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 JUNE 30, 2009 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-25141
________________
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer £ | Accelerated Filer R |
Non-accelerated Filer £ (Do not check if a smaller reporting company) | Smaller Reporting Company £ |
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 August 4, 2009, the number of outstanding shares of Common Stock was 10,926,315.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
June 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 24,111 | $ | 26,383 | ||||
Federal funds sold and other short-term investments | 43,185 | 11,718 | ||||||
Total cash and cash equivalents | 67,296 | 38,101 | ||||||
Securities available-for-sale, at fair value | 121,855 | 102,104 | ||||||
Securities held-to-maturity (fair value $3,132 at June 30, 2009) | 3,044 | – | ||||||
Other investments | 17,545 | 29,220 | ||||||
Loans, net of allowance for loan losses of $24,266 and $24,235, respectively | 1,297,212 | 1,321,813 | ||||||
Accrued interest receivable | 5,770 | 5,946 | ||||||
Premises and equipment, net | 6,596 | 7,368 | ||||||
Goodwill | 21,827 | 21,827 | ||||||
Core deposit intangibles | 417 | 506 | ||||||
Customers' liability on acceptances | 4,492 | 8,012 | ||||||
Foreclosed assets, net | 23,649 | 4,825 | ||||||
Other assets | 42,867 | 40,516 | ||||||
Total assets | $ | 1,612,570 | $ | 1,580,238 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 209,910 | $ | 204,107 | ||||
Interest-bearing | 1,163,529 | 1,065,046 | ||||||
Total deposits | 1,373,439 | 1,269,153 | ||||||
Junior subordinated debentures | 36,083 | 36,083 | ||||||
Other borrowings | 27,574 | 139,046 | ||||||
Accrued interest payable | 1,589 | 1,279 | ||||||
Acceptances outstanding | 4,492 | 8,012 | ||||||
Other liabilities | 6,633 | 7,506 | ||||||
Total liabilities | 1,449,810 | 1,461,079 | ||||||
Commitments and contingencies | – | – | ||||||
Shareholders' equity: | ||||||||
Preferred stock, $1.00 par value, 2,000,000 shares authorized; 45,000 shares issued and outstanding at June 30, 2009 and none at December 31, 2008 | 44,647 | – | ||||||
Common stock, $1.00 par value, 50,000,000 shares authorized; 10,994,965 shares issued and 10,926,315 and 10,885,081 shares outstanding at June 30, 2009 and December 31, 2008, respectively | 10,995 | 10,995 | ||||||
Additional paid-in-capital | 28,749 | 28,222 | ||||||
Retained earnings | 79,892 | 82,311 | ||||||
Accumulated other comprehensive loss | (603 | ) | (910 | ) | ||||
Treasury stock, at cost, 68,650 and 109,884 shares at June 30, 2009 and December 31, 2008, respectively | (920 | ) | (1,459 | ) | ||||
Total shareholders' equity | 162,760 | 119,159 | ||||||
Total liabilities and shareholders' equity | $ | 1,612,570 | $ | 1,580,238 |
See accompanying notes to condensed consolidated financial statements
2
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income: | ||||||||||||||||
Loans | $ | 20,747 | $ | 23,020 | $ | 41,137 | $ | 46,420 | ||||||||
Securities: | ||||||||||||||||
Taxable | 999 | 1,276 | 2,083 | 2,648 | ||||||||||||
Tax-exempt | 77 | 64 | 125 | 137 | ||||||||||||
Other investments | 154 | 95 | 297 | 182 | ||||||||||||
Federal funds sold and other short-term investments | 77 | 146 | 121 | 283 | ||||||||||||
Total interest income | 22,054 | 24,601 | 43,763 | 49,670 | ||||||||||||
Interest expense: | ||||||||||||||||
Time deposits | 5,439 | 6,830 | 11,304 | 14,431 | ||||||||||||
Demand and savings deposits | 2,195 | 1,902 | 4,429 | 3,967 | ||||||||||||
Junior subordinated debentures | 520 | 520 | 1,040 | 1,040 | ||||||||||||
Subordinated debentures and other borrowings | 236 | 880 | 528 | 1,768 | ||||||||||||
Total interest expense | 8,390 | 10,132 | 17,301 | 21,206 | ||||||||||||
Net interest income | 13,664 | 14,469 | 26,462 | 28,464 | ||||||||||||
Provision for loan losses | 1,827 | 1,465 | 9,114 | 3,049 | ||||||||||||
Net interest income after provision for loan losses | 11,837 | 13,004 | 17,348 | 25,415 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service fees | 1,086 | 1,206 | 2,175 | 2,449 | ||||||||||||
Loan-related fees | 161 | 183 | 293 | 364 | ||||||||||||
Letters of credit commissions and fees | 258 | 295 | 513 | 562 | ||||||||||||
Gain on securities transactions, net | 9 | 124 | 9 | 148 | ||||||||||||
Gain on sale of loans | – | 194 | – | 245 | ||||||||||||
Other noninterest income | 424 | 376 | 878 | 739 | ||||||||||||
Total noninterest income | 1,938 | 2,378 | 3,868 | 4,507 | ||||||||||||
Noninterest expenses: | ||||||||||||||||
Salaries and employee benefits | 5,243 | 5,931 | 10,631 | 12,417 | ||||||||||||
Occupancy and equipment | 2,000 | 1,982 | 3,992 | 3,941 | ||||||||||||
Foreclosed assets, net | 997 | (389 | ) | 1,420 | (332 | ) | ||||||||||
Impairment on securities | 940 | 1,540 | 1,180 | 1,540 | ||||||||||||
Less: Noncredit portion of other-than-temporary impairments (“OTTI”) | (881 | ) | – | (881 | ) | – | ||||||||||
Net impairments on securities | 59 | 1,540 | 299 | 1,540 | ||||||||||||
FDIC assessment | 1,413 | 98 | 1,685 | 183 | ||||||||||||
Other noninterest expense | 2,421 | 2,636 | 4,677 | 5,012 | ||||||||||||
Total noninterest expenses | 12,133 | 11,798 | 22,704 | 22,761 | ||||||||||||
Income (loss) before provision for income taxes | 1,642 | 3,584 | (1,488 | ) | 7,161 | |||||||||||
Provision (benefit) for income taxes | 490 | 1,316 | (606 | ) | 2,658 | |||||||||||
Net income (loss) | $ | 1,152 | $ | 2,268 | $ | (882 | ) | $ | 4,503 | |||||||
Dividends – preferred stock | 562 | – | 1,031 | – | ||||||||||||
Net income (loss) available to common shareholders | $ | 590 | $ | 2,268 | $ | (1,913 | ) | $ | 4,503 | |||||||
Earnings (loss) per common share: | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.21 | $ | (0.18 | ) | $ | 0.42 | |||||||
Diluted | $ | 0.05 | $ | 0.21 | $ | (0.18 | ) | $ | 0.41 | |||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 10,906 | 10,819 | 10,891 | 10,815 | ||||||||||||
Diluted | 10,912 | 10,899 | 10,894 | 10,900 | ||||||||||||
Dividends per common share | $ | – | $ | 0.04 | $ | 0.04 | $ | 0.08 |
See accompanying notes to condensed consolidated financial statements
3
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) | $ | 1,152 | $ | 2,268 | $ | (882 | ) | $ | 4,503 | |||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Unrealized (loss) gain on investment securities, net: | ||||||||||||||||
