have variable rates and amortize over a 15 to 20 year period, with balloon payments due at the end of five to seven years. For Metro United, these loans have both variable and fixed rates and amortize over a 25 to 30 year period, with balloon payments due at the end of five to ten years. As of December 31, 2012, the Company had a commercial mortgage portfolio of $665.2 million or 60.3% of the gross loan portfolio. The Company also originates two to seven year balloon residential mortgage loans, primarily collateralized by owner occupied residential properties, with a 15 to 30-year amortization, which are retained in the Company’s residential mortgage portfolio. As of December 31, 2012, the residential mortgage portfolio was $36.8 million or 3.3% of the gross loan portfolio. The Company had no subprime residential mortgage loans at December 31, 2012.
Real Estate Construction Loans.
The Company originates loans to finance the construction of residential and non-residential properties. The majority of the Company’s residential construction loans are in Texas and are for single-family dwellings. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. As of December 31, 2012, the Company had a real estate construction portfolio of $9.7 million or 0.88% of the gross loan portfolio, of which $2.4 million was residential and $7.3 million was commercial.
Government Guaranteed Small Business Lending.
The Company, through its subsidiary MetroBank, has developed an expertise in several government guaranteed lending programs in order to provide credit enhancement to its commercial and industrial and commercial mortgage portfolios and specializes in United States Small Business Administration (“SBA”) loans to minority-owned businesses. As a Preferred Lender under the SBA federally guaranteed lending program, MetroBank’s pre-approved status allows it to quickly respond to customers’ needs. Depending upon prevailing market conditions, the Company may sell the guaranteed portion of these loans into the secondary market, yet retain servicing of these loans. As of December 31, 2012, MetroBank had $25.9 million or 2.4% of the gross loan portfolio in the retained portion of its SBA loans.
Trade Finance.
The Company, through its subsidiary MetroBank, originates trade finance loans and letters of credit to facilitate export and import transactions for small and medium-sized businesses. In this capacity, the Company has worked with the Export Import Bank of the United States (the “Ex-Im Bank”), an agency of the U.S. Government that provides foreign accounts receivable insurance to its export customers. At December 31, 2012, the Company’s aggregate trade finance portfolio commitments comprising standby and commercial letters of credit were approximately $12.0 million.
Retail Banking.
The Company offers a variety of deposit products and services to retail customers through its branch networks in Texas and California. Retail deposit products and services include checking and savings accounts, money market accounts, time deposits, ATM cards, debit cards and online banking. The Company, through its subsidiary Metro United Bank, also offers consumer loan products. At December 31, 2012, consumer loans totaled less than one percent of the gross loan portfolio.
Competition
The banking and financial services industry in Texas and California is highly competitive, and the profitability of the Company depends principally on the Company’s ability to compete in the market areas in which its banking operations are located. The Company competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other non-financial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing. To compete with these other financial institutions, the Company emphasizes customer service, technology and responsive decision-making. Additionally, management believes the Company remains competitive by establishing long-term customer relationships, building customer loyalty and providing a broad line of products and services designed to address the specific needs of its customers.
Employees
As of December 31, 2012, the Company had 286 full-time equivalent employees, 79 of whom were officers of the Banks classified as Vice President or above. The Company considers its relations with employees to be satisfactory.
Supervision and Regulation
The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the deposit insurance fund of the FDIC and the banking system as a whole, and not for the protection of the bank holding company shareholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks including the power to impose substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company and the Banks are subject. References herein to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations.
The Company
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the “BHCA”), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). The BHCA and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
As a Company with securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on the NASDAQ Global Market under the ticker symbol “MCBI”, the Company is also subject to the Sarbanes-Oxley Act of 2002 and regulation by the SEC and NASDAQ.
Regulatory Restrictions on Dividends.
The Company is regarded as a legal entity separate and distinct from the Banks. The principal source of the Company's revenues is dividends received from the Banks. As described in more detail below, federal law places limitations on the amount that banks may pay in dividends, which the Banks must adhere to when paying dividends to the Company. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s expected capital needs and financial condition. The Federal Reserve Board’s policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. The Federal Reserve Board is authorized to limit or prohibit the payment of dividends if, in the Federal Reserve Board’s opinion, the payment of dividends would constitute an unsafe or unsound practice in light of a bank holding company’s financial condition. In addition, the Federal Reserve Board has indicated that each bank holding company should carefully review its dividend policy and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that may be issued and allow the company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital are very strong.
Given the current financial and economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance also provides that all bank holding companies inform and consult with the Federal Reserve Board prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s capital structure, including dividends on the Series A Preferred Stock issued to the U.S. Department of the Treasury (“U.S. Treasury”) under the Capital Purchase Program (“CPP”) or interest on the subordinated debentures underlying the Company’s trust preferred securities. As of August 7, 2012, the Company had repurchased all outstanding shares of the Series A Preferred Stock.
Source of Strength.
Under Federal Reserve Board policy and federal law, a bank holding company is expected to act as a source of financial and managerial strength to each of its banking subsidiaries and commit resources to their support. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Banks, including support at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution. Further, any claim for breach of such obligation will generally have priority over most other uncollateralized claims.
Scope of Permissible Activities.
Except as provided below, the Company is prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except the Company may engage in and may own shares of companies engaged in certain activities found by the Federal Reserve Board to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
The Gramm-Leach-Bliley Act amended the BHCA and granted certain expanded powers to bank holding companies. The Gramm-Leach-Bliley Act permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The Gramm-Leach-Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (“CRA”) by filing a declaration that the bank holding company wishes to become a financial holding company. Presently, the Company has no plans to become a financial holding company.
While the Federal Reserve Board serves as the “umbrella” regulator for financial holding companies and has the power to examine banking organizations engaged in new activities, regulation and supervision of activities which are financial in nature or determined to be incidental to such financial activities will be handled along functional lines. Accordingly, activities of subsidiaries of a financial holding company will be regulated by the agency or authorities with the most experience regulating that activity as it is conducted in a financial holding company.
The Dodd-Frank Act amends the BHCA to require the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies. This statutory provision, commonly known as the “Volcker Rule,” defines unregistered investment companies as hedge funds and private equity funds. In November 2011, federal regulators proposed rules to implement the Volcker Rule after a comment period, no later than July 2012. As proposed, financial institutions would have a two year period, until July 21, 2014, following implementation of the final rules to bring affected activities into conformance with the Volcker Rule, subject to extension for up to three additional years. In early 2012, following the comment period, regulators announced that they would not be able to meet the July 2012 deadline. At present, lawmakers continue to work on drafting the final rules. The proposed rules are highly complex, and many aspects of their application remain uncertain. Based on the proposed rules, the Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company and the Banks, as the Company does not engage in the businesses prohibited by the Volcker Rule. The Company may incur costs if it is required to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such costs are not expected to be material. Until a final rule is adopted, the precise financial impact of the rule on the Company, its customers or the financial industry more generally, cannot be determined.
Safe and Sound Banking Practices.
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Prior approval of the Federal Reserve Board would not be required for the redemption or purchase of equity securities for a bank holding company that would be well capitalized both before and after such transaction, well-managed and not subject to unresolved supervisory issues.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.
Anti-Tying Restrictions.
Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements.
The Federal Reserve Board has adopted a system using risk-based capital guidelines under a two-tier framework to evaluate the capital adequacy of bank holding companies. Tier 1 capital generally consists of common stockholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and noncontrolling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles. Tier 2 capital generally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance, and unrealized holding gains on certain equity securities.
Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2012, the Company’s ratio of Tier 1 capital to total risk-weighted assets ( “Tier 1 risk-based capital ratio”) was 16.68% and its ratio of total capital to total risk-weighted assets (“Total risk-based capital ratio”) was 17.95%.
In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies may be required to maintain a leverage ratio of at least 4.0%. As of December 31, 2012, the Company’s leverage ratio was 13.18%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
Proposed Capital Adequacy Requirements
. In June 2012, the Company’s primary federal regulator, the Federal Reserve Board, published two notices of proposed rulemaking (the “2012 Capital Proposals”) that would substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Banks. One of the 2012 Capital Proposals (the “Basel III Proposal”) addresses the components of capital and other issues affecting the numerator in banking institutions’ regulatory capital ratios and would implement the Basel Committee’s December 2010 framework for strengthening international capital standards, commonly known as “Basel III.” The other proposal (the “Standardized Approach Proposal”) addresses risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and would replace the existing Basel I-derived risk-weighting approach with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 capital accords. The 2012 Capital Proposals would also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. As proposed, the Basel III Proposal and the Standardized Approach Proposal would come into effect on January 1, 2013 (subject to a phase-in period) and January 1, 2015 (with an option for early adoption), respectively. Final rules, however, have not yet been adopted, and the Basel III framework is therefore not yet applicable to the Company or the Banks.
The Basel III Proposal, among other things, (i) introduces a new capital measure: “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most deductions and adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the deductions and adjustments as compared to existing regulations.
In addition, the Basel III Proposal provides for two distinct buffers of capital designed to protect the banking system as a whole during periods of systemic risk. One of the proposed buffers, a “capital conservation buffer,” is designed to absorb losses during periods of economic stress. The other, a “countercyclical capital buffer,” may be imposed by bank regulatory agencies where there is excess aggregate credit growth coupled with increasing systemic risk. The “countercyclical capital buffer” is applicable to only certain covered institutions and is not expected to have any current applicability to the Company or the Banks. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Under the Basel III Proposal, the initial minimum capital ratios were to be the following: (i) 3.5% CET1 to risk-weighted assets, (ii) 4.5% Tier 1 capital to risk-weighted assets and (iii) 8.0% Total capital to risk-weighted assets.
When fully phased in on January 1, 2019, the Basel III Proposal will require the Banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The Basel III Proposal provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Proposal, the effects of certain accumulated other comprehensive items are not excluded, which could result in significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s securities portfolio. The Basel III Proposal also requires the phase-out of certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies in equal installments between 2013 and 2016. Trust preferred securities no longer included in Tier 1 capital may nonetheless be included as a component of Tier 2 capital.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
With respect to the Banks, the Basel III Proposal would also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well capitalized status being 8% (as compared with the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Proposal does not change the total risk-based capital requirement for any category.
Proposed Liquidity Requirements
.
Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation going forward. However, the federal banking agencies have not proposed rules implementing the Basel III liquidity framework and have not determined to what extent they will apply to banks that are not large, internationally active banks. As such, the potential impact of this framework on the Company and the Banks is unknown at this time.
One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The Basel III liquidity framework contemplates that the LCR will be subject to an observation period continuing through mid-2013, subject to any revisions resulting from the analyses conducted and data collected during the observation period, will be implemented as minimum standards on January 1, 2015, with a phase-in period ending January 1, 2019. Similarly, the Basel III liquidity framework contemplates that the NSFR will be subject to an observation period through mid-2016 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, will be implemented as a minimum standard by January 1, 2018. These new standards are subject to further rulemaking and as a result, their terms could change before implementation.
Imposition of Liability for Undercapitalized Subsidiaries.
Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of: (a) 5% of the institution’s assets at the time it became undercapitalized or (b) the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit an acceptable capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies.
The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.
Control Acquisitions.
The Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company.
The CBCA also prohibits any entity from acquiring 25% (or 5% in the case of an acquiror that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve Board. In most circumstances, an entity that owns 25% or more of the voting securities of a banking organization owns enough of the capital resources to have a controlling influence over such banking organization for purposes of the CBCA. On September 22, 2008, the Federal Reserve Board issued a policy statement on equity investments in bank holding companies and banks, which allows the Federal Reserve Board to generally be able to conclude that an entity’s investment is not “controlling” if the entity does not own in excess of 15% of the voting power and 33% of the total equity of the bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the banking organization, based on the policy statement, the Federal Reserve Board will permit noncontrolling investments in the form of voting and nonvoting shares that represent in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.
In addition, under the California Financial Code, the approval of the California Department of Financial Institutions (the “CDFI”) is required for any person to acquire control, directly or indirectly, of a California state bank or its holding company. For this purpose, a person is deemed to have acquired control of a bank or holding company if the person, directly or indirectly, has the power to vote 25% or more of the voting power of the bank or holding company or to direct or to cause the direction of the management and policies of the bank or holding company. Further, a person who directly or indirectly owns or controls 10% or more of the outstanding voting stock of a bank or holding company or other company is presumed, subject to final determination by the CDFI, to control that bank, holding company or other company.
The Banks—MetroBank, National Association and Metro United Bank
MetroBank is a national banking association, whose deposits are insured by the Deposit Insurance Fund (“DIF”) of the FDIC up to the applicable legal limits. MetroBank’s primary regulator is the OCC. By virtue of the insurance of its deposits, however, MetroBank is also subject to supervision and regulation by the FDIC. Such supervision and regulation subjects MetroBank to special restrictions, requirements, potential enforcement actions, and periodic examination by the OCC. Because the Federal Reserve Board regulates the bank holding company parent of MetroBank, the Federal Reserve Board also has supervisory authority, which directly affects MetroBank.
Metro United is a California state banking association, whose deposits are insured by the DIF of the FDIC up to the applicable legal limits. Metro United is supervised, examined and regulated by the CDFI, as well as the FDIC. Such supervision and regulation subjects Metro United to special restrictions, requirements, potential enforcement actions, and periodic examination by either of these regulators. Because the Federal Reserve Board regulates the bank holding company parent of Metro United, the Federal Reserve Board also has supervisory authority, which directly affects Metro United.
Financial Modernization.
Under the Gramm-Leach-Bliley Act, a national bank may establish a financial subsidiary and engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well managed and have a CRA rating of satisfactory or better. National banks with financial subsidiaries must remain well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a bank may not acquire a company that is engaged in activities that are financial in nature unless the bank has a CRA rating of satisfactory or better.
Branching.
The interstate Banking and Branching efficiency act (the “Interstate Act”), as amended by the Dodd-Frank Act, permits a bank holding company, with Federal Reserve Board approval, to acquire banking institutions located in states other than in the bank holding company’s home state without regard to whether the transaction is prohibited under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to and following the proposed acquisition, control no more than
10% of the total amount of deposits of insured depository institutions in the U.S. and no more than 30% of such deposits in that state (or such amount as established by state law if such amount is lower than 30%). The Interstate Act, as amended, also authorizes banks to operate branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states and by establishing de novo branches in other states, subject to various conditions. In the case of purchasing branches in a state in which it does not already have banking operations, the “host” state must have “opted-in” to the Interstate Act by enacting a law permitting such branch purchases. The Dodd-Frank Act expanded the de novo interstate branching authority of banks beyond what had been permitted under the Interstate Act by eliminating the requirement that a state expressly “opt-in” to de novo branching, in favor of a rule that de novo interstate branching is permissible if under the law of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch. Effective July 21, 2011, the Dodd-Frank Act also required that a bank holding company or bank be well capitalized and well-managed (rather than simply adequately capitalized and adequately managed) in order to take advantage of these interstate banking and branching provisions.
Branching—MetroBank.
The establishment of a branch must be approved by the OCC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers.
Branching—Metro United.
California law provides that a California-chartered bank can establish a branch anywhere in California provided that the branch is approved in advance by the CDFI. The branch must also be approved by the FDIC, which considers a number of factors, including financial history, adequacy of the bank’s shareholders’ equity, earnings prospects, character of management, and the convenience and needs of the community to be served by the branch.
Restrictions on Transactions with Affiliates and Insiders.
Transactions between MetroBank and its non-banking affiliates, and Metro United and its non-banking affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with the bank. In general, Section 23A imposes limits on the amount of such transactions to 10% of a bank's capital stock and surplus and requires that such transactions be secured by designated amounts of specified collateral. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its non-banking subsidiaries. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, it requires that the 10% of capital limit on covered transactions begin to apply to financial subsidiaries. “Covered transactions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between MetroBank and its affiliates, and Metro United and its affiliates, be on terms substantially the same, or at least as favorable to MetroBank and Metro United, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve Board has also issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to insiders and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus and the primary federal regulator may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Banks have provided a substantial part of the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Banks to the Company will continue to be the Company’s principal source of operating funds. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Banks.
MetroBank.
Until capital surplus equals or exceeds capital stock, a national bank must transfer to surplus 10% of its net income for the preceding four quarters in the case of an annual dividend or 10% of its net income for the preceding two quarters in the case of a quarterly or semiannual dividend. At December 31, 2012, MetroBank’s capital surplus exceeded its capital stock. Without prior approval, a national bank may not declare a dividend if the total amount of all dividends, declared by the bank in any calendar year exceeds the total of the bank’s retained net income for the current year and retained net income for the preceding two years. Under federal law, MetroBank cannot pay a dividend if, after paying the dividend, the bank will be “undercapitalized.” Federal regulators may declare a dividend payment to be unsafe and unsound even though MetroBank would continue to meet its capital requirements after the dividend.
Metro United.
A California-chartered bank may not declare a dividend in an amount which exceeds the lesser of (i) the bank’s retained earnings or (ii) the bank’s net income for its last three fiscal years less the amount of any dividends paid to shareholders during such period. However, a bank may, with the prior approval of the CDFI, declare a dividend in an amount not exceeding the greater of (a) its retained earnings, (b) its net income for its last fiscal year or (c) its net income for its current fiscal year. Under federal law, Metro United cannot pay a dividend if, after paying the dividend, Metro United will be “undercapitalized.” In the event that the CDFI determines the shareholders’ equity of a bank is inadequate or that the making of the dividend by the bank would be unsafe or unsound, the CDFI may order the bank to refrain from making the proposed dividend. Federal regulators may declare a dividend payment to be unsafe and unsound even though Metro United would continue to meet its capital requirements after the dividend. Under the terms of the Order, Metro United cannot declare or pay cash dividends.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, arising as a result of their status as shareholders, including any depository institution holding company (such as the Company) or any shareholder or creditor thereof.
Examinations—MetroBank.
The OCC periodically examines and evaluates national banks. Based upon such an evaluation, the OCC may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the OCC-determined value and the book value of such assets.
Examinations—Metro United.
The CDFI examines banks at least once every two years, but may conduct examinations whenever and as often as deemed necessary. The FDIC also periodically examines and evaluates insured, state non-member banks such as Metro United. Based upon such an evaluation, the FDIC may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the FDIC determined value and the book value of such assets.
Audit Reports.
Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal regulators. In some instances, the audit report of the institution’s holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements, and reports of enforcement actions. For institutions with total assets of $1 billion or more, financial statements prepared in accordance with U.S. generally accepted accounting principles, management’s certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by their primary federal regulator, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. For institutions with total assets of more than $3 billion, independent auditors may be required to review quarterly financial statements. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
Capital Adequacy Requirements.
Similar to the Federal Reserve Board’s requirements for bank holding companies, the OCC and FDIC (“federal banking regulators”) have adopted regulations establishing minimum requirements for the capital adequacy of national banks. The federal banking regulators may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. When final rules for the Basel III framework are adopted, the current capital adequacy requirements are expected to change as described above in “
Proposed Capital Adequacy Requirements
.”
The federal banking regulators’ risk-based capital guidelines generally require banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. As of December 31, 2012, the ratio of Tier 1 capital to total risk-weighted assets was 16.53% for MetroBank and 15.07% for Metro United. The ratio of total capital to total risk-weighted assets at December 31, 2012 was 17.80% for MetroBank, and 16.34% for Metro United.
The federal banking regulators’ leverage guidelines require banks to maintain Tier 1 capital of no less than 4.0% of average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. As of December 31, 2012, MetroBank’s and Metro United’s ratio of Tier 1 capital to average total assets (leverage ratio) was 12.70% and 12.76% respectively.
Corrective Measures for Capital Deficiencies.
The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A “well capitalized” bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An “adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a well capitalized bank. A bank is “undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized. As of December 31, 2012, the most recent notifications from the OCC categorized MetroBank as “well capitalized” under the regulatory framework for prompt corrective action. As of December 31, 2012, the most recent notifications from the FDIC categorized Metro United as “well capitalized” under the regulatory framework for prompt corrective action There are no conditions or events since the notifications that management believes have changed MetroBank’s or Metro United’s level of capital adequacy.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations authorize broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment, and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
As an institution’s capital decreases, the federal banking regulator’s enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. The federal banking regulators have only very limited discretion in dealing with a critically undercapitalized institution and are virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital. Additionally, the CDFI as the primary regulator for California state–chartered banks such as Metro United, has a broad range of enforcement measures, from issuing a cease and desist order, imposing monetary penalties and forcing a bank into receivership in order to liquidate.
Deposit Insurance Assessments.
Substantially all of the deposits of the Banks are insured up to applicable limits (currently $250,000) by the DIF of the FDIC and the Banks must pay deposit insurance assessments to the FDIC for such deposit insurance protection. The FDIC maintains the DIF by designating a required reserve ratio. If the reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the DIF will return to an acceptable level generally within five years. The designated reserve ratio is currently set at 2.00%. The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio.
The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon certain statutory factors. Under its current regulations, the FDIC imposes assessments for deposit insurance according to a depository institution's ranking in one of four risk categories based upon supervisory and capital evaluations. The assessment rate for an individual institution is determined according to a formula based on a combination of weighted average CAMELS component ratings, financial ratios and, for institutions that have long-term debt ratings, the average ratings of its long-term debt. On February 7, 2011, the FDIC approved a final rule that amended the then-existing DIF restoration plan and implemented certain provisions of the Dodd-Frank Act. As of April 1, 2011, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the prior assessment base of adjusted domestic deposits. Since the change resulted in a much larger assessment base, the final rule also lowered the assessment rates in order to keep the total amount collected from financial institutions relatively unchanged from the amounts previously being collected.
In November 2009, the FDIC adopted a rule that required all insured institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As of December 31, 2012, $3.4 million in pre-paid deposit insurance was included in the Company’s consolidated balance sheet.
Enforcement Powers.
The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or its banking subsidiaries, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan.
Brokered Deposit Restrictions.
Adequately capitalized institutions (as defined for purposes of the prompt corrective action rules described above) cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits. Well capitalized institutions are not subject to restrictions. Pursuant to the Agreement, MetroBank must obtain prior approval from the OCC before it may accept, renew or roll over any brokered deposits. There are no brokered deposit restrictions for Metro United.
Concentrated Commercial Real Estate Lending Regulations
. The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other land represent 300% or more of total capital, and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
U.S. Treasury Capital Purchase Program
. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) (initially introduced as the Troubled Asset Relief Program or “TARP”) was enacted. TARP gave the U.S. Treasury authority to deploy up to $700 billion into the financial system with an objective of improving liquidity in capital markets. On October 14, 2008, the U.S. Treasury announced the CPP, which provided for direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. The program is voluntary and requires participating institutions to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. The CPP provided for the purchase by the U.S. Treasury of perpetual senior preferred stock in an aggregate amount ranging from 1% to 3% of a participant’s risk-weighted assets. The CPP also required a public company participant to issue to the U.S. Treasury warrants to purchase common stock equal to 15% of the capital invested by the U.S. Treasury. The Company elected to participate in the CPP on January 16, 2009. During the third quarter of 2012, the Company repurchased all outstanding preferred shares associated with the CPP. See Note 11,
“Shareholders’ Equity”
for more information.
American Recovery and Reinvestment Act of 2009
. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. Section 7001 of the ARRA amended Section 111 of the EESA in its entirety and significantly expanded the executive compensation restrictions previously imposed by the EESA. Such restrictions apply to any entity that has received or will receive financial assistance under the TARP, and shall generally continue to apply for as long as any obligation arising from financial assistance provided under TARP, including preferred stock the Company issued under the CPP, remains outstanding. These ARRA restrictions shall not apply to any TARP recipient during such time when the U.S. Treasury (i) only holds a warrant to purchase common stock of such recipient or (ii) holds no preferred stock or warrant to purchase common stock of such recipient.
Cross-Guarantee Provisions.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) contains a “cross-guarantee” provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution.
Community Reinvestment Act.
The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate-income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. FIRREA requires federal banking agencies to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. In their most recent performance evaluations, MetroBank received a “satisfactory” CRA performance rating from the OCC and Metro United Bank received a “satisfactory” CRA performance rating from the FDIC.
Consumer Financial Protection Bureau
. The Dodd-Frank Act established the CFPB, which has supervisory authority over depository institutions with total assets of $10 billion or greater. The CFPB will focus its supervision and regulatory efforts on (i) risks to consumers and compliance with the federal consumer financial laws, when it evaluates the policies and practices of a financial institution; (ii) the markets in which firms operate and risks to consumers posed by activities in those markets; (iii) depository institutions that offer a wide variety of consumer financial products and services; depository institutions with a more specialized focus; and (iv) non-depository companies that offer one or more consumer financial products or services. At present, the CFPB has no supervisory authority over the Company or the Banks.
Consumer Laws and Regulations.
In addition to the laws and regulations discussed herein, the Banks are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Banks must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.
Privacy.
In addition to expanding the activities in which banks and bank holding companies may engage, the Gramm-Leach-Bliley Act imposes new requirements on financial institutions with respect to customer privacy. The Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of customer privacy than the Gramm- Leach-Bliley Act.
Anti-Money Laundering and Anti-Terrorism Legislation
. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including, causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions when approval is not required.
Office of Foreign Assets Control Regulation
. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). Failure to comply with these sanctions could have serious legal and reputational consequences, including, causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions when approval is not required.
Legislative and Regulatory Initiatives
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or the Banks. A change in statutes, regulations or regulatory policies applicable to the Company or the Banks could have a material effect on the Company’s business, financial condition and results of operations.
Dodd-Frank Act
The Dodd-Frank Act, enacted in July 2010, significantly restructured the financial regulatory landscape in the United States. It contains numerous provisions that affect all bank holding companies and banks. Many of the Dodd-Frank Act’s provisions are still subject to the final rulemaking by federal banking agencies, and the implication of the Dodd-Frank Act for the Company’s business will depend to a large extent on how such rules are adopted and implemented. The Company’s management continues to review actively the provisions of the Dodd–Frank Act and assess its probable impact on its business, financial condition and results of operations.
The Dodd-Frank Act authorized the Federal Reserve Board to adopt enhanced supervision and prudential standards for, among others, bank holding companies with total consolidated assets of $50 billion or more (often referred to as “systemically important financial institutions” or “SIFI”), and authorized the Federal Reserve Board to establish such standards either on its own or upon the recommendations of the Financial Stability Oversight Council (“FSOC”), a new systemic risk oversight body created by the Dodd-Frank Act. In December 2011, the Federal Reserve Board issued for public comment a notice of proposed rulemaking establishing enhanced prudential standards responsive to these provisions for (i) risk-based capital requirements and leverage limits, (ii) stress testing of capital, (iii) liquidity requirements (iv) overall risk management requirements (v) resolution plan and credit exposure reporting and (vi) concentration/credit exposure limits. Although comments on these proposed rules (the “Proposed SIFI Rules”), were due by April 30, 2012, the final rule has not yet been issued. The Proposed SIFI Rules address a wide, diverse array of regulatory areas, each of which is highly complex. Most of the Proposed SIFI Rules will not apply to the Company as its total consolidated assets remain below $50 billion. However, two aspects of the Proposed SIFI Rules apply to bank holding companies with total consolidated assets of $10 billion or more (a) requirements for annual stress testing of capital under one base and two stress scenarios and (b) certain corporate governance provisions requiring, among other things, that each bank holding company establish a risk committee of its board of directors and that that committee include a “risk expert.”
