UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007 |
|
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-25141
________________
MetroCorp Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas | 76-0579161 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9600 Bellaire Boulevard, Suite 252
Houston, Texas 77036
(Address of principal executive offices including zip code)
(713) 776-3876
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer £ Accelerated Filer R Non-accelerated Filer £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
As of April 30, 2007, the number of outstanding shares of Common Stock was 10,959,862.
PART I
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
| | March 31, | | December 31, | |
| | 2007 | | 2006 | |
ASSETS | | | | | |
| | | | | |
Cash and due from banks | | $ | 25,955 | | $ | 25,709 | |
Federal funds sold and other short-term investments | | | 24,466 | | | 125,649 | |
Total cash and cash equivalents | | | 50,421 | | | 151,358 | |
Securities available-for-sale, at fair value | | | 174,685 | | | 181,544 | |
Other investments | | | 4,971 | | | 4,931 | |
Loans, net of allowance for loan losses of $11,900 and $11,436, respectively | | | 994,378 | | | 875,120 | |
Accrued interest receivable | | | 6,110 | | | 5,841 | |
Premises and equipment, net | | | 7,914 | | | 7,585 | |
Goodwill | | | 21,827 | | | 21,827 | |
Core deposit intangibles | | | 1,016 | | | 1,103 | |
Customers' liability on acceptances | | | 4,683 | | | 7,693 | |
Foreclosed assets, net | | | 2,657 | | | 2,747 | |
Other assets | | | 9,028 | | | 8,685 | |
Total assets | | $ | 1,277,690 | | $ | 1,268,434 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | |
Deposits: | | | | | | | |
Noninterest-bearing | | $ | 201,772 | | $ | 208,750 | |
Interest-bearing | | | 888,978 | | | 872,914 | |
Total deposits | | | 1,090,750 | | | 1,081,664 | |
Junior subordinated debentures | | | 36,083 | | | 36,083 | |
Other borrowings | | | 25,802 | | | 26,316 | |
Accrued interest payable | | | 1,774 | | | 1,822 | |
Acceptances outstanding | | | 4,683 | | | 7,693 | |
Other liabilities | | | 9,238 | | | 8,908 | |
Total liabilities | | | 1,168,330 | | | 1,162,486 | |
Commitments and contingencies | | | - | | | - | |
| | | | | | | |
Shareholders' equity: | | | | | | | |
Common stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares issued and 10,955,669 and 10,946,135 shares outstanding at March 31, 2007 and December 31, 2006, respectively | | | 10,995 | | | 10,995 | |
Additional paid-in capital | | | 26,294 | | | 25,974 | |
Retained earnings | | | 74,435 | | | 71,783 | |
Accumulated other comprehensive loss | | | (2,054 | ) | | (2,421 | ) |
Treasury stock, at cost | | | (310 | ) | | (383 | ) |
Total shareholders' equity | | | 109,360 | | | 105,948 | |
Total liabilities and shareholders' equity | | $ | 1,277,690 | | $ | 1,268,434 | |
See accompanying notes to condensed consolidated financial statements
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| | For the Three Months | |
| | Ended March 31, | |
| | 2007 | | 2006 | |
Interest income: | | | | | |
Loans | | $ | 20,621 | | $ | 16,423 | |
Securities: | | | | | | | |
Taxable | | | 1,864 | | | 2,209 | |
Tax-exempt | | | 85 | | | 206 | |
Other investments | | | 68 | | | 55 | |
Federal funds sold and other short-term investments | | | 968 | | | 638 | |
Total interest income | | | 23,606 | | | 19,531 | |
Interest expense: | | | | | | | |
Time deposits | | | 7,601 | | | 5,027 | |
Demand and savings deposits | | | 1,525 | | | 916 | |
Junior subordinated debentures | | | 520 | | | 520 | |
Other borrowings | | | 324 | | | 323 | |
Total interest expense | | | 9,970 | | | 6,786 | |
Net interest income | | | 13,636 | | | 12,745 | |
Provision for loan losses | | | 137 | | | 258 | |
Net interest income after provision for loan losses | | | 13,499 | | | 12,487 | |
Noninterest income: | | | | | | | |
Service fees | | | 1,216 | | | 1,461 | |
Loan-related fees | | | 177 | | | 211 | |
Letters of credit commissions and fees | | | 204 | | | 171 | |
Other noninterest income | | | 69 | | | 76 | |
Total noninterest income | | | 1,666 | | | 1,919 | |
Noninterest expenses: | | | | | | | |
Salaries and employee benefits | | | 5,746 | | | 5,290 | |
Occupancy and equipment | | | 1,970 | | | 1,544 | |
Foreclosed assets, net | | | 42 | | | 43 | |
Other noninterest expense | | | 2,467 | | | 2,634 | |
Total noninterest expenses | | | 10,225 | | | 9,511 | |
| | | | | | | |
Income before provision for income taxes | | | 4,940 | | | 4,895 | |
Provision for income taxes | | | 1,850 | | | 1,664 | |
Net income | | $ | 3,090 | | $ | 3,231 | |
Earnings per common share: | | | | | | | |
Basic | | $ | 0.28 | | $ | 0.30 | |
Diluted | | $ | 0.28 | | $ | 0.29 | |
Weighted average shares outstanding: | | | | | | | |
Basic | | | 10,953 | | | 10,868 | |
Diluted | | | 11,163 | | | 11,030 | |
Dividends per common share | | $ | 0.04 | | $ | 0.04 | |
See accompanying notes to condensed consolidated financial statements
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| | For the Three Months | |
| | Ended March 31, | |
| | 2007 | | 2006 | |
| | | | | |
Net income | | $ | 3,090 | | $ | 3,231 | |
| | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Unrealized gain (loss) on investment securities, net: | | | | | | | |
Unrealized holding gain (loss) arising during the period | | | 367 | | | (480 | ) |
Less: reclassification adjustment for gain included in net income | | | - | | | 1 | |
Other comprehensive income (loss) | | | 367 | | | (481 | ) |
Total comprehensive income | | $ | 3,457 | | $ | 2,750 | |
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2007
(In thousands)
(Unaudited)
| | | | | | | | | | Accumulated | | | | | |
| | | | | | Additional | | | | Other | | Treasury | | | |
| | Common Stock | | Paid-In | | Retained | | Comprehensive | | Stock, At | | | |
| | Shares | | At Par | | Capital | | Earnings | | Income (Loss) | | Cost | | Total | |
Balance at December 31, 2006 | | | 10,946 | | $ | 10,995 | | $ | 25,974 | | $ | 71,783 | | $ | (2,421 | ) | $ | (383 | ) | $ | 105,948 | |
Re-issuance of treasury stock | | | 10 | | | - | | | 90 | | | - | | | - | | | 73 | | | 163 | |
Stock-based compensation expense recognized in earnings | | | - | | | - | | | 230 | | | - | | | - | | | - | | | 230 | |
Net income | | | - | | | - | | | - | | | 3,090 | | | - | | | - | | | 3,090 | |
Other comprehensive income | | | - | | | - | | | - | | | - | | | 367 | | | - | | | 367 | |
Cash dividends ($0.04 per share) | | | - | | | - | | | - | | | (438 | ) | | - | | | - | | | (438 | ) |
Balance at March 31, 2007 | | | 10,956 | | $ | 10,995 | | $ | 26,294 | | $ | 74,435 | | $ | (2,054 | ) | $ | (310 | ) | $ | 109,360 | |
See accompanying notes to condensed consolidated financial statements
METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | For the Three Months Ended March 31, | |