Securities with OTTI charges during the period | (602 | ) | (986 | ) | (755 | ) | (986 | ) | ||||||||
Less: OTTI charges recognized in net income | (38 | ) | (986 | ) | (191 | ) | (986 | ) | ||||||||
Net unrealized losses on investment securities with OTTI | (564 | ) | – | (564 | ) | – | ||||||||||
Unrealized holding (loss) gain arising during the period | 37 | (629 | ) | 877 | (68 | ) | ||||||||||
Less: reclassification adjustment for gain included in net income | 6 | 79 | 6 | 95 | ||||||||||||
Net unrealized gains (losses) on investment securities | 31 | (708 | ) | 871 | (163 | ) | ||||||||||
Other comprehensive income (loss) | (533 | ) | (708 | ) | 307 | (163 | ) | |||||||||
Total comprehensive income (loss) | $ | 619 | $ | 1,560 | $ | (575 | ) | $ | 4,340 |
See accompanying notes to condensed consolidated financial statements
4
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2009
(In thousands)
(Unaudited)
Preferred Stock | Common Stock | Additional | Accumulated other | Treasury | ||||||||||||||||||||||||||||||||
Shares | At par | Shares | At par | paid-in capital | Retained earnings | comprehensive income (loss) | stock, at cost | Total | ||||||||||||||||||||||||||||
Balance at December 31, 2008 | – | $ | – | 10,885 | $ | 10,995 | $ | 28,222 | $ | 82,311 | $ | (910 | ) | $ | (1,459 | ) | $ | 119,159 | ||||||||||||||||||
Issuance of preferred stock and warrant, at fair value | 45 | 44,289 | – | – | 711 | – | – | – | 45,000 | |||||||||||||||||||||||||||
Re-issuance of treasury stock | – | – | 42 | – | (373 | ) | – | – | 542 | 169 | ||||||||||||||||||||||||||
Stock-based compensation expense related to stock options recognized in earnings | – | – | – | – | 304 | – | – | – | 304 | |||||||||||||||||||||||||||
Net loss | – | – | – | – | – | (882 | ) | – | – | (882 | ) | |||||||||||||||||||||||||
Amortization of preferred stock discount | – | 71 | – | – | – | (71 | ) | – | – | – | ||||||||||||||||||||||||||
Shortfall from restricted shares | – | – | – | – | (115 | ) | – | – | – | (115 | ) | |||||||||||||||||||||||||
Forfeiture of restricted shares | – | – | (1 | ) | – | – | – | – | (3 | ) | (3 | ) | ||||||||||||||||||||||||
Other comprehensive income | – | – | – | – | – | – | 307 | – | 307 | |||||||||||||||||||||||||||
Dividends – preferred stock | – | 287 | – | – | – | (1,031 | ) | – | – | (744 | ) | |||||||||||||||||||||||||
Dividends – common stock ($0.04 per share) | – | – | – | – | – | (435 | ) | – | – | (435 | ) | |||||||||||||||||||||||||
Balance at June 30, 2009 | 45 | $ | 44,647 | 10,926 | $ | 10,995 | $ | 28,749 | $ | 79,892 | $ | (603 | ) | $ | (920 | ) | $ | 162,760 |
See accompanying notes to condensed consolidated financial statements
5
METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended June 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (882 | ) | $ | 4,503 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation | 989 | 1,062 | ||||||
Provision for loan losses | 9,114 | 3,049 | ||||||
Impairment on securities | 299 | 1,540 | ||||||
Gain on securities transactions, net | (9 | ) | (148 | ) | ||||
Loss (gain) on sale of foreclosed assets | 328 | (447 | ) | |||||
Loss on sale of premises and equipment | (11 | ) | 9 | |||||
Gain on sale of loans, net | – | (245 | ) | |||||
Amortization of premiums and discounts on securities, net | (43 | ) | 29 | |||||
Amortization of deferred loan fees and discounts | (1,049 | ) | (1,269 | ) | ||||
Amortization of core deposit intangibles | 89 | 125 | ||||||
Stock-based compensation | 186 | 553 | ||||||
Changes in: | ||||||||
Accrued interest receivable | 176 | 408 | ||||||
Other assets | (2,543 | ) | (2,364 | ) | ||||
Accrued interest payable | 310 | (383 | ) | |||||
Other liabilities | (439 | ) | 514 | |||||
Net cash provided by operating activities | 6,515 | 6,936 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of securities available-for-sale | (36,401 | ) | (14,996 | ) | ||||
Purchases of securities held-to-maturity | (3,044 | ) | – | |||||
Purchases of other investments | (1,066 | ) | (2,972 | ) | ||||
Proceeds from sales of securities available-for-sale | – | 4,196 | ||||||
Proceeds from maturities, calls, and principal paydowns of securities available-for-sale | 16,902 | 31,276 | ||||||
Proceeds from sales and maturities of other investments | 12,741 | 653 | ||||||
Net change in loans | (10,025 | ) | (111,024 | ) | ||||
Proceeds from sale of foreclosed assets | 7,409 | 1,921 | ||||||
Proceeds from sale of premises and equipment | 11 | 7 | ||||||
Purchases of premises and equipment | (217 | ) | (506 | ) | ||||
Net cash used in investing activities | (13,690 | ) | (91,445 | ) | ||||
Cash flows from financing activities: | ||||||||
Net change in: | ||||||||
Deposits | 104,286 | 51,658 | ||||||
Other borrowings | (111,472 | ) | 56,802 | |||||
Proceeds from issuance of preferred stock with common stock warrant | 45,000 | – | ||||||
Re-issuance of treasury stock | 169 | 307 | ||||||
Cash dividends paid on preferred stock | (744 | ) | – | |||||
Cash dividends paid on common stock | (869 | ) | (865 | ) | ||||
Net cash provided by financing activities | 36,370 | 107,902 | ||||||
Net increase in cash and cash equivalents | 29,195 | 23,393 | ||||||
Cash and cash equivalents at beginning of period | 38,101 | 46,270 | ||||||
Cash and cash equivalents at end of period | $ | 67,296 | $ | 69,663 |
See accompanying notes to condensed consolidated financial statements
6
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 the greater Houston and Dallas, Texas metropolitan areas, and Metro United is engaged in commercial banking activities through its six branches in the San Diego, Los Angeles and San Francisco, California metropolitan areas. 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 of America. 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 June 30, 2009, results of operations for the three and six months ended June 30, 2009 and 2008, and cash flows for the six months ended June 30, 2009 and 2008. Interim period results are not necessarily indicative of results for a full-year period. The Company has evaluated subsequent events for potential recognition and/or disclosure through August 10, 2009, which is the date the financial statements included in this Quarterly Report on Form 10-Q were issued.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2008.