Incentive Compensation
. In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors
The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking industry by FDICIA is the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the federal regulators possess extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the agencies’ authority in recent years, and the agencies have not yet fully tested the limits of their powers.
Effect of Monetary Policy
The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate or federal funds rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted.
An investment in the Company’s Common Stock involves risks. The following is a description of the material risks and uncertainties that the Company believes affect its business and an investment in its Common Stock. Additional risks and uncertainties that the Company is unaware of, or that it currently deems immaterial, also may become important factors that affect the Company and its business. If any of the risks described in this Annual Report on Form 10-K were to occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Common Stock could decline significantly and you could lose all or part of your investment.
Risks Associated with the Company’s Business
The current economic environment poses significant challenges for the Company and could adversely affect the Company’s business, financial condition and results of operations.
The Company is operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and locally in its markets. Financial institutions continue to be affected by declines in the real estate market that have negatively impacted the credit performance of mortgage, construction and commercial real estate loans and resulted in significant write-downs of assets by many financial institutions. The Company retains direct exposure to the residential and commercial real estate markets, and is affected by these events. The Company’s ability to assess the creditworthiness of customers and to estimate the losses inherent in its loan portfolio is made more complex by these difficult market and economic conditions.
A prolonged national economic recession or further deterioration in these conditions in the Company’s markets could drive losses beyond that which is provided for in its allowance for loan losses and result in the following consequences:
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increases in loan delinquencies;
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increases in nonperforming assets and foreclosures;
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decreases in demand for the Company’s products and services, which could adversely affect its liquidity position; and
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decreases in the value of the collateral securing the Company’s loans, especially real estate, which could reduce customers’ borrowing power.
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A worsening of these conditions would likely exacerbate the adverse effects of these difficult economic conditions on the Company, its customers and the other financial institutions in its market. As a result, the Company may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds. Continued declines in real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse affect on the Company’s borrowers or its customers, which could adversely affect its business, financial condition and results of operations.
The Company's dependence on loans secured by real estate subjects it to risks relating to fluctuations in the real estate market and related interest rates and legislation that could result in significant additional costs and capital requirements that could adversely affect its financial condition and results of operations.
Approximately 77.3% of the Company’s loan portfolio as of December 31, 2012 was comprised of loans collateralized by real estate. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in the Company’s primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estate owned by the Company. As real estate values decline, it is also more likely that the Company would be required to make provisions for additional loan losses, which could adversely affect its financial condition and results of operations. In the event of a default with respect to any of these loans, amounts received upon disposal of the collateral may be insufficient to recover outstanding principal and interest on the loan. As a result, the Company’s profitability and financial condition could be adversely impacted.
As of December 31, 2012, approximately $9.7 million or 0.88% of the Company’s gross loan portfolio was in real estate construction loans. Of this amount, $2.4 million were made to finance residential construction projects, of which 86.3% were located in Texas, and 13.7% were located in California. Further, $7.3 million of real estate construction loans were made to finance commercial construction, with 65.1% of these loans made to finance construction projects located in Texas and 34.9% in California. Construction loans are subject to risks during the construction phase that are not present in standard residential real estate and commercial real estate loans. These risks include:
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the viability of the contractor;
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the contractor’s ability to complete the project, to meet deadlines and time schedules and to stay within cost estimates; and
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concentrations of such loans with a single contractor and its affiliates.
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Real estate construction loans also present risks of default in the event of declines in property values or volatility in the real estate market during the construction phase. The current slowdown in the sales of residential properties, and the related reduction in prices, has affected construction lending activities in the Company’s market areas, and the Company expects that these conditions will have the effect of extending the durations of its construction loans and increasing the risk of possible loss on these loans. If any of these risks were to occur, it could adversely affect the Company’s financial condition and results of operations.
The federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If there is any deterioration in the Company’s commercial mortgage or construction portfolios or if its regulators conclude that the Company has not implemented appropriate risk management practices, it could adversely affect the Company’s business and result in a requirement of increased capital levels, and such capital may not be available at that time.
The Company's commercial mortgage loans and commercial and industrial loans expose it to increased credit risks.
The Company's lending efforts are primarily focused on commercial and industrial loans and commercial mortgage loans. As of December 31, 2012, commercial and industrial loans, including short-term loans to foreign correspondent banks, and commercial mortgage loans totaled $1.05 billion. In general, commercial mortgage loans and commercial and industrial loans yield higher returns and often generate a deposit relationship, but also pose greater credit risks than do owner-occupied residential real estate loans. As the Company's various commercial loan portfolios increase, the corresponding risks and potential for losses from these loans will also increase.
The Company makes both secured and a limited amount of unsecured commercial loans. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Secured commercial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed. Further, commercial loans generally will be serviced primarily from the operation of the business, which may not be successful, and commercial mortgage loans generally will be serviced from income on the properties securing the loans.
The Company’s business is subject to interest rate risk and fluctuations in interest rates may adversely affect its earnings and capital levels.
The majority of the Company’s assets are monetary in nature and, as a result, the Company is subject to significant risk from changes in interest rates. Changes in interest rates can impact the Company’s net interest income as well as the valuation of its assets and liabilities. The Company’s earnings are significantly dependent on its net interest income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company expects that it will periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either its interest-bearing liabilities will be more sensitive to changes in market interest rates than its interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to the Company’s position, this “gap” will negatively impact the Company’s earnings.
An increase in the general level of interest rates may also, among other things, reduce the demand for loans and the Company’s ability to originate loans. Conversely, a decrease in the general level of interest rates, among other things, may lead to an increase in prepayments on the Company’s loan and mortgage-backed securities portfolios and increased competition for deposits. Accordingly, changes in the general level of market interest rates affect the Company’s net yield on interest-earning assets, loan origination volume, market value of loans and mortgage-backed securities portfolios.
Market interest rates are affected by many factors outside of the Company’s control, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international disorder, and instability in domestic and foreign financial markets. In view of the low interest rates on savings, loans and investments that currently prevail, it is quite possible that significant changes in interest rates may take place in the future, and the Company cannot always accurately predict the nature or magnitude of such changes or how such changes may affect its business. Although the Company’s asset-liability management strategy is designed to control its risk from changes in the general level of market interest rates, it may not be able to prevent changes in interest rates from having a material adverse affect on the Company’s earnings and capital levels.
If the goodwill that the Company recorded in connection with a business acquisition becomes impaired, it could have a negative impact on the Company’s profitability.
Goodwill represents the amount by which acquisition cost exceeds the fair value of net assets the Company acquired in the purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. Examples of those events or circumstances include the following:
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significant decline in the Company’s stock price;
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significant reductions in profitability;
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significant adverse change in business climate;
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significant changes in credit quality;
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significant unanticipated loss of customers;
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unanticipated loss of key personnel; or
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significant loss of deposits or loans.
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The Company determines impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in the Company’s results of operations in the periods in which they become known. Goodwill is reviewed at least annually or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable. During the fourth quarter of 2009, the first quarter of 2010 and the fourth quarter of 2011, the Company recorded non-cash impairment charges of $2.5 million, $2.0 million and $3.0 million, respectively, as a component of noninterest expense. No impairment charges were recorded in 2012. At December 31, 2012, the Company’s goodwill after the impairments was $14.3 million. If weaknesses and adverse economic conditions with respect to the Company’s California markets worsen or fail to improve or if the market price of the Company’s common stock declines significantly from the price at December 31, 2012, the Company may be required to recognize additional goodwill impairment charges in the future, which could have a material adverse effect on the Company’s equity and financial condition.
The Company has a high level of nonperforming assets, which take significant time to resolve, have required it to significantly increase the provision for loan losses and are likely to continue to materially adversely affect the Company’s business, results of operations and financial condition.
The Company experienced a substantial increase in nonperforming assets during the year ending December 31, 2009, resulting in increases in its provisions for loan losses. At December 31, 2009, 2010, 2011 and 2012 total nonperforming assets (which include nonperforming loans and ORE) were $102.9 million, $92.8 million, $63.9 million and $41.5 million, or 6.47%, 5.95%, 4.27% and 2.73% of total assets, respectively.
Nonperforming assets adversely affect the Company’s net income in various ways. Until economic and market conditions improve, the Company may continue to incur losses relating to an increase in nonperforming assets. The Company does not record interest income on nonaccrual loans or ORE, thereby adversely affecting its net interest income, and increasing its loan administration costs. When the Company takes collateral in foreclosures and similar proceedings, it is required to mark the related loan to the then fair value of the collateral, which may ultimately result in a loss. Further, an increase in the level of nonperforming assets increases the Company’s regulatory risk profile. While the Company reduces problem assets through workouts, restructurings, loan sales and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond the Company’s control, could adversely affect the Company’s business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and the Board of Directors, which can be detrimental to the performance of their other responsibilities. There can be no assurance that the Company will not experience future increases in nonperforming assets.
MetroBank’s failure to comply with the provisions of the Agreement with the OCC could subject MetroBank and the Company to more severe regulatory enforcement actions.
On August 10, 2009, MetroBank entered into the Agreement with the OCC, which was based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009. Pursuant to the Agreement, MetroBank took certain actions to address various issues that have impacted MetroBank’s asset quality. The Agreement provides for, among other things, the development and implementation of written programs to reduce MetroBank’s credit risks, monitor and reduce the level of criticized assets and manage commercial real estate loan concentrations in light of current adverse commercial real estate market conditions generally and in its market areas.
Management and the Boards of Directors of the Company and MetroBank have taken steps to address the findings of the exam and are working with the OCC to comply with the requirements of the Agreement. Failure by MetroBank to meet the requirements and conditions imposed by the Agreement could result in more severe regulatory enforcement actions such as capital directives to raise additional capital, civil money penalties, cease and desist or removal orders, injunctions, and public disclosure of such actions against MetroBank. Any such failure and resulting regulatory action could have a material adverse effect on the financial condition and results of operations of the Company and MetroBank.
Compliance with the Agreement will require significant time and attention from the management teams of the Company and MetroBank, which may increase the Company’s operating cost, impede the efficiency of the Company’s internal business processes and adversely affect the Company’s financial condition and results of operations in the near-term.
On August 10, 2009, MetroBank entered into the Agreement with the OCC. The Agreement requires the review, revision and adherence to current policies and procedures, and in certain instances adoption of new policies and procedures, including those associated with credit concentration management, the allowance for loan losses, liquidity management and criticized assets. While the Company intends to take all such actions as may be necessary to enable the MetroBank to comply with the requirements of the Agreement, compliance with such requirements could divert management’s attention from other important issues. If the Company is unable to manage compliance with the Agreement effectively or is unable to comply fully with the provisions of the Agreement, the Company’s operating costs, efficiency, financial condition and results of operations may be adversely affected.
The Company’s allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect its earnings.
As a lender, the Company is exposed to the risk that its loan customers may not repay their loans according to the terms of these loans and the collateral securing the payment of these loans may be insufficient to fully compensate the Company for the outstanding balance of the loan plus the costs to dispose of the collateral. Management makes various assumptions and judgments about the collectability of the Company’s loan portfolio, including concentrations of credit, common characteristics of known problem loans, potential problem loans, and other loans that exhibit weaknesses or deterioration, the general economic environment in the Company’s markets as well as the national economy, particularly the real estate markets, changes in value of the collateral securing loans, results of portfolio stress tests, and changes in lending processes, procedures and personnel and other relevant factors.
The Company maintains an allowance for loan losses in an attempt to cover loan losses inherent in its loan portfolio. Additional loan losses will likely occur in the future and may occur at a rate greater than the Company has experienced to date. In determining the size of the allowance, the Company relies on an analysis of its loan portfolio, its experience and its evaluation of general economic conditions. If the Company’s assumptions prove to be incorrect or if it experiences significant loan losses, its current allowance may not be sufficient to cover actual losses and adjustments may be necessary to allow for different economic conditions or adverse developments in its loan portfolio. A material addition to the allowance could cause a material decrease in net income.
In addition, federal and state regulators periodically review the Company’s allowance for loan losses and may require the Company to increase its provision for loan losses or recognize further charge-offs, based on judgments different than those of the Company’s management. Any increase in the Company’s allowance for loan losses or charge-offs as required by these regulatory agencies could have a material adverse effect on the Company’s operating results and financial condition.
Future losses or insufficient core earnings may result in the Company's inability to fully realize its deferred tax asset, which could have a material adverse effect on the Company's earnings and capital.
As of December 31, 2012, the Company had a deferred tax asset of $13.1 million. The Company must assess the likelihood that it will be able to recover its deferred tax assets. If recovery is not likely, it must increase the provision for taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. The Company believes that it will ultimately recover the deferred tax asset recorded in its consolidated balance sheets. However, should there be a change in the Company’s ability to recover its deferred tax asset, the tax provision would increase in the period in which it has determined that the recovery was not likely.
The Company did not establish a valuation allowance against the deferred tax asset as of December 31, 2012 as management believes that it is more likely than not that the Company will have sufficient future earnings to utilize this asset to offset future income tax liabilities.
If the Company were to determine at some point in the future that it will
not achieve sufficient future taxable income to realize its deferred tax
asset, the Company would be required under generally accepted accounting principles to
establish a full or partial valuation allowance. If the Company determines that a
valuation allowance is necessary, the Company would incur a charge to operations that could have a material adverse effect on its earnings and capital.
Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition.
Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings, and other sources could have a substantial negative effect on its liquidity. The Company’s access to funding sources in amounts adequate to finance its activities or on terms which are acceptable to it could be impaired by factors that affect the Company specifically or the financial services industry or economy in general. Factors that could detrimentally impact the Company’s access to liquidity sources include a decrease in the level of its business activity as a result of a downturn in the markets in which its loans are concentrated or adverse regulatory action against it. The Company’s ability to borrow could also be impaired by factors that are not specific to it, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.
The Company may need to raise additional capital in the future and such capital may not be available when needed.
The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs. The Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of its control, and its financial performance. The ongoing liquidity crisis and the loss of confidence in financial institutions may increase the Company’s cost of funding and limit its access to some of its customary sources of capital, including, but not limited to, inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve.
The Company cannot be assured that such capital will be available to it on acceptable terms or at all. Any occurrence that may limit its access to the capital markets, such as a decline in the confidence of investors, depositors of the Banks or counterparties participating in the capital markets, may adversely affect the Company’s capital costs and its ability to raise capital and, in turn, its liquidity. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the Company’s businesses, financial condition and results of operations.
The Company’s profitability depends significantly on local economic conditions and a substantial decline in these local economic conditions could negatively affect its financial condition, results of operations and future prospects.
The Company’s success depends primarily on the general economic conditions of the geographic markets in which it operates. Unlike larger banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in the greater Houston and Dallas metropolitan areas in Texas, and in the greater San Diego, Los Angeles, and San Francisco metropolitan areas in California. The local economic conditions in these areas have a significant impact on the Company’s commercial, real estate and construction loans, the ability of its borrowers to repay their loans and the value of the collateral securing these loans. In addition, if the population or income growth in the Company’s market areas is slower than projected, income levels, deposits and housing starts could be adversely affected and could result in a reduction of the Company’s expansion, growth and profitability. Recently, economic conditions in California and, to a lesser extent, Texas have declined and if either of these regions experiences a downturn or a recession for a prolonged period of time, the Company would likely experience significant increases in nonperforming loans, which could lead to operating losses, impaired liquidity and eroding capital. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic calamities, unemployment or other factors could impact these local economic conditions and negatively affect the Company’s financial condition, results of operations and future prospects.
The small to medium-sized businesses that the Company lends to may have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to the Company, and such impairment could materially harm its results of operations and financial condition.
The Company targets its business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized businesses generally have fewer resources in terms of capital or borrowing capacity than larger entities, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan.
The Company primarily makes secured commercial and industrial loans. Secured commercial loans may be collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses.
In addition, the success of a small to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact the Company’s market areas could cause the Company to incur substantial credit losses that could negatively affect the Company’s results of operations and financial condition may be negatively affected.
Adverse conditions in Asia could adversely affect the Company’s business.
The Company has many customers with economic and cultural ties to Asia and, as a result, the Company is likely to feel the effects of adverse economic and political conditions in Asia. Additionally, the Company has extended credit to foreign correspondent banks in China, which are directly affected by economic and political conditions in China. United States and global economic policies, military tensions, and unfavorable global economic conditions may adversely impact the Asian economies. Pandemics and other public health crises or concerns over the possibility of such crises could create economic and financial disruptions in the region. If economic conditions in Asia deteriorate, the Company could be exposed to economic and transfer risk, and could experience an outflow of deposits by those customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of loans made to such entities. Adverse economic conditions in Asia and in China in particular, may also negatively impact asset values and the profitability and liquidity of the Company’s customers who operate in this region.
The Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy and its business, results of operations, financial condition or prospects could be harmed by the loss of their services.
The Company believes that its continued growth and future success will depend in large part on the skills of its senior management team. The Company believes its senior management team possesses valuable knowledge about and experience in the banking industry and that their knowledge and relationships would be very difficult to replicate. Although George M. Lee, our Co-Chairman, Chief Executive Officer and President, has entered into an employment agreement with the Company, he may not complete the term of his employment agreement or renew it upon expiration. The Company also needs to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of its business. Competition for such personnel can be intense, and the Company may not be able to hire or retain such personnel. The loss of service of one or more of its executive officers or key personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on The Company’s business, results of operations, financial condition or prospects.
The Company may be required to pay significantly higher FDIC deposit insurance assessments in the future, which could adversely affect its earnings.
Recent insured depository institution failures, as well as deterioration in banking and economic conditions generally, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the FDIC to historical lows. The FDIC anticipates that additional insured depository institutions are likely to fail in the foreseeable future so the reserve ratio may continue to decline. In addition, the deposit insurance limit on FDIC deposit insurance coverage generally has increased to $250,000. These developments have caused the FDIC premiums to increase and may result in increased assessments in the future.
On February 7, 2011, the FDIC approved a final rule that amended the DIF restoration plan and implemented certain provisions of the Dodd-Frank Act. Effective April 1, 2011, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the previous assessment base of adjusted domestic deposits. The new assessment rates, calculated on the revised assessment base, generally range from 2.5 to 9 basis points for Risk Category I institutions, 9 to 24 basis points for Risk Category II institutions, 18 to 33 basis points for Risk Category III institutions, and 30 to 45 basis points for Risk Category IV institutions. The new assessment rates were calculated for the quarter beginning April 1, 2011 and were reflected in invoices for assessments due September 30, 2011.
The final rule provides the FDIC’s board with the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted on February 7, 2011 without notice and comment, if certain conditions are met. An increase in the assessment rates could have an adverse impact on the Company’s results of operations. While the Company’s FDIC insurance related costs declined to $1.8 million for the year ended December 31, 2012, compared with $2.5 million and $3.3 million for the years ended December 31, 2011 and 2010, respectively, assessments may increase in the future at the discretion of the FDIC.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.
The recent repeal of federal prohibitions on payment of interest on demand deposits could increase the Company's interest expense, which could have a material adverse effect on its business, financial condition and results of operations.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions may offer interest on demand deposits to compete for clients. The Company's interest expense will increase and its net interest margin will decrease if it begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company could be subject to environmental risks and associated costs on its foreclosed real estate assets, which could adversely affect its profitability.
A significant portion of the Company’s loan portfolio is secured by real property. There is a risk that hazardous or toxic waste could be discovered on the properties that secure the Company’s loans. If the Company acquires such properties as a result of foreclosure, it could be held responsible for the cost of cleaning up or removing this waste, and this cost could exceed the value of the underlying properties and adversely affect the Company’s profitability. Although the Company has policies and procedures that require it to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.
Potential acquisitions may disrupt the Company’s business and dilute shareholder value.
The Company has in the past, and may in the future consider acquisition opportunities with other financial institutions. The Company seeks merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
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Potential exposure to unknown or contingent liabilities of the target company;
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Exposure to potential asset quality issues of the target company;
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Difficulty and expense of integrating the operations, management, products and services of the target company;
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Potential disruption to the Company’s business;
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Potential diversion of the Company management’s time and attention;
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Possible loss of key employees and customers of the target company; and
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Difficulty in estimating the value of the target company.
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Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. The Company’s failure to successfully integrate any entity it may acquire and realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from such acquisition could have a material adverse effect on the Company’s financial condition, results of operations and business.
The Company is subject to losses resulting from fraudulent and negligent acts on the part of loan applicants, correspondents or other third parties.
The Company relies heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans the Company will originate, as well as the terms of those loans. If any of the information upon which the Company relies is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or the Company may fund a loan that it would not have funded or on terms it would not have extended. Whether a misrepresentation is made by the applicant or another third party, the Company generally bears the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses the Company may suffer.
The network and computer systems on which the Company depends could fail or experience a security breach and any such failure or breach could have a material adverse effect on its business, results of operations, financial condition or prospects.
The Company computer systems are vulnerable to unforeseen problems. Because the Company conducts part of its business over the Internet and outsource several critical functions to third-parties, its operations depend on its ability, as well as that of third-party service providers, to protect computer systems and network infrastructure against damage from fire, power loss, telecommunications failure, physical break-ins or similar catastrophic events. Any damage or failure that causes interruptions in operations could have a material adverse effect on the Company’s business, results of operations, financial condition or prospects.
The Company also relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in its customer relationship management, general ledger, deposit, loan and other systems. The occurrence of any failure, interruption or security breach of its information systems could damage its reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose it to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, results of operations, financial condition or prospects.
The business of the Company is dependent on technology and its inability to invest in technological improvements may adversely affect its results of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company’s future success will depend in part upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as create additional efficiencies in its operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. There can be no assurance that the Company will be able to effectively implement new technology driven products and services or be successful in marketing these products and services to its customers.
The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision that could
have a material adverse effect on its business, financial condition and results of operations, and the Company may be adversely affected by changes in federal and local laws and regulations.
The Company and the Banks are subject to extensive regulation, supervision and examination by federal and state banking authorities. These regulations affect the Company's lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal legislation could have a substantial impact on the Company, the Banks and their respective operations.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect the Company's powers, authority and operations, or the powers, authority and operations of the Banks in substantial and unpredictable ways. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative impact on the Company. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If the Company’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that the Company has already acquired or may acquire in the future are deficient, it would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including its acquisition plans, which would negatively impact the Company’s business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.
Severe weather, natural disasters, acts of war or terrorism and other external events could have a material adverse effect on the Company’s financial condition and results of operations.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company's ability to conduct business. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on the Company's financial condition and results of operations.
Risks Associated with the Company’s Common Stock
The Company’s corporate organizational documents and the provisions of Texas law to which it is subject may delay or prevent a change in control of the Company that you may favor.
The Company’s amended and restated articles of incorporation and amended and restated bylaws contain various provisions which may delay, discourage or prevent an attempted acquisition or change of control of the Company. These provisions include:
|
|
•
|
a board of directors classified into three classes of directors with the directors of each class having staggered three year terms;
|
|
|
•
|
a provision that any special meeting of the Company’s shareholders may be called only by the chairman of the board, the president and chief executive officer, the majority of the board of directors or the holders of at least 50% of the Company’s shares entitled to vote at the meeting;
|
|
|
•
|
a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders; and
|
|
|
•
|
a provision that denies shareholders the right to amend the Company’s bylaws.
|
The Company’s articles of incorporation provide for noncumulative voting for directors and authorize the Board of Directors to issue shares of its preferred stock without shareholder approval and upon such terms as the Board of Directors may determine. The issuance of the Company preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in the Company. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of the Company.
The trading volume in the Company Common Stock has been low, which means that significant sales of Company Common Stock, or the expectation of these sales, could cause its stock price to fall.
Although the Company Common Stock is listed for trading on the NASDAQ Global Market, the trading volume in the Company Common Stock has been limited and is less than that of larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market place of willing buyers and sellers of the Company Common Stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the limited trading volume of the Company Common Stock, significant sales of its Common Stock, or the expectation of these sales, could cause the Company’s stock price to fall. As of December 31, 2012, the Company’s executive officers and directors owned approximately 14.8% of the Common Stock. The significant amount of Common Stock owned by the Company’s executive officers and directors may adversely affect the development of a more active trading market.
The Company’s directors and executive officers own a significant number of shares of Company Common Stock, allowing management further control over the Company’s corporate affairs.
As of December 31, 2012, the Company’s executive officers and directors owned approximately 14.8% of the outstanding Company Common Stock. Accordingly, these directors and executive officers are able to control, to a significant extent, the outcome of all matters required to be submitted to the Company’s shareholders for approval, including decisions relating to the election of directors, the determination of day-to-day corporate and management policies and other significant corporate transactions.
The Company has currently suspended the payment of dividends on its Common Stock. In addition, its future ability to pay dividends is subject to restrictions.
It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. In April 2009, the Company’s Board of Directors elected to suspend its common stock dividend indefinitely. The payment of any future dividends by the Company will be made at the discretion of the Company's Board of Directors and will be subject to any regulatory restrictions imposed by the Federal Reserve Board. Additionally, future determination of dividends will depend on a number of factors, including but not limited to current and prospective earnings, capital requirements, financial condition, and other factors that the Board of Directors and regulators may deem relevant to the Company and the Banks.
The Company’s principal source of funds to pay dividends on its Common Stock will be cash dividends that it receives from the Banks. The payment of dividends by the Banks to the Company is subject to certain restrictions imposed by federal banking laws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be “undercapitalized” as defined by statute. In addition, the relevant federal regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending on the financial condition of the Banks. Regulatory authorities could impose administratively stricter limitations on the ability of the Banks to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements. Under applicable restrictions as of December 31, 2012, no dividends could be paid by MetroBank to the Company without prior regulatory approval.
The holders of the Company’s junior subordinated debentures have rights that are senior to those of the Company’s shareholders.