| | 2007 | | 2006 | |
| | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 3,090 | | $ | 3,231 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation | | | 433 | | | 326 | |
Provision for loan losses | | | 137 | | | 258 | |
Gain on sale of securities, net | | | - | | | (2 | ) |
Amortization of premiums and discounts on securities | | | 8 | | | 24 | |
Amortization of deferred loan fees and discounts | | | (650 | ) | | (574 | ) |
Amortization of core deposit intangibles | | | 87 | | | 118 | |
Stock-based compensation | | | 230 | | | 28 | |
Excess tax benefits from stock-based compensation | | | - | | | (12 | ) |
Changes in: | | | | | | | |
Accrued interest receivable | | | (269 | ) | | 72 | |
Other assets | | | (553 | ) | | (302 | ) |
Accrued interest payable | | | (48 | ) | | (11 | ) |
Other liabilities | | | 330 | | | 2,030 | |
Net cash provided by operating activities | | | 2,795 | | | 5,186 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of securities available-for-sale | | | (89 | ) | | (235 | ) |
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale | | | 7,476 | | | 11,266 | |
Net change in loans | | | (118,745 | ) | | (14,764 | ) |
Proceeds from sale of foreclosed assets | | | 90 | | | - | |
Purchases of premises and equipment | | | (762 | ) | | (255 | ) |
Net cash used in investing activities | | | (112,030 | ) | | (3,988 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Net change in: | | | | | | | |
Deposits | | | 9,086 | | | 10,116 | |
Other borrowings | | | (514 | ) | | (479 | ) |
Proceeds from stock option exercises | | | 75 | | | 303 | |
Re-issuance of treasury stock | | | 88 | | | 91 | |
Dividends paid | | | (437 | ) | | (437 | ) |
Excess tax benefits from stock-based compensation | | | - | | | 12 | |
Net cash provided by financing activities | | | 8,298 | | | 9,606 | |
| | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (100,937 | ) | | 10,804 | |
Cash and cash equivalents at beginning of period | | | 151,358 | | | 81,812 | |
Cash and cash equivalents at end of period | | $ | 50,421 | | $ | 92,616 | |
See accompanying notes to condensed consolidated financial statements
METROCORP BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts of MetroCorp Bancshares, Inc. (the “Company”) and wholly-owned subsidiaries, MetroBank, National Association (“MetroBank”) and Metro United Bank (“Metro United”), in Texas and California, respectively (collectively, the “Banks”). MetroBank is engaged in commercial banking activities through its thirteen branches in Houston and Dallas, Texas, and Metro United is engaged in commercial banking activities through its five branches in San Diego, Los Angeles and San Francisco, California. 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.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities, (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiary, MCBI Statutory Trust I, is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not consolidated in the Company’s financial statements.
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at March 31, 2007, results of operations for the three months ended March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and 2006. Interim period results are not necessarily indicative of results for a full-year period.
Certain amounts applicable to the prior periods have been reclassified to conform to the classifications currently used. Such reclassifications had no effect on net income, shareholders’ equity, or cash flows.
These financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
2. SECURITIES
The amortized cost and approximate fair value of securities is as follows:
| | As of March 31, 2007 | | As of December 31, 2006 | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | (Dollars in thousands) | |
Securities available for sale | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 27 | | $ | 1 | | $ | (1 | ) | $ | 27 | | $ | 28 | | $ | 1 | | $ | ─ | | $ | 29 | |
U.S. Government sponsored enterprises | | | 36,915 | | | ─ | | | (412 | ) | | 36,503 | | | 36,906 | | | ─ | | | (510 | ) | | 36,396 | |
Obligations of state and political subdivisions | | | 6,530 | | | 165 | | | ─ | | | 6,695 | | | 7,425 | | | 157 | | | ─ | | | 7,582 | |
Mortgage-backed securities and collateralized mortgage obligations | | | 114,638 | | | 82 | | | (2,639 | ) | | 112,081 | | | 121,196 | | | 62 | | | (3,060 | ) | | 118,198 | |
Other debt securities | | | 105 | | | 1 | | | (1 | ) | | 105 | | | 143 | | | 1 | | | (1 | ) | | 143 | |
Investment in ARM and CRA funds | | | 19,707 | | | ─ | | | (433 | ) | | 19,274 | | | 19,658 | | | ─ | | | (462 | ) | | 19,196 | |
Total available for sale securities | | $ | 177,922 | | $ | 249 | | $ | (3,486 | ) | $ | 174,685 | | $ | 185,356 | | $ | 221 | | $ | (4,033 | ) | $ | 181,544 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other investments | | | | | | | | | | | | | | | | | | | | | | | | | |
FHLB/Federal Reserve Bank stock | | $ | 3,888 | | $ | ─ | | $ | ─ | | $ | 3,888 | | $ | 3,848 | | $ | ─ | | $ | ─ | | | 3,848 | |
Investment in subsidiary trust | | | 1,083 | | | ─ | | | ─ | | | 1,083 | | | 1,083 | | | ─ | | | ─ | | | 1,083 | |
Total other investments | | $ | 4,971 | | $ | ─ | | $ | ─ | | $ | 4,971 | | $ | 4,931 | | $ | ─ | | $ | ─ | | $ | 4,931 | |
The following table displays the gross unrealized losses and fair value of securities available for sale as of March 31, 2007 that were in a continuous unrealized loss position for the periods indicated:
| | Less Than 12 Months | | Greater Than 12 Months | | Total | |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
| | (Dollars in thousands) | |
Securities available for sale | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 11 | | $ | (1 | ) | $ | ─ | | $ | ─ | | $ | 11 | | $ | (1 | ) |
U.S. Government sponsored enterprises | | | ─ | | | ─ | | | 36,503 | | | (412 | ) | | 36,503 | | | (412 | ) |
Mortgage-backed securities and collateralized mortgage obligations | | | 10,236 | | | (118 | ) | | 94,200 | | | (2,522 | ) | | 104,436 | | | (2,640 | ) |
Other debt securities | | | 13 | | | (1 | ) | | ─ | | | ─ | | | 13 | | | (1 | ) |
Investment in ARM and CRA funds | | | 4,523 | | | (6 | ) | | 14,751 | | | (426 | ) | | 19,274 | | | (432 | ) |
Total securities | | $ | 14,783 | | $ | (126 | ) | $ | 145,454 | | $ | (3,360 | ) | $ | 160,237 | | $ | (3,486 | ) |
Declines in the fair value of individual securities below their cost that are other than temporary would result in write-downs, as a realized loss, of the individual securities to their fair value. Management believes that based upon the credit quality of the debt securities and the Company’s intent and ability to hold the securities until their recovery, none of the unrealized losses on securities should be considered other than temporary.
3. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
| | As of and for the three months ended March 31, 2007 | | As of and for the three months ended March 31, 2006 | |
| | (Dollars in thousands) | |
Allowance for loan losses at beginning of period | | $ | 11,436 | | $ | 13,169 | |
Provision for loan losses | | | 137 | | | 258 | |
Charge-offs | | | (226 | ) | | (1,097 | ) |
Recoveries | | | 553 | | | 1,399 | |
Allowance for loan losses at end of period | | $ | 11,900 | | $ | 13,729 | |
In addition to the allowance for loan losses, the Company maintains a reserve for unfunded commitments to provide for the risk of loss inherent in its unfunded lending related commitments. The reserve for unfunded commitments was $919,000 and $539,000 at March 31, 2007 and 2006, respectively.
4. INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement 109” ("FIN 48") on January 1, 2007. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in the financial statements, only if the position is more likely than not of being sustained on examination by taxing authorities, based on the technical merits of the position. Adoption of this standard on January 1, 2007 did not have a material effect on the Company's consolidated results of operations or financial condition. Additionally, the Company had no unrecognized tax benefits as of March 31, 2007, 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 and will continue to be consistently applied in the future. As of March 31, 2007, 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 is subject to taxation in the United States and 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, 2003 through December 31, 2006.
5. EARNINGS PER COMMON 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 can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. Stock options that are antidilutive are excluded from earnings per share calculation. Stock options are antidilutive when the exercise price is higher than the current market price of the Company’s common stock. As of March 31, 2007 and 2006, there were 47,408 and 4,438 antidilutive stock options, respectively. The number of potentially dilutive common shares is determined using the treasury stock method.
| | For the Three Months | |
| | Ended March 31, | |
| | 2007 | | 2006 | |
| | (In thousands, except per share amounts) | |
| | | | | |
Net income available to common shareholders | | $ | 3,090 | | $ | 3,231 | |
| | | | | | | |
| | | | | | | |
Weighted average common shares in basic EPS | | | 10,953 | | | 10,868 | |
Effect of dilutive securities | | | 210 | | | 162 | |
Weighted average common and potentially dilutive common shares used in diluted EPS | | | 11,163 | | | 11,030 | |
| | | | | | | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | | $ | 0.28 | | $ | 0.30 | |
Diluted | | $ | 0.28 | | $ | 0.29 | |
6. LITIGATION
The Company is involved in various litigation that arises from time to time 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.
7. 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 statement of financial condition. The Company’s maximum exposure to credit loss 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 they do for on-balance sheet instruments. Off-balance sheet financial instruments include commitments to extend credit and guarantees under standby and other letters of credit.
The contractual amount of the Company’s financial instruments with off-balance sheet risk at March 31, 2007 and December 31, 2006 is presented below:
| | As of March 31, 2007 | | As of December 31, 2006 | |
| | (Dollars in thousands) | |
Unfunded loan commitments including unfunded lines of credit | | $ | 267,376 | | $ | 234,501 | |
Standby letters of credit | | | 7,137 | | | 7,597 | |
Commercial letters of credit | | | 9,457 | | | 9,596 | |
Operating leases | | | 10,797 | | | 9,718 | |
Total financial instruments with off-balance sheet risk | | $ | 294,767 | | $ | 261,412 | |
8. OPERATING SEGMENT INFORMATION
The Company operates two community banks in distinct geographical areas, and manages its operations and prepares management reports and other information with a primary focus on these geographical areas. Performance assessment and resource allocation are based upon this geographical structure. The operating segment identified as “Other” includes the parent company 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 three months ended March 31, 2007:
| | MetroBank | | Metro United | | Other | | Consolidated | |
| | (Dollars in thousands) | |
| | | | | | | | | |
Total interest income | | $ | 18,589 | | $ | 5,000 | | $ | 17 | | $ | 23,606 | |
Total interest expense | | | 6,879 | | | 2,571 | | | 520 | | | 9,970 | |
Net interest income | | | 11,710 | | | 2,429 | | | (503 | ) | | 13,636 | |
Provision for loan losses | | | - | | | 137 | | | - | | | 137 | |
Net interest income after provision for loan losses | | | 11,710 | | | 2,292 | | | (503 | ) | | 13,499 | |
Noninterest income | | | 1,590 | | | 76 | | | - | | | 1,666 | |
Noninterest expense | | | 7,856 | | | 2,060 | | | 309 | | | 10,225 | |
Income before income tax provision | | | 5,444 | | | 308 | | | (812 | ) | | 4,940 | |
Provision for income taxes | | | 1,972 | | | 125 | | | (247 | ) | | 1,850 | |
Net income | | $ | 3,472 | | $ | 183 | | $ | (565 | ) | $ | 3,090 | |
| | | | | | | | | | | | | |
Net loans | | $ | 748,512 | | $ | 245,866 | | $ | - | | $ | 994,378 | |
Total assets | | | 990,734 | | | 285,713 | | | 1,243 | | | 1,277,690 | |
Deposits | | | 855,381 | | | 236,905 | | | (1,536 | ) | | 1,090,750 | |
9. NEW ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” , which establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This new guidance does not eliminate disclosure requirements included in other accounting standards, including fair value measurement disclosures required by Statement No. 157, “Fair Value Measurements” and Statement No. 107, “Disclosures about Fair Value of Financial Instruments.” Statement No. 159 is effective for the Company beginning January 1, 2008. The Company is in the process of determining the impact of adoption of this statement.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement No. 157 is effective for the Company beginning January 1, 2008. The Company is in the process of determining the impact of adoption of this statement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Cautionary Notice Regarding Forward-looking Statements
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. Words such as “believe”, “expect”, “anticipate”, “estimate”, “continue”, “intend”, “may”, “will”, “should”, or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:
| • | changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations; |
| • | changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio; |
| • | changes in local economic and business conditions which adversely affect the ability of the Company’s customers to transact profitable business with the Company, including the ability of borrowers to repay their loans according to their terms or a change in the value of the related collateral; |
| • | increased competition for deposits and loans adversely affecting rates and terms; |
| • | the Company’s ability to identify suitable acquisition candidates; |
| • | the timing, impact and other uncertainties of the Company’s ability to enter new markets successfully and capitalize on growth opportunities; |
| • | increased credit risk in the Company’s assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of the total loan portfolio; |
| • | the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses; |
| • | changes in the availability of funds resulting in increased costs or reduced liquidity; |
| • | increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios; |
| • | the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; |
| • | the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels; and |
| • | changes in statutes and government regulations or their interpretations applicable to bank holding companies and our present and future banking and other subsidiaries, including changes in tax requirements and tax rates. |
All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company’s balance sheets and statements of income. This section should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying notes and other detailed information appearing elsewhere in this document.