2. | SECURITIES |
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The Company adopted this guidance on April 1, 2009. Under FSP FAS 115-2 and FAS 124-2, 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). Unrealized gains or losses on securities for which an OTTI has been recognized in earnings is tracked as a separate component of accumulated other comprehensive income (loss). FSP FAS 115-2 and FAS 124-2 does not impact equity securities. Prior to the adoption of FSP FAS 115-2 and FAS 124-2, an OTTI recognized in earnings for debt securities was equal to the total difference between amortized cost and fair value at the time of impairment.
For debt securities, the split between the amount of an OTTI recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates including prepayment assumptions, are based on data from widely accepted third-party data sources. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The Company has developed these estimates using information based on historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security.
7
The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an OTTI, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. For debt securities, the discount (or reduced premium) based on the new cost basis may be accreted into net investment income in future periods based on prospective changes in cash flow estimates, to reflect adjustments to the effective yield.
For equity securities, the Company evaluates whether unrealized losses on securities represent impairment that is other than temporary. If such impairment is identified, the carrying amount of the security is reduced with a charge to earnings. In making this evaluation, management first considers the reasons for the indicated impairment. These could include changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, and changes in the market’s perception of the issuer’s financial health and the security’s credit quality. The Company then considers the likelihood of a recovery in fair value sufficient to eliminate the indicated impairment and the length of time over which an anticipated recovery would occur. Finally, the Company determines its ability to hold the impaired security until an anticipated recovery, in which case the impairment would be considered temporary.
Prior to the adoption of FSP FAS 115-2 and FAS 124-2 the Company recorded an OTTI charge of $225,000 for mortgage-backed securities and $15,000 for asset-backed securities for the three months ended March 31, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 had no effect on previously recognized OTTI as of March 31, 2009. During the second quarter of 2009, the Company recorded a $59,000 write down of investment securities through earnings for OTTI and the noncredit-related OTTI on securities of $881,000 was recognized through other comprehensive income, a component of equity.
8
The amortized cost and approximate fair value of securities is as follows:
As of June 30, 2009 | ||||||||||||||||||||
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 | $ | 43,268 | $ ─ | $ | (110 | ) | $ ─ | $ | 43,158 | |||||||||||
Obligations of state and political subdivisions | 3,112 | 30 | (4 | ) | ─ | 3,138 | ||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | ||||||||||||||||||||
Government issued or guaranteed | 65,122 | 1,155 | (112 | ) | ─ | 66,165 | ||||||||||||||
Privately issued residential | 4,883 | ─ | (1,117 | ) | (603 | ) | 3,163 | |||||||||||||
Asset backed securities | 505 | ─ | ─ | (278 | ) | 227 | ||||||||||||||
Equity Securities | ||||||||||||||||||||
Investment in CRA funds | 5,908 | 96 | ─ | ─ | 6,004 | |||||||||||||||
Total available-for-sale securities | $ | 122,798 | $ | 1,281 | $ | (1,343 | ) | $ | (881 | ) | $ | 121,855 | ||||||||
Securities held-to-maturity | ||||||||||||||||||||
Obligations of state and political subdivisions | $ | 3,044 | $ | 114 | $ | (26 | ) | $ ─ | $ | 3,132 | ||||||||||
Total held-to-maturity securities | $ | 3,044 | $ | 114 | $ | (26 | ) | $ ─ | $ | 3,132 | ||||||||||
Other investments | ||||||||||||||||||||
Investment in CDARS | $ | 10,355 | $ ─ | $ ─ | $ ─ | $ | 10,355 | |||||||||||||
FHLB/Federal Reserve Bank stock | 6,107 | ─ | ─ | ─ | 6,107 | |||||||||||||||
Investment in subsidiary trust | 1,083 | ─ | ─ | ─ | 1,083 | |||||||||||||||
Total other investments | $ | 17,545 | $ ─ | $ ─ | $ ─ | $ | 17,545 |
9
As of December 31, 2008 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Securities available-for-sale | ||||||||||||||||
Debt Securities | ||||||||||||||||
U.S. Treasury and other U.S. government corporations and agencies | $ | 14,908 | $ | 179 | $ ─ | $ | 15,087 | |||||||||
Obligations of state and political subdivisions | 3,853 | 24 | ─ | 3,877 | ||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | ||||||||||||||||
Government issued or guaranteed | 72,787 | 555 | (956 | ) | 72,386 | |||||||||||
Privately issued residential | 5,639 | 19 | (1,299 | ) | 4,359 | |||||||||||
Asset backed securities | 550 | ─ | ─ | 550 | ||||||||||||
Equity Securities | ||||||||||||||||
Investment in CRA funds | 5,809 | 36 | ─ | 5,845 | ||||||||||||
Total available-for-sale securities | $ | 103,546 | $ | 813 | $ | (2,255 | ) | $ | 102,104 | |||||||
Securities held-to-maturity | ||||||||||||||||
Obligations of state and political subdivisions | $ ─ | $ ─ | $ ─ | $ ─ | ||||||||||||
Total held-to-maturity securities | $ ─ | $ ─ | $ ─ | $ ─ | ||||||||||||
Other investments | ||||||||||||||||
Investment in CDARS | $ | 20,240 | $ ─ | $ ─ | $ | 20,240 | ||||||||||
FHLB/Federal Reserve Bank stock | 7,897 | ─ | ─ | 7,897 | ||||||||||||
Investment in subsidiary trust | 1,083 | ─ | ─ | 1,083 | ||||||||||||
Total other investments | $ | 29,220 | $ ─ | $ ─ | $ | 29,220 |
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.