As of December 31, 2012, the Company had $36.1 million in junior subordinated debentures outstanding which were issued to the Company’s subsidiary trust, MCBI Trust I. The junior subordinated debentures are senior to the Company’s shares of Common Stock and Series A Preferred Stock. As a result, the Company must make payments on the junior subordinated debentures (and the related trust preferred securities) before any dividends can be paid on its Common Stock and Series A Preferred Stock and, in the event of the Company’s bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of the Common Stock or Series A Preferred Stock. The Company has the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid to holders of the Company’s Common Stock and Series A Preferred Stock. The Company’s ability to pay the future distributions depends upon the earnings of the Banks and dividends from the Banks to the Company, which may be inadequate to service the obligations. Interest payments on the junior subordinated debentures underlying the trust preferred securities are classified as a “dividend” by the Federal Reserve supervisory policies and therefore will be subject to applicable restrictions and approvals imposed by the Federal Reserve Board on the Company.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The principal executive offices of the Company and MetroBank are located in leased space at 9600 Bellaire Boulevard, Suite 252, Houston, Texas. The principal executive offices of Metro United are located in the Rowland Heights branch, in leased space at 17560 East Colima Road, in Rowland Heights, California. The following table sets forth the Company’s locations by geographic area:
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|
|
Owned
|
|
|
Leased
|
|
|
Total
|
|
|
Branches in Houston metropolitan area
|
|
|
4
|
|
|
|
5
|
|
|
|
9
|
|
|
Branches in Dallas metropolitan area
|
|
|
—
|
|
|
|
4
|
|
|
|
4
|
|
|
Branch in San Diego, California
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Branches in Los Angeles metropolitan area (1)
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
Branches in San Francisco metropolitan area (2)
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
Branch in Rowland Heights, California
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Corporate headquarters in Houston, Texas
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Total
|
|
|
4
|
|
|
|
16
|
|
|
|
20
|
|
|
(1)
|
Los Angeles metropolitan area includes Irvine and Alhambra, California
|
|
(2)
|
San Francisco metropolitan area includes San Mateo, California
|
The leases for the branches in Texas have expiration dates ranging from May 2013 to September 2017, excluding any renewal periods available at the Company’s option. The leases for branches in California have expiration dates ranging from November 2014 to June 2018. The leases covering the corporate headquarters have expiration dates in December 2015.
Item 3.
Legal Proceedings
The Company is involved in various legal proceedings that arise in the normal course of business. In the opinion of management of the Company, after consultation with its legal counsel, such legal proceedings are not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Item 4.
Mine Safety Disclosures
None.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or notes thereto.
3. The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with the Securities and Exchange Commission. The Company will furnish a copy of any exhibit to shareholders upon written request to the Company and payment of a reasonable fee.
|
Exhibit
Number(1)
|
|
Description
|
|
|
|
|
|
2.1
|
|
Letter Agreement, dated January 16, 2009, including the Securities Purchase Agreement—Standard Terms incorporated by reference therein, by and between the Company and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
|
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|
|
|
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3.1
|
|
Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-62667) (the “Registration Statement”)).
|
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|
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3.2
|
|
Articles of Amendment to the Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).
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|
|
|
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3.3
|
|
Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
|
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|
|
|
|
3.4
|
|
Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report of Form 8-K filed on November 19, 2007).
|
|
|
|
|
|
4.1
|
|
Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
|
|
Exhibit
Number(1)
|
|
Description
|
|
|
|
|
|
4.2
|
|
Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company’s Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
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|
|
|
|
10.1†
|
|
MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Registration Statement).
|
|
|
|
|
|
10.2†
|
|
MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan, as amended (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement of Form S-8 (Registration No. 333-160112)).
|
|
|
|
|
|
10.3†
|
|
Form of Incentive Stock Option Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (Registration No. 333-143502) the “S-8 Registration Statement”)).
|
|
|
|
|
|
10.4†
|
|
Form of Non Qualified Stock Option Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.4 of the S-8 Registration Statement).
|
|
|
|
|
|
10.5†
|
|
Form of Stock Appreciation Rights Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.5 of the S-8 Registration Statement).
|
|
|
|
|
|
10.6†
|
|
Form of Restricted Stock Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.6 of the S-8 Registration Statement).
|
|
|
|
|
|
10.7†
|
|
Form of Restricted Stock Agreement (CPP Long-Term) under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011).
|
|
|
|
|
|
10.8†
|
|
Employment Agreement between the Company and George M. Lee effective January 26, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report of Form 8-K filed on February 21, 2012).
|
|
|
|
|
|
10.9†
|
|
Letter Agreement between MetroBank, N.A. and David Tai dated as of February 14, 2005 (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
|
|
|
|
|
|
10.10†
|
|
Letter Agreement between MetroBank, N.A. and David Choi dated as of February 14, 2005 (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
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|
|
|
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10.11
|
|
Form of Waiver, executed by each of George M. Lee, David C. Choi and David Tai (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
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|
|
|
|
|
10.12†
|
|
Form of Executive Compensation Letter Agreement, executed by each of George M. Lee, David C. Choi and David Tai (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
|
|
|
|
|
|
|
|
|
|
10.13†
|
|
Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 10, 2012).
|
|
|
|
|
|
10.14†
|
|
Form of Incentive Stock Option Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (No. 333-181629)).
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|
|
|
|
|
10.15†
|
|
Form of Nonqualified Stock Option Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.4 to the Registration Statement on Form S-8 (No. 333-181629)).
|
|
|
|
|
|
10.16†
|
|
Form of Stock Appreciation Rights Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-8 (No. 333-181629)).
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|
|
|
|
|
10.17†
|
|
Form of Restricted Stock Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.6 to the Registration Statement on Form S-8 (No. 333-181629)).
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|
|
|
|
10.18†
|
|
Form of Restricted Stock Agreement (CPP Long-Term) under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.7 to the Registration Statement on Form S-8 (No. 333-181629)).
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|
|
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10.19
|
|
Underwriting Agreement dated June 27, 2012, by and among the Company., MetroBank, N.A., Metro United Bank, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Sandler O’Neill & Partners, L.P., as representatives of the several underwriters named in the Underwriting Agreement, and the United States Department of the Treasury (incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on June 28, 2012).
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|
|
|
|
|
11
|
|
Computation of Earnings Per Common Share, included as Note (16) to the Consolidated Financial Statements of this Form 10-K.
|
|
|
|
|
|
21
|
|
Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein by reference to Exhibit 21 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
|
|
|
|
|
|
23.1*
|
|
Consent of KPMG LLP.
|
|
|
|
|
|
23.2*
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
31.1*
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
|
|
|
31.2*
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
|
|
|
32.1**
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2**
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
|
|
|
|
|
99.1*
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008.
|
|
|
|
|
|
101*
|
|
Interactive Data File.
|
|
(1)
|
The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to Securities and Exchange Commission upon request.
|
|
†
|
Management contract or compensatory plan or arrangement.
|
|
*
|
Filed herewith.
|
|
**
|
Furnished herewith.
|
|
(b)
|
Exhibits. See the exhibit list included in Item 15(a)3 of this Annual Report on Form 10-K.
|
|
(c)
|
Financial Statement Schedules. See Item 15(a)2 of this Annual Report on Form 10-K.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Houston.
|
|
METROCORP BANCSHARES, INC.
(Registrant)
|
|
|
|
|
|
Date: March 21, 2013
|
By:
|
/s/
George M. Lee
|
|
|
|
George M. Lee
Co-Chairman,
President and Chief Executive Officer
(principal executive officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ DON J. WANG
|
|
Co-Chairman of the Board
|
|
March 21, 2013
|
|
Don J. Wang
|
|
|
|
|
|
|
|
|
|
|
|
/s/ GEORGE M. LEE
|
|
Co-Chairman, President and Chief Executive Officer (principal executive officer)
|
|
March 21, 2013
|
|
George M. Lee
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DAVID TAI
|
|
Director
|
|
March 21, 2013
|
|
David Tai
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DAVID C. CHOI
|
|
Chief Financial Officer (principal financial officer and principal accounting officer)
|
|
March 21, 2013
|
|
David C. Choi
|
|
|
|
|
|
|
|
|
|
|
|
/s/ KRISHNAN BALASUBRAMANIAN
|
|
Director
|
|
March 21, 2013
|
|
Krishnan Balasubramanian
|
|
|
|
|
|
|
|
|
|
|
|
/s/ HELEN F. CHEN
|
|
Director
|
|
March 21, 2013
|
|
Helen F. Chen
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MAY P. CHU
|
|
Director
|
|
March 21, 2013
|
|
May P. Chu
|
|
|
|
|
|
|
|
|
|
|
|
/s/ SHIRLEY L. CLAYTON
|
|
Director
|
|
March 21, 2013
|
|
Shirley L. Clayton
|
|
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT W. HSUEH
|
|
Director
|
|
March 21, 2013
|
|
Robert W. Hsueh
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN LEE
|
|
Director
|
|
March 21, 2013
|
|
John Lee
|
|
|
|
|
|
|
|
|
|
|
|
/s/ SAISHI FRANK LI
|
|
Director
|
|
March 21, 2013
|
|
Saishi Frank Li
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CHARLES L. ROFF
|
|
Director
|
|
March 21, 2013
|
|
Charles L. Roff
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JOE TING
|
|
Director
|
|
March 21, 2013
|
|
Joe Ting
|
|
|
|
|
|
|
|
|
|
|
|
/s/ YUEPING SUN
|
|
Director
|
|
March 21, 2013
|
|
Yueping Sun
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DANIEL B. WRIGHT
|
|
Director
|
|
March 21, 2013
|
|
Daniel B. Wright
|
|
|
|
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
METROCORP BANCSHARES, INC. AND SUBSIDIARIES
|
Report of Independent Registered Public Accounting Firm 2012 and 2011
|
65
|
|
Report of Independent Registered Public Accounting Firm 2010
|
66
|
|
Consolidated Balance Sheets as of December 31, 2012 and 2011
|
67
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011, and 2010
|
68
|
|
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2012, 2011, and 2010
|
69
|
|
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2012, 2011, and 2010
|
70
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011, and 2010
|
71
|
|
Notes to Consolidated Financial Statements
|
72
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
MetroCorp Bancshares, Inc.:
We have audited the accompanying consolidated balance sheet of MetroCorp Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated financial statements of the Company as of December 31, 2010 were audited by other auditors whose report thereon dated March 15, 2011 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MetroCorp Bancshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
March 21, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
MetroCorp Bancshares, Inc.:
In our opinion, the consolidated statement of operations, comprehensive income (loss), changes in shareholders' equity and cash flows of MetroCorp Bancshares, Inc. and its subsidiaries
present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 15, 2011
METROCORP BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
31,203
|
|
|
$
|
28,798
|
|
|
Federal funds sold and other short-term investments
|
|
|
128,246
|
|
|
|
164,811
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
159,449
|
|
|
|
193,609
|
|
|
Interest-bearing time deposits in banks
|
|
|
15,321
|
|
|
|
—
|
|
|
Securities available-for-sale, at fair value
|
|
|
119,422
|
|
|
|
121,633
|
|
|
Securities available-for-sale pledged with creditors’ right to repledge, at fair value
|
|
|
44,626
|
|
|
|
50,756
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale
|
|
|
164,048
|
|
|
|
172,389
|
|
|
Securities held-to-maturity, at cost (fair value of $4,757 and $4,536)
|
|
|
4,046
|
|
|
|
4,046
|
|
|
Other investments
|
|
|
5,592
|
|
|
|
6,484
|
|
|
Loans, net of allowance for loan losses of $24,592 and $28,321, respectively
|
|
|
1,075,745
|
|
|
|
1,015,095
|
|
|
Loans, held-for-sale
|
|
|
—
|
|
|
|
1,200
|
|
|
Accrued interest receivable
|
|
|
4,120
|
|
|
|
4,327
|
|
|
Premises and equipment, net
|
|
|
4,046
|
|
|
|
4,697
|
|
|
Goodwill
|
|
|
14,327
|
|
|
|
14,327
|
|
|
Deferred tax asset, net
|
|
|
13,110
|
|
|
|
14,995
|
|
|
Customers’ liability on acceptances
|
|
|
7,045
|
|
|
|
5,152
|
|
|
Foreclosed assets, net
|
|
|
12,555
|
|
|
|
19,018
|
|
|
Cash value of bank owned life insurance
|
|
|
32,794
|
|
|
|
31,427
|
|
|
Prepaid FDIC assessment
|
|
|
3,439
|
|
|
|
5,204
|
|
|
Other assets
|
|
|
4,175
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,519,812
|
|
|
$
|
1,494,531
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
309,696
|
|
|
$
|
259,397
|
|
|
Interest-bearing
|
|
|
957,334
|
|
|
|
992,178
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,267,030
|
|
|
|
1,251,575
|
|
|
Junior subordinated debentures
|
|
|
36,083
|
|
|
|
36,083
|
|
|
Other borrowings
|
|
|
25,000
|
|
|
|
26,315
|
|
|
Accrued interest payable
|
|
|
233
|
|
|
|
310
|
|
|
Acceptances outstanding
|
|
|
7,045
|
|
|
|
5,152
|
|
|
Other liabilities
|
|
|
7,390
|
|
|
|
9,913
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,342,781
|
|
|
|
1,329,348
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, 2,000,000 shares authorized; no shares and 45,000 shares issued and outstanding at December 31, 2012 and 2011, respectively
|
|
|
—
|
|
|
|
45,003
|
|
|
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,766,765 and 13,340,815 shares issued and 18,746,385 and 13,340,815 outstanding at December 31, 2012 and 2011, respectively
|
|
|
18,767
|
|
|
|
13,341
|
|
|
Additional paid-in-capital
|
|
|
74,998
|
|
|
|
33,816
|
|
|
Retained earnings
|
|
|
82,881
|
|
|
|
73,188
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
567
|
|
|
|
(165
|
)
|
|
Treasury stock, at cost, 20,380 shares and no shares at December 31 2012 and 2011, respectively
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
177,031
|
|
|
|
165,183
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,519,812
|
|
|
$
|
1,494,531
|
|
The accompanying notes are an integral part of these consolidated financial statements.
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
58,525
|
|
|
$
|
61,798
|
|
|
$
|
72,746
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,006
|
|
|
|
4,452
|
|
|
|
3,632
|
|
|
Tax-exempt
|
|
|
553
|
|
|
|
390
|
|
|
|
457
|
|
|
Other investments
|
|
|
182
|
|
|
|
167
|
|
|
|
259
|
|
|
Federal funds sold and other short-term investments (1)
|
|
|
858
|
|
|
|
642
|
|
|
|
357
|
|
|
Total interest income
|
|
|
64,124
|
|
|
|
67,449
|
|
|
|
77,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
5,370
|
|
|
|
7,745
|
|
|
|
11,887
|
|
|
Demand and savings deposits
|
|
|
2,185
|
|
|
|
3,300
|
|
|
|
5,401
|
|
|
Junior subordinated debentures
|
|
|
1,338
|
|
|
|
1,307
|
|
|
|
2,047
|
|
|
Subordinated debentures and other borrowings
|
|
|
992
|
|
|
|
1,052
|
|
|
|
1,084
|
|
|
Total interest expense
|
|
|
9,885
|
|
|
|
13,404
|
|
|
|
20,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
54,239
|
|
|
|
54,045
|
|
|
|
57,032
|
|
|
(Reduction in) provision for loan losses
|
|
|
(590
|
)
|
|
|
3,725
|
|
|
|
17,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after (reduction in) provision for loan losses
|
|
|
54,829
|
|
|
|
50,320
|
|
|
|
39,454
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
4,375
|
|
|
|
4,336
|
|
|
|
4,518
|
|
|
Gain on securities, net
|
|
|
208
|
|
|
|
199
|
|
|
|
679
|
|
|
Total other-than-temporary-impairment (“OTTI”) on securities
|
|
|
(149
|
)
|
|
|
(242
|
)
|
|
|
(625
|
)
|
|
Less: Noncredit portion of OTTI
|
|
|
27
|
|
|
|
36
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairments on securities
|
|
|
(122
|
)
|
|
|
(206
|
)
|
|
|
(486
|
)
|
|
Increase in cash value of bank owned life insurance
|
|
|
1,367
|
|
|
|
1,440
|
|
|
|
1,462
|
|
|
Other noninterest income
|
|
|
1,513
|
|
|
|
1,445
|
|
|
|
1,390
|
|
|
Total noninterest income
|
|
|
7,341
|
|
|
|
7,214
|
|
|
|
7,563
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
23,857
|
|
|
|
20,707
|
|
|
|
20,584
|
|
|
Occupancy and equipment
|
|
|
6,877
|
|
|
|
7,308
|
|
|
|
7,577
|
|
|
Foreclosed assets, net
|
|
|
2,686
|
|
|
|
3,814
|
|
|
|
6,604
|
|
|
FDIC assessment
|
|
|
1,846
|
|
|
|
2,489
|
|
|
|
3,295
|
|
|
Legal and other professional fees
|
|
|
2,660
|
|
|
|
2,408
|
|
|
|
2,038
|
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
3,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications expense
|
|
|
916
|
|
|
|
772
|
|
|
|
802
|
|
|
Printing and supplies expense
|
|
|
752
|
|
|
|
622
|
|
|
|
592
|
|
|
Other noninterest expense
|
|
|
6,101
|
|
|
|
5,610
|
|
|
|
4,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
45,695
|
|
|
|
46,730
|
|
|
|
48,296
|
|
|
Income (loss) before provision (benefit) for income taxes
|
|
|
16,475
|
|
|
|
10,804
|
|
|
|
(1,279
|
)
|
|
Provision (benefit) for income taxes
|
|
|
5,352
|
|
|
|
4,374
|
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,123
|
|
|
$
|
6,430
|
|
|
$
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and discount —preferred stock
|
|
|
(1,429
|
)
|
|
|
(2,410
|
)
|
|
|
(2,410
|
)
|
|
Adjustment from repurchase of preferred stock
|
|
|
557
|
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
10,251
|
|
|
$
|
4,020
|
|
|
$
|
(3,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.63
|
|
|
$
|
0.31
|
|
|
$
|
(0.28
|
)
|
|
Diluted
|
|
$
|
0.62
|
|
|
$
|
0.30
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,331
|
|
|
|
13,142
|
|
|
|
12,069
|
|
|
Diluted
|
|
|
16,551
|
|
|
|
13,227
|
|
|
|
12,069
|
|
|
Dividends per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Includes interest-bearing time deposits in banks.
|
The accompanying notes are an integral part of these consolidated financial statements.
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Net income (loss)
|
|
$
|
11,123
|
|
|
$
|
6,430
|
|
|
$
|
(927
|
)
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated gain (loss) on effective cash flow hedging derivatives
|
|
|
139
|
|
|
|
(326
|
)
|
|
|
(910
|
)
|
|
Change in unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with OTTI charges during the period
|
|
|
(95
|
)
|
|
|
(155
|
)
|
|
|
(400
|
)
|
|
Less: OTTI charges recognized in net income
|
|
|
(78
|
)
|
|
|
(132
|
)
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities with OTTI
|
|
|
(17
|
)
|
|
|
(23
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period
|
|
|
743
|
|
|
|
2,547
|
|
|
|
304
|
|
|
Less: reclassification adjustment for gains included in net income
|
|
|
133
|
|
|
|
127
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment securities
|
|
|
610
|
|
|
|
2,420
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
732
|
|
|
|
2,071
|
|
|
|
(1,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
11,855
|
|
|
$
|
8,501
|
|
|
$
|
(2,057
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2012, 2011 and 2010
(In thousands)
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock At
|
|
|
|
|
|
|
|
Shares
|
|
|
At Par
|
|
|
Shares
|
|
|
At Par
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Cost
|
|
|
Total
|
|
|
Balance at December 31, 2009
|
|
|
45
|
|
|
$
|
44,718
|
|
|
|
10,927
|
|
|
$
|
10,995
|
|
|
$
|
29,114
|
|
|
$
|
72,505
|
|
|
$
|
(1,106
|
)
|
|
$
|
(920
|
)
|
|
$
|
155,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-issuance of treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
78
|
|
|
|
—
|
|
|
|
(705
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
952
|
|
|
|
247
|
|
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
2,235
|
|
|
|
2,235
|
|
|
|
4,766
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,001
|
|
|
Stock-based compensation expense related to stock options recognized in earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Forfeiture of restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(927
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(927
|
)
|
|
Amortization of preferred stock discount
|
|
|
—
|
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(143
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,130
|
)
|
|
|
—
|
|
|
|
(1,130
|
)
|
|
Dividends—preferred stock
|
|
|
—
|
|
|
|
566
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,267
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
45
|
|
|
$
|
45,427
|
|
|
|
13,230
|
|
|
$
|
13,230
|
|
|
$
|
33,178
|
|
|
$
|
69,168
|
|
|
$
|
(2,236
|
)
|
|
$
|
—
|
|
|
$
|
158,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
111
|
|
|
|
111
|
|
|
|
547
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
658
|
|
|
Stock-based compensation expense related to stock options recognized in earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,430
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,430
|
|
|
Amortization of preferred stock discount
|
|
|
—
|
|
|
|
142
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(142
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,071
|
|
|
|
—
|
|
|
|
2,071
|
|
|
Dividends—preferred stock
|
|
|
—
|
|
|
|
(566
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,268
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
45
|
|
|
$
|
45,003
|
|
|
|
13,341
|
|
|
$
|
13,341
|
|
|
$
|
33,816
|
|
|
$
|
73,188
|
|
|
$
|
(165
|
)
|
|
$
|
—
|
|
|
$
|
165,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
5,426
|
|
|
|
5,426
|
|
|
|
40,543
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,969
|
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(182
|
)
|
|
|
(182
|
)
|
|
Repurchase of preferred stock
|
|
|
(45
|
)
|
|
|
(45,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,443
|
)
|
|
Stock-based compensation expense related to stock options recognized in earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,123
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,123
|
|
|
Amortization of preferred stock discount
|
|
|
—
|
|
|
|
285
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(285
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
732
|
|
|
|
—
|
|
|
|
732
|
|
|
Dividends—preferred stock
|
|
|
—
|
|
|
|
(288
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,145
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
—
|
|
|
$
|
—
|
|
|
|
18,767
|
|
|
$
|
18,767
|
|
|
$
|
74,998
|
|
|
$
|
82,881
|
|
|
$
|
567
|
|
|
$
|
(182
|
)
|
|
$
|
177,031
|
|
The accompanying notes are an integral part of these consolidated financial statements.
METROCORP BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,123
|
|
|
$
|
6,430
|
|
|
$
|
(927
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,034
|
|
|
|
1,388
|
|
|
|
1,594
|
|
|
(Reduction in) provision for loan losses
|
|
|
(590
|
)
|
|
|
3,725
|
|
|
|
17,578
|
|
|
Impairment on securities
|
|
|
122
|
|
|
|
206
|
|
|
|
486
|
|
|
Impairment on goodwill
|
|
|
—
|
|
|
|
3,000
|
|
|
|
2,000
|
|
|
Gain on securities transactions, net
|
|
|
(208
|
)
|
|
|
(199
|
)
|
|
|
(679
|
)
|
|
Loss on sale and write-downs of foreclosed assets
|
|
|
1,384
|
|
|
|
1,705
|
|
|
|
3,605
|
|
|
Loss (gain) on sale of premises and equipment
|
|
|
—
|
|
|
|
11
|
|
|
|
(7
|
)
|
|
Amortization of premiums and discounts on securities
|
|
|
491
|
|
|
|
253
|
|
|
|
18
|
|
|
Amortization of deferred loan fees and discounts
|
|
|
(1,209
|
)
|
|
|
(1,153
|
)
|
|
|
(1,302
|
)
|
|
Amortization of core deposit intangibles
|
|
|
56
|
|
|
|
87
|
|
|
|
127
|
|
|
Stock-based compensation expense
|
|
|
1,281
|
|
|
|
450
|
|
|
|
363
|
|
|
Deferred income taxes provision (benefit)
|
|
|
1,552
|
|
|
|
1,438
|
|
|
|
(2,655
|
)
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
207
|
|
|
|
355
|
|
|
|
479
|
|
|
Other assets
|
|
|
553
|
|
|
|
820
|
|
|
|
2,067
|
|
|
Accrued interest payable
|
|
|
(77
|
)
|
|
|
(137
|
)
|
|
|
(178
|
)
|
|
Other liabilities
|
|
|
(2,384
|
)
|
|
|
1,995
|
|
|
|
1,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,335
|
|
|
|
20,374
|
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in interest-bearing time deposits in banks
|
|
|
(15,321
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Purchases of securities available-for-sale
|
|
|
(118,867
|
)
|
|
|
(134,397
|
)
|
|
|
(190,324
|
)
|
|
Purchases of other investments
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(51
|
)
|
|
Proceeds from sales of securities available-for-sale
|
|
|
3,621
|
|
|
|
7,927
|
|
|
|
50,154
|
|
|
Proceeds from sales and maturities of other investments
|
|
|
895
|
|
|
|
444
|
|
|
|
14,704
|
|
|
Proceeds from maturities and principal paydowns of securities available-for-sale
|
|
|
124,107
|
|
|
|
133,271
|
|
|
|
62,662
|
|
|
Net change in loans
|
|
|
(69,067
|
)
|
|
|
65,576
|
|
|
|
95,707
|
|
|
Proceeds from sale of foreclosed assets
|
|
|
16,495
|
|
|
|
25,343
|
|
|
|
20,788
|
|
|
Proceeds from sale of premises and equipment
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
Purchases of premises and equipment
|
|
|
(383
|
)
|
|
|
(719
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(58,522
|
)
|
|
|
97,442
|
|
|
|
52,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
15,455
|
|
|
|
(42,609
|
)
|
|
|
(69,983
|
)
|
|
Other borrowings
|
|
|
(1,315
|
)
|
|
|
(30,489
|
)
|
|
|
31,291
|
|
|
Proceeds from issuance of common stock
|
|
|
42,945
|
|
|
|
—
|
|
|
|
6,899
|
|
|
Repurchase of common stock
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase of preferred stock
|
|
|
(44,443
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Dividends paid on preferred stock
|
|
|
(1,433
|
)
|
|
|
(2,834
|
)
|
|
|
(1,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
11,027
|
|
|
|
(75,932
|
)
|
|
|
(33,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(34,160
|
)
|
|
|
41,884
|
|
|
|
43,632
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
193,609
|
|
|
|
151,725
|
|
|
|
108,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
159,449
|
|
|
$
|
193,609
|
|
|
$
|
151,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
9,962
|
|
|
$
|
13,541
|
|
|
$
|
20,597
|
|
|
Income taxes paid
|
|
|
4,582
|
|
|
|
1,870
|
|
|
|
3,675
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant to incentive plan
|
|
|
3,024
|
|
|
|
657
|
|
|
|
349
|
|
|
Foreclosed assets acquired
|
|
|
11,416
|
|
|
|
26,110
|
|
|
|
22,058
|
|
|
Loans originated to finance foreclosed assets
|
|
|
6,501
|
|
|
|
9,953
|
|
|
|
3,955
|
|
The accompanying notes are an integral part of these consolidated financial statements.
METROCORP BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
MetroCorp Bancshares, Inc. (the “Parent”) is a Texas corporation headquartered in Houston, Texas, which is engaged in commercial banking activities through its wholly-owned subsidiaries, MetroBank, National Association (“MetroBank”) in Texas and Metro United Bank (“Metro United”) in California (collectively, the “Banks”).