Overview
The Company recorded net income of $3.1 million for the three months ended March 31, 2007, a decrease of approximately $141,000 compared with net income of $3.2 million for the same quarter in 2006. The Company’s diluted earnings per share (“EPS”) for the three months ended March 31, 2007 was $0.28, a decrease of $0.01 per diluted share compared with diluted EPS of $0.29 for the same quarter in 2006.
Total assets were $1.28 billion at March 31, 2007, an increase of approximately $9.3 million or 0.73% from $1.27 billion at December 31, 2006. Available for sale investment securities at March 31, 2007 were $174.7 million, a decrease of approximately $6.9 million or 3.8% from $181.5 million at December 31, 2006. Net loans at March 31, 2007 were $994.4 million, an increase of approximately $119.3 million or 13.6% from $875.1 million at December 31, 2006. Total deposits at March 31, 2007 were $1.09 billion, an increase of approximately $9.1 million or 0.84% from $1.08 billion at December 31, 2006. Other borrowings at March 31, 2007 were $25.8 million, a decrease of approximately $514,000 or 2.0% from $26.3 million at December 31, 2006. The Company’s return on average assets (“ROAA”) for the three months ended March 31, 2007 and 2006 was 0.99% and 1.16%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended March 31, 2007 and 2006 was 11.59% and 13.85%, respectively.
Shareholders’ equity at March 31, 2007 was $109.3 million compared to $105.9 million at December 31, 2006, an increase of approximately $3.4 million or 3.2%.
Details of the changes in the various components of net income are further discussed below.
Results of Operations
Net Interest Income and Net Interest Margin. For the three months ended March 31, 2007, net interest income, before the provision for loan losses, was $13.6 million, an increase of approximately $891,000 or 7.0% compared with $12.7 million for the same period in 2006. Average interest-earning assets for the three months ended March 31, 2007 were $1.19 billion, an increase of approximately $127.6 million or 12.0% compared with $1.06 billion for the same period in 2006. The increase was primarily due to new loan growth. The weighted average yield on interest-earning assets for the first quarter 2007 was 8.03%, an increase of 59 basis points compared with 7.44% for the same quarter in 2006. . Average interest-bearing liabilities for the three months ended March 31, 2007 were $934.8 million, an increase of approximately $98.5 million or 11.8% compared with $836.2 million for the same period in 2006, primarily due to an increase in savings and time deposits. The weighted average interest rate paid on interest-bearing liabilities for the first quarter 2007 was 4.33%, an increase of 104 basis points compared with 3.29% for the same quarter in 2006.
The net interest margin for the three months ended March 31, 2007 was 4.64%, a decrease of 22 basis points compared with 4.86% for the same period in 2006. The decrease was primarily the result of an increase in the cost of earning assets of 81 basis points offset by an increase in the yield on earning assets of 59 basis points. The increase in the cost of earning assets was due primarily to an increase in both the volume and interest paid on time deposits and savings and money market accounts. The increase in yield on earning assets was due primarily to an increase in both the volume and yield on loans.
Total Interest Income. Total interest income for the three months ended March 31, 2007 was $23.6 million, an increase of approximately $4.1 million or 20.9% compared with $19.5 million for the same period in 2006. The increase was primarily the result of loan growth and a higher yield on a higher volume of interest-earning assets.
Interest Income from Loans. Interest income from loans for the three months ended March 31, 2007 was $20.6 million, an increase of approximately $4.2 million or 25.6% from $16.4 million for the same quarter in 2006. The increase was primarily the result of higher yield on loans as well as growth in the loan portfolio. Average total loans for the three months ended March 31, 2007 were $933.8 million compared to $772.9 million for the same period in 2006, an increase of approximately $160.9 million or 20.8%. For the first quarter of 2007, the average yield on loans was 8.96% compared to 8.62% for the same quarter in 2006, an increase of 34 basis points.
Approximately $717.9 million or 71.1% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates. At March 31, 2007, the average yield on total loans was approximately 71 basis points above the prime rate. To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors. At March 31, 2007, approximately $489.5 million in loans or 48.5% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 9.0%. At March 31, 2006, variable rate loans with interest rate floors carried a weighted average interest rate of 8.75% and comprised 63.5% of the total loan portfolio.
Interest Income from Investments. Interest income from investments (which includes investment securities, Federal funds sold, and other investments) for the three months ended March 31, 2007 was $3.0 million, a decrease of approximately $123,000 or 4.0% compared to $3.1 million for the same period in 2006, primarily due to normal paydowns and maturities of investment securities, which were used to fund loan growth. Average total investments for the three months ended March 31, 2007 were $258.3 million compared to average total investments for the same period in 2006 of $291.6 million, a decrease of approximately $33.3 million or 11.4%. For the first quarter 2007, the average yield on total investments was 4.69% compared to 4.32% for the same quarter in 2006, an increase of 37 basis points.
Total Interest Expense. Total interest expense for the three months ended March 31, 2007 was $10.0 million, an increase of approximately $3.2 million or 46.9% compared to $6.8 million for the same period in 2006. The increase primarily reflected higher interest rates and an increase in interest-bearing deposits.
Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended March 31, 2007 was $9.1 million, an increase of approximately $3.2 million or 53.6% compared to $5.9 million for the same period in 2006. The increase was primarily due to higher interest rates paid for and a higher volume of interest-bearing deposits. Average interest-bearing deposits for the three months ended March 31, 2007 were $872.0 million compared to average interest-bearing deposits for the same period in 2006 of $773.5 million, an increase of $98.5 million or 12.7%. The average interest rate paid on interest-bearing deposits for the first quarter 2007 was 4.24% compared to 3.12% for the same quarter in 2006, an increase of 112 basis points.
Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended March 31, 2007 was $324,000 and consistent compared to $323,000 for the same period in 2006. Average borrowed funds for the three months ended March 31, 2007 and 2006 were $26.7 million. The average interest rate paid on borrowed funds for the first quarter of 2007 was 4.92%, compared to 4.91% for the same quarter in 2006.
The following table presents, for each major category of interest-earning assets and interest-bearing liabilities, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates for the periods indicated. No tax-equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the table as loans having a zero yield, with income, if any, recognized at the end of the loan term.
| | For The Three Months Ended March 31, | |
| | 2007 | | 2006 | |
| | Average | | Interest | | Average | | Average | | Interest | | Average | |
| | Outstanding | | Earned/ | | Yield/ | | Outstanding | | Earned/ | | Yield/ | |
| | Balance | | Paid | | Rate(1) | | Balance | | Paid | | Rate(1) | |
| | (Dollars in thousands) | |
Assets | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 933,829 | | $ | 20,621 | | | 8.96 | % | $ | 772,913 | | $ | 16,423 | | | 8.62 | % |
Taxable securities | | | 170,962 | | | 1,864 | | | 4.42 | | | 210,123 | | | 2,209 | | | 4.26 | |
Tax-exempt securities | | | 6,895 | | | 85 | | | 5.00 | | | 16,685 | | | 206 | | | 5.01 | |
Other investments (2) | | | 4,938 | | | 68 | | | 5.58 | | | 4,347 | | | 55 | | | 5.13 | |
Federal funds sold and other short-term investments | | | 75,476 | | | 968 | | | 5.20 | | | 60,411 | | | 638 | | | 4.28 | |
Total interest-earning assets | | | 1,192,100 | | | 23,606 | | | 8.03 | | | 1,064,479 | | | 19,531 | | | 7.44 | |
Allowance for loan losses | | | (11,641 | ) | | | | | | | | (13,811 | ) | | | | | | |
Total interest-earning assets, net of allowance for loan losses | | | 1,180,459 | | | | | | | | | 1,050,668 | | | | | | | |
Noninterest-earning assets | | | 81,087 | | | | | | | | | 81,789 | | | | | | | |
Total assets | | $ | 1,261,546 | | | | | | | | $ | 1,132,457 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 68,341 | | $ | 205 | | | 1.21 | % | $ | 80,918 | | $ | 169 | | | 0.85 | % |
Savings and money market accounts | | | 171,520 | | | 1,320 | | | 3.12 | | | 143,532 | | | 747 | | | 2.11 | |
Time deposits | | | 632,118 | | | 7,601 | | | 4.88 | | | 549,036 | | | 5,027 | | | 3.71 | |
Junior subordinated debentures | | | 36,083 | | | 520 | | | 5.76 | | | 36,083 | | | 520 | | | 5.76 | |
Other borrowings | | | 26,695 | | | 324 | | | 4.92 | | | 26,659 | | | 323 | | | 4.91 | |
Total interest-bearing liabilities | | | 934,757 | | | 9,970 | | | 4.33 | | | 836,228 | | | 6,786 | | | 3.29 | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing demand deposits | | | 202,256 | | | | | | | | | 188,767 | | | | | | | |
Other liabilities | | | 16,390 | | | | | | | | | 12,845 | | | | | | | |
Total liabilities | | | 1,153,403 | | | | | | | | | 1,037,840 | | | | | | | |
Shareholders' equity | | | 108,143 | | | | | | | | | 94,617 | | | | | | | |
Total liabilities and shareholders' equity | | $ | 1,261,546 | | | | | | | | $ | 1,132,457 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | $ | 13,636 | | | | | | | | $ | 12,745 | | | | |
Net interest spread | | | | | | | | | 3.71 | % | | | | | | | | 4.15 | % |
Net interest margin | | | | | | | | | 4.64 | % | | | | | | | | 4.86 | % |
_______________________________
(2) | Other investments include Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust. |
The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between changes in outstanding balances and changes in interest rates for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.
| | Three Months Ended March 31, | |
| | 2007 vs 2006 | |
| | Increase (Decrease) | | | |
| | Due to | | | |
| | Volume | | Rate | | Total | |
| | (Dollars in thousands) | |
| | | | | | | |
Interest-earning assets: | | | | | | | |
Loans | | $ | 3,419 | | $ | 779 | | $ | 4,198 | |
Taxable securities | | | (412 | ) | | 67 | | | (345 | ) |
Tax-exempt securities | | | (121 | ) | | - | | | (121 | ) |
Other investments | | | 7 | | | 6 | | | 13 | |
Federal funds sold and other short-term investments | | | 159 | | | 171 | | | 330 | |
Total increase in interest income | | | 3,052 | | | 1,023 | | | 4,075 | |
| | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | |
Interest-bearing demand deposits | | | (26 | ) | | 62 | | | 36 | |
Savings and money market accounts | | | 146 | | | 427 | | | 573 | |
Time deposits | | | 761 | | | 1,813 | | | 2,574 | |
Junior subordinated debentures | | | - | | | - | | | - | |
Other borrowings | | | - | | | 1 | | | 1 | |
Total increase in interest expense | | | 881 | | | 2,303 | | | 3,184 | |
| | | | | | | | | | |
Increase (decrease) in net interest income | | $ | 2,171 | | $ | (1,280 | ) | $ | 891 | |
Provision for Loan Losses. Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses for the three months ended March 31, 2007 was $137,000, a decrease of approximately $121,000, compared to $258,000 for the same period in 2006. The decrease was primarily due to improvement in asset quality as indicated by the increase in the ratio of allowance for loan losses to net nonperforming loans from 145.88% at March 31, 2006 to 236.25% at March 31, 2007. The allowance for loan losses as a percent of total loans (net of unearned discounts, interest, and deferred fees) at March 31, 2007 and 2006 was 1.18% and 1.75%, respectively.
Noninterest Income. Noninterest income for the three months ended March 31, 2007 was $1.7 million, a decrease of approximately $253,000 compared to $1.9 million for the same period in 2006. The decrease was primarily due to a decrease in service fees. Service fees decreased as a result of fewer NSF service charges, an increase in the earnings credit on commercial demand deposit accounts, and a reduction in check cashing fees.
Noninterest Expense. Total noninterest expense for the three months ended March 31, 2007 was $10.2 million, an increase of approximately $714,000 or 7.5% compared to $9.5 million for the same quarter in 2006. Salaries and benefits expense for the three months ended March 31, 2007 was $5.7 million, up $456,000 compared with $5.3 million for the same period in 2006. The increase was primarily due to an increase in personnel at Metro United.