10
The following table displays the gross unrealized losses and fair value of securities available-for-sale and held-to-maturity as of June 30, 2009 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 | ||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||
U.S. Treasury and other U.S. government corporations and agencies | $ | 43,157 | $ | (110 | ) | $ ─ | $ ─ | $ | 43,157 | $ | (110 | ) | ||||||||||||
Obligations of state and political subdivisions | 380 | (4 | ) | ─ | ─ | 380 | (4 | ) | ||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | ||||||||||||||||||||||||
Government issued or guaranteed | 5,594 | (71 | ) | 1,684 | (41 | ) | 7,278 | (112 | ) | |||||||||||||||
Privately issued residential | 2,969 | (1,720 | ) | ─ | ─ | 2,969 | (1,720 | ) | ||||||||||||||||
Asset backed securities | 227 | (278 | ) | ─ | ─ | 227 | (278 | ) | ||||||||||||||||
Total available-for-sale securities | $ | 52,327 | $ | (2,183 | ) | $ | 1,684 | $ | (41 | ) | $ | 54,011 | $ | (2,224 | ) | |||||||||
Securities held-to-maturity | ||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 974 | $ | (26 | ) | $ ─ | $ ─ | $ | 974 | $ | (26 | ) | ||||||||||||
Total held-to-maturity securities | $ | 974 | $ | (26 | ) | $ ─ | $ ─ | $ | 974 | $ | (26 | ) |
Other-Than-Temporary Impairments (OTTI)
During the six months ended June 30, 2009, OTTI charges of $1.2 million were recorded. The credit-related portion of these impairments was $299,000, which was included in noninterest expense. The noncredit portion of these impairments was $881,000 and was included in accumulated other comprehensive loss as of June 30, 2009.
For the six months ended June 30, 2009, credit-related losses of $274,000 and $25,000 on 26 non-agency residential mortgage-backed securities and four asset-backed securities, respectively, were recognized. The noncredit portion of these impairments of $602,000 on non-agency residential mortgage-backed securities and $278,000 on asset-backed securities was included in accumulated other comprehensive loss as of June 30, 2009. 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.
11
The following table represents the impairment activity related to credit losses on debt securities.
Three months ended June 30, 2009 | ||||||||||||
Impairment related to credit losses | Impairment related to other factors | Total impairment | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning balance, April 1, 2009 | $ | 661 | $ ─ | $ | 661 | |||||||
Addition of OTTI that was not previously recognized | 49 | 375 | 424 | |||||||||
Reduction for securities sold during the period | ─ | ─ | ─ | |||||||||
Reduction for securities with OTTI recognized in earnings because the security might be sold before recovery of its amortized cost | ─ | ─ | ─ | |||||||||
Addition of OTTI that was previously recognized because the security might not be sold before recovery of its amortized cost basis | 10 | 506 | 516 | |||||||||
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security | ─ | ─ | ─ | |||||||||
Recovery of non-credit effects previously recognized in OTTI | ─ | ─ | ─ | |||||||||
Ending balance, June 30, 2009 | $ | 720 | $ | 881 | $ | 1,601 |
Six months ended June 30, 2009 | ||||||||||||
Impairment related to credit losses | Impairment related to other factors | Total impairment | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning balance, January 1, 2009 | $ | 421 | $ ─ | $ | 421 | |||||||
Addition of OTTI that was not previously recognized | 231 | 428 | 659 | |||||||||
Reduction for securities sold during the period | ─ | ─ | ─ | |||||||||
Reduction for securities with OTTI recognized in earnings because the security might be sold before recovery of its amortized cost | ─ | ─ | ─ | |||||||||
Addition of OTTI that was previously recognized because the security might not be sold before recovery of its amortized cost basis | 68 | 453 | 521 | |||||||||
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security | ─ | ─ | ─ | |||||||||
Recovery of non-credit effects previously recognized in OTTI | ─ | ─ | ─ | |||||||||
Ending balance, June 30, 2009 | $ | 720 | $ | 881 | $ | 1,601 |
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.
Six Months Ended June 30, | ||||||||
2009 | 2008 | |||||||
Amortized cost | $ | — | $ | 4,319 | ||||
Proceeds | — | 4,196 | ||||||
Gross realized gains | — | 123 | ||||||
Gross realized losses | — | — |
At June 30, 2009, future contractual maturities of debt securities were as follows (in thousands):
Securities | Securities | |||||||||||||||
Available-for-sale | Held-to-maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Within one year | $ | — | $ | — | $ | — | $ | — | ||||||||
Within two to five years | 30,999 | 30,729 | — | — | ||||||||||||
Within six to ten years | 2,316 | 2,277 | — | — | ||||||||||||
After ten years | 13,570 | 13,517 | 3,044 | 3,132 | ||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | 70,005 | 69,328 | — | — | ||||||||||||
Total debt securities | $ | 116,890 | $ | 115,851 | $ | 3,044 | $ | 3,132 |
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.
12
3. | ALLOWANCE FOR LOAN AND CREDIT LOSSES |
Changes in the allowance for loan and credit losses are as follows:
As of and for the Three Months | As of and for the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands) | ||||||||||||||||
Allowance for loan losses at beginning of period | $ | 24,158 | $ | 14,588 | $ | 24,235 | $ | 13,125 | ||||||||
Provision for loan losses | 1,827 | 1,465 | 9,114 | 3,049 | ||||||||||||
Charge-offs | (2,148 | ) | (623 | ) | (9,588 | ) | (759 | ) | ||||||||
Recoveries | 429 | 90 | 505 | 105 | ||||||||||||
Allowance for loan losses at end of period | $ | 24,266 | $ | 15,520 | $ | 24,266 | $ | 15,520 | ||||||||
Reserve for unfunded lending commitments at beginning of period | 1,204 | 907 | 1,092 | 816 | ||||||||||||
Provision for unfunded lending commitments | 274 | 10 | 386 | 101 | ||||||||||||
Reserve for unfunded lending commitments at end of period | 1,478 | 917 | 1,478 | 917 | ||||||||||||
Allowance for credit losses | $ | 25,744 | $ | 16,437 | $ | 25,744 | $ | 16,437 |
4. | 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.
The Company completed its 2008 impairment testing based on information that was as of August 31, 2008. 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. The estimated fair value of Metro United as of August 31, 2008 exceeded its respective carrying value; therefore, the Company determined there was no impairment of goodwill as of that date.
As a result of the decline in the market price of the Company's stock to a level below book value during the fourth quarter of 2008 and further decline in the first quarter of 2009, and a net loss recorded by Metro United for these same quarters, and other economic factors, the Company performed additional valuations of goodwill as of December 31, 2008 and March 31, 2009.