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Parent and all other entities in which the Parent has a controlling financial interest (collectively, the “Company”). The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain principles which significantly affect the determination of financial position, results of operations and cash flows are summarized below.
A legal entity is referred to as a Variable Interest Entity (“VIE”) if any of the following conditions exist: (1) the total equity at risk is insufficient to permit the legal entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or receive the expected returns of the entity. In addition, as specified in VIE accounting guidance, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance, and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. All facts and circumstances are taken into consideration when determining whether the Company has variable interest that would deem it the primary beneficiary and, therefore, require consolidation of the related VIE or otherwise rise to the level where disclosure would provide useful information to the users of the Company’s financial statements. In the case of the Company’s sole VIE, MCBI Trust I, it is qualitatively clear based on the extent of the Company’s involvement that the Company is not the primary beneficiary of the VIE. Accordingly, the accounts of this entity are not consolidated in the Company’s financial statements.
Accounting Standards Codification
The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Use of Estimates
These financial statements are prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts are recognized when it is probable that an asset has been impaired or a liability has been incurred and the cost can be reasonably estimated. Actual results could differ from those estimates. Significant estimates include the allowance for loan losses, goodwill, impairment of investment securities, stock-based compensation, fair value and deferred income taxes.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and other short-term investments with original maturities of less than three months.
Interest-Bearing Time Deposits in Banks
Interest-bearing time deposits in banks mature within two years and are carried at cost.
Securities
Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Investment securities classified as available-for-sale are reported at estimated fair value, and unrealized net gains and temporary losses are excluded from income and reported, net of the associated deferred income tax effect, as a separate component of accumulated other comprehensive income in shareholders’ equity. The Company does not have trading securities. Interest income includes amortization of purchase premiums and discounts. Realized gains and losses from sales of available-for-sale securities are recorded in earnings using the specific identification method. The Company’s available-for-sale and held-to-maturity securities with unrealized losses are reviewed quarterly to identify OTTIs in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, and interest-rate related including general credit spread widening); (3) the financial condition of and near-term prospects of the issuer, and (4) the Company’s intent not to sell and that it is not more likely than not that the Company would be required to sell the security before the anticipated recovery of its amortized cost basis. With regard to available-for-sale equity securities, the Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value. When it is determined that a decline in value of an equity security is other-than-temporary, the carrying value of the equity security is reduced to its fair value, with a corresponding charge to earnings. Declines in the fair value of individual securities below their cost that are other-than-temporary result in write-downs, as a recognized loss, of the individual securities to their fair value. When an other-than-temporary-impairment (“OTTI”) of a debt security has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the OTTI recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For OTTIs of debt securities that do not meet these two criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in other comprehensive income (loss) (“OCI”).
Loans, Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
Loans are reported at the principal amount outstanding, reduced by unearned discounts, net deferred loan fees, and an allowance for loan losses. Unearned income on installment loans is recognized using the effective interest method over the term of the loan. Interest on other loans is calculated using the simple interest method on the daily principal amount outstanding.
Loans are placed on nonaccrual status when principal or interest is past due more than 90 days or when, in management’s opinion, collection of principal and interest is not likely to be made in accordance with a loan’s contractual terms. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Interest income on nonaccrual loans may be recognized only to the extent received in cash; however, where there is doubt regarding the ultimate collectability of the loan principal, cash receipts, whether designated as principal or interest, are thereafter applied to reduce the principal balance of the loan. Loans are restored to accrual status only when interest and principal payments are brought current and, in management’s judgment, future payments are reasonably assured.
Loans are classified as a troubled debt restructuring in cases where a borrower experiences financial difficulty but is current on their payment and the Company makes limited concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate and an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated the loan may be returned to performing status after the calendar year end.
A loan, with the exception of groups of smaller-balance homogenous loans that are collectively evaluated for impairment, is considered impaired when, based on current information, it is probable that the borrower will be unable to pay contractual interest or principal payments as scheduled in the loan agreement. The Company recognizes interest income on impaired loans pursuant to the discussion above for nonaccrual loans.
The allowance for loan losses related to impaired loans is determined based on the difference of carrying value of loans and the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.
The reserve for unfunded lending commitments provides for the risk of loss inherent in the Company’s unfunded lending related commitments, which is included in other liabilities. The process used in determining the reserve is consistent with the process used for the allowance for loan losses discussed below.
The allowance for credit losses consists of allowance for loan losses and the reserve for unfunded lending commitments which provide for the risk of losses inherent in the lending process. The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio. The allowance for possible loan losses includes allowance allocations calculated in accordance with Accounting Standards Codification ("ASC") Topic 310, "Receivables" and allowance allocations calculated in accordance with ASC Topic 450, "Contingencies." Further information regarding the Company's policies and methodology used to estimate the allowance for loan losses is presented in Note 4 - Loans and Allowance for Loan Losses.
Nonrefundable Fees and Costs Associated with Lending Activities
Loan origination fees in excess of the associated costs are recognized over the life of the related loan as an adjustment to yield using the interest method.
Loan commitment fees are deferred and recognized as an adjustment of yield by the interest method over the related commitment period or, if the commitment expires unexercised, recognized in income upon expiration of the commitment.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or estimated fair value. Premiums, discounts and loan fees (net of certain direct loan origination costs) on loans held for sale are deferred until the related loans are sold or repaid. Gains or losses on loan sales are recognized at the time of sale and determined using the specific identification method. Loans are classified as held for sale when management has positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made subsequent to the origination. Once a decision has been made to sell loans not previously classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or estimated fair value. For loans held for sale, the lower of cost or estimated fair value is determined based upon the individual loan’s current market price or the underlying collateral value if the loan is nonperforming and collateral dependent.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. For financial accounting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the term of the respective leases or the estimated useful lives of the improvements. Gains and losses on the sale of premises and equipment are recorded using the specific identification method at the time of sale. Expenditures for maintenance and repairs, which do not extend the life of bank premises and equipment, are charged to other non-interest expense as incurred.
Goodwill and Core Deposit Intangibles
Goodwill is recorded for the excess of the purchase price over the fair value of identifiable net assets, including core deposit intangibles, acquired through an acquisition transaction. Goodwill is not amortized, but instead is tested for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Other acquired intangible assets determined to have finite lives, such as core deposit intangibles, which are included in other assets, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. Impairment tests are performed quarterly on these finite-lived intangible assets.
Foreclosed Assets
Foreclosed assets consist of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties are initially recorded at fair value less estimated costs to sell. Prior to foreclosure, the recorded amount of the loan is written down, if necessary, to the appraised fair value of the real estate to be acquired, less selling costs, by charging the allowance for loan losses. Any subsequent reduction in fair value net of estimated selling costs is charged to noninterest expense. Operating expenses, net of related revenue and gains and losses on sale of such assets, are reported in noninterest expense. Expenditures to complete or improve foreclosed properties are capitalized only if expected to be recovered; otherwise, they are expensed.
Other Borrowings
Other borrowings typically include U.S. Treasury tax note option accounts with maturities of 14 days or less, Federal Home Loan Bank (FHLB) borrowings and Subordinated Debentures.
Repurchase Agreements
The Company has entered into securities repurchase agreements for the purpose of long-term borrowing to control interest rate risk. Under these repurchase agreements the Company sells and transfers securities to counterparties subject to agreements to repurchase the securities from the counterparties on a future date. Securities sold by the Company under repurchase agreements include direct obligations of the U.S. government, government sponsored entities and federal agencies. The securities repurchase agreements are accounted for as collateralized financing transactions in the accompanying consolidated balance sheet and the Company’s obligations to repurchase securities under the repurchase agreements are reflected as a liability at the sale price plus accrued interest. The Company may be required to pledge other securities, financial instruments and cash from time to time to secure the Company’s repurchase obligations under repurchase agreements. These pledged assets are carried on the Company’s consolidated balance sheets as assets of the Company.
Junior Subordinated Debentures
The Company has established a statutory business trust that is a wholly-owned subsidiary of the Company. The Trust issued fixed/floating rate capital securities representing undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of the beneficial interests represented by the common securities of the Trust. The Trust used the proceeds from the issuance of the capital securities and the common securities to purchase the Company’s junior subordinated debentures. The purpose of forming the Trust to issue the capital securities was to provide the Company with a cost-effective means of funding the Metro United acquisition. Junior subordinated debentures represent liabilities of the Company to the Trust.
Income Taxes
The Company utilizes an asset and liability approach to provide for income taxes that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. When management determines that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. In estimating future tax consequences, all expected future events other than enactments of changes in tax laws or rates are considered.
Earnings Per Share
Basic earnings per common share is calculated by dividing net earnings available for common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net earnings available for common shareholders by the weighted average number of common and potentially dilutive common shares. Stock options can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. The number of potentially dilutive common shares is determined using the treasury stock method. For earnings per share calculation purposes, the impact of dilutive securities are excluded from the diluted share count during periods that the Company has recognized a net loss available to common shareholders.
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with the fair value recognition provisions of FASB accounting guidance. The Black-Scholes option-pricing model is utilized which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s Common Stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on the consolidated statements of operations.
Off-Balance Sheet Instruments
The Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, standby letters of credit and operating leases. Such financial instruments are recorded in the financial statements when they are funded.
Derivative Financial Instruments
The Company’s hedging policies permit the use of derivative financial instruments to manage interest rate risk. Derivatives are recorded at fair value on the Company’s balance sheet. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. The Company considers a hedge to be highly effective if the change in fair value of the derivative hedging instrument is within 80% to 125% of the opposite change in the fair value of the hedged item attributable to the hedged risk. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income. Ineffective portions of hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting for that derivative or position.
Fair Value
Certain portions of the Company’s assets are reported on a fair value basis. Fair value is used on a recurring basis for certain assets in which fair value is the primary basis of accounting. An example of this recurring use of fair value is available for sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets for impairment or as required for disclosure purposes. Examples of these non-recurring uses of fair value include goodwill, intangible assets, and certain collateral dependent impaired loans. Depending on the nature of the asset, various valuation techniques and assumptions are used when estimating fair value.
Fair values of financial instruments are based on the fair value hierarchy established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy. The fair value hierarchy consists of three levels of inputs that may be used to measure fair value.
Comprehensive Income
Comprehensive income includes all changes in equity during the period presented that result from transactions and other economic events other than transactions with shareholders. The Company reports comprehensive income in the consolidated statements of comprehensive income (loss) and the consolidated statements of changes in shareholders’ equity.
New Authoritative Accounting Guidance
Accounting Standards Updates
Accounting Standards Update (“ASU”) ASU No. 2013-02
–“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”.
ASU No. 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts ASU 2013-02 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2013-01 – “Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”.
ASU No. 2013-01 addresses implementation issues about the scope of ASU No. 2011-11
“Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”
and clarifies that ASU No. 2011-11 applies to derivatives accounted for in accordance with
Topic 815, Derivatives and Hedging
, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement
.
ASU 2013-01 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2012-06 – “Business Combinations (Topic 805) -
Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution”.
ASU No. 2012-06 states that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 was effective for the Company for annual and interim periods beginning on January 1, 2013 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2012-04 – “Technical Corrections and Improvements”.
The amendments in ASU No. 2012-04 represent changes to clarify the FASB Accounting Standards Codification (“Codification”), correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are categorized as (1) source literature amendments (2) guidance clarification and reference corrections and (3) relocated guidance. Additionally, the amendments are intended to make the Codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarifications. The amendments in ASU No. 2012-04 that do not have transition guidance were effective October 1, 2012. The amendments that are subject to the transition guidance were effective for fiscal periods beginning on January 1, 2013. ASU No. 2012-04 did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU 2012-02 "Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment."
ASU 2012-02 gives entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that an indefinite-lived intangible asset is impaired, then the entity must perform the quantitative impairment test. If, under the quantitative impairment test, the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. ASU 2012-02 was effective for the Company beginning January 1, 2013 and did not have a significant impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2011-12 "Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05."
ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 was effective for the Company for annual and interim periods beginning on January 1, 2012 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2011-11, "Balance Sheet (Topic 210) - "Disclosures about Offsetting Assets and Liabilities."
ASU 2011-11 amends Topic 210, "Balance Sheet," to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 was effective for the Company for annual and interim periods beginning on January 1, 2013, and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment
” amends Topic 350 to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessments, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The new authoritative accounting guidance under ASU 2011-08 was effective for the Company on January 1, 2012 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” amends Topic 220,
"Comprehensive Income," to require that all nonowner changes in shareholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in shareholders' equity was eliminated. The new authoritative accounting guidance under ASU 2011-05 was effective for the Company on January 1, 2012 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
” amends Topic 820, "Fair Value Measurements and Disclosures," to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. The new authoritative accounting guidance under ASU 2011-04 was effective for the Company on January 1, 2012 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.”
ASU 2011-03 removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The new authoritative accounting guidance under ASU 2011-03 was effective for the Company on January 1, 2012 and did not have a material impact on the Company's financial condition, results of operations or cash flows.
2. Cash and Cash Equivalents
The Company is required by the Board of Governors of the Federal Reserve System to maintain average daily reserve balances. As of December 31, 2012, the Company’s vault cash balance was more than sufficient to meet the average daily reserve balance requirement.
3. Securities
In the normal course of business, the Company invests in securities issued by the Federal government, government sponsored enterprises, and political subdivisions, which inherently carry interest rate risks based upon overall economic trends and related market yield fluctuations. Securities within the held-to-maturity portfolio are generally used for pledging purposes. Securities within the available-for-sale portfolio may be used as part of the Company’s asset/liability strategy and may be sold in response to changes in interest rate risk, prepayment risk or other similar economic factors.
At December 31, 2012 and 2011, the amortized cost, unrealized gains, unrealized losses, OTTI and fair value of securities was as follows (in thousands):
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As of December 31, 2012
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Amortized
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Unrealized
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Fair
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Cost
|
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Gains
|
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Losses
|
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OTTI
|
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Value
|
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Securities available-for-sale
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|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
70,892
|
|
|
$
|
362
|
|
|
$
|
(73
|
)
|
|
$
|
—
|
|
|
$
|
71,181
|
|
|
Obligations of state and political subdivisions
|
|
|
12,810
|
|
|
|
579
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,389
|
|
|
Corporate
|
|
|
6,080
|
|
|
|
270
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,350
|
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government issued or guaranteed
|
|
|
56,572
|
|
|
|
1,369
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,941
|
|
|
Privately issued residential
|
|
|
718
|
|
|
|
330
|
|
|
|
—
|
|
|
|
(365
|
)
|
|
|
683
|
|
|
Asset backed securities
|
|
|
187
|
|
|
|
129
|
|
|
|
—
|
|
|
|
(173
|
)
|
|
|
143
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in CRA funds
|
|
|
14,128
|
|
|
|
233
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
161,387
|
|
|
$
|
3,272
|
|
|
$
|
(73
|
)
|
|
$
|
(538
|
)
|
|
$
|
164,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
4,046
|
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities
|
|
$
|
4,046
|
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB (1)/Federal Reserve Bank (2) stock
|
|
|
4,509
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,509
|
|
|
Investment in subsidiary trust (3)
|
|
|
1,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
$
|
5,592
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,592
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
OTTI
|
|
|
Value
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
91,660
|
|
|
$
|
546
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
92,199
|
|
|
Obligations of state and political subdivisions
|
|
|
5,467
|
|
|
|
279
|
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
5,706
|
|
|
Corporate
|
|
|
6,102
|
|
|
|
57
|
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
6,141
|
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government issued or guaranteed
|
|
|
52,594
|
|
|
|
1,160
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
53,739
|
|
|
Privately issued residential
|
|
|
900
|
|
|
|
232
|
|
|
|
(23
|
)
|
|
|
(442
|
)
|
|
|
667
|
|
|
Asset backed securities
|
|
|
231
|
|
|
|
56
|
|
|
|
—
|
|
|
|
(185
|
)
|
|
|
102
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in CRA funds
|
|
|
13,700
|
|
|
|
135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
170,654
|
|
|
$
|
2,465
|
|
|
$
|
(103
|
)
|
|
$
|
(627
|
)
|
|
$
|
172,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
4,046
|
|
|
$
|
490
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities
|
|
$
|
4,046
|
|
|
$
|
490
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB (1)/Federal Reserve Bank (2) stock
|
|
|
5,401
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,401
|
|
|
Investment in subsidiary trust (3)
|
|
|
1,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other investments
|
|
$
|
6,484
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,484
|
|
|
(1)
|
FHLB stock held by the Banks is subject to certain restrictions under a credit policy of the FHLB dated May 1, 1997. Redemption of FHLB stock is dependent upon repayment of borrowings, if any, from the FHLB.
|
|
(2)
|
Federal Reserve Bank stock held by MetroBank is subject to certain restrictions under Federal Reserve Bank Policy.
|
|
(3)
|
The Company’s ownership of common securities of MCBI Trust I is carried at cost.
|
The following table displays the fair value and gross unrealized losses of securities available-for-sale as of December 31, 2012 and 2011, for which OTTI has not been recognized that were in a continuous unrealized loss position for the periods indicated (in thousands). There were no held-to-maturity securities in a continuous unrealized loss position as of December 31, 2012 and 2011.
|
|
|
As of December 31, 2012
|
|
|
|
|
Less Than 12
Months
|
|
|
Greater Than 12
Months
|
|
|
Total
|
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
9,921
|
|
|
$
|
(73
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,921
|
|
|
$
|
(73
|
)
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately issued residential
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
9,921
|
|
|
$
|
(73
|
)
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
9,993
|
|
|
$
|
(73
|
)
|
|
|
|
As of December 31, 2011
|
|
|
|
|
Less Than 12
Months
|
|
|
Greater Than 12
Months
|
|
|
Total
|
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
4,993
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,993
|
|
|
$
|
(7
|
)
|
|
Obligations of state and political subdivisions
|
|
|
1,580
|
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,580
|
|
|
|
(40
|
)
|
|
Corporate
|
|
|
3,017
|
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,017
|
|
|
|
(18
|
)
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government issued or guaranteed
|
|
|
8,786
|
|
|
|
(15
|
)
|
|
|
10
|
|
|
|
—
|
|
|
|
8,796
|
|
|
|
(15
|
)
|
|
Privately issued residential
|
|
|
—
|
|
|
|
—
|
|
|
|
168
|
|
|
|
(23
|
)
|
|
|
168
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
18,376
|
|
|
$
|
(80
|
)
|
|
$
|
178
|
|
|
$
|
(23
|
)
|
|
$
|
18,554
|
|
|
$
|
(103
|
)
|
As of December 31, 2012, management did not have the intent to sell any of the securities classified as available-for-sale in unrealized loss positions and believes it is not more likely than not that the Company will have to sell any such securities before a recovery of the cost. However, if strategic opportunities arise, the Company may consider selling selected securities. Any unrealized losses on such selected securities would be charged to earnings.
The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such securities decline. Management does not believe any of the unrealized losses above are due to credit quality. Accordingly, management believes the $73,000 of unrealized losses is temporary and the remaining $538,000 of OTTI represents an unrealized loss for which an impairment has been recognized in other comprehensive income (loss).
Other-Than-Temporary Impairments (OTTI)
The following table presents a rollforward for the years ended December 31, 2012 and 2011, of the credit loss component of OTTI losses that have been recognized in income, related to debt securities that the Company does not intend to sell (in thousands):
|
|
|
Years Ended December 31,
|
|
|
Impairment related to credit losses
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Credit losses at beginning of period
|
|
$
|
1,594
|
|
|
$
|
1,600
|
|
|
Addition of OTTI that was not previously recognized
|
|
|
4
|
|
|
|
4
|
|
|
Additions to OTTI that were previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis
|
|
|
56
|
|
|
|
24
|
|
|
Transfers from accumulated other comprehensive income to OTTI related to credit losses
|
|
|
62
|
|
|
|
178
|
|
|
Reclassifications from OTTI to realized losses on sales of securities
|
|
|
—
|
|
|
|
(212
|
)
|
|
Credit losses at end of period
|
|
$
|
1,716
|
|
|
$
|
1,594
|
|
For the year ended December 31, 2012, the Company recognized credit-related losses of $107,000 on 12 non-agency residential mortgage-backed securities and $15,000 on one asset-backed security. There were no noncredit impairments included in accumulated other comprehensive loss for the year ended December 31, 2012. For the year ended December 31, 2011, the Company recognized credit-related losses of $166,000 on 15 non-agency residential mortgage-backed securities and $40,000 on two asset-backed securities. The noncredit portion of these impairments of $36,000 on non-agency residential mortgage-backed securities was included in accumulated other comprehensive loss for the year ended December 31, 2011.
To measure credit losses, external credit ratings and other relevant collateral details and performance statistics on a security-by-security basis were considered. Securities exhibiting significant deterioration are subjected to further analysis. Assumptions were developed for prepayment speed, default rate, and loss severity for each security using third party sources and based on the collateral history. The resulting projections of future cash flows of the underlying collateral were then discounted by the underlying yield before any write-downs were considered to determine the net present value of the cash flows (“NPV”). The difference between the cost basis and the NPV was taken as a credit loss in the current period to the extent that these losses have not been previously recognized. The difference between the NPV and the quoted market price is considered a noncredit related loss and was included in other comprehensive loss.
Other Securities Information
Investments with a fair value of $57.9 million and $64.0 million at December 31, 2012 and 2011, respectively, were pledged to collateralize public deposits and other borrowings.
The following sets forth information concerning sales (excluding calls and maturities) of available-for-sale securities (in thousands). There were no sales of held-to-maturity securities.
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Amortized cost
|
|
$
|
3,525
|
|
|
$
|
7,972
|
|
|
$
|
49,598
|
|
|
Proceeds
|
|
|
3,621
|
|
|
|
7,927
|
|
|
|
50,154
|
|
|
Gross realized gains
|
|
|
96
|
|
|
|
94
|
|
|
|
820
|
|
|
Gross realized losses
|
|
|
—
|
|
|
|
(140
|
)
|
|
|
(265
|
)
|
At December 31, 2012, future contractual maturities of debt securities were as follows (in thousands):
|
|
|
Securities
Available-for-sale
|
|
|
Securities
Held-to-maturity
|
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Within one year
|
|
$
|
704
|
|
|
$
|
717
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Within two to five years
|
|
|
7,077
|
|
|
|
7,351
|
|
|
|
—
|
|
|
|
—
|
|
|
Within six to ten years
|
|
|
70,681
|
|
|
|
71,078
|
|
|
|
—
|
|
|
|
—
|
|
|
After ten years
|
|
|
11,507
|
|
|
|
11,917
|
|
|
|
4,046
|
|
|
|
4,757
|
|
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
57,290
|
|
|
|
58,624
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
147,259
|
|
|
$
|
149,687
|
|
|
$
|
4,046
|
|
|
$
|
4,757
|
|
The Company holds mortgage-backed securities which may mature at an earlier date than the contractual maturity due to prepayments. The Company also holds certain securities which may be called by the issuer at an earlier date than the contractual maturity date.
4. Loans and Allowance for Loan Losses
The loan portfolio is summarized by major categories as follows (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Commercial and industrial
|
|
$
|
383,641
|
|
|
$
|
345,265
|
|
|
Real estate mortgage
|
|
|
702,051
|
|
|
|
687,409
|
|
|
Real estate construction
|
|
|
9,704
|
|
|
|
10,308
|
|
|
Consumer and other
|
|
|
7,531
|
|
|
|
3,936
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
1,102,927
|
|
|
|
1,046,918
|
|
|
Deferred loan fees
|
|
|
(2,590
|
)
|
|
|
(2,302
|
)
|
|
Total loans
|
|
|
1,100,337
|
|
|
|
1,044,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(24,592
|
)
|
|
|
(28,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,075,745
|
|
|
$
|
1,016,295
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate loans (1)
|
|
$
|
760,913
|
|
|
$
|
795,468
|
|
|
Fixed rate loans
|
|
|
342,014
|
|
|
|
251,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
$
|
1,102,927
|
|
|
$
|
1,046,918
|
|
|
(1)
|
Includes $608.6 million or 55.2% of the total loan portfolio in variable rate loans with interest rate floors that carried a weighted average interest rate of 5.58%.
|
The recorded investment in loans is the face amount increased or decreased by applicable accrued interest and unamortized premiums, discounts, or finance charges, and may also reflect previous direct write-downs of loans.
The recorded investment in loans at December 31, 2012 and 2011 is determined as follows (in thousands):
|
December 31, 2012
|
|
Gross Loan
Balance
|
|
|
Deferred Loan
Fees
|
|
|
Accrued
Interest
Receivable
|
|
|
Recorded
Investment in
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
383,641
|
|
|
$
|
(814
|
)
|
|
$
|
1,078
|
|
|
$
|
383,905
|
|
|
Real estate mortgage
|
|
|
702,051
|
|
|
|
(1,595
|
)
|
|
|
2,024
|
|
|
|
702,480
|
|
|
Real estate construction
|
|
|
9,704
|
|
|
|
(30
|
)
|
|
|
18
|
|
|
|
9,692
|
|
|
Consumer and other
|
|
|
7,531
|
|
|
|
(151
|
)
|
|
|
21
|
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,102,927
|
|
|
$
|
(2,590
|
)
|
|
$
|
3,141
|
|
|
$
|
1,103,478
|
|
|
December 31, 2011
|
|
Gross Loan
Balance
|
|
|
Deferred Loan
Fees
|
|
|
Accrued
Interest
Receivable
|
|
|
Recorded
Investment in
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
345,265
|
|
|
$
|
(777
|
)
|
|
$
|
1,077
|
|
|
$
|
345,565
|
|
|
Real estate mortgage
|
|
|
687,409
|
|
|
|
(1,327
|
)
|
|
|
2,270
|
|
|
|
688,352
|
|
|
Real estate construction
|
|
|
10,308
|
|
|
|
(2
|
)
|
|
|
29
|
|
|
|
10,335
|
|
|
Consumer and other
|
|
|
3,936
|
|
|
|
(196
|
)
|
|
|
14
|
|
|
|
3,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,046,918
|
|
|
$
|
(2,302
|
)
|
|
$
|
3,390
|
|
|
$
|
1,048,006
|
|
The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced.
Inherent in all lending is the risk of nonpayment. The types of collateral required, the terms of the loans and the underwriting practices discussed under each loan category above are all designed to minimize the risk of nonpayment. In addition, as further risk protection, the Banks rarely makes loans at their respective legal lending limit. MetroBank generally does not make loans larger than $13 million to one borrower and Metro United generally does not make loans larger than $8 million to one borrower. Loans greater than the Bank’s lending limits are subject to participation with other financial institutions, including with each other. Loans originated by MetroBank are approved by the Chief Lending Officer, Chief Credit Officer, MetroBank’s Loan Committee or the Director’s Loan Committee based on the size of the loan relationship and its risk rating. Loans originated by Metro United are approved by the Management Credit Committee or Director’s Credit Committee except for certain consumer loans. Control systems and procedures are in place to ensure all loans are approved in accordance with credit policies. The Company’s policies and procedures, discussed under “Nonperforming Assets,” are designed to minimize the risk of nonpayment with respect to outstanding loans.