Occupancy and equipment expense for the three months ended March 31, 2007 was $2.0 million, up $426,000 or 27.6% compared with $1.5 million for the same period in 2006. The increase was due to the opening of new branches in California and in Texas, and the opening of the representative office in China during the fourth quarter of 2006.
Other noninterest expense for the three months ended March 31, 2007 was $2.5 million, down $167,000 compared with $2.6 million for the same period in 2006. The decrease was primarily due to a decrease in accounting fees, consulting fees, and legal fees.
The Company’s efficiency ratio for the three months ended March 31, 2007 was 66.82%, an increase from 64.86% for the same quarter in 2006, and was primarily due to increased non-interest expenses as a result of growth in California.
Income Taxes. Income tax expense for the three months ended March 31, 2007 was $1.9 million, compared with $1.7 million for the same period in 2006. The Company’s effective tax rate was 37.4% and 34.0% for the three months ended March 31, 2007 and 2006, respectively. The increase in the effective tax rate is attributed to the effects of the Texas margin tax, which replaced the existing Texas franchise tax in 2007. The effective tax rate is also affected by the amount of tax-exempt income in relation to taxable income.
Financial Condition
Loan Portfolio. Total loans at March 31, 2007 were $1.01 billion, an increase of $119.7 million or 13.5% compared with $886.6 million at December 31, 2006. Compared to the loan level at December 31, 2006, real estate loans increased $85.6 million or 16.6% during the three months ended March 31, 2007. At March 31, 2007 and December 31, 2006, the ratio of total loans to total deposits was 92.26%, and 81.96%, respectively. At the same dates, total loans represented 78.8% and 69.9% of total assets, respectively.
The following table summarizes the loan portfolio by type of loan at the dates indicated:
| | As of March 31, 2007 | | As of December 31, 2006 | |
| | Amount | | Percent | | Amount | | Percent | |
| | (Dollars in thousands) | |
| | | |
Commercial and industrial | | $ | 400,865 | | | 39.70 | % | $ | 367,072 | | | 41.25 | % |
Real estate mortgage | | | | | | | | | | | | | |
Residential | | | 7,363 | | | 0.73 | | | 4,847 | | | 0.55 | |
Commercial | | | 493,224 | | | 48.85 | | | 424,431 | | | 47.70 | |
| | | 500,587 | | | 49.58 | | | 429,278 | | | 48.25 | |
Real estate construction | | | | | | | | | | | | | |
Residential | | | 30,165 | | | 2.99 | | | 27,781 | | | 3.13 | |
Commercial | | | 70,230 | | | 6.96 | | | 58,311 | | | 6.55 | |
| | | 100,395 | | | 9.95 | | | 86,092 | | | 9.68 | |
Consumer and other | | | 7,805 | | | 0.77 | | | 7,332 | | | 0.82 | |
Gross loans | | | 1,009,652 | | | 100.00 | % | | 889,774 | | | 100.00 | % |
Unearned discounts, interest and deferred fees | | | (3,374 | ) | | | | | (3,218 | ) | | | |
Total loans | | | 1,006,278 | | | | | | 886,556 | | | | |
Allowance for loan losses | | | (11,900 | ) | | | | | (11,436 | ) | | | |
Loans, net | | $ | 994,378 | | | | | $ | 875,120 | | | | |
Nonperforming Assets. Total nonperforming assets decreased $1.9 million from $12.2 million at December 31, 2006 to $10.3 million at March 31, 2007. The decrease was primarily due to a loan payoff of $2.7 million; the addition of a $1.3 million loan secured by a retail center; and other loan payments of approximately $230,000.
As of March 31, 2007, nonperforming assets primarily consisted of $7.4 million in nonaccrual loans, $250,000 in accruing loans that were 90 days or more past due, and $2.7 million in other real estate. The increase of $221,000 in accruing loans 90 days or more past due compared to December 31, 2006 was primarily due to the delayed renewal of one matured loan. Approximately $4.2 million of nonaccrual loans are collateralized by real estate, which represented 57.2% of total nonaccrual loans at March 31, 2007. Other real estate decreased $90,000 from December 31, 2006 to March 31, 2007 as the result of the sale of a property related to a construction loan secured by several single-family residences.
Net nonperforming assets at March 31, 2007 were $7.7 million compared to $9.3 million at December 31, 2006, a decrease of $1.6 million or 17.6%. The ratios for net nonperforming assets to total loans and other real estate at March 31, 2007 and December 31, 2006 were 0.76% and 1.05%, respectively. The ratios for net nonperforming assets to total assets were 0.60% and 0.74% for the same periods, respectively. These ratios take into consideration guarantees from the United States Department of Commerce’s Small Business Administration (the “SBA”), the Export Import Bank of the United States (the “Ex-Im Bank”), an independent agency of the United States Government, and the Overseas Chinese Community Guaranty Fund (“OCCGF”), an agency sponsored by the government of Taiwan, which totaled $2.6 million at March 31, 2007 compared to $2.9 million at December 31, 2006.
The Company is occasionally involved in the sale of certain federally guaranteed loans into the secondary market with servicing retained. Under the terms of the SBA program, the Company may repurchase any loan that may become classified as nonperforming. Any repurchased loans may increase the Company’s nonperforming loans until the time at which the loan repurchased is either restored to an accrual status or the Company files a claim with the SBA for the guaranteed portion of the loan.
The following table presents information regarding nonperforming assets as of the dates indicated:
| | As of | | As of | |
| | March 31, 2007 | | December 31, 2006 | |
| | (Dollars in thousands) | |
Nonaccrual loans | | $ | 7,383 | | $ | 9,414 | |
Accruing loans 90 days or more past due | | | 250 | | | 29 | |
Other real estate (“ORE”) and other assets repossessed (“OAR”) | | | 2,657 | | | 2,747 | |
Total nonperforming assets | | | 10,290 | | | 12,190 | |
Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF | | | (2,596 | ) | | (2,857 | ) |
Total net nonperforming assets | | $ | 7,694 | | $ | 9,333 | |
| | | | | | | |
Total nonperforming assets to total assets | | | 0.81 | % | | 0.96 | % |
Total nonperforming assets to total loans and ORE/OAR | | | 1.02 | % | | 1.37 | % |
Net nonperforming assets to total assets (1) | | | 0.60 | % | | 0.74 | % |
Net nonperforming assets to total loans and ORE/OAR (1) | | | 0.76 | % | | 1.05 | % |
______________________________
(1) | Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. |
A loan is considered impaired, based on current information and events, if management believes that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement. An insignificant delay or insignificant shortfall in the amount of payment does not require a loan to be considered impaired. If the measure of the impaired loan is less than the recorded investment in the loan, a specific reserve is established for the shortfall as a component of the Company’s allowance for loan loss methodology. The Company considers all nonaccrual loans to be impaired.