For periods prior to the second quarter of 2009, due to a lack of guideline bank acquisitions since the last annual test date, the Company utilized a discounted cash flow analysis to determine the fair value of Metro United. Multi-year financial forecasts were developed by projecting net income for the next five years and discounting the average terminal values based on the transaction multiples such as price-to-book, price-to-tangible book, price-to-deposits in a normalized market. For the period ending March 31, 2009, 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%. In the sensitivity analysis, an 8% discount rate indicated a fair value that was $15.6 million greater than carrying value, a 12.6% discount rate indicated that the fair value and carrying value were approximately equal, and a 15% discount rate indicated a fair value that was $6.7 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 a reconciliation to 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 then compared to the carrying value of its equity. As the carrying value of its equity exceeded the fair value, an additional goodwill impairment evaluation was performed which involved calculating the implied fair value of Metro United’s goodwill.
13
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. This evaluation and resulting conclusion were significantly affected by the estimated fair value of the loans of Metro United that were evaluated, particularly the market risk adjustment that is a consequence of the current distressed market conditions. Based on this analysis, the Company determined that the implied fair value of the goodwill for Metro United was in excess of the carrying value of the goodwill; therefore, no goodwill impairment was recorded as of March 31, 2009. However, it is possible that future changes in the fair value of Metro United’s net assets could result in future goodwill impairment. For example, to the extent that market liquidity returns and the fair value of the individual assets 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, resulting in goodwill impairment. Ultimately, future potential changes in valuation assumptions may impact the estimated fair value of Metro United and cause its fair value to be below its carrying value, therefore resulting in an impairment of the goodwill.
During the second quarter of 2009, the Company performed an analysis that considered the Company’s stock price, loan values of Metro United, and other factors and determined that as of June 30, 2009, goodwill was not impaired. The Company’s stock price increased during the second quarter of 2009 and closed above the average closing price for the first quarter of 2009. The loan value of Metro United remained at the same level as the first quarter.
5. | SHAREHOLDERS’ EQUITY |
In connection with the Company's participation in the Capital Purchase Program (“CPP”), on January 16, 2009, the Company issued and sold to the U.S. Treasury (i) 45,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, with a liquidation value of $1,000 per share (the “Series A Preferred Stock”), and (ii) a warrant (“Warrant”) to purchase 771,429 shares of the Company's common stock, at an exercise price of $8.75 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $45.0 million in cash. Approximately $44.3 million was allocated to the initial carrying value of the preferred stock and $711,000 to the warrant based on their relative estimated fair values on the issue date. The fair value of the warrant was determined using a valuation model which incorporates assumptions including the Company’s common stock price, dividend yield, stock price volatility and the risk-free interest rate. The fair value of the preferred stock was determined based on assumptions regarding the discount rate for the Company which was estimated to be approximately 8% at the date of issuance. The difference between the initial carrying value of the preferred stock and the $45 million full redemption value will be accreted over five years using a straight-line method over the expected life of the preferred stock. The total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios.
The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Pursuant to Section 111 of the Emergency Economic Stabilization Act of 2008, as amended, the Company may, at its option, subject to the necessary bank regulatory approval, redeem the Series A Preferred Stock at par value plus accrued and unpaid dividends.
The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue date, the Company also may not increase its common stock dividend rate above a quarterly rate of $0.04 per share or repurchase its common shares without Treasury’s consent, unless Treasury has transferred all the preferred shares to third parties or the preferred stock has been redeemed. In April 2009, the Company suspended regular cash dividends on its common stock for an indefinite period of time.
6. | EARNINGS PER COMMON SHARE |
Basic earnings per common share (“EPS”) is computed by dividing net income (after deducting dividends on preferred stock) 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, restricted common shares and warrants can be dilutive common shares and are therefore considered in the earnings per share calculation, if dilutive. Stock options, restricted common shares and warrants that are antidilutive are excluded from earnings per share calculation. Stock options, restricted common shares and warrants are antidilutive when the exercise price is higher than the current market price of the Company’s common stock. For the three month ended June 30, 2009 and 2008, antidilutive stock options were 1,814,579 and 285,405, respectively. For the six month ended June 30, 2009 and 2008, there were 1,815,657 and 285,342 antidilutive stock options, respectively. The number of potentially dilutive common shares is determined using the treasury stock method.
14
As of and for the Three Months | As of and for the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net income (loss) available to common shareholders | $ | 590 | $ | 2,268 | $ | (1,913 | ) | $ | 4,503 | |||||||
Weighted average common shares in basic EPS | 10,906 | 10,819 | 10,891 | 10,815 | ||||||||||||
Effect of dilutive securities | 6 | 80 | 3 | 85 | ||||||||||||
Weighted average common and potentially dilutive common shares used in diluted EPS | 10,912 | 10,899 | 10,894 | 10,900 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.05 | $ | 0.21 | $ | (0.18 | ) | $ | 0.42 | |||||||
Diluted | $ | 0.05 | $ | 0.21 | $ | (0.18 | ) | $ | 0.41 |
7. | 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.
8. | 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 June 30, 2009 and December 31, 2008 is presented below:
As of June 30, 2009 | As of December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Unfunded loan commitments including unfunded lines of credit | $ | 190,075 | $ | 247,731 | ||||
Standby letters of credit | 12,626 | 9,981 | ||||||
Commercial letters of credit | 12,526 | 12,244 | ||||||
Operating leases | 6,923 | 8,065 | ||||||
Total financial instruments with off-balance sheet risk | $ | 222,150 | $ | 278,021 |
9. | 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.