Most of the Company’s lending activity occurs within Texas and California, including the metropolitan areas of Houston, Dallas, San Diego, Los Angeles and San Francisco, as well as other markets. The majority of the Company’s loan portfolio consists of commercial real estate and commercial and industrial loans. Other than hotels/motels and retail neighborhood centers, as of December 31, 2012 and hotels/motels as of December 31, 2011, there were no concentrations of loans related to any single industry in excess of 10% of gross loans.
Nonperforming Assets
The Company has certain lending procedures in place that are designed to maximize loan income within an acceptable level of risk. These procedures include the approval of lending policies and underwriting guidelines by the Board of Directors of each Bank, and separate policy, administrative and approval oversight by the Directors’ Loan Committee of MetroBank, and by the Directors’ Credit Committee of Metro United. Additionally, MetroBank’s loan portfolio is reviewed by its internal loan review department, and Metro United's loan portfolio is reviewed by an external third-party company. These procedures also serve to timely identify changes in asset quality and to ensure proper recording and reporting of nonperforming assets.
The loan review process of both Banks involves the grading of each loan by its respective loan officer. Depending on the grade, a loan will be aggregated with other loans of similar grade and a loss factor is applied to the total loans in each group to establish the required level of allowance for loan losses. For both Banks, grades of 1-10 are applied to each loan, with loans graded 7-10 requiring the most allowance for loan losses. Factors utilized in the grading process include but are not limited to historical performance, payment status, collateral value, and financial strength of the borrower. Oversight of the loan review process is the responsibility of the Loan Review/Compliance Officer. Differences of opinion are resolved among the loan officer, compliance officer, and the Chief Credit Officer. See “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” for additional discussion on loan grades.
MetroBank’s credit department reports credit risk grade changes on a monthly basis to its management and the Board of Directors. MetroBank performs monthly and quarterly, and Metro United performs quarterly concentration analyses based on industries, collateral types, business lines, large credit sizes and officer portfolio loads. Metro United’s loan review process is performed three times a year by an external independent loan review company. Findings of each respective examination are reported to the Director’s Credit Committee of each Bank. It is the responsibility of the loan administration personnel and loan officers to respond to the findings of the examination and take corrective actions so as to reduce and minimize risk exposure to the Bank. Loan concentration reports based on type and geographic regions are prepared, monitored and reviewed quarterly and presented to the Directors’ Loan Committee for MetroBank, the Directors’ Credit Committee for Metro United and to the Board of Directors of each respective Bank.
The following table presents the recorded investment in loans by credit risk profile, and which were updated as of the date indicated (in thousands):
|
As of December 31, 2012
|
|
Commercial
and industrial
|
|
|
Real estate
mortgage
|
|
|
Real estate construction
|
|
|
Consumer and
other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-6 - “Pass”
|
|
$
|
366,571
|
|
|
$
|
611,159
|
|
|
$
|
5,163
|
|
|
$
|
7,401
|
|
|
$
|
990,294
|
|
|
7 - “Special Mention”/ “Watch”
|
|
|
4,393
|
|
|
|
14,593
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,986
|
|
|
8 - “Substandard”
|
|
|
12,941
|
|
|
|
76,728
|
|
|
|
4,529
|
|
|
|
—
|
|
|
|
94,198
|
|
|
9 -“Doubtful"
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
383,905
|
|
|
$
|
702,480
|
|
|
$
|
9,692
|
|
|
$
|
7,401
|
|
|
$
|
1,103,478
|
|
|
As of December 31, 2011
|
|
Commercial
and industrial
|
|
|
Real estate
mortgage
|
|
|
Real estate construction
|
|
|
Consumer and
other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-6 - “Pass”
|
|
$
|
310,626
|
|
|
$
|
551,496
|
|
|
$
|
3,078
|
|
|
$
|
3,753
|
|
|
$
|
868,953
|
|
|
7 - “Special Mention”/ “Watch”
|
|
|
10,735
|
|
|
|
30,491
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41,226
|
|
|
8 - “Substandard”
|
|
|
24,204
|
|
|
|
106,160
|
|
|
|
7,257
|
|
|
|
1
|
|
|
|
137,622
|
|
|
9 -“Doubtful"
|
|
|
—
|
|
|
|
205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
345,565
|
|
|
$
|
688,352
|
|
|
$
|
10,335
|
|
|
$
|
3,754
|
|
|
$
|
1,048,006
|
|
In addition, the Company reviews the real estate values, and when necessary, orders new appraisals on loans collateralized by real estate when loans are renewed, prior to foreclosure and at other times as necessary, particularly in problem loan situations. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible charge-offs or appropriate additions to the allowance for loan losses. The Company records other real estate at fair value at the time of acquisition less estimated costs to sell.
There can be no assurance, however, that the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrowers’ financial condition due to general economic and other factors. While future deterioration in the loan portfolio is possible, management is continuing its risk assessment and resolution program. In addition, management is focusing its attention on minimizing the Company’s credit risk through diversification.
The Company generally places a loan on nonaccrual status and ceases accruing interest when, in the opinion of management, full payment of loan principal or interest is in doubt. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. All loans past due 90 days are placed on nonaccrual status unless the loan is both well collateralized and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as significant doubt exists as to collection of the principal. In addition to nonaccrual loans, the Company evaluates on an ongoing basis other loans which are potential problem loans as to risk exposure in determining the adequacy of the allowance for loan losses.
A loan is considered impaired based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual basis for other loans. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price or based on the fair value of the collateral if the loan is collateral-dependent.
Loans are classified as a troubled debt restructuring in cases where a borrower experiences financial difficulty but is current on their payment and the Company makes any concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate and an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated the loan may be returned to performing status after the calendar year end.
The Company requires that nonperforming assets be monitored by the special assets department or senior lenders for MetroBank, and internal credit personnel with the assistance of third party consultants and attorneys for Metro United. All nonperforming assets are actively managed pursuant to the Company’s loan policy. Management is apprised on a weekly basis of the workout endeavors and provides assistance as necessary to determine the best strategy for problem loan resolution and maximizing repayment on nonperforming assets.
In addition to the Banks’ loan review process described in the preceding paragraphs, the OCC periodically examines and evaluates MetroBank, while the FDIC and CDFI periodically examine and evaluate Metro United. Based upon such examinations, the regulators may revalue the assets of the institution and require that it charge-off certain assets, establish specific reserves to compensate for the difference between the regulators-determined value and the book value of such assets or take other regulatory action designed to lessen the risk in the asset portfolio.
The following tables provide an analysis of the age of the recorded investment in loans by portfolio segment at the date indicated (in thousands):
|
As of December 31, 2012
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than 90
Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Recorded
Investment
in Loans
|
|
|
Recorded
Investment
90 Days and
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,233
|
|
|
$
|
817
|
|
|
$
|
1,308
|
|
|
$
|
4,358
|
|
|
$
|
379,547
|
|
|
$
|
383,905
|
|
|
$
|
—
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
239
|
|
|
|
239
|
|
|
|
36,667
|
|
|
|
36,906
|
|
|
|
—
|
|
|
Commercial
|
|
|
114
|
|
|
|
3,817
|
|
|
|
18,141
|
|
|
|
22,072
|
|
|
|
643,502
|
|
|
|
665,574
|
|
|
|
—
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
1,426
|
|
|
|
1,426
|
|
|
|
984
|
|
|
|
2,410
|
|
|
|
—
|
|
|
Commercial
|
|
|
150
|
|
|
|
—
|
|
|
|
3,103
|
|
|
|
3,253
|
|
|
|
4,029
|
|
|
|
7,282
|
|
|
|
—
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,401
|
|
|
|
7,401
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,497
|
|
|
$
|
4,634
|
|
|
$
|
24,217
|
|
|
$
|
31,348
|
|
|
$
|
1,072,130
|
|
|
$
|
1,103,478
|
|
|
$
|
—
|
|
|
As of December 31, 2011
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
Greater
Than 90
Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Recorded
Investment
in Loans
|
|
|
Recorded
Investment
90 Days and Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,018
|
|
|
$
|
121
|
|
|
$
|
9,433
|
|
|
$
|
11,572
|
|
|
$
|
333,993
|
|
|
$
|
345,565
|
|
|
$
|
—
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
105
|
|
|
|
—
|
|
|
|
251
|
|
|
|
356
|
|
|
|
42,440
|
|
|
|
42,796
|
|
|
|
—
|
|
|
Commercial
|
|
|
7,361
|
|
|
|
4,002
|
|
|
|
15,559
|
|
|
|
26,922
|
|
|
|
618,634
|
|
|
|
645,556
|
|
|
|
—
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,011
|
|
|
|
7,011
|
|
|
|
—
|
|
|
Commercial
|
|
|
—
|
|
|
|
3,324
|
|
|
|
—
|
|
|
|
3,324
|
|
|
|
—
|
|
|
|
3,324
|
|
|
|
—
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
5
|
|
|
|
1
|
|
|
|
6
|
|
|
|
3,748
|
|
|
|
3,754
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,484
|
|
|
$
|
7,452
|
|
|
$
|
25,244
|
|
|
$
|
42,180
|
|
|
$
|
1,005,826
|
|
|
$
|
1,048,006
|
|
|
$
|
—
|
|
The following table presents the recorded investment in nonaccrual loans, including nonaccruing troubled debt restructurings, by portfolio segment at the date indicated (in thousands):
|
|
|
As of December 31,
|
|
|
Recorded investment in nonaccrual loans
|
|
2012
|
|
|
2011
|
|
|
Commercial and industrial
|
|
$
|
1,308
|
|
|
$
|
10,665
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
239
|
|
|
|
251
|
|
|
Commercial
|
|
|
22,501
|
|
|
|
30,600
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,426
|
|
|
|
—
|
|
|
Commercial
|
|
|
3,103
|
|
|
|
3,324
|
|
|
Consumer and other
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,577
|
|
|
$
|
44,841
|
|
Had nonaccrual loans remained on an accrual basis, interest of approximately $1.2 million, $1.8 million and $2.3 million would have been accrued on these loans for each of the years ended December 31, 2012, 2011 and 2010, respectively.
Information on impaired loans, which includes nonaccrual loans and troubled debt restructurings (“TDRs”), and the related specific allowance for loan losses on such loans as of December 31, 2012 and 2011, is presented below (in thousands):
|
As of December 31, 2012
|
|
Recorded Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related Allowance
|
|
|
Average
Recorded
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,287
|
|
|
$
|
1,289
|
|
|
$
|
—
|
|
|
$
|
5,162
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
239
|
|
|
|
239
|
|
|
|
—
|
|
|
|
213
|
|
|
Commercial
|
|
|
18,369
|
|
|
|
18,369
|
|
|
|
—
|
|
|
|
19,732
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,426
|
|
|
|
1,426
|
|
|
|
—
|
|
|
|
1,529
|
|
|
Commercial
|
|
|
3,103
|
|
|
|
3,103
|
|
|
|
—
|
|
|
|
3,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with an allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
1,434
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,533
|
|
|
|
4,535
|
|
|
|
503
|
|
|
|
6,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,308
|
|
|
$
|
1,310
|
|
|
$
|
21
|
|
|
$
|
6,596
|
|
|
Real estate mortgage
|
|
|
23,141
|
|
|
|
23,143
|
|
|
|
503
|
|
|
|
26,781
|
|
|
Real estate construction
|
|
|
4,529
|
|
|
|
4,529
|
|
|
|
—
|
|
|
|
4,700
|
|
|
As of December 31, 2011
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with no allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
3,647
|
|
|
$
|
3,652
|
|
|
$
|
—
|
|
|
$
|
8,901
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
251
|
|
|
|
251
|
|
|
|
—
|
|
|
|
263
|
|
|
Commercial
|
|
|
19,922
|
|
|
|
19,913
|
|
|
|
—
|
|
|
|
26,256
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,324
|
|
|
|
3,324
|
|
|
|
—
|
|
|
|
831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with an allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
7,018
|
|
|
|
7,025
|
|
|
|
224
|
|
|
|
4,835
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
10,678
|
|
|
|
10,696
|
|
|
|
710
|
|
|
|
14,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
10,665
|
|
|
$
|
10,677
|
|
|
$
|
224
|
|
|
$
|
13,736
|
|
|
Real estate mortgage
|
|
|
30,851
|
|
|
|
30,860
|
|
|
|
710
|
|
|
|
40,561
|
|
|
Real estate construction
|
|
|
3,324
|
|
|
|
3,324
|
|
|
|
—
|
|
|
|
831
|
|
Interest income of $146,000, $119,000 and $109,000 was recognized on impaired loans, which consisted of nonaccrual loans that were paid in full and accruing TDRs for the years ended December 31, 2012, 2011 and 2010, respectively.
Troubled Debt Restructurings
Loans are classified as a TDR in cases where a borrower is experiencing financial difficulty and the Banks make concessionary modifications to contractual terms. Restructured loans typically involve a modification of terms such as a reduction of the stated interest rate and/or an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated the loan may be returned to performing status after the calendar year end. Effective July 1, 2011, the Company adopted the provisions of
Accounting Standards Update (“ASU”) No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”
The following table presents the recorded investment in TDRs that occurred and were outstanding for the year ended December 31, 2012 (dollars in thousands):
|
|
Year Ended December 31, 2012
|
|
|
|
Number
of
Contracts
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
$
|
3,308
|
|
|
$
|
3,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
|
401
|
|
|
|
401
|
|
The following describes TDRs that occurred during the year ended December 31, 2012 and were outstanding at December 31, 2012:
Two commercial real estate loans to the same borrower were identified and classified as TDRs. The TDRs were previously on nonaccrual status and reported as impaired loans prior to restructuring. The borrower was under the protection of the Federal Bankruptcy Act and the court approved and imposed a reorganization plan which modified the existing payment terms. Since the loans were classified and on nonaccrual status both before and after restructuring, the modification did not impact the Company’s determination of the allowance for loan losses.
Two real estate construction loans to the same borrower were restructured as TDRs. The loans, previously on accrual status and paid according to contractual terms, had matured and were renewed without a principal reduction. The loans were classified and on accrual status both before and after restructuring. Prior to restructuring, the Company’s determination of the allowance for loan losses was based on FASB codification 450-20; after restructuring, the determination of the allowance for loan losses was based on FASB codification 310-10-35 and therefore insignificantly reduced the allowance for loan losses.
As of December 31, 2012, there were no commitments to lend additional funds on the loan that was modified as a TDR. As of December 31, 2012, there have been no defaults on any loans that were modified as TDRs during the preceding twelve months.
The following table presents the recorded investment in troubled debt restructurings that occurred and were outstanding for the year ended December 31, 2011 (dollars in thousands):
|
|
|
Year Ended December 31, 2011
|
|
|
Troubled Debt Restructurings
|
|
Number of Contracts
|
|
|
Pre-Modification Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
$
|
7,715
|
|
|
$
|
7,451
|
|
The loan identified as a TDR by the Company was previously on nonaccrual status and reported as an impaired loan prior to restructuring. The modification primarily related to an interest rate reduction and a period of interest-only payments. The loan restructured during the year ended December 31, 2011 was on nonaccrual status as of December 31, 2011. Because the loan was classified and on nonaccrual status both before and after restructuring, the modification did not impact the Company’s determination of the allowance for loan losses.
At December 31, 2011, commitments to lend additional funds on loans that were modified as TDRs were insignificant. At December 31, 2011, there were no defaults on any loans that were modified as TDRs during the preceding twelve months.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments
The allowance for loan losses provides for the risk of losses inherent in the lending process and the Company allocates the allowance for loan losses according to management’s assessments of risk inherent in the portfolio. The allowance for loan losses is increased by provisions charged against current earnings and is reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible in whole or in part. Recoveries are recorded when cash payments are received. In developing the assessment, the Company relies on estimates and exercises judgment regarding matters where the ultimate outcome is uncertain. Circumstances may change and future assessments of credit risk may yield materially different results, resulting in an increase or decrease in the allowance for credit losses.
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments and is maintained at levels that the Company believes are adequate to absorb probable losses inherent in the loan portfolio and unfunded lending commitments as of the date of the financial statements. The Company employs a systematic methodology for determining the allowance for credit losses that consists of four components: (1) a formula-based general reserve based on historical average losses by loan grade and grade migration, (2) specific reserves on larger impaired individual credits that are based on the difference between the current loan balance and the loan’s collateral value, observable market price, or discounted present value, (3) a qualitative component that reflects current market conditions and other factors precedent to losses different from historical averages, and (4) a reserve for unfunded lending commitments.
In setting the qualitative reserve portion of the allowance for loan losses, the factors the Company may consider include, but are not limited to, concentrations of credit, common characteristics of known problem loans, potential problem loans, and other loans that exhibit weaknesses or deterioration, the general economic environment in the Company’s markets as well as the national economy, particularly the real estate markets, changes in value of the collateral securing loans, results of portfolio stress tests, and changes in lending processes, procedures and personnel. After the aforementioned assessment of the loan portfolio, the general economic environment and other relevant factors, management determines the appropriate allowance for loan loss level and makes the provision necessary to achieve that level. This methodology is consistently followed so that the level of the allowance for loan losses is reevaluated in response to changes in circumstances, economic conditions or other factors on an ongoing basis.
The Company follows a loan review program to evaluate the credit risk in the loan portfolio as discussed under “Nonperforming Assets.” Through the loan review process, the Company maintains an internally classified loan list which, along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as “substandard” are risk-rated as grade 8, and are those loans with well-defined weaknesses such as a highly-leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the debt. Loans classified as “doubtful” are risk-rated as grade 9, and are those loans which have characteristics similar to substandard loans but with an increased risk that a loss may occur, or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans include some loans that are delinquent at least 30 days or on nonaccrual status. Loans classified as “loss” are risk-rated as grade 10, and are those loans which are charged off.
In addition to the internally classified loan list and delinquency list of loans, the Company maintains a separate “watch list” for loans risk-rated as grade 7, which further aids the Company in monitoring loan portfolios. Watch list loans show potential weaknesses where the present status portrays one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements compared with those of a satisfactory credit. The Company reviews these loans to assist in assessing the adequacy of the allowance for loan losses.
Policies and procedures have been developed to assess the adequacy of the allowance for loan losses and the reserve for unfunded lending commitments that include the monitoring of qualitative and quantitative trends described above. Management of both banks review and approve their respective allowance for loan losses and the reserve for unfunded lending commitments monthly and perform a comprehensive analysis quarterly, which is also presented for approval by each banks’ Board of Directors. The allowance for credit losses is also subject to federal banking regulations. The Banks’ primary regulators conduct periodic examinations of the allowance for credit losses and make assessments regarding its adequacy and the methodology used in its determination.
The Company maintains a reserve for unfunded commitments to provide for the risk of loss inherent in its unfunded lending related commitments. The process used in determining the reserve is consistent with the process used for the allowance for loan losses discussed above.
The following table presents the allowance for loan losses and recorded investment in loans by portfolio segment as of the date indicated (in thousands):
|
As of December 31, 2012
|
|
Commercial
and
industrial
|
|
|
Real estate mortgage
|
|
|
Real estate construction
|
|
|
Consumer and other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of year
|
|
$
|
7,966
|
|
|
$
|
19,213
|
|
|
$
|
320
|
|
|
$
|
137
|
|
|
$
|
685
|
|
|
$
|
28,321
|
|
|
(Reduction in) provision for loan losses
|
|
|
2,262
|
|
|
|
(4,230
|
)
|
|
|
729
|
|
|
|
104
|
|
|
|
545
|
|
|
|
(590
|
)
|
|
Charge-offs
|
|
|
(2,394
|
)
|
|
|
(2,100
|
)
|
|
|
(853
|
)
|
|
|
(120
|
)
|
|
|
—
|
|
|
|
(5,467
|
)
|
|
Recoveries
|
|
|
421
|
|
|
|
1,865
|
|
|
|
19
|
|
|
|
23
|
|
|
|
—
|
|
|
|
2,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
|
|
8,255
|
|
|
|
14,748
|
|
|
|
215
|
|
|
|
144
|
|
|
|
1,230
|
|
|
|
24,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses balance for loans individually evaluated for impairment
|
|
|
21
|
|
|
|
503
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses balance for loans collectively evaluated for impairment
|
|
|
8,234
|
|
|
|
14,245
|
|
|
|
215
|
|
|
|
144
|
|
|
|
|
|
|
|
22,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans
|
|
|
383,905
|
|
|
|
702,480
|
|
|
|
9,692
|
|
|
|
7,401
|
|
|
|
|
|
|
|
1,103,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans individually evaluated for impairment
|
|
|
1,308
|
|
|
|
23,141
|
|
|
|
4,529
|
|
|
|
—
|
|
|
|
|
|
|
|
28,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans collectively evaluated for impairment
|
|
$
|
382,597
|
|
|
$
|
679,339
|
|
|
$
|
5,163
|
|
|
$
|
7,401
|
|
|
|
|
|
|
$
|
1,074,500
|
|
|
As of December 31, 2011
|
|
Commercial
and
industrial
|
|
|
Real estate mortgage
|
|
|
Real estate construction
|
|
|
Consumer and other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of year
|
|
$
|
8,187
|
|
|
$
|
22,016
|
|
|
$
|
1,993
|
|
|
$
|
194
|
|
|
$
|
1,367
|
|
|
$
|
33,757
|
|
|
(Reduction in) provision for loan losses
|
|
|
3,037
|
|
|
|
3,811
|
|
|
|
(2,416
|
)
|
|
|
(25
|
)
|
|
|
(682
|
)
|
|
|
3,725
|
|
|
Charge-offs
|
|
|
(3,806
|
)
|
|
|
(7,068
|
)
|
|
|
—
|
|
|
|
(62
|
)
|
|
|
—
|
|
|
|
(10,936
|
)
|
|
Recoveries
|
|
|
548
|
|
|
|
454
|
|
|
|
743
|
|
|
|
30
|
|
|
|
—
|
|
|
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
|
|
7,966
|
|
|
|
19,213
|
|
|
|
320
|
|
|
|
137
|
|
|
|
685
|
|
|
|
28,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses balance for loans individually evaluated for impairment
|
|
|
224
|
|
|
|
710
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses balance for loans collectively evaluated for impairment
|
|
|
7,742
|
|
|
|
18,503
|
|
|
|
320
|
|
|
|
137
|
|
|
|
|
|
|
|
26,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans
|
|
|
345,565
|
|
|
|
688,352
|
|
|
|
10,335
|
|
|
|
3,754
|
|
|
|
|
|
|
|
1,048,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans individually evaluated for impairment
|
|
|
10,665
|
|
|
|
30,851
|
|
|
|
3,324
|
|
|
|
1
|
|
|
|
|
|
|
|
44,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans collectively evaluated for impairment
|
|
$
|
334,900
|
|
|
$
|
657,501
|
|
|
$
|
7,011
|
|
|
$
|
3,753
|
|
|
|
|
|
|
$
|
1,003,165
|
|
|
As of December 31, 2010
|
|
Commercial
and
industrial
|
|
|
Real estate mortgage
|
|
|
Real estate construction
|
|
|
Consumer and other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of year
|
|
$
|
6,398
|
|
|
$
|
19,503
|
|
|
$
|
2,753
|
|
|
$
|
248
|
|
|
$
|
501
|
|
|
$
|
29,403
|
|
|
(Reduction in) provision for loan losses
|
|
|
3,706
|
|
|
|
11,538
|
|
|
|
1,323
|
|
|
|
146
|
|
|
|
865
|
|
|
|
17,578
|
|
|
Charge-offs
|
|
|
(2,412
|
)
|
|
|
(9,234
|
)
|
|
|
(2,104
|
)
|
|
|
(228
|
)
|
|
|
—
|
|
|
|
(13,978
|
)
|
|
Recoveries
|
|
|
496
|
|
|
|
209
|
|
|
|
21
|
|
|
|
28
|
|
|
|
—
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
|
|
8,188
|
|
|
|
22,016
|
|
|
|
1,993
|
|
|
|
194
|
|
|
|
1,366
|
|
|
|
33,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses balance for loans individually evaluated for impairment
|
|
|
57
|
|
|
|
483
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance for loan losses balance for loans collectively evaluated for impairment
|
|
|
8,131
|
|
|
|
21,533
|
|
|
|
1,993
|
|
|
|
194
|
|
|
|
|
|
|
|
31,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans
|
|
|
350,075
|
|
|
|
759,024
|
|
|
|
35,347
|
|
|
|
3,735
|
|
|
|
|
|
|
|
1,148,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans individually evaluated for impairment
|
|
|
18,038
|
|
|
|
48,880
|
|
|
|
5,402
|
|
|
|
3
|
|
|
|
|
|
|
|
72,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans collectively evaluated for impairment
|
|
$
|
332,037
|
|
|
$
|
710,144
|
|
|
$
|
29,945
|
|
|
$
|
3,732
|
|
|
|
|
|
|
$
|
1,075,858
|
|
5. Premises and Equipment
Premises and equipment are summarized as follows (dollars in thousands):
|
|
|
Estimated useful
lives
|
|
|
|
As of December 31,
|
|
|
|
|
(in years)
|
|
|
2012
|
|
|
2011
|
|
|
Furniture, fixtures and equipment
|
|
|
3-10
|
|
|
$
|
15,048
|
|
|
$
|
14,817
|
|
|
Building and improvements
|
|
|
3-20
|
|
|
|
4,427
|
|
|
|
4,422
|
|
|
Land
|
|
|
—
|
|
|
|
1,548
|
|
|
|
1,548
|
|
|
Leasehold improvements
|
|
|
5
|
|
|
|
6,257
|
|
|
|
6,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,280
|
|
|
|
26,956
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(23,234
|
)
|
|
|
(22,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
|
|
|
$
|
4,046
|
|
|
$
|
4,697
|
|
6. Goodwill
Goodwill is recorded on the acquisition date of each entity, and evaluated annually for possible impairment. Goodwill is required to be tested for impairment on an annual basis or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s only reporting unit with assigned goodwill is Metro United.
2012 Annual Evaluation
The Company completed its 2012 annual impairment test based on information as of August 31, 2012. The impairment analysis utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and the market capitalization of the Company to estimate the fair value of Metro United.
Due to the limited number of bank transaction multiples, management allocated more weight on the income approach for the step-one analysis. The Company also performed a reconciliation of the estimated fair value of the reporting unit to the stock price of the Company. This reconciliation is performed by first determining the fair value of the reporting unit from various valuation techniques (i.e., guideline transactions, discounted cash flows, and quoted market prices). The fair value is compared to the allocated value of the reporting unit based on the Company’s market value using the stock price as of the valuation date. The Company allocates the total market value to both of its segments, MetroBank and Metro United. For each Bank, the allocation is based upon the following internal ratios:
Balance Sheet Ratios
• Total Bank assets as a percentage of total assets;
• Total Bank loans as a percentage of total loans;
• Total Bank deposits as a percentage of total deposits; and
• Total Bank shareholder's equity as a percentage of total shareholders' equity.