The following is a summary of loans considered to be impaired as of the dates indicated:
| | As of March 31, 2007 | | As of December 31, 2006 | |
| | (Dollars in thousands) | |
Impaired loans with no SFAS No. 114 valuation reserve | | $ | 4,608 | | $ | 6,715 | |
Impaired loans with a SFAS No. 114 valuation reserve | | | 2,775 | | | 2,699 | |
Total recorded investment in impaired loans | | $ | 7,383 | | $ | 9,414 | |
| | | | | | | |
Valuation allowance related to impaired loans | | $ | 1,075 | | $ | 900 | |
The average recorded investment in impaired loans during the three months ended March 31, 2007 and the year ended December 31, 2006 was $9.1 million and $12.1 million, respectively. Interest income on impaired loans of $33,000 was recognized for cash payments received during the three months ended March 31, 2007.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At March 31, 2007 and 2006, the allowance for loan losses was $11.9 million and $13.7 million, respectively, or 1.18% and 1.75% of total loans, respectively. At December 31, 2006, the allowance for loan losses was $11.4 million, or 1.29% of total loans. Net recoveries for the three months ended March 31, 2007 and 2006 were $ 327,000 and $302,000, respectively.
The allowance for loan losses provides for the risk of losses inherent in the lending process. 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, (2) specific reserves on larger individual credits that are based on the difference between the current loan balance and the loan’s observable market price, (3) an unallocated component that reflects the inherent uncertainty of estimates and unforeseen events that allow MetroBank and Metro United to fully capture probable losses in the loan portfolio, and (4) a reserve for unfunded lending commitments. 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 including changes in past due levels, criticized and non-performing loans, and charge-offs.
In setting the general reserve portion of the allowance for loan losses, the factors the Company may consider include, but are not limited to, changes in the quality of the loan portfolio as determined by loan quality grades assigned to each loan, an assessment 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, value of the collateral securing loans, payment history, cash flow analysis of borrowers and other historical information. After the aforementioned assessment of the loan portfolio, the general economic environment and other relevant factors, changes are implemented in the allowance for loan losses. While this methodology is consistently followed, future changes in circumstances, economic conditions or other factors could cause management to reevaluate the level of the allowance for loan losses.
The following table presents an analysis of the allowance for loan losses and other related data for the periods indicated:
| | As of and for the Three Months Ended March 31, | |
| | 2007 | | 2006 | |
| | (Dollars in thousands) | |
Average total loans outstanding for the period | | $ | 933,829 | | $ | 772,913 | |
Total loans outstanding at end of period | | $ | 1,006,278 | | $ | 786,693 | |
| | | | | | | |
Allowance for loan losses at beginning of period | | $ | 11,436 | | $ | 13,169 | |
Provision for loan losses | | | 137 | | | 258 | |
Charge-offs: | | | | | | | |
Commercial and industrial | | | - | | | (997 | ) |
Real estate mortgage | | | (219 | ) | | (21 | ) |
Real estate construction | | | - | | | - | |
Consumer and other | | | (7 | ) | | (79 | ) |
Total charge-offs | | | (226 | ) | | (1,097 | ) |
| | | | | | | |
Recoveries: | | | | | | | |
Commercial and industrial | | | 452 | | | 486 | |
Real estate mortgage | | | 99 | | | 851 | |
Real estate construction | | | - | | | - | |
Consumer and other | | | 2 | | | 62 | |
Total recoveries | | | 553 | | | 1,399 | |
Net recoveries (charge-offs) | | | 327 | | | 302 | |
| | | | | | | |
Allowance for loan losses at end of period | | | 11,900 | | | 13,729 | |
| | | | | | | |
Reserve for unfunded lending commitments at beginning of period | | | 793 | | | 546 | |
Provision for unfunded lending commitments | | | 126 | | | (7 | ) |
Reserve for unfunded lending commitments at end of period | | | 919 | | | 539 | |
| | | | | | | |
Allowance for credit losses | | $ | 12,819 | | $ | 14,268 | |
| | | | | | | |
Ratio of allowance for loan losses to end of period total loans | | | 1.18 | % | | 1.75 | % |
Ratio of net recoveries to average total loans | | | 0.03 | % | | 0.04 | % |
Ratio of allowance for loan losses to end of period total nonperforming loans (1) | | | 155.90 | % | | 119.17 | % |
Ratio of allowance for loan losses to end of period net nonperforming loans (2) | | | 236.25 | % | | 145.88 | % |
______________________________
(1) | Total nonperforming loans are nonaccrual loans plus loans over 90 days past due. |
(2) | Net nonperforming loans are nonaccrual loans plus loans over 90 days past due, net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. |
Securities. At March 31, 2007, the available for sale securities portfolio was $174.7 million, a decrease of $6.9 million or 3.8% compared with $181.5 million at December 31, 2006. The decrease was primarily due to principal payments and maturities on tax-free municipal bonds, mortgage-backed securities and collateralized mortgage obligations . The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, obligations of U.S. government sponsored enterprises, and tax-free municipal bonds. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan prepayments in excess of loan funding requirements. Other investments, which include Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stock and the investment in subsidiary trust, were $5.0 million at March 31, 2007 and $4.9 million at December 31, 2006.
Deposits. At March 31, 2007, total deposits were $1.09 billion, an increase of $9.1 million or 0.8% compared with $1.08 billion at December 31, 2006. However, noninterest-bearing demand deposits at March 31, 2007 decreased $7.0 million or 3.3% to $201.8 million from $208.8 million at December 31, 2006. The Company’s ratio of noninterest-bearing demand deposits to total deposits at March 31, 2007 and December 31, 2006 was 18.5% and 19.3%, respectively. Interest-bearing deposits at March 31, 2007 were $889.0 million, an increase of $16.1 million or 1.8% compared with $872.9 million at December 31, 2006.
Junior Subordinated Debentures. Junior subordinated debentures at March 31, 2007 and December 31, 2006 were $36.1 million. The junior subordinated debentures accrue interest at a fixed rate of 5.7625% until December 15, 2010, at which time the debentures will accrue interest at a floating rate equal to the 3-month LIBOR plus 1.55%. The debentures mature on December 15, 2035, but are redeemable at the Company’s option at par plus accrued and unpaid interest on or after December 15, 2010. The net proceeds to the Company from the sale of the debentures to the Company’s subsidiary trust, MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United.
Other Borrowings. Other borrowings at March 31, 2007 were $25.8 million, a decrease of approximately $514,000 or 2.0% compared to other borrowings of $26.3 million at December 31, 2006. The Company has two ten-year loans totaling $25.0 million from the FHLB of Dallas, maturing in September 2008, to diversify its funding sources. The ten-year loans bear interest at an average rate of 4.99% per annum and are callable quarterly at the discretion of the FHLB.