15
The following is a summary of selected operating segment information as of and for the three and six months ended June 31, 2009 and 2008:
For the three months ended June 30, 2009 | For the three months ended June 30, 2008 | |||||||||||||||||||||||||||||||
MetroBank | Metro United | Other | Consolidated Company | MetroBank | Metro United | Other | Consolidated Company | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Total interest income | $ | 16,478 | $ | 5,561 | $ | 15 | $ | 22,054 | $ | 18,187 | $ | 6,398 | $ | 16 | $ | 24,601 | ||||||||||||||||
Total interest expense | 5,584 | 2,286 | 520 | 8,390 | 6,644 | 2,966 | 522 | 10,132 | ||||||||||||||||||||||||
Net interest income | 10,894 | 3,275 | (505 | ) | 13,664 | 11,543 | 3,432 | (506 | ) | 14,469 | ||||||||||||||||||||||
Provision for loan losses | 1,339 | 488 | ─ | 1,827 | 914 | 551 | ─ | 1,465 | ||||||||||||||||||||||||
Net interest income after provision for loan losses | 9,555 | 2,787 | (505 | ) | 11,837 | 10,629 | 2,881 | (506 | ) | 13,004 | ||||||||||||||||||||||
Noninterest income | 2,175 | 105 | (342 | ) | 1,938 | 2,567 | 149 | (338 | ) | 2,378 | ||||||||||||||||||||||
Noninterest expenses | 9,255 | 2,925 | (47 | ) | 12,133 | 9,070 | 2,431 | 297 | 11,798 | |||||||||||||||||||||||
Income (loss) before income tax provision | 2,475 | (33 | ) | (800 | ) | 1,642 | 4,126 | 599 | (1,141 | ) | 3,584 | |||||||||||||||||||||
Provision (benefit) for income taxes | 731 | (2 | ) | (239 | ) | 490 | 1,469 | 199 | (352 | ) | 1,316 | |||||||||||||||||||||
Net income (loss) | $ | 1,744 | $ | (31 | ) | $ | (561 | ) | $ | 1,152 | $ | 2,657 | $ | 400 | $ | (789 | ) | $ | 2,268 |
16
For the six months ended June 30, 2009 | For the six months ended June 30, 2008 | |||||||||||||||||||||||||||||||
MetroBank | Metro United | Other | Consolidated Company | MetroBank | Metro United | Other | Consolidated Company | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Total interest income | $ | 32,622 | $ | 11,110 | $ | 31 | $ | 43,763 | $ | 36,743 | $ | 12,894 | $ | 33 | $ | 49,670 | ||||||||||||||||
Total interest expense | 11,575 | 4,676 | 1,050 | 17,301 | 13,886 | 6,278 | 1,042 | 21,206 | ||||||||||||||||||||||||
Net interest income | 21,047 | 6,434 | (1,019 | ) | 26,462 | 22,857 | 6,616 | (1,009 | ) | 28,464 | ||||||||||||||||||||||
Provision for loan losses | 6,527 | 2,587 | ─ | 9,114 | 1,604 | 1,445 | ─ | 3,049 | ||||||||||||||||||||||||
Net interest income after provision for loan losses | 14,520 | 3,847 | (1,019 | ) | 17,348 | 21,253 | 5,171 | (1,009 | ) | 25,415 | ||||||||||||||||||||||
Noninterest income | 4,349 | 208 | (689 | ) | 3,868 | 4,929 | 254 | (676 | ) | 4,507 | ||||||||||||||||||||||
Noninterest expenses | 17,384 | 5,247 | 73 | 22,704 | 17,068 | 5,158 | 535 | 22,761 | ||||||||||||||||||||||||
Income (loss) before income tax provision | 1,485 | (1,192 | ) | (1,781 | ) | (1,488 | ) | 9,114 | 267 | (2,220 | ) | 7,161 | ||||||||||||||||||||
Provision (benefit) for income taxes | 368 | (458 | ) | (516 | ) | (606 | ) | 3,169 | 138 | (649 | ) | 2,658 | ||||||||||||||||||||
Net income (loss) | $ | 1,117 | $ | (734 | ) | $ | (1,265 | ) | $ | (882 | ) | $ | 5,945 | $ | 129 | $ | (1,571 | ) | $ | 4,503 | ||||||||||||
As of June 30, 2009 | As of June 30, 2008 | |||||||||||||||||||||||||||||||
MetroBank | Metro United | Other | Consolidated Company | MetroBank | Metro United | Other | Consolidated Company | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Net loans | $ | 938,745 | $ | 358,467 | $ | - | $ | 1,297,212 | $ | 932,030 | $ | 364,015 | $ | – | $ | 1,296,045 | ||||||||||||||||
Total assets | 1,189,135 | 426,801 | (3,366 | ) | 1,612,570 | 1,145,890 | 433,386 | (798 | ) | 1,578,478 | ||||||||||||||||||||||
Deposits | 1,025,526 | 356,281 | (8,368 | ) | 1,373,439 | 922,798 | 323,519 | (3,616 | ) | 1,242,701 |
10. | FAIR VALUE |
SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” which applies SFAS 157 for non-financial assets and non-financial liabilities was adopted January 1, 2009. In addition, FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP 157-4 was adopted April 1, 2009.
SFAS No. 157 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. |
17
· | 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 2 Securities for additional discussion on valuation of securities.
The following table presents the financial instruments carried at fair value on a recurring basis by caption on the consolidated balance sheets and by SFAS No. 157 valuation hierarchy (as described above) at June 30, 2009 and December 31, 2008:
Fair Value Measurements, using | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
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 June 30, 2009 | ||||||||||||||||
U.S. Treasury and other U.S. government corporations and agencies | $ | – | $ | 43,158 | $ | – | $ | 43,158 | ||||||||
Obligations of state and political subdivisions | – | 3,138 | – | 3,138 | ||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | – | |||||||||||||||
Government issued or guaranteed | – | 66,165 | – | 66,165 | ||||||||||||
Privately issued residential | – | 3,163 | – | 3,163 | ||||||||||||
Asset backed securities | – | 227 | – | 227 | ||||||||||||
Investment in CRA funds | 6,004 | – | – | 6,004 | ||||||||||||
Total available-for-sale securities June 30, 2009 | $ | 6,004 | $ | 115,851 | $ | – | $ | 121,855 | ||||||||
Securities available-for-sale at December 31, 2008 | ||||||||||||||||
U.S. Treasury and other U.S. government corporations and agencies | $ | – | $ | 15,087 | $ | – | $ | 15,087 | ||||||||
Obligations of state and political subdivisions | – | 3,877 | – | 3,877 | ||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | – | |||||||||||||||
Government issued or guaranteed | – | 72,386 | – | 72,386 | ||||||||||||
Privately issued residential | – | 4,359 | – | 4,359 | ||||||||||||
Asset backed securities | – | 550 | – | 550 | ||||||||||||
Investment in CRA funds | 5,845 | – | – | 5,845 | ||||||||||||
Total available-for-sale securities December 31, 2008 | $ | 5,845 | $ | 96,259 | $ | – | $ | 102,104 |
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). 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, as well as discounted cash flow analysis. 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 4 Goodwill for additional information.
18
Impaired Loans. Certain impaired loans with a valuation reserve subject to SFAS Statement No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS No. 114”) are measured for impairment using the practical expedient in SFAS No. 114, 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 June 30, 2009, 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. Impaired loans with a carrying value of $2.6 million were reduced by specific valuation allowance allocations of $577,000 to a fair value of $2.0 million based on collateral valuations utilizing Level 2 valuation inputs. Impaired loans with a carrying value of $793,000 were reduced by specific valuation allowance allocations of $555,000 to a fair value of $238,000 based on collateral valuations utilizing Level 3 valuation inputs.
On April 1, 2009, the Company adopted FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. FSP SFAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments”, to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods.