Performance Ratios
• Total Bank nonperforming assets as a percentage of total assets;
• Last twelve months return on assets; and
• Last twelve months return on equity.
In allocating the market value between the two Banks, more weight was assigned to the Performance Ratios than the Balance Sheet Ratios in order to account for the differences in market valuation as a result of different financial performance. The allocated market value of Metro United is then reconciled to the weighted average fair value derived from each valuation technique (i.e., guideline transactions, discounted cash flows, and quoted market prices) by assigning an estimated control premium of 20% to the allocated market value.
Under the discounted cash flow method, the Company used an average asset growth rate of 9.8% for the next five-year period and discounted Metro United’s cash flow and terminal value using a 13.2% discount rate. The derived fair value of Metro United was lower than the carrying value of its equity; therefore Metro United failed the step-one impairment test.
The Company then performed the step-two analysis to derive the implied fair value of goodwill. The size of the implied goodwill under the step-two analysis was significantly affected by the estimated fair value of the loans pertaining to Metro United. The significant market risk adjustment, which is a consequence of the current market conditions such as the interest rate environment, risk premium requirement on performing and nonperforming loans, supply and demand of loans for sale, macroeconomic conditions and political and regulatory environment, were all substantial contributors to the valuation discounts associated with Metro United’s loan portfolio. The implied fair value of goodwill at the evaluation date exceeded the carrying value; therefore the Company determined there was no impairment of goodwill as of that date.
To the extent that market liquidity returns and the fair value of the individual assets or loans of Metro United increases at a faster rate than the fair value of Metro United as a whole, that may cause the implied goodwill to be lower than the carrying value of goodwill. Future potential changes in valuation assumptions may also impact the estimated fair value of Metro United, resulting in impairment of goodwill under the step-two analysis. The stock price performance of the Company and the fair value of Metro United's loans are factors that may impact the potential future goodwill impairment.
Goodwill impairment, if any, is a noncash adjustment to the Company’s financial statements. As goodwill and other intangible assets are not included in the calculation of regulatory capital, the Company’s well capitalized regulatory ratios are not affected. Subsequent reversal of goodwill impairment is prohibited.
2011 Annual Evaluation
The Company completed its 2011 annual impairment test based on information as of August 31, 2011. The review utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and quoted stock prices for the Company and guideline banks to estimate the fair value of Metro United.
Due to the limited number of bank transaction multiples and fluctuations in market capitalization of peer banks used in the market methods, management put more weight on the income approach for the step one evaluation. The Company also performed a reconciliation of the estimated fair value to the stock price of the Company which was performed by first using the Company’s market price on a minority basis with an estimated control premium of 30%. The Company then allocated the total fair value to both of its reporting units, MetroBank and Metro United.
Under the discounted cash flow method, the Company used an average asset growth rate of 6.5% for the five-year period and discounted Metro United’s terminal value using a 10% rate of return. The Company also performed a sensitivity analysis utilizing additional discount rates ranging from 8% to 15%. An 8% discount rate indicated a fair value that was $9.8 million greater than carrying value, an 11% discount rate indicated that fair value and carrying value were approximately equal, and a 15% discount rate indicated a fair value that was $9.8 million less than the carrying value.
The derived fair value of Metro United was compared with the carrying value of its equity. The fair value at the evaluation date exceeded the carrying value, therefore the Company determined there was no impairment of goodwill as of that date.
2011 Year End Evaluation
The Company’s stock price continued to trade below book value per share after the annual test and an additional goodwill impairment test was conducted as of December 31, 2011. The test was similar to the annual test incorporating the most recent stock performance, guideline bank transactions as well as other observable market information to the extent available and relevant.
Under the step-one analysis, the Company used a 20% control premium, an average asset growth rate of 8% for the five-year period, and discounted Metro United’s terminal value using a 10% rate of return. The Company also performed a sensitivity analysis utilizing additional discount rates ranging from 8% to 15%.
The derived fair value of Metro United was lower than the carrying value of its equity; and therefore, the step-one impairment test failed.
The Company then performed the step-two analysis to derive the implied fair value of goodwill. As a result of improved market liquidity and the increase in fair value of loan assets, the implied fair value of goodwill was below the carrying value as of the evaluation date by $3.0 million; and as a result, the Company impaired goodwill by $3.0 million as of December 31, 2011.
The implied goodwill was significantly affected by the estimated fair value of the loans pertaining to Metro United and the Company’s stock price. The significant market risk adjustment that is a consequence of the current market conditions was a significant contributor to the valuation discounts associated with Metro United’s loan portfolio. To the extent that market liquidity returns and the fair value of the individual assets or loans of Metro United increases at a faster rate than the fair value of Metro United as a whole, the implied fair value of goodwill may be lower than the carrying value of goodwill. Future potential changes in valuation assumptions may also impact the estimated fair value of Metro United, therefore resulting in additional impairment of goodwill. The stock price performance of the Company and the fair value of Metro United's loans are factors that may also impact the potential of future goodwill impairment.
2010 Impairment
During the first quarter of 2010, the Company’s stock price declined further from that at the prior year end. The Company performed an evaluation of goodwill for the quarter ended March 31, 2010 and impaired goodwill by $2.0 million. Due to the staleness of the bank transactions multiples and fluctuations in market capitalization of peer banks used in the market methods, management reduced the weight of the market approach and relied primarily on the income approach for the step one evaluation. The Company also performed a reconciliation of the estimated fair value to the stock price of the Company. Because the step-one impairment test failed, the Company performed the step-two analysis to derive the implied fair value of goodwill. As a result of the evaluation, the implied fair value of goodwill was less than the carrying value of goodwill by $2.0 million, and an impairment was recorded in the first quarter of 2010.
2010 Annual Evaluation
The Company completed its 2010 annual impairment testing based on information as of August 31, 2010. The review utilized guideline company and guideline transaction information where available, discounted cash flow analysis, and quoted stock prices for the Company and guideline banks to estimate the fair value of Metro United.
Due to the staleness of the bank transactions multiples and fluctuations in market capitalization of peer banks used in the market methods, management relied primarily on the income approach for the step one evaluation. The Company also performed a reconciliation of the estimated fair value to the stock price of the Company. Because the step-one impairment test failed, the Company performed the step-two analysis to derive the implied fair value of goodwill.
Under the step-two analysis, the implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of Metro United’s assets and liabilities, including unrecognized intangible assets, is individually evaluated. The excess of the fair value of Metro United over the fair value of its net assets is the implied fair value of goodwill. The Company estimated the fair value of Metro United’s assets and liabilities, including previously unrecognized intangible assets, through a variety of valuation techniques that incorporated interest rates, credit or nonperformance risk, as well as market risk adjustments that are indicative of the current economic environment. The estimated values are based on an exit price and reflect management’s expectations regarding how a market participant would value the assets and liabilities. The implied goodwill was significantly affected by the estimated fair value of the loans pertaining to Metro United and the Company’s stock price. The significant market risk adjustment that is a consequence of the current distressed market conditions was a significant contributor to the valuation discounts associated with these loans.
In the step-two analysis, the estimated implied fair value of Metro United goodwill as of August 31, 2010 exceeded its respective carrying value in the step-two analysis; therefore, the Company determined there was no impairment of goodwill as of that date.
2010 Year End Evaluation
As of December 31, 2010, the Company’s stock price continued to trade below book value per share after the annual test and additional goodwill impairment test was done. Under the discounted cash flow method, the Company used an average growth rate of 5% for the five-year period and discounted Metro United’s terminal value using a 10% rate of return. The Company also performed a sensitivity analysis utilizing additional discount rates ranging from 8% to 15%. An 8% discount rate indicated a fair value that was $13.4 million greater than carrying value, a 12.3% discount rate indicated that fair value and carrying value were approximately equal, and a 15% discount rate indicated a fair value that was $6.9 million less than carrying value.
The Company also considered the fair value of Metro United in relationship to the Company’s stock price and performed reconciliation to the market price. This reconciliation was performed by first using the Company’s market price on a minority basis with an estimated control premium of 30%. The Company then allocated the total fair value to both of its reporting units, MetroBank and Metro United.
The derived fair value of Metro United was compared to the carrying value of its equity. As the carrying value at the evaluation date exceeded the fair value and failed the step-one impairment test, the Company performed the step-two goodwill impairment test. In the step-two analysis, the estimated fair value of Metro United as of December 31, 2010 exceeded its respective carrying value in the step-two analysis; therefore, the Company determined there was no impairment of goodwill as of that date.
Changes in the carrying amount of the Company’s goodwill for the years ended December 31, 2012, 2011 and 2010 were as follows (in thousands):
|
Balance as of January 1, 2010
|
|
|
|
|
Goodwill
|
|
$
|
21,827
|
|
|
Accumulated impairment losses
|
|
|
2,500
|
|
|
Net goodwill
|
|
|
19,327
|
|
|
|
|
|
|
|
|
Impairment losses for the year ended December 31, 2010
|
|
|
2,000
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
|
|
|
Goodwill
|
|
|
21,827
|
|
|
Accumulated impairment losses
|
|
|
4,500
|
|
|
Net goodwill
|
|
|
17,327
|
|
|
|
|
|
|
|
|
Impairment losses for the year ended December 31, 2011
|
|
|
3,000
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
|
|
|
Goodwill
|
|
|
21,827
|
|
|
Accumulated impairment losses
|
|
|
7,500
|
|
|
Net goodwill
|
|
|
14,327
|
|
|
|
|
|
|
|
|
Impairment losses for the year ended December 31, 2012
|
|
|
—
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
|
|
|
Goodwill
|
|
|
21,827
|
|
|
Accumulated impairment losses
|
|
|
7,500
|
|
|
Net goodwill
|
|
$
|
14,327
|
|
7. Interest-Bearing Deposits
The types of accounts and their respective balances included in interest-bearing deposits are as follows (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Interest-bearing demand deposits
|
|
$
|
72,994
|
|
|
$
|
64,509
|
|
|
Savings and money market accounts
|
|
|
425,687
|
|
|
|
420,927
|
|
|
Time deposits less than $100,000
|
|
|
151,831
|
|
|
|
176,458
|
|
|
Time deposits $100,000 and over
|
|
|
306,822
|
|
|
|
330,284
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
957,334
|
|
|
$
|
992,178
|
|
At December 31, 2012, the scheduled maturities of time deposits were as follows (in thousands):
|
2013
|
|
$
|
323,264
|
|
|
2014
|
|
|
107,678
|
|
|
2015
|
|
|
16,049
|
|
|
2016
|
|
|
3,129
|
|
|
2017
|
|
|
8,514
|
|
|
Thereafter
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
$
|
458,653
|
|
The Company had $21.4 million and $29.8 million of brokered deposits at December 31, 2012 and 2011, respectively. However, as a result of the Agreement between MetroBank and the OCC, MetroBank cannot acquire, accept, renew or roll over any brokered deposits without OCC approval. There were no major deposit concentrations as of December 31, 2012 or 2011.
8. Junior Subordinated Debentures
In September 2005, the Company formed MCBI Trust I, a variable interest entity for which the Company is not the primary beneficiary. Accordingly, the accounts of the Trust are not included in the Company’s consolidated financial statements. See Note 1—“Summary of Significant Accounting Policies” for additional information about the Company’s consolidation policy.
On October 3, 2005, the Trust issued 35,000 Fixed/Floating Rate Capital Securities with an aggregate liquidation value of $35.0 million to a third party in a private placement. Concurrent with the issuance of the capital securities, the Trust issued trust common securities to the Company in the aggregate liquidation value of $1.1 million. The proceeds of the issuance of the capital securities and trust common securities were invested in $36.1 million of the Company’s Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures. The net proceeds to the Company from the sale of the debentures to the Trust were used to fund the Company’s acquisition of Metro United.
The proceeds from the sale of debentures represent liabilities of the Company to the Trust and are reported in the consolidated balance sheet as junior subordinated debentures. Interest payments on these debentures are deductible for tax purposes. The capital securities of the Trust are not registered with the Securities and Exchange Commission. For regulatory reporting purposes, the capital securities can qualify up to 25% of the total Tier I capital of the Company.
The debentures accrued interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures began accruing interest at a floating rate equal to the 3-month LIBOR plus 1.55%. The quarterly distributions on the capital securities will be paid at the same rate that interest is paid on the debentures, and will be paid on the 15th day of December, March, June and September. The ability of the Trust to pay amounts due on the capital securities and common securities is solely dependent upon the Company making payment on the related debentures. The debentures, which are the only assets of the Trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. Under the provisions of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for a period not exceeding five years. If interest payments on the debentures are deferred, the distributions on the capital securities and common securities will also be deferred.
During the third quarter of 2009, the Company entered into a forward-starting interest rate swap contract on the junior subordinated debentures with a notional amount of $17.5 million. Under the five-year swap contract, beginning December 2010, the Company pays a fixed interest rate of 5.38% and receives a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements that began in March 2011. See Note 18—“Derivative Financial Instruments.”
The debentures mature on December 15, 2035, but are redeemable at the Company’s option at par plus accrued and unpaid interest. If the Company redeems any amount of the debentures, the Trust must redeem a like amount of the capital securities. The Company has guaranteed the payment of distributions and payments on liquidation or redemption of the capital securities, but only in each case if and to the extent of funds held by the Trust.
9. Other Borrowings
Other borrowings are as follows (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Repurchase agreements
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
Unsecured debt
|
|
|
—
|
|
|
|
1,000
|
|
|
TT&L deposits
|
|
|
—
|
|
|
|
315
|
|
|
|
|
$
|
25,000
|
|
|
$
|
26,315
|
|
The Company utilizes borrowings to supplement deposits to fund its lending and investing activities. Other borrowings at December 31, 2012 include $25.0 million in fixed and variable rate security repurchase agreements.
The Company has entered into securities repurchase agreements with two counterparty financial institutions that bear a weighted average interest rate per annum of 3.71% and mature on December 31, 2014. Securities sold under securities repurchase agreements are currently puttable by the counterparty at a fixed repurchase price at the end of each calendar quarter. In addition, securities under one repurchase agreement are puttable by either the counterparty or the Company at the replacement cost of the repurchase transaction at the end of each calendar year. The Company has pledged and transferred securities as collateral under repurchase agreements with an aggregate fair value of $31.6 million as of December 31, 2012. The counterparties are permitted, in certain instances, to sell or repledge securities transferred or pledged by the Company to secure the repurchase obligations.
In February 2010, the Company issued a promissory note to one of the Company’s Co-Chairmen of the Board and to an affiliate of one of the Company’s 5% or more shareholders. Each note was issued for a principal amount of $500,000. The notes, as amended in February 2012, were to mature February 10, 2013 and bore interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly and began March 31, 2010; however the promissory notes were repaid in the fourth quarter of 2012. The proceeds from issuance of the promissory notes were used for general corporate purposes.
There were no other short-term borrowings at December 31, 2012. Other short-term borrowings at December 31, 2011 include $315,000 in TT&L payments deposited in Company. These funds typically remain in the Company for one day and are then moved to the U.S. Treasury. The Company had pledged securities with a fair value of $322,000 at December 31, 2011 to secure these TT&L deposits.
The total unused borrowing capacity from the FHLBs was $441.0 million and $404.3 million at December 31, 2012 and 2011, respectively. Additionally, at December 31, 2012 and 2011, unused borrowing capacity from the Federal Reserve Bank discount window was $10.3 million, with which the Company had pledged securities with a fair value of $10.6 million at December 31, 2012 and 2011. The Company also had unused lines of credit with correspondent banks of $5.0 million at December 31, 2012 and 2011.
10. Income Taxes
The Company is subject to taxation in the United States, Texas and California. State income tax returns are generally subject to examination for a period of three to five years after filing. The state impact of any changes made to the federal return remains subject to examination by various states for a period up to one year after formal notification to the state. The Company is open to federal tax authority examinations for the tax years ended December 31, 2009 through December 31, 2011.
The Company records tax effects from uncertain tax positions in the financial statements, only if the positions are more likely than not of being sustained on examination by taxing authorities, based on the technical merits of the positions. The Company had no unrecognized tax benefits as of December 31, 2012 and 2011, and as a result there is no impact on the Company’s effective tax rate.
To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense in the financial statements. This is an accounting policy election made by the Company that is a continuation of the Company’s historical policy. As of December 31, 2012 and 2011, the Company has not accrued any interest and penalties related to unrecognized tax benefits.
The Company does not anticipate a significant change in the balance of unrecognized tax benefits within the next 12 months.
The Company’s effective tax rate was 32.5% for year ended December 31, 2012 compared with 40.5% for the year ended December 31, 2011. The decrease in the effective income tax rate in 2012 as compared to 2011 was partially the result of nondeductible goodwill impairment in 2011. Additionally, the effective income tax rates for the two years were impacted by the amount of other non-deductible expense and non-taxable income in each respective year, and also relative to the pre-tax accounting income/loss upon which the effective income tax rate was calculated. The Texas state tax is based on the Company’s gross margin with limited deductions. Because the Texas state tax allows only limited deductions the tax may not correlate, from year to year, with pre-tax income. The California state tax is based on the unitary income of the consolidated group which can vary disproportionately from pre-tax income depending on the apportionment of income among members of the unitary group.
As of December 31, 2012, the Company had approximately $13.1 million in deferred tax assets. Deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized. The Company has not provided a valuation allowance for the deferred tax assets at December 31, 2012 and 2011 due primarily to its ability to offset reversals of net deductible temporary differences against income taxes paid in previous years and expected to be paid in future years. In making such judgments, significant weight is given to evidence that can be objectively verified. Because of historical losses that were recorded by the Company for the years ended December 31, 2010 and 2009, and if the Company is unable to generate sufficient taxable income in the future, then the Company may not be able to conclude it is more likely than not that the benefits of the deferred tax assets will be fully realized and may be required to recognize a valuation allowance and a corresponding income tax expense equal to the portion of the deferred tax asset that may not be realized.
The U.S. Federal and California State net operating loss carryforward period of 20 years provides sufficient time to utilize the deferred tax assets pertaining to the existing net operating loss carryforwards and any net operating losses that would be created by the reversal of the future net deductions which have not yet been taken.
Components of the total provision (benefit) for income taxes are as follows (in thousands):
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
Current provision for federal income taxes
|
|
$
|
3,196
|
|
|
$
|
2,670
|
|
|
$
|
1,955
|
|
|
Deferred federal income tax provision (benefit)
|
|
|
1,832
|
|
|
|
1,411
|
|
|
|
(2,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for federal income taxes
|
|
|
5,028
|
|
|
|
4,081
|
|
|
|
(552
|
)
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision for state income taxes
|
|
|
451
|
|
|
|
109
|
|
|
|
348
|
|
|
Deferred state income tax provision (benefit)
|
|
|
(127
|
)
|
|
|
184
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for state income taxes
|
|
|
324
|
|
|
|
293
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
5,352
|
|
|
$
|
4,374
|
|
|
$
|
(352
|
)
|
A reconciliation of the provision (benefit) for income taxes computed at statutory rates compared with the actual provision (benefit) for income taxes is as follows (dollars in thousands):
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Federal income tax provision (benefit) at statutory rate
|
|
$
|
5,766
|
|
|
|
35
|
%
|
|
$
|
3,781
|
|
|
|
35
|
%
|
|
$
|
(448
|
)
|
|
|
(35
|
)%
|
|
Tax-exempt interest income
|
|
|
(187
|
)
|
|
|
(1
|
)
|
|
|
(160
|
)
|
|
|
(1
|
)
|
|
|
(167
|
)
|
|
|
(13
|
)
|
|
Stock-based compensation
|
|
|
29
|
|
|
|
—
|
|
|
|
32
|
|
|
|
1
|
|
|
|
88
|
|
|
|
7
|
|
|
State income taxes
|
|
|
322
|
|
|
|
2
|
|
|
|
(66
|
)
|
|
|
(1
|
)
|
|
|
(33
|
)
|
|
|
(3
|
)
|
|
Non-deductible goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
1,050
|
|
|
|
9
|
|
|
|
700
|
|
|
|
54
|
|
|
Bank owned life insurance
|
|
|
(478
|
)
|
|
|
(2
|
)
|
|
|
(504
|
)
|
|
|
(4
|
)
|
|
|
(512
|
)
|
|
|
(39
|
)
|
|
Other, net
|
|
|
(100
|
)
|
|
|
(1
|
)
|
|
|
241
|
|
|
|
2
|
|
|
|
20
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
5,352
|
|
|
|
33
|
%
|
|
$
|
4,374
|
|
|
|
41
|
%
|
|
$
|
(352
|
)
|
|
|
(27
|
)%
|
Deferred income taxes result from differences between the amounts of assets and liabilities as measured for income tax return and for financial reporting purposes. The significant components of the net deferred tax asset are as follows (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
9,269
|
|
|
$
|
10,456
|
|
|
Deferred loan fees
|
|
|
327
|
|
|
|
335
|
|
|
Premises and equipment
|
|
|
1,427
|
|
|
|
1,381
|
|
|
Interest on nonaccrual loans
|
|
|
744
|
|
|
|
1,064
|
|
|
Interest rate derivative
|
|
|
639
|
|
|
|
717
|
|
|
Securities impairment
|
|
|
382
|
|
|
|
460
|
|
|
Foreclosed assets
|
|
|
1,025
|
|
|
|
990
|
|
|
Deferred compensation
|
|
|
340
|
|
|
|
143
|
|
|
Other
|
|
|
274
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
14,427
|
|
|
|
16,065
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Unrealized gains on investment securities available-for-sale
|
|
|
1,152
|
|
|
|
850
|
|
|
Core deposit intangibles
|
|
|
24
|
|
|
|
47
|
|
|
FHLB stock dividends
|
|
|
141
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
1,317
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
13,110
|
|
|
$
|
14,995
|
|
The following sets forth the deferred tax benefit (provision) related to other comprehensive income (in thousands):
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Accumulated losses on effective cash flow hedging derivatives
|
|
$
|
79
|
|
|
$
|
(183
|
)
|
|
$
|
(512
|
)
|
|
Unrealized losses on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with OTTI charges during the period
|
|
|
(54
|
)
|
|
|
(87
|
)
|
|
|
(225
|
)
|
|
Less: OTTI charges recognized in net income
|
|
|
(44
|
)
|
|
|
(74
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities with OTTI
|
|
|
(10
|
)
|
|
|
(13
|
)
|
|
|
(50
|
)
|
|
Unrealized gains arising during the period
|
|
|
418
|
|
|
|
1,362
|
|
|
|
170
|
|
|
Less: reclassification adjustment for gains realized in net income
|
|
|
75
|
|
|
|
72
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment securities
|
|
|
343
|
|
|
|
1,290
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
412
|
|
|
$
|
1,094
|
|
|
$
|
(636
|
)
|
11. Shareholders’ Equity
New Capital Raised
On May 21, 2012, the Company completed the public offering of 5,111,750 shares of its common stock, $1.00 par value per share (the “Offering”), at a price of $9.00 per share. The shares sold in the Offering included 666,750 shares sold pursuant to the underwriter’s full exercise of its option to purchase additional shares to cover over-allotments. The shares were sold in accordance with an underwriting agreement between the Company and Keefe, Bruyette & Woods, Inc., the sole underwriter.
Proceeds to the Company, after deducting the underwriting discount, commissions and Offering expenses, were approximately $42.9 million.
The Offering was made pursuant to a registration statement on Form S-3 (File No. 333-180889) of the Company, which became effective on May 7, 2012. A prospectus supplement, dated May 16, 2012, to the base prospectus, dated May 7, 2012, forming a part of the registration statement was filed on May 17, 2012 with the Securities and Exchange Commission under Rule 424(b)(2) of the Securities Act of 1933, as amended.
Repurchase of Troubled Asset Relief Program (“TARP”) Preferred Stock
The Company repurchased 43,740 shares of the Company’s 45,000 outstanding shares of preferred stock (“Preferred Stock”) from the U.S. Department of the Treasury (“Treasury”), which were issued to the Treasury in connection with the Company’s participation in the TARP Capital Purchase Program (“CPP”). The repurchase of $43.7 million in stated value of Preferred Stock at a discount of 1.883% (or an actual cost of $42.9 million) resulted in an adjustment, net of settlement costs, to capital totaling $557,000 offset by the amortization of $249,000 in the Preferred Stock discount. The Company completed the repurchase and payment of Preferred Stock on July 3, 2012. The remaining 1,260 shares of Preferred Stock were sold by the Treasury to other investors and repurchased by the Company on August 7, 2012 in the amount of $1.26 million. The warrants to purchase common stock, with an exercise price of $8.75, associated with the CPP are still outstanding.
As a result of participation in the CPP, among other things, the Company was subject to the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury held the Company’s Preferred Stock, including the second quarter of 2012. These standards were most recently set forth in the Interim Final Rule on TARP Standards for Compensation and Corporate Governance, published June 15, 2009. Because the Treasury sold all of the Preferred Stock in the auction, these executive compensation and corporate governance standards are no longer applicable to the Company as of July 4, 2012.
The Company paid no common dividends during 2012, 2011 or 2010. Preferred dividends paid for the years ended December 31, 2012, 2011 and 2010 were $1.43 million or $31.84 per share, $2.83 million or $62.97 per share and $1.70 million or $37.80 per share, respectively.
12. Regulatory Matters
The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The regulations require the Company to meet specific capital adequacy guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks’ capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2012, that the Company and the Banks met all capital adequacy requirements to which they were subject.
The Banks are subject to regulations and, among others things, may be limited in their ability to pay dividends or otherwise transfer funds to the holding company. Under applicable restrictions as of December 31, 2012, no dividends could be paid by MetroBank to the Parent without regulatory approval. In addition, dividends paid by the Banks to the holding company would be prohibited if the effect thereof would cause the Banks’ capital to be reduced below applicable minimum capital requirements.
On August 10, 2009, MetroBank entered into a written agreement (the “Agreement”) with the OCC. The Agreement is based on the findings of the OCC during the annual on-site examination of MetroBank performed in the first quarter of 2009 and is primarily focused on matters related to MetroBank’s asset quality. Pursuant to the Agreement, the Board of Directors of MetroBank has appointed a compliance committee to monitor and coordinate MetroBank’s performance under the Agreement. The Agreement provides for, among other things, the development and implementation of written programs to reduce MetroBank’s credit risks, monitor and reduce the level of criticized assets and manage commercial real estate loan concentrations in light of current adverse commercial real estate market conditions generally and in its market areas. Since the completion of the examination, management of MetroBank has proactively made adjustments in policies and procedures in an effort to alleviate the effects of the credit challenge caused by the economic deterioration and market conditions generally and in its market areas. Additionally, management and the Boards of Directors of the Company and MetroBank have aggressively taken steps to address the findings of the exam and are aggressively working to comply with the requirements of the Agreement. Failure by MetroBank to meet the requirements and conditions imposed by the Agreement could result in more severe regulatory enforcement actions such as capital directives to raise additional capital, civil money penalties, cease and desist or removal orders, injunctions, and public disclosure of such actions against MetroBank. Any such failure and resulting regulatory action could have a material adverse effect on the financial condition and results of operations of the Company and MetroBank.