The following table provides an analysis of the Company’s other borrowings as of the dates and for the periods indicated:
| | As of and for the Three Months Ended March 31, 2007 | | As of and for the Year Ended December 31, 2006 | |
| | (Dollars in thousands) | |
FHLB notes: | | | | | |
at end of period | | $ | 25,000 | | $ | 25,000 | |
average during the period | | | 25,901 | | | 25,247 | |
maximum month-end balance during the period | | | 25,000 | | | 25,000 | |
Interest rate at end of period | | | 4.99 | % | | 4.99 | % |
Interest rate during the period | | | 5.07 | | | 5.05 | |
Federal Reserve TT&L: | | | | | | | |
at end of period | | $ | 802 | | $ | 1,316 | |
average during the period | | | 794 | | | 702 | |
maximum month-end balance during the period | | | 802 | | | 1,316 | |
Liquidity. The Company’s loan to deposit ratio at March 31, 2007 and 2006 was 92.3% and 81.0%, respectively. As of this same date, the Company had commitments to fund loans in the amount of $267.4 million. At March 31, 2007, the Company had stand-by letters of credit of $7.1 million, for which the Company has recorded a liability of $17,000 for the fair value of the Company’s probable obligations. Available sources to fund these commitments and other cash demands of the Company come from loan and investment securities repayments, deposit inflows, and unsecured lines of credit from the FHLBs of Dallas and San Francisco as well as the FRB discount window. With its current level of collateral, the Company has the ability to borrow an additional $383.0 million from the FHLBs, $7.7 million from the FRB discount window, and $10.5 million from other correspondent banks.
Capital Resources. Shareholders’ equity at March 31, 2007 was $109.4 million compared to $105.9 million at December 31, 2006, an increase of approximately $3.5 million. This increase was primarily the combined result of $3.1 million in net income, and an increase in additional paid-in capital of $320,000 due to the effect of dividend reinvestment and stock-based compensation, partially offset by dividend payments of approximately $438,000, and a decrease in accumulated other comprehensive loss of $367,000.
The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of March 31, 2007 to the minimum and well-capitalized regulatory standards:
| | Minimum Required For Capital Adequacy Purposes | | To Be Categorized as Well Capitalized Under Prompt Corrective Action Provisions | | Actual Ratio At March 31, 2007 |
The Company | | | | | | | | | |
Leverage ratio | | 4.00 | %(1) | | N/A | % | | 9.49 | % |
Tier 1 risk-based capital ratio | | 4.00 | | | N/A | | | 10.50 | |
Risk-based capital ratio | | 8.00 | | | N/A | | | 12.23 | |
MetroBank | | | | | | | | | |
Leverage ratio | | 4.00 | %(2) | | 5.00 | % | | 9.75 | % |
Tier 1 risk-based capital ratio | | 4.00 | | | 6.00 | | | 11.02 | |
Risk-based capital ratio | | 8.00 | | | 10.00 | | | 12.16 | |
Metro United | | | | | | | | | |
Leverage ratio | | 4.00 | %(3) | | 5.00 | % | | 9.79 | % |
Tier 1 risk-based capital ratio | | 4.00 | | | 6.00 | | | 9.95 | |
Risk-based capital ratio | | 8.00 | | | 10.00 | | | 11.10 | |
_________________________________
(1) | The Federal Reserve Board may require the Company to maintain a leverage ratio above the required minimum. |
(2) | The OCC may require MetroBank to maintain a leverage ratio above the required minimum. |
(3) | The FDIC may require Metro United to maintain a leverage ratio above the required minimum. |
Critical Accounting Estimates
The Company has established various accounting estimates which govern the application of accounting principles generally accepted in the United States in the preparation of the Company’s consolidated financial statements. Certain accounting estimates involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting estimates to be critical accounting estimates. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.
The Company believes the allowance for loan losses is a critical accounting estimate that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. The Company’s allowance for possible loan loss methodology is based on guidance provided in SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” and includes allowance allocations calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS 118, and allowance allocations determined in accordance with SFAS No. 5, “Accounting for Contingencies.” In estimating the allowance for loan losses, management reviews the effect of changes in the local real estate market on collateral values, the effect of current economic indicators on the loan portfolio and their probable impact on borrowers and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management’s estimate of the allowance to increase or decrease and result in adjustments to the Company’s provision for loan losses. See — “Financial Condition — Allowance for Loan Losses and the Reserve for Unfunded Lending Commitments”.
The Company believes goodwill is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. Goodwill is recorded for the excess of the purchase price over the fair value of identifiable net assets, including core deposit intangibles, acquired through a merger transaction. Goodwill is not amortized, but instead will be tested for impairment at least annually using both a discounted cash flow analysis and a review of the valuation of recent bank acquisitions. The discounted cash flow analysis utilizes a risk-free interest rate, estimates of future cash flow and probabilities as to the occurrence of the future cash flows. Other acquired intangible assets determined to have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, an impairment test will be performed periodically on these amortizing intangible assets.
The Company believes stock-based compensation is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R. The Company uses the Black-Scholes option-pricing model 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 income.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the market risk information previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. See Form 10-K, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Interest Rate Sensitivity and Liquidity.”
Item4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective.
Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various litigation that arises from time to time 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, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
Exhibit Number | | Identification of Exhibit |
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 Amended and Restated 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, 2006). |
| | |
3.3 | | - Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Registration Statement). |
| | |
4 | | - Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement). |
| | |
11 | | - Computation of Earnings Per Common Share, included as Note (5) to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q. |
| | |
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, 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, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
__________________
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| METROCORP BANCSHARES, INC. | |
| | |
| By: | /s/ George M. Lee | |
| | George M. Lee | |
| | Chief Executive Officer (principal executive officer) | |
|
| | |
Date: May 9, 2007 | By: | /s/ David C. Choi | |
| | David C. Choi | |
| | Chief Financial Officer (principal financial officer/ principal accounting officer) | |
EXHIBIT INDEX
Exhibit Number | | Identification of Exhibit |
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 Amended and Restated 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, 2006). |
| | |
3.3 | | - Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Registration Statement). |
| | |
4 | | - Specimen form of certificate evidencing the Common Stock (incorporated herein by reference to Exhibit 4 to the Registration Statement). |
| | |
11 | | - Computation of Earnings Per Common Share, included as Note (5) to the unaudited Condensed Consolidated Financial Statements of this Form 10-Q. |
| | |
| | - Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| | |
| | - Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| | |
| | - Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | - Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
__________________
* Filed herewith.
** Furnished herewith.