Fair Value of Financial Instruments
The following table summarizes the carrying value and estimated fair values of financial instruments as of June 30, 2009 and December 31, 2008:
As of June 30, 2009 | As of December 31, 2008 | |||||||||||||||
Carrying or Contract Amount | Estimated Fair Value | Carrying or Contract Amount | Estimated Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial Assets | ||||||||||||||||
Cash and cash equivalents | $ | 67,296 | $ | 67,296 | $ | 38,101 | $ | 38,101 | ||||||||
Investment securities available-for-sale | 121,855 | 121,855 | 102,104 | 102,104 | ||||||||||||
Investment securities held-to-maturity | 3,044 | 3,132 | — | — | ||||||||||||
Other investments | 17,545 | 17,545 | 29,220 | 29,220 | ||||||||||||
Loans held-for-investment, net | 1,297,212 | 1,201,218 | 1,321,813 | 1,212,619 | ||||||||||||
Cash value of bank owned life insurance | 27,792 | 27,792 | 27,090 | 27,090 | ||||||||||||
Accrued interest receivable | 5,770 | 5,770 | 5,946 | 5,946 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Deposits | ||||||||||||||||
Transaction accounts | 695,797 | 695,797 | 597,877 | 597,876 | ||||||||||||
Time deposits | 677,642 | 680,295 | 671,276 | 677,416 | ||||||||||||
Total deposits | 1,373,439 | 1,376,092 | 1,269,153 | 1,275,292 | ||||||||||||
Other borrowings | 27,574 | 27,717 | 139,046 | 138,992 | ||||||||||||
Junior subordinated debentures | 36,083 | 38,520 | 36,083 | 38,623 | ||||||||||||
Accrued interest payable | 1,589 | 1,589 | 1,279 | 1,279 | ||||||||||||
Off-balance sheet financial instruments | ||||||||||||||||
Unfunded loan commitments, including unfunded lines of credit | 190,075 | — | 247,731 | — | ||||||||||||
Standby letters of credit | 12,626 | — | 9,981 | — | ||||||||||||
Commercial letters of credit | 12,526 | — | 12,244 | — |
19
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, 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 losses.
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.
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 was estimated by discounting the cash flows through maturity based on the prevailing market rate.
Commitments to Extend Credit and Letters of Credit. The fair value of such instruments is estimated using fees currently charged for similar arrangements in the market. The estimated fair values of these instruments are not material as of the reporting dates.
20
11. | SUBSEQUENT EVENTS |
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 most recent on-site examination of MetroBank and is primarily focused on matters related to MetroBank's asset quality. The examination was dated March 16, 2009 and based on financial information as of and for the year ended December 31, 2008.
The requirements of the Agreement must be implemented within 30 to 90 days as specified in the Agreement. At this time, management believes that all requirements of the Agreement will be met within the required time parameters. As part of the Company's and MetroBank's active role in improving the asset quality and overall condition of the bank, MetroBank has previously developed and implemented various programs contemplated by the Agreement and taken many of the steps required by the Agreement. During and 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.
Under the terms of the Agreement, MetroBank has agreed, to improve and enhance its internal procedures and programs on the following:
• | Loan portfolio management; |
• | Construction loan underwriting standards; |
• | Commercial real estate concentration risk management; |
• | Timely and accurate identification of nonaccrual loans and other low graded loans by lending officers; |
• | Eliminate the basis of criticism of criticized assets; |
• | Ensure the maintenance of an adequate allowance for loan losses; and |
• | Develop a profit plan to improve future earnings. |
Pursuant to the Agreement, the Board of Directors of MetroBank is also required to appoint a Compliance Committee to monitor and coordinate MetroBank’s performance under the Agreement and to submit, on a quarterly basis, a report setting forth a description of the action needed to comply with the Agreement, the actions taken to comply and the results and status of such actions. Additionally, MetroBank must obtain prior approval from the Assistant Deputy Comptroller of the OCC before it may accept, renew or roll over any brokered deposits.
12. | NEW ACCOUNTING PRONOUNCEMENTS |
Statements of Financial Accounting Standards
The FASB issued Statement No. 165, “Subsequent Events.” Statement No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. Statement No. 165 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. Statement No. 165 became effective for the Company’s financial statements for periods ending after June 15, 2009. The new interim disclosures required by Statement No. 165 are included in the Company’s interim financial statements as of and for the six months ended June 30, 2009.
The FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” Statement No. 166 amends Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. Statement No. 166 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. Statement No. 166 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. Statement No. 166 is effective for the Company beginning January 1, 2010. The adoption of Statement No. 166 is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.
The FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R).” Statement No. 167 amends FIN 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. Statement No. 167 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. Statement No. 167 is effective for the Company beginning January 1, 2010. The Company is in the process of determining the impact of Statement No. 167 on the financial condition, results of operations, and cash flows of the Company.
The FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162.” Statement No. 168 replaces Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. Statement No. 168 is effective for the Company for periods ending after September 15, 2009. The adoption of Statement No. 168 is not expected to have a material impact on the financial condition, results of operations, or cash flows of the Company.
Financial Accounting Standards Board Staff Positions and Interpretations
FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP SFAS 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP SFAS 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure requirements. FSP 157-4 became effective for interim and annual periods ending after June 15, 2009 and did not have a significant impact on the Company’s financial statements.
FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP SFAS 115-2 and SFAS 124-2 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. FSP SFAS 115-2 and SFAS 124-2 was effective for interim and annual periods ending after June 15, 2009. The adoption of FSP SFAS 115-2 and SFAS 124-2 was applied and considered during management’s other-than-temporary impairments analysis and conclusion. See Note 2 Securities for disclosures required by this new guidance.
FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP SFAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. Under FSP SFAS 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS 107, and FSP SFAS 107-1 and APB 28-1. The new interim disclosures required by FSP SFAS 107-1 and APB 28-1 became effective for interim and annual periods ending after June 15, 2009 and are included in the Company’s interim financial statements as of and for the six months ended June 30, 2009.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Cautionary Notice Regarding Forward-looking Statements
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. Words such as “believe”, “expect”, “anticipate”, “estimate”, “continue”, “intend”, “may”, “will”, “should”, or similar expressions, identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:
• | changes in the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on the Company's loan portfolio and allowance for loan losses; |
• | changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations; |
• | changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan portfolio; |
• | changes in local economic and business conditions which adversely affect the ability of the Company’s customers to transact profitable business with the Company, including the ability of borrowers to repay their loans according to their terms or a change in the value of the related collateral; |
• | increased competition for deposits and loans adversely affecting rates and terms; |
• | the 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; |
• | the effect of compliance, or failure to comply within stated deadlines, of the provisions of the formal agreement with regulators; |
• | 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; |
• | the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations; |
• | changes in the availability of funds resulting in increased costs or reduced liquidity; |
• | a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company’s securities portfolio; |
• | increased asset levels and changes in the composition of assets and the resulting impact on 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; |
• | government intervention in the U.S. financial system; 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. |
22
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.