The Board of Directors of Metro United was officially informed on July 20, 2012 by the FDIC and CDFI that the Consent Order entered into on July 22, 2010 had been terminated effective as of July 20, 2012.
As of December 31, 2012, the most recent notifications from the OCC with respect to MetroBank, and the CDFI with respect to Metro United categorized the Banks as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notifications that management believes have changed the Banks’ level of capital adequacy.
The Company’s and the Banks’ actual capital amounts and ratios at the dates indicated are presented in the following table (dollars in thousands):
|
|
|
Actual
|
|
|
Minimum
Required For
Capital Adequacy
Purposes
|
|
|
To be Categorized
as Well Capitalized
under Prompt
Corrective Action
Provisions
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCorp Bancshares, Inc.
|
|
$
|
212,083
|
|
|
|
17.95
|
%
|
|
$
|
94,509
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
MetroBank, N.A.
|
|
|
152,613
|
|
|
|
17.80
|
|
|
|
68,587
|
|
|
|
8.00
|
|
|
$
|
85,734
|
|
|
|
10.00
|
%
|
|
Metro United Bank
|
|
|
52,714
|
|
|
|
16.34
|
|
|
|
25,814
|
|
|
|
8.00
|
|
|
|
32,267
|
|
|
|
10.00
|
|
|
Tier 1 risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCorp Bancshares, Inc.
|
|
|
197,077
|
|
|
|
16.68
|
|
|
|
47,255
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
MetroBank, N.A.
|
|
|
141,702
|
|
|
|
16.53
|
|
|
|
34,293
|
|
|
|
4.00
|
|
|
|
51,440
|
|
|
|
6.00
|
|
|
Metro United Bank
|
|
|
48,636
|
|
|
|
15.07
|
|
|
|
12,907
|
|
|
|
4.00
|
|
|
|
19,360
|
|
|
|
6.00
|
|
|
Leverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCorp Bancshares, Inc.
|
|
|
197,077
|
|
|
|
13.18
|
|
|
|
59,812
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
MetroBank, N.A.
|
|
|
141,702
|
|
|
|
12.70
|
|
|
|
44,613
|
|
|
|
4.00
|
|
|
|
55,766
|
|
|
|
5.00
|
|
|
Metro United Bank
|
|
|
48,636
|
|
|
|
12.76
|
|
|
|
15,243
|
|
|
|
4.00
|
|
|
|
19,053
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCorp Bancshares, Inc.
|
|
$
|
195,765
|
|
|
|
17.30
|
%
|
|
$
|
90,552
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
MetroBank, N.A.
|
|
|
140,510
|
|
|
|
16.82
|
|
|
|
66,831
|
|
|
|
8.00
|
|
|
$
|
83,539
|
|
|
|
10.00
|
%
|
|
Metro United Bank
|
|
|
48,778
|
|
|
|
16.48
|
|
|
|
23,674
|
|
|
|
8.00
|
|
|
|
29,593
|
|
|
|
10.00
|
|
|
Tier 1 risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCorp Bancshares, Inc.
|
|
|
181,368
|
|
|
|
16.02
|
|
|
|
45,276
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
MetroBank, N.A.
|
|
|
129,864
|
|
|
|
15.55
|
|
|
|
33,416
|
|
|
|
4.00
|
|
|
|
50,124
|
|
|
|
6.00
|
|
|
Metro United Bank
|
|
|
45,034
|
|
|
|
15.22
|
|
|
|
11,837
|
|
|
|
4.00
|
|
|
|
17,756
|
|
|
|
6.00
|
|
|
Leverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCorp Bancshares, Inc.
|
|
|
181,368
|
|
|
|
12.16
|
|
|
|
59,659
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
MetroBank, N.A.
|
|
|
129,864
|
|
|
|
11.67
|
|
|
|
44,514
|
|
|
|
4.00
|
|
|
|
55,643
|
|
|
|
5.00
|
|
|
Metro United Bank
|
|
|
45,034
|
|
|
|
11.80
|
|
|
|
15,269
|
|
|
|
4.00
|
|
|
|
19,086
|
|
|
|
5.00
|
|
As of December 31, 2012 and 2011, $35.0 million in trust preferred securities issued by MCBI Trust I were included in the Company’s Tier 1 capital for regulatory purposes and none were included in Tier 2 capital. Currently, trust preferred securities and qualifying perpetual preferred stock are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements. The rule amended the prior limit by providing that restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill and associated deferred tax liability. Because the 25% limit is calculated without deducting goodwill, the rule reduced the amount of trust preferred securities that the Company can include in Tier 1 capital. The amount of such excess trust preferred securities are includable in Tier 2 capital. The quantitative limits were fully effective on March 31, 2011. The rules had no effect on the amount of trust preferred securities that the Company may include in its Tier 1 capital as of December 31, 2012 and 2011.
13. 401(k) Profit Sharing Plan
The Company has established a defined contribution profit sharing plan pursuant to Internal Revenue Code Section 401(k) covering substantially all employees (the “Plan”). The Plan provides for pretax employee contributions of up to 100% of annual compensation with an annual dollar limit of $17,000, $16,500 and $16,500 per participant for the years ended December 31, 2012, 2011, and 2010, respectively. The Banks matched each participant’s contributions to the Plan up to 5% of such participant’s salary for the years ended December 31, 2012, 2011 and 2010. MetroBank made contributions to the Plan of approximately $564,000, $556,000, and $543,000 during the years ended December 31, 2012, 2011, and 2010, respectively. Metro United made contributions to the Plan of approximately $169,000, $173,000 and $160,000 during the years ended December 31, 2012, 2011 and 2010, respectively.
14. Stock-Based Compensation
The Company issues stock options to employees under the Company’s Amended and Restated 2007 Stock Awards and Incentive Plan (“2007 Plan”) and prior to December 16, 2008 under the Company’s 1998 Stock Incentive Plan (“1998 Plan”). The Company estimates fair value of stock option awards as of grant date using the Black-Scholes option valuation model. This model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, it requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options awards have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing model does not necessarily provide a reliable single measure of the fair value of employee stock options. The expected term of the options was derived using the “simplified” method. The Company’s option grants met the “plain vanilla” option definition and did not have sufficient historical option exercise data to calculate an alternative expected term. Expected stock price volatility is based on historical volatility of the Company’s stock that covers a period which corresponds to the expected life of the options. The risk-free interest rate for the expected life of the options granted is based on the U.S. Treasury yield in effect as of the grant date. The dividend yield is calculated using the expected annual dividend amount divided by the published stock price on grant date.
For the years ended December 31, 2012, 2011 and 2010, total stock-based compensation cost recognized in the Company’s Consolidated Statements of Operations was $1.3 million, $449,000 and $349,000, respectively.
Stock Incentive Plans
. The Company has one active stock incentive plan, the 2007 Plan, under which the Company can issue shares of restricted stock and stock options. Shares of restricted stock may be issued under the plan from unissued common stock or treasury stock. Shares of restricted stock were also issued under the 1998 Plan, which expired on December 16, 2008.
As amended and restated on May 7, 2012, the 2007 Plan authorizes the issuance of up to 1,150,000 shares of Common Stock, and provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, performance awards, phantom stock awards or any combination of the foregoing. No more than 200,000 shares of stock may be subject to options or stock appreciation rights granted under the 2007 Plan to any one individual during any 12 month period. No more than 100,000 shares of stock may be granted under the 2007 Plan as a restricted stock award to any one individual during any 12 month period. Restricted stock may be granted with or without payment except to the extent required by law and awards are subject to performance or service restrictions as determined by the Compensation Committee. The recipient of restricted stock is entitled to voting rights and dividends on the common stock prior to the lapsing of the forfeiture restrictions with respect to such stock. As of December 31, 2012, there were 232,496 shares available for future grants under the 2007 Plan.
The Company classifies all share-based awards as equity instruments and recognizes the vesting of the awards ratably over their respective terms. Compensation expense for each tranche of each award was separately recognized as if it was a separate award with its own vesting date.
Stock option awards generally vest 30% in each of the two years following the date of the grant and 40% in the third year following the date of the grant and have contractual terms of up to ten years. For all options granted on or after January 1, 2007, compensation expense is recognized on a graded-vesting basis from the grant date until the vesting date of the respective option.
Restricted stock vests in equal increments in each of the three years following the date of the grant. Compensation expense is recognized on a straight-line basis from the grant date until the vesting date of the respective award.
Stock Option Activity.
The Company granted stock options to employees under both the 2007 Plan and the 1998 Plan. There were 20,000, 60,000, and 30,000 options granted during 2012, 2011, and 2010, respectively. All options are granted at a fixed exercise price. The fair value of stock awards was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:
|
Assumptions
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Expected term (in years)
|
|
|
6.2
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
Expected stock price volatility
|
|
|
48.32
|
%
|
|
|
44.45
|
%
|
|
|
41.37
|
%
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Risk-free interest rate
|
|
|
0.88
|
%
|
|
|
2.13
|
%
|
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated weighted average grant-date fair value per option granted
|
|
$
|
4.81
|
|
|
$
|
2.30
|
|
|
$
|
1.09
|
|
A summary of activity for the Company’s stock options as of December 31, 2012 and the changes during the year then ended is presented below:
|
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Aggregate Intrinsic
Value
(in thousands)
|
|
|
Outstanding options at December 31, 2011
|
|
|
907,200
|
|
|
$
|
13.32
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
20,000
|
|
|
|
10.26
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(5,500
|
)
|
|
|
14.28
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(165,450
|
)
|
|
|
14.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2012
|
|
|
756,250
|
|
|
$
|
12.89
|
|
|
|
3.91
|
|
|
$
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at December 31, 2012
|
|
|
682,250
|
|
|
$
|
13.62
|
|
|
|
3.40
|
|
|
$
|
626
|
|
No stock options were exercised during the years ended December 31, 2012, 2011 and 2010.
As of December 31, 2012, compensation expense not yet recognized for unvested share-based awards was approximately $103,000, which is expected to be recognized over a weighted average period of 1.91 years. The total fair value of shares vested during the years ended December 31, 2012, 2011, and 2010 was $69,000, $361,000, and $573,000, respectively.
Restricted Stock Activity.
The Company granted restricted stock to employees under the 2007 Plan. Compensation expense for restricted stock is measured based upon the number of shares granted multiplied by the difference of the stock price on the grant date less payment required, if any. Such expense is recognized in the Company’s Consolidated Statement of Operations.
The following table summarizes the Company’s restricted stock activity for 2012:
|
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
Outstanding at December 31, 2011
|
|
|
195,503
|
|
|
$
|
3.66
|
|
|
Granted
|
|
|
314,200
|
|
|
|
4.06
|
|
|
Vested
|
|
|
(76,485
|
)
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
433,218
|
|
|
|
3.99
|
|
As of December 31, 2012, compensation cost not yet recognized for unvested share-based awards was approximately $2.1 million, which is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the years ended December 31, 2012, 2011, and 2010 was $264,000, $76,000 and $120,000. No shares were converted nor were there any share-based liabilities paid during 2012, 2011, and 2010.
15. Accumulated Other Comprehensive Income (Loss)
The tax effects allocated to each component of other comprehensive income were as follows (in thousands):
|
|
|
Twelve months ended December 31, 2012
|
|
|
Twelve months ended December 31, 2011
|
|
|
|
|
Before Tax
Amount
|
|
|
Tax Expense
(Benefit)
|
|
|
Net of Tax
Amount
|
|
|
Before Tax
Amount
|
|
|
Tax Expense
(Benefit)
|
|
|
Net of Tax
Amount
|
|
|
Change in accumulated gain (loss) on effective cash flow derivatives
|
|
$
|
218
|
|
|
$
|
79
|
|
|
$
|
139
|
|
|
$
|
(509
|
)
|
|
$
|
(183
|
)
|
|
$
|
(326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment securities with OTTI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with OTTI charges during the period
|
|
|
(149
|
)
|
|
|
(54
|
)
|
|
|
(95
|
)
|
|
|
(242
|
)
|
|
|
(87
|
)
|
|
|
(155
|
)
|
|
Less: OTTI charges recognized in net income
|
|
|
(122
|
)
|
|
|
(44
|
)
|
|
|
(78
|
)
|
|
|
(206
|
)
|
|
|
(74
|
)
|
|
|
(132
|
)
|
|
Net unrealized losses on investment securities with OTTI
|
|
|
(27
|
)
|
|
|
(10
|
)
|
|
|
(17
|
)
|
|
|
(36
|
)
|
|
|
(13
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain arising during the period
|
|
|
1,161
|
|
|
|
418
|
|
|
|
743
|
|
|
|
3,980
|
|
|
|
1,433
|
|
|
|
2,547
|
|
|
Less: reclassification adjustment for gain (loss) included in net income
|
|
|
208
|
|
|
|
75
|
|
|
|
133
|
|
|
|
199
|
|
|
|
72
|
|
|
|
127
|
|
|
Net unrealized gains on investment securities
|
|
|
953
|
|
|
|
343
|
|
|
|
610
|
|
|
|
3,781
|
|
|
|
1,361
|
|
|
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
1,144
|
|
|
$
|
412
|
|
|
$
|
732
|
|
|
$
|
3,236
|
|
|
$
|
1,165
|
|
|
$
|
2,071
|
|
The balance of and changes in each component of accumulated other comprehensive income (net of taxes) for the years ended December 31, 2012 and 2011 are as follows (in thousands):
|
|
|
Gains (Losses) on
Effective Cash
Hedging
Derivatives
|
|
|
Net Unrealized
Losses on
Investments
with OTTI
|
|
|
Net Unrealized
Investment
Gains (Losses)
|
|
|
Total
Accumulated
Other
Comprehensive
Income (Losses)
|
|
|
Balance December 31, 2010
|
|
$
|
(949
|
)
|
|
$
|
(977
|
)
|
|
$
|
(310
|
)
|
|
$
|
(2,236
|
)
|
|
Net change
|
|
|
(326
|
)
|
|
|
(23
|
)
|
|
|
2,420
|
|
|
|
2,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2011
|
|
$
|
(1,275
|
)
|
|
$
|
(1,000
|
)
|
|
$
|
2,110
|
|
|
$
|
(165
|
)
|
|
Net change
|
|
|
139
|
|
|
|
(17
|
)
|
|
|
610
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2012
|
|
$
|
(1,136
|
)
|
|
$
|
(1,017
|
)
|
|
$
|
2,720
|
|
|
$
|
567
|
|
16. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Stock options and restricted stock can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. Stock options and restricted stock that are antidilutive are excluded from the earnings per share calculation. Stock options and restricted shares are antidilutive when the exercise price is higher than the current market price of the Company’s Common Stock. As of December 31, 2012, 2011 and 2010 there were 432,000, 1,227,000 and 1,751,000, respectively, of antidilutive common shares comprised of stock options and restricted stock which were excluded from the diluted shares calculation. The number of potentially dilutive common shares is determined using the treasury stock method. For earnings per common share calculation purposes, the impact of dilutive securities are excluded from the diluted share count during periods that the Company has recognized a net loss available to common shareholders.
Earnings per common share for the years ended December 31, 2012, 2011 and 2010 are calculated below (in thousands, except per share amounts):
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
10,251
|
|
|
$
|
4,020
|
|
|
$
|
(3,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares in basic EPS
|
|
|
16,331
|
|
|
|
13,142
|
|
|
|
12,069
|
|
|
Effect of dilutive securities (1)
|
|
|
220
|
|
|
|
85
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potentially dilutive common shares used in diluted EPS
|
|
$
|
16,551
|
|
|
$
|
13,227
|
|
|
$
|
12,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.63
|
|
|
$
|
0.31
|
|
|
$
|
(0.28
|
)
|
|
Diluted
|
|
$
|
0.62
|
|
|
$
|
0.30
|
|
|
$
|
(0.28
|
)
|
|
(1)
|
For earnings per share calculation purposes, the impact of dilutive securities are excluded from the diluted share count during periods that the Company has recognized a net loss available to common shareholders.
|
17. Off-Balance Sheet Activities
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include various guarantees, commitments to extend credit and standby letters of credit. Additionally, these instruments may involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets. The Company’s maximum exposure to credit loss and the maximum potential amount of future payments the Company could be required to make under such arrangements is represented by the contractual amount of those instruments. The Company applies the same credit policies and collateralization guidelines in making commitments and conditional obligations as it does for on-balance sheet instruments. Off-balance sheet financial instruments include commitments to extend credit and guarantees under standby and other letters of credit. Unfunded loan commitments including unfunded lines of credit at December 31, 2012 and 2011 were $99.5 million and $105.0 million, respectively. Commitments under standby and commercial letters of credit at December 31, 2012 and 2011 were $12.0 million and $21.6 million, respectively. The Company conducts a portion of its operations utilizing leased premises and equipment under operating leases.
The contractual amount of the Company’s financial instruments with off-balance sheet risk at December 31, 2012 and 2011 is presented below (in thousands):
|
|
|
2012
|
|
|
2011
|
|
|
Unfunded loan commitments including unfunded lines of credit
|
|
$
|
99,474
|
|
|
$
|
105,049
|
|
|
Standby letters of credit
|
|
|
10,387
|
|
|
|
15,765
|
|
|
Commercial letters of credit
|
|
|
1,595
|
|
|
|
5,818
|
|
|
Operating leases
|
|
|
7,337
|
|
|
|
8,058
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments with off-balance sheet risk
|
|
$
|
118,793
|
|
|
$
|
134,690
|
|
18. Derivative Financial Instruments
The fair value of derivative positions outstanding is included in other assets and other liabilities in the consolidated balance sheet.
Interest Rate Derivatives.
During the third quarter of 2009, the Company entered into a forward-starting interest rate swap contract on its junior subordinated debentures with a notional amount of $17.5 million. The interest rate swap contract was designated as a hedging instrument in a cash flow hedge with the objective of protecting the quarterly interest payments on a portion of the Company’s $36.1 million of junior subordinated debentures issued to the Company’s unconsolidated subsidiary trust MCBI Trust I throughout the five-year period beginning in December 2010 and ending in December 2015 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. (See Note 8 - “Junior Subordinated Debentures”.) Under the five-year swap contract, beginning December 2010, the Company will pay a fixed interest rate of 5.38% and receive a variable interest rate of three-month LIBOR plus a margin of 1.55% on a total notional amount of $17.5 million, with quarterly settlements beginning March 2011.
The notional amount of the interest rate derivative contract outstanding at December 31, 2012 and 2011 was $17.5 million and the estimated fair value for the same periods was ($1.8 million) and ($2.0 million), respectively. The Company obtains dealer quotations to value its interest rate derivative contract designated as hedges of cash flows.
The Company applies hedge accounting to interest rate derivatives. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability and type of risk to be hedged, and how the effectiveness of the derivative will be assessed prospectively and retrospectively. To assess effectiveness, the Company compares the dollar-value of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk) must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.
At the end of the second quarter of 2011, the Company entered into an interest rate cap with a notional amount of $15.0 million with the objective of mitigating the effect of potential future interest rate increases. The interest rate cap contract is not designated nor accounted for as a hedging instrument. The interest rate cap contract was effective July 1, 2011 for a five-year term. Under the interest rate cap contract, beginning October 3, 2011 and ending July 1, 2016, the Company will receive quarterly settlements for the difference between the three-month LIBOR interest rate and the cap rate of 2.0%, if the three-month LIBOR interest rate exceeds the cap rate on the settlement date.
The Company obtains dealer quotations to value its interest rate derivative contract designated as a hedge of cash flows and its non-hedging interest rate derivative. The notional amounts and estimated fair values of interest rate derivative contracts outstanding at December 31, 2012 and 2011 are presented in the following table (in thousands).
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
|
Interest rate derivative contract designated as a hedge of cash flows
|
|
$
|
17,500
|
|
|
$
|
(1,775
|
)
|
|
$
|
17,500
|
|
|
$
|
(1,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative contract not designated as a hedge of cash flows
|
|
$
|
15,000
|
|
|
$
|
41
|
|
|
$
|
15,000
|
|
|
$
|
194
|
|
Gains, Losses and Derivative Cash Flows
. For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other non-interest income or other non-interest expense. Net cash flows from the interest rate swap on junior subordinated debentures designated as a hedging instrument in an effective hedge of cash flows are included in interest expense on junior subordinated debentures.
Amounts included in the consolidated statements of operations and in other comprehensive income (loss) for the years ended December 31, 2012 and 2011 to interest rate derivatives designated as hedges of cash flows were as follows (in thousands):
|
|
|
Gains/(losses) recorded in income and other comprehensive income (loss), net of tax
|
|
|
Year ended December 31, 2012
|
|
Derivatives—
effective portion
reclassified from
AOCI into income
|
|
|
Hedge
ineffectiveness
recorded directly
in income
|
|
|
Total income
statement
impact
|
|
|
Derivatives—
effective portion
recorded in OCI
|
|
|
Total change
in OCI
for year
|
|
|
Contract type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(217
|
)
|
|
$
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(326
|
)
|
|
$
|
(326
|
)
|
Amounts included in the consolidated statements of operations for the period related to non-hedging interest rate derivatives for the year ended December 31, 2012 and 2011 were as follows (in thousands).
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Non-hedging interest rate derivative:
|
|
|
|
|
|
|
|
Other non-interest income
|
|
$
|
(153)
|
|
|
$
|
(390)
|
|
Counterparty Credit Risk.
Derivative contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Derivative contracts are executed with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer credit rating deterioration. Institutional counterparties must have an investment grade credit rating. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. There are no credit-risk-related contingent features associated with any of the Company’s derivative contracts. The Company had no credit exposure relating to the interest rate swap at December 31, 2011. The amount of cash collateral posted by the Company related to derivative contracts was $2.3 million at December 31, 2012 and 2011.
19. Fair Value
Financial Instruments Measured at Fair Value
Fair value is the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is reported based on a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
FASB accounting guidance describes three levels of inputs that may be used to measure fair value:
|
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
|
Financial assets measured at fair value on a recurring basis are as follows:
Securities.
Where quoted prices are available in an active market, securities are reported at fair value utilizing Level 1 inputs. Level 1 securities are comprised of bond funds. If quoted market prices are not available, the Company obtains fair values from an independent pricing service. The fair value measurements consider data that may include proprietary pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities are comprised of highly liquid government bonds, and collateralized mortgage and debt obligations. Market values provided by the pricing service are compared to prices from other sources for reasonableness. The Company has not adjusted the values from the pricing service. See Note 3 - “Securities” for additional discussion on valuation of securities.
Interest Rate Derivatives
. The Company’s derivative position is classified within Level 2 in the fair value hierarchy and is valued using models generally accepted in the financial services industry that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivative is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, yield curves, non-performance risk and volatility. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration.
The following table presents the financial instruments carried at fair value on a recurring basis as of December 31, 2012 and 2011, by caption on the consolidated balance sheets and by valuation hierarchy (as described above) (in thousands):
|
|
|
Fair Value Measurements, using
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Fair Value
Measurements
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale at December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
—
|
|
|
$
|
71,181
|
|
|
$
|
—
|
|
|
$
|
71,181
|
|
|
Obligations of state and political subdivisions
|
|
|
—
|
|
|
|
13,389
|
|
|
|
—
|
|
|
|
13,389
|
|
|
Corporate
|
|
|
—
|
|
|
|
6,350
|
|
|
|
—
|
|
|
|
6,350
|
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government issued or guaranteed
|
|
|
—
|
|
|
|
57,941
|
|
|
|
—
|
|
|
|
57,941
|
|
|
Privately issued residential
|
|
|
—
|
|
|
|
683
|
|
|
|
—
|
|
|
|
683
|
|
|
Asset backed securities
|
|
|
—
|
|
|
|
143
|
|
|
|
—
|
|
|
|
143
|
|
|
Investment in CRA funds
|
|
|
14,361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
14,361
|
|
|
|
149,687
|
|
|
|
—
|
|
|
|
164,048
|
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap
|
|
|
—
|
|
|
|
41
|
|
|
|
—
|
|
|
|
41
|
|
|
Total assets measured at fair value on a recurring basis
|
|
$
|
14,361
|
|
|
$
|
149,728
|
|
|
$
|
—
|
|
|
$
|
164,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities at December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(1,775)
|
|
|
$
|
—
|
|
|
$
|
(1,775)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements, using
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Fair Value
Measurements
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale at December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government corporations and agencies
|
|
$
|
—
|
|
|
$
|
92,199
|
|
|
$
|
—
|
|
|
$
|
92,199
|
|
|
Obligations of state and political subdivisions
|
|
|
—
|
|
|
|
5,706
|
|
|
|
—
|
|
|
|
5,706
|
|
|
Corporate
|
|
|
—
|
|
|
|
6,141
|
|
|
|
—
|
|
|
|
6,141
|
|
|
Mortgage-backed securities and collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
Government issued or guaranteed
|
|
|
—
|
|
|
|
53,739
|
|
|
|
—
|
|
|
|
53,739
|
|
|
Privately issued residential
|
|
|
—
|
|
|
|
667
|
|
|
|
—
|
|
|
|
667
|
|
|
Asset backed securities
|
|
|
—
|
|
|
|
102
|
|
|
|
—
|
|
|
|
102
|
|
|
Investment in CRA funds
|
|
|
13,835
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
|
13,835
|
|
|
|
158,554
|
|
|
|
—
|
|
|
|
172,389
|
|
|
Derivative assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap
|
|
|
—
|
|
|
|
194
|
|
|
|
—
|
|
|
|
194
|
|
|
Total assets measured at fair value on a recurring basis
|
|
$
|
13,835
|
|
|
$
|
158,748
|
|
|
$
|
—
|
|
|
$
|
172,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities at December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
—
|
|
|
$
|
(1,992)
|
|
|
$
|
—
|
|
|
$
|
(1,992)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets measured at fair value for impairment assessment, as well as foreclosed assets. Certain financial assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Non-financial and financial assets measured at fair value on a non-recurring basis include the following:
Goodwill.
Goodwill is measured at fair value on a non-recurring basis using Level 3 inputs. In the first step of a goodwill impairment test, the Company primarily uses a review of the valuation of recent guideline bank acquisitions, if available, pricing of publicly traded comparables, as well as discounted cash flow analysis and the market capitalization of the Company. If the second step of a goodwill impairment test is required, the implied fair value of goodwill is determined in the same manner as goodwill is recognized in a business combination. See Note 6 - “Goodwill and Core Deposit Intangibles” for additional information.
Foreclosed Assets
. Foreclosed assets are carried at fair value less costs to sell. The fair value measurements of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments, sales cost estimates, etc. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial recognition of certain foreclosed assets, the Company may recognize charge-offs through the allowance for loan losses, and subsequent to initial recognition based on updated appraisals or other factors, may remeasure foreclosed assets to fair value through a write-down included in noninterest expense.
Impaired Loans.
Certain impaired loans with a valuation reserve are measured for impairment using the practical expedient, whereby fair value of the loan is based on the fair value of the loan’s collateral, provided the loan is collateral dependent. The fair value measurements of loan collateral can include real estate appraisals, comparable real estate sales information, cash flow projections, realization estimates, etc., all of which can include observable and unobservable inputs. As a result, the categorization of impaired loans can be either Level 2 or Level 3 of the fair value hierarchy, depending on the nature of the inputs used for measuring the related collateral’s fair value. As of December 31, 2012 and 2011, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral.
The following presents assets carried at fair value on a nonrecurring basis by caption on the condensed consolidated balance sheets and by valuation hierarchy (as described above) at December 31, 2012 and 2011 (in thousands):
|
|
|
As of December 31, 2012
|
|
|
Losses
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Year ended
December 31,
2012
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
—
|
|
|
$
|
14,327
|
|
|
$
|
—
|
|
|
Foreclosed assets (1)
|
|
|
—
|
|
|
|
12,555
|
|
|
|
1,949
|
|
|
Impaired loans (2)
|
|
|
4,646
|
|
|
|
—
|
|
|
|
451
|
|
|
|
|
As of December 31, 2011
|
|
|
Losses
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Year ended
December 31,
2011
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
—
|
|
|
$
|
14,327
|
|
|
$
|
—
|
|
|
Foreclosed assets (1)
|
|
|
—
|
|
|
|
19,018
|
|
|
|
1,963
|
|
|
Impaired loans (2)
|
|
|
15,696
|
|
|
|
—
|
|
|
|
3,021
|
|
|
(1)
|
Losses represent related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.
|
|
(2)
|
Loans represent collateral dependent impaired loans with a specific allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.
|
Fair Value of Financial Instruments
FASB ASC Topic 825 requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.
The estimated fair values of financial instruments that are reported at amortized cost in the Company’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows (in thousands):
|
|
|
As of December 31, 2012
|
|
|
As of December 31, 2011
|
|
|
|
|
Carrying or
Contract Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying or
Contract Amount
|
|
|
Estimated
Fair Value
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
|
$
|
174,770
|
|
|
$
|
174,770
|
|
|
$
|
193,609
|
|
|
$
|
193,609
|
|
|
Investment securities held-to-maturity
|
|
|
4,046
|
|
|
|
4,757
|
|
|
|
4,046
|
|
|
|
4,536
|
|
|
Other investments
|
|
|
5,592
|
|
|
|
5,592
|
|
|
|
6,484
|
|
|
|
6,484
|
|
|
Loans held-for-sale
|
|
|
—
|
|
|
|
—
|
|
|
|
1,200
|
|
|
|
1,498
|
|
|
Cash value of bank owned life insurance
|
|
|
32,794
|
|
|
|
32,794
|
|
|
|
31,427
|
|
|
|
31,427
|
|
|
Accrued interest receivable
|
|
|
4,120
|
|
|
|
4,120
|
|
|
|
4,327
|
|
|
|
4,327
|
|
|
Level 3 inputs:
|
|
|
Loans held-for-investment, net
|
|
|
1,075,745
|
|
|
|
1,062,432
|
|
|
|
1,015,095
|
|
|
|
968,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit transaction accounts
|
|
|
808,377
|
|
|
|
808,377
|
|
|
|
744,833
|
|
|
|
744,833
|
|
|
Junior subordinated debentures
|
|
|
36,083
|
|
|
|
36,083
|
|
|
|
36,083
|
|
|
|
36,083
|
|
|
Accrued interest payable
|
|
|
233
|
|
|
|
233
|
|
|
|
310
|
|
|
|
310
|
|
|
Level 3 inputs:
|
|
|
Time deposits
|
|
|
458,653
|
|
|
|
461,672
|
|
|
|
506,742
|
|
|
|
511,050
|
|
|
Other borrowings
|
|
|
25,000
|
|
|
|
25,008
|
|
|
|
26,315
|
|
|
|
26,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments, including unfunded lines of credit
|
|
|
—
|
|
|
|
251
|
|
|
|
—
|
|
|
|
236
|
|
|
Standby letters of credit
|
|
|
—
|
|
|
|
24
|
|
|
|
—
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes interest-bearing time deposits in banks.
|
The following methodologies and assumptions were used to estimate the fair value of the Company’s financial instruments as disclosed in the table:
Assets for Which Fair Value Approximates Carrying Value
.
The fair values of certain financial assets and liabilities carried at cost, including cash and due from banks, deposits with banks, federal funds sold, cash value of bank owned life insurance, certificates of deposit with banks denominated in a foreign currency, other investments, due from customers on acceptances and accrued interest receivable, are considered to approximate their respective carrying values due to their short-term nature and/or negligible credit risks.
Investment Securities.
Fair values are based primarily upon quoted market prices obtained from an independent pricing service.
Loans.
The fair value of loans originated by the Banks is estimated by discounting the expected future cash flows using the current interest rates at which similar loans with similar terms would be made. The presence of floors on a large portion of the variable rate loans has supported the yields above current market levels and is the key factor causing the fair value of the variable rate loans with floors to exceed the book value. The fair value of the remainder of the variable rate loans approximates the carrying value while fixed rate loans are generally above the carrying values. Using these results, valuation adjustments are made for specific credit risks as well as general portfolio credit and market risks to arrive at the fair value.
Loans held-for-sale.
The fair value of loans held-for-sale is based on contractual sales prices.
Liabilities for Which Fair Value Approximates Carrying Value.
The estimated fair value for transactional deposit liabilities with no stated maturity (i.e., demand, savings, and money market deposits) approximates the carrying value. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. Nonetheless, the company would likely realize a core deposit premium if its deposit portfolio were sold in the principal market for such deposits.
The fair value of acceptances outstanding, accounts payable and accrued liabilities are considered to approximate their respective carrying values due to their short-term nature.
Time Deposits.
Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.
Other Borrowings.
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other borrowings maturing within fourteen days approximate their fair values. Fair values of other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Junior Subordinated Debentures.
The fair value of the junior subordinated debentures approximates the carrying value as the debentures reprice quarterly.
Commitments to Extend Credit and Letters of Credit.
The fair value of such instruments is estimated using the unamortized portion of fees collected for execution of such credit facility.
20. Commitments and Contingencies
Litigation
The Company is involved in various litigation that arises in the normal course of business. In the opinion of management, after consultations with its legal counsel, such litigation is not expected to have a material adverse effect of the Company’s consolidated financial position, result of operations or cash flows.
Leases
The Company leases certain branch premises and equipment under operating leases, which expire between 2013 through 2018. The Company incurred rental expense of $2.3 million, $2.4 million, and $2.4 million, for the years ended December 31, 2012, 2011 and 2010, respectively, under these lease agreements. Future minimum lease payments at December 31, 2012 due under these lease agreements are as follows (in thousands):
|
Year
|
|
Amount
|
|
|
2013
|
|
$
|
2,127
|
|
|
2014
|
|
|
2,065
|
|
|
2015
|
|
|
1,766
|
|
|
2016
|
|
|
948
|
|
|
2017
|
|
|
358
|
|
|
Thereafter
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
$
|
7,337
|
|
21. Operating Segment Information
In October 2005, the Company acquired Metro United and continued its operation as a separate subsidiary. Because the Company operates two community banks in distinct geographical areas, the Company manages its operations and prepares management reports and other information with a primary focus on these geographical areas. Performance assessment and resource allocation are also based upon this geographical structure. The operating segment identified as “Other” includes the Parent and eliminations of transactions between segments. The accounting policies of the individual operating segments are the same as those of the Company as described in Note 1. Transactions between operating segments are primarily conducted at fair value, resulting in profits that are eliminated for reporting consolidated results of operations. Operating segments pay for centrally provided services based upon estimated or actual usage of those services.
The following is a summary of selected operating segment information as of and for the years ended December 31, 2012, 2011 and 2010 (in thousands):
|
|
|
As of and for the year ended December 31, 2012
|
|
|
|
|
MetroBank
|
|
|
Metro
United
|
|
|
Other(1)
|
|
|
Consolidated
Company
|
|
|
Interest income
|
|
$
|
47,952
|
|
|
$
|
16,148
|
|
|
$
|
24
|
|
|
$
|
64,124
|
|
|
Interest expense
|
|
|
6,198
|
|
|
|
2,306
|
|
|
|
1,381
|
|
|
|
9,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
41,754
|
|
|
|
13,842
|
|
|
|
(1,357
|
)
|
|
|
54,239
|
|
|
(Reduction in) provision for loan losses
|
|
|
100
|
|
|
|
(690
|
)
|
|
|
—
|
|
|
|
(590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after (reduction in) provision for loan losses
|
|
|
41,654
|
|
|
|
14,532
|
|
|
|
(1,357
|
)
|
|
|
54,829
|
|
|
Noninterest income
|
|
|
8,525
|
|
|
|
375
|
|
|
|
(1,559
|
)
|
|
|
7,341
|
|
|
Noninterest expense
|
|
|
34,011
|
|
|
|
10,677
|
|
|
|
1,007
|
|
|
|
45,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
16,168
|
|
|
|
4,230
|
|
|
|
(3,923
|
)
|
|
|
16,475
|
|
|
Provision (benefit) for income taxes
|
|
|
5,076
|
|
|
|
1,616
|
|
|
|
(1,340
|
)
|
|
|
5,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,092
|
|
|
$
|
2,614
|
|
|
$
|
(2,583
|
)
|
|
$
|
11,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
1,116,112
|
|
|
$
|
414,519
|
|
|
$
|
(10,819
|
)
|
|
$
|
1,519,812
|
|
|
Net loans
|
|
|
747,700
|
|
|
|
328,045
|
|
|
|
—
|
|
|
|
1,075,745
|
|
|
Goodwill
|
|
|
—
|
|
|
|
14,327
|
|
|
|
—
|
|
|
|
14,327
|
|
|
Deposits
|
|
|
935,485
|
|
|
|
350,666
|
|
|
|
(19,121
|
)
|
|
|
1,267,030
|
|
|
|
|
As of and for the year ended December 31, 2011
|
|
|
|
|
MetroBank
|
|
|
Metro
United
|
|
|
Other(1)
|
|
|
Consolidated
Company
|
|
|
Interest income
|
|
$
|
50,854
|
|
|
$
|
16,569
|
|
|
$
|
26
|
|
|
$
|
67,449
|
|
|
Interest expense
|
|
|
8,927
|
|
|
|
3,120
|
|
|
|
1,357
|
|
|
|
13,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
41,927
|
|
|
|
13,449
|
|
|
|
(1,331
|
)
|
|
|
54,045
|
|
|
Provision for loan losses
|
|
|
3,150
|
|
|
|
575
|
|
|
|
—
|
|
|
|
3,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
38,777
|
|
|
|
12,874
|
|
|
|
(1,331
|
)
|
|
|
50,320
|
|
|
Noninterest income
|
|
|
8,293
|
|
|
|
271
|
|
|
|
(1,350
|
)
|
|
|
7,214
|
|
|
Noninterest expense
|
|
|
33,480
|
|
|
|
13,136
|
|
|
|
114
|
|
|
|
46,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
13,590
|
|
|
|
9
|
|
|
|
(2,795
|
)
|
|
|
10,804
|
|
|
Provision (benefit) for income taxes
|
|
|
4,052
|
|
|
|
1,253
|
|
|
|
(931
|
)
|
|
|
4,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,538
|
|
|
$
|
(1,244
|
)
|
|
$
|
(1,864
|
)
|
|
$
|
6,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
1,102,093
|
|
|
$
|
394,942
|
|
|
$
|
(2,504
|
)
|
|
$
|
1,494,531
|
|
|
Net loans
|
|
|
722,722
|
|
|
|
293,573
|
|
|
|
—
|
|
|
|
1,016,295
|
|
|
Goodwill
|
|
|
—
|
|
|
|
14,327
|
|
|
|
—
|
|
|
|
14,327
|
|
|
Deposits
|
|
|
930,678
|
|
|
|
333,517
|
|
|
|
(12,620
|
)
|
|
|
1,251,575
|
|
|
|
|
As of and for the year ended December 31, 2010
|
|
|
|
|
MetroBank
|
|
|
Metro
United
|
|
|
Other (1)
|
|
|
Consolidated
Company
|
|
|
Interest income
|
|
$
|
56,991
|
|
|
$
|
20,396
|
|
|
$
|
64
|
|
|
$
|
77,451
|
|
|
Interest expense
|
|
|
13,602
|
|
|
|
4,726
|
|
|
|
2,091
|
|
|
|
20,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
43,389
|
|
|
|
15,670
|
|
|
|
(2,027
|
)
|
|
|
57,032
|
|
|
Provision for loan losses
|
|
|
12,850
|
|
|
|
4,728
|
|
|
|
—
|
|
|
|
17,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
30,539
|
|
|
|
10,942
|
|
|
|
(2,027
|
)
|
|
|
39,454
|
|
|
Noninterest income
|
|
|
8,529
|
|
|
|
358
|
|
|
|
(1,324
|
)
|
|
|
7,563
|
|
|
Noninterest expense
|
|
|
34,968
|
|
|
|
13,198
|
|
|
|
130
|
|
|
|
48,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
4,100
|
|
|
|
(1,898
|
)
|
|
|
(3,481
|
)
|
|
|
(1,279
|
)
|
|
Provision (benefit) for income taxes
|
|
|
880
|
|
|
|
(61
|
)
|
|
|
(1,171
|
)
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,220
|
|
|
$
|
(1,837
|
)
|
|
$
|
(2,310
|
)
|
|
$
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
1,150,216
|
|
|
$
|
410,522
|
|
|
$
|
(2,153
|
)
|
|
$
|
1,558,585
|
|
|
Net loans
|
|
|
792,732
|
|
|
|
317,821
|
|
|
|
—
|
|
|
|
1,110,553
|
|
|
Goodwill
|
|
|
—
|
|
|
|
17,327
|
|
|
|
—
|
|
|
|
17,327
|
|
|
Deposits
|
|
|
986,096
|
|
|
|
317,946
|
|
|
|
(9,858
|
)
|
|
|
1,294,184
|
|
|
|
(1)
|
Other includes the Parent and eliminations of transactions between segments.
|
22. Parent Company Financial Information
The condensed balance sheets, statements of income and statements of cash flows for MetroCorp Bancshares, Inc. (Parent only) are presented below:
Condensed Balance Sheets
(In thousands, except share amounts)
|
|
|
As of December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and due from subsidiary banks
|
|
$
|
3,922
|
|
|
$
|
7,691
|
|
|
Investment in subsidiary trust
|
|
|
1,083
|
|
|
|
1,083
|
|
|
Investment in bank subsidiaries
|
|
|
206,426
|
|
|
|
194,128
|
|
|
Other assets
|
|
|
3,298
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
214,729
|
|
|
$
|
204,269
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
50
|
|
|
$
|
58
|
|
|
Junior subordinated debentures
|
|
|
36,083
|
|
|
|
36,083
|
|
|
Other borrowings
|
|
|
—
|
|
|
|
1,000
|
|
|
Other liabilities
|
|
|
1,565
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
37,698
|
|
|
|
39,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, 2,000,000 shares authorized; no shares and 45,000 shares issued and outstanding at December 31, 2012 and 2011
|
|
|
—
|
|
|
|
45,003
|
|
|
Common stock, $1.00 par value, 50,000,000 shares authorized; 18,766,765 and 13,340,815 shares issued and 18,746,385 and 13,340,815 shares outstanding at December 31, 2012 and 2011, respectively
|
|
|
18,767
|
|
|
|
13,341
|
|
|
Additional paid-in-capital
|
|
|
74,998
|
|
|
|
33,816
|
|
|
Retained earnings
|
|
|
82,881
|
|
|
|
73,188
|
|
|
Other comprehensive income (loss)
|
|
|
567
|
|
|
|
(165
|
)
|
|
Treasury stock, at cost, 20,380 shares and no shares at December 31 2012 and 2011, respectively
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
177,031
|
|
|
|
165,183
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
214,729
|
|
|
$
|
204,269
|
|
Condensed Statements of Operations
(In thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Interest income on deposits
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
Dividends received from subsidiary trust
|
|
|
22
|
|
|
|
21
|
|
|
|
60
|
|
|
Dividends received from bank subsidiaries
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
28
|
|
|
|
6,026
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on junior subordinated debentures
|
|
|
1,338
|
|
|
|
1,306
|
|
|
|
2,047
|
|
|
Interest expense on subordinated debentures
|
|
|
46
|
|
|
|
50
|
|
|
|
44
|
|
|
Stock-based compensation expense
|
|
|
82
|
|
|
|
91
|
|
|
|
3
|
|
|
Other expenses
|
|
|
2,485
|
|
|
|
1,374
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,951
|
|
|
|
2,821
|
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes and equity in undistributed net income (loss) of subsidiaries
|
|
|
(3,923
|
)
|
|
|
3,205
|
|
|
|
(3,481
|
)
|
|
Income tax benefit
|
|
|
1,340
|
|
|
|
931
|
|
|
|
1,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in undistributed net income of subsidiaries
|
|
|
(2,583
|
)
|
|
|
4,136
|
|
|
|
(2,310
|
)
|
|
Equity in undistributed net income (distributions in excess of earnings) of subsidiaries
|
|
|
13,706
|
|
|
|
2,294
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,123
|
|
|
$
|
6,430
|
|
|
$
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends—preferred stock
|
|
|
(1,429
|
)
|
|
|
(2,410
|
)
|
|
|
(2,410
|
)
|
|
Adjustment from repurchase of preferred stock
|
|
|
557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
10,251
|
|
|
$
|
4,020
|
|
|
$
|
(3,337
|
)
|
Condensed Statements of Cash Flows
(In thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,123
|
|
|
$
|
6,430
|
|
|
$
|
(927
|
)
|
|
Stock-based compensation expense
|
|
|
1,281
|
|
|
|
450
|
|
|
|
363
|
|
|
Distributions in excess of earnings (equity in undistributed earnings of subsidiaries)
|
|
|
(13,706
|
)
|
|
|
(2,294
|
)
|
|
|
(1,383
|
)
|
|
Increase in other assets
|
|
|
(105
|
)
|
|
|
(295
|
)
|
|
|
(24
|
)
|
|
(Decrease) increase in other liabilities
|
|
|
(249
|
)
|
|
|
294
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,656
|
)
|
|
|
4,585
|
|
|
|
(1,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in bank subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of unsecured debt
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
|
Repayment of unsecured debt
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from issuance of common stock
|
|
|
42,945
|
|
|
|
—
|
|
|
|
6,899
|
|
|
Repurchase of common stock
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase of preferred stock
|
|
|
(44,443
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Cash dividends paid on preferred stock
|
|
|
(1,433
|
)
|
|
|
(2,834
|
)
|
|
|
(1,701
|
)
|
|
Return of capital from subsidiary
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,113
|
)
|
|
|
(2,834
|
)
|
|
|
6,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,769
|
)
|
|
|
1,751
|
|
|
|
4,299
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,691
|
|
|
|
5,940
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,922
|
|
|
$
|
7,691
|
|
|
$
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared but not paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
23. Related Party Transactions
In the ordinary course of business, the Company enters into transactions with its and the Banks’ executive officers, directors and their affiliates. It is the Company’s policy that all transactions with these parties are on the same terms, including interest rates and collateral requirements on loans, as those prevailing at the same time for comparable transactions with unrelated parties. At December 31, 2012 and 2011, there was no outstanding indebtedness of officers, directors or their affiliated companies; however one officer was issued a line of credit in the amount of $800,000 in 2011 in which no advances were issued during 2011.
The following is an analysis of activity for the years ended December 31, 2012 and 2011 for such amounts (in thousands):
|
|
|
2012
|
|
|
2011
|
|
|
Balance at January 1,
|
|
$
|
—
|
|
|
$
|
91
|
|
|
New loans and advances
|
|
|
580
|
|
|
|
—
|
|
|
Repayments
|
|
|
(580
|
)
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
—
|
|
|
$
|
—
|
|
In addition, as of December 31, 2012 and 2011, the Company held demand and other deposits for related parties of approximately $6.5 million and $5.4 million, respectively.
One of the Company’s Co-Chairmen is a principal shareholder and the Chairman of the Board of New Era Life Insurance Company (New Era). MetroBank had five commercial real estate loan participations with New Era as of December 31, 2012, and seven as of December 31, 2011. These loans were originated by and are being serviced by MetroBank. As of December 31, 2012, four of the loans are contractually current on their payments and one real estate loan in the amount of $8.9 million is on nonaccrual status and is 90 days or more past due. The following is an analysis of these loans as of December 31, 2012 and 2011 (in thousands):
|
|
|
2012
|
|
|
2011
|
|
|
Gross balance
|
|
$
|
37,614
|
|
|
$
|
56,290
|
|
|
Less: participation portion sold to New Era
|
|
|
(17,084
|
)
|
|
|
(23,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net balance outstanding
|
|
$
|
20,530
|
|
|
$
|
32,738
|
|
With the exception of the $8.9 million real estate loan on nonaccrual status, $19.4 million of the loans have interest rates ranging from 5.00% to 6.63% and the remaining $9.3 million in loans have interest rates which float with the prime rate. The loans mature between March 2013 and November 2017. The percent of the participation portions sold to New Era varies from 16.67% to 76.00%.
Gaumnitz, Inc. owns the building in which the Company’s corporate headquarters and MetroBank’s Bellaire branch are located and has entered into lease agreements for these locations with the Company and MetroBank. The controlling shareholder of Gaumnitz, Inc. is a major shareholder of the Company. The lease agreements covering the different areas comprising the Company’s headquarters have lease commencement dates of December 2010, at a net rent of $47,000 per month, and expiration dates in December 2015. The lease agreement for MetroBank’s Bellaire branch commenced on December 1, 2011 at a total rent of $12,000 per month and expires in December 2016. For these respective lease agreements, the Company paid Gaumnitz, Inc. $704,000 for the years ended December 31, 2012, 2011 and 2010.
In February 2010, the Company issued a promissory note to one of the Company's Co-Chairmen of the Board and to an affiliate of one of the Company's 5% or more shareholders. Each note was issued for a principal amount of $500,000. The notes, as amended in February 2012, were to mature February 10, 2013 and bear interest on the principal amount at a fixed rate per annum equal to 5.0% due quarterly beginning March 31, 2010. The notes were repaid in December 2012.
EXHIBIT INDEX
|
Exhibit
Number(1)
|
|
Description
|
|
|
|
|
|
2.1
|
|
Letter Agreement, dated January 16, 2009, including the Securities Purchase Agreement—Standard Terms incorporated by reference therein, by and between the Company and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
|
|
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-62667) (the “Registration Statement”)).
|
|
|
|
|
|
3.2
|
|
Articles of Amendment to the Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008).
|
|
|
|
|
|
3.3
|
|
Statement of Designations establishing the terms of the Series A Preferred Stock of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
|
|
|
|
|
|
3.4
|
|
Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report of Form 8-K filed on November 19, 2007).
|
|
|
|
|
|
4.1
|
|
Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement).
|
|
|
|
|
|
4.2
|
|
Warrant, dated January 16, 2009, to purchase 771,429 shares of the Company’s Common Stock (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
|
|
|
|
|
|
10.1†
|
|
MetroCorp Bancshares, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Registration Statement).
|
|
|
|
|
|
10.2†
|
|
MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan, as amended (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement of Form S-8 (Registration No. 333-160112)).
|
|
|
|
|
|
10.3†
|
|
Form of Incentive Stock Option Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (Registration No. 333-143502) the “S-8 Registration Statement”)).
|
|
|
|
|
|
10.4†
|
|
Form of Non Qualified Stock Option Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.4 of the S-8 Registration Statement).
|
|
|
|
|
|
10.5†
|
|
Form of Stock Appreciation Rights Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.5 of the S-8 Registration Statement).
|
|
|
|
|
|
10.6†
|
|
Form of Restricted Stock Agreement under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.6 of the S-8 Registration Statement).
|
|
|
|
|
|
10.7†
|
|
Form of Restricted Stock Agreement (CPP Long-Term) under the 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011).
|
|
|
|
|
|
10.8†
|
|
Employment Agreement between the Company and George M. Lee effective January 26, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 21, 2012).
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Exhibit
Number(1)
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Description
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10.9†
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Letter Agreement between MetroBank, N.A. and David Tai dated as of February 14, 2005 (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
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10.10†
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Letter Agreement between MetroBank, N.A. and David Choi dated as of February 14, 2005 (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
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10.11
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Form of Waiver, executed by each of George M. Lee, David C. Choi and David Tai (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
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10.12†
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Form of Executive Compensation Letter Agreement, executed by each of George M. Lee, David C. Choi and David Tai (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 21, 2009).
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10.13†
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Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 10, 2012).
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10.14†
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Form of Incentive Stock Option Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (No. 333-181629)).
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10.15†
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Form of Nonqualified Stock Option Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.4 to the Registration Statement on Form S-8 (No. 333-181629)).
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10.16†
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Form of Stock Appreciation Rights Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-8 (No. 333-181629)).
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10.17†
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Form of Restricted Stock Agreement under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.6 to the Registration Statement on Form S-8 (No. 333-181629)).
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10.18†
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Form of Restricted Stock Agreement (CPP Long-Term) under the Amended and Restated MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.7 to the Registration Statement on Form S-8 (No. 333-181629)).
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10.19
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Underwriting Agreement dated June 27, 2012, by and among the Company., MetroBank, N.A., Metro United Bank, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Sandler O’Neill & Partners, L.P., as representatives of the several underwriters named in the Underwriting Agreement, and the United States Department of the Treasury (incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on June 28, 2012).
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11
|
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Computation of Earnings Per Common Share, included as Note (16) to the Consolidated Financial Statements of this Form 10-K.
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21
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Subsidiaries of MetroCorp Bancshares, Inc. (incorporated herein by reference to Exhibit 21 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
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23.1*
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Consent of KPMG LLP.
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23.2*
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Consent of PricewaterhouseCoopers LLP.
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31.1*
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
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31.2*
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
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32.1**
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Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2**
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
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99.1*
|
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Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008.
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101*
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Interactive Data File.
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(1)
|
The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to Securities and Exchange Commission upon request.
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†
|
Management contract or compensatory plan or arrangement.
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*
|
Filed herewith.
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**
|
Furnished herewith.
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(b)
|
Exhibits. See the exhibit list included in Item 15(a)3 of this Annual Report on Form 10-K.
|
|
(c)
|
Financial Statement Schedules. See Item 15(a)2 of this Annual Report on Form 10-K.
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114
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