23
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 $1.2 million for the three months ended June 30, 2009, a decrease of $1.1 million compared with the same quarter in 2008. The Company’s diluted earnings per common share for the three months ended June 30, 2009 was $0.05, a decrease of $0.16 per diluted share compared with diluted earnings per common share of $0.21 for the same quarter in 2008. Diluted earnings per share is computed by dividing net income (after deducting dividends on preferred stock) by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Preferred stock dividends were $562,000 or $0.05 per diluted share for the three months ended June 30, 2009. There were no preferred stock dividends for the three months ending June 30, 2008. The Company recorded a net loss of $882,000 for the six months ended June 30, 2009, a decrease of $5.4 million compared with the same period in 2008. The Company’s diluted loss per common share for the six months ended June 30, 2009 was $0.18, a decrease of $0.59 per diluted share compared with diluted earnings per common share of $0.41 for the same period in 2008. Preferred stock dividends were $1.0 million or $0.09 per diluted share for the six months ended June 30, 2009. There were no preferred stock dividends for the six months ended June 30, 2008.
Total assets were $1.61 billion at June 30, 2009, an increase of $32.3 million or 2.0% from $1.58 billion at December 31, 2008. Available-for-sale investment securities at June 30, 2009 were $121.9 million, an increase of $19.8 million or 19.3% from $102.1 million at December 31, 2008. Net loans at June 30, 2009 were $1.30 billion, a decrease of $24.6 million or 1.9% from $1.32 billion at December 31, 2008. Total deposits at June 30, 2009 were $1.37 billion, an increase of $104.3 million or 8.2% from $1.27 billion at December 31, 2008. Other borrowings at June 30, 2009 were $27.6 million, a decrease of $111.4 million or 80.2% from $139.0 million at December 31, 2008. The Company’s return on average assets (“ROAA”) for the three months ended June 30, 2009 and 2008 was 0.28% and 0.59%, respectively. The Company’s return on average equity (“ROAE”) for the three months ended June 30, 2009 and 2008 was 2.83% and 7.46%, respectively. The Company’s ROAA for the six months ended June 30, 2009 and 2008 was (0.11)% and 0.60%, respectively. The Company’s ROAE for the six months ended June 30, 2009 and 2008 was (1.10)% and 7.49%, respectively. Shareholders’ equity at June 30, 2009 was $162.8 million compared to $119.2 million at December 31, 2008, an increase of $43.6 million or 36.6%. Details of the changes in the various components of net income are further discussed below.
Recent Developments
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 most recent on-site examination of MetroBank and is primarily focused on matters related to MetroBank's asset quality. The examination was dated March 16, 2009 and based on financial information as of and for the year ended December 31, 2008.
The requirements of the Agreement must be implemented within 30 to 90 days as specified in the Agreement. At this time, management believes that all requirements of the Agreement will be met within the required time parameters. As part of the Company's and MetroBank's active role in improving the asset quality and overall condition of the bank, MetroBank has previously developed and implemented various programs contemplated by the Agreement and taken many of the steps required by the Agreement. During and 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.
Under the terms of the Agreement, MetroBank has agreed, to improve and enhance its internal procedures and programs on the following:
• | Loan portfolio management; |
• | Construction loan underwriting standards; |
• | Commercial real estate concentration risk management; |
• | Timely and accurate identification of nonaccrual loans and other low graded loans by lending officers; |
• | Eliminate the basis of criticism of criticized assets; |
• | Ensure the maintenance of an adequate allowance for loan losses; and |
• | Develop a profit plan to improve future earnings. |
Pursuant to the Agreement, the Board of Directors of MetroBank is also required to appoint a Compliance Committee to monitor and coordinate MetroBank’s performance under the Agreement and to submit, on a quarterly basis, a report setting forth a description of the action needed to comply with the Agreement, the actions taken to comply and the results and status of such actions. Additionally, MetroBank must obtain prior approval from the Assistant Deputy Comptroller of the OCC before it may accept, renew or roll over any brokered deposits.
As noted above, the results of the examination were based on financial information as of December 31, 2008. The examination and the actions required by the Agreement correspond to MetroBank's recent experience of an increase in criticized assets as the economy in its primary lending area has come under increasing downward pressure. Management believes that the substantive actions called for by the Agreement should strengthen MetroBank and make it more efficient in the long-run.
Results of Operations
Net Interest Income and Net Interest Margin. For the three months ended June 30, 2009, net interest income, before the provision for loan losses, was $13.7 million, a decrease of $805,000 or 5.6% compared with $14.5 million for the same period in 2008, primarily due to lower loan yields and an increase in nonperforming assets. Average interest-earning assets for the three months ended June 30, 2009 were $1.53 billion, an increase of $76.1 million or 5.2% compared with $1.46 billion for the same period in 2008, primarily due to growth in federal funds sold and other short-term investments and loan growth. The weighted average yield on interest-earning assets for the second quarter of 2009 was 5.78%, a decrease of 102 basis points compared with 6.80% for the same quarter in 2008. Average interest-bearing liabilities for the three months ended June 30, 2009 were $1.24 billion, an increase of $55.7 million or 4.7% compared with $1.19 billion for the same period in 2008, primarily due to an increase in money market accounts and time deposits, partially offset by a decrease in other borrowings. The weighted average interest rate paid on interest-bearing liabilities for the second quarter 2009 was 2.71%, a decrease of 72 basis points compared with 3.43% for the same quarter in 2008. Interest rate cuts by the Federal Reserve, which caused the prime rate to decrease from 5% to 3.25% during the last 12 months, resulted in a decrease in yields and costs for the three months ended June 30, 2009, compared with the same period in 2008.
For the six months ended June 30, 2009, net interest income, before the provision for loan losses, was $26.5 million, a decrease of $2.0 million or 7.0% compared with $28.5 million for the same period in 2008, primarily due to lower loan yields and an increase in nonperforming assets. Average interest-earning assets for the six months ended June 30, 2009 were $1.52 billion, an increase of $105.6 million or 7.5% compared with $1.42 billion for the same period in 2008, primarily due to loan growth. The weighted average yield on interest-earning assets for the six months ended June 30, 2009 was 5.80%, down 126 basis points compared with 7.06% for the same period in 2008. Average interest-bearing liabilities for the six months ended June 30, 2009 were $1.23 billion, an increase of $73.4 million or 6.3% compared with $1.16 billion for the same period in 2008, primarily due to an increase in money market accounts and time deposits, partially offset by a decrease in other borrowings. The weighted average rate paid on interest-bearing liabilities for the six months ended June 30, 2009 was 2.83%, down 85 basis points compared with 3.68% for the same period in 2008.
The net interest margin for the three months ended June 30, 2009 was 3.58%, a decrease of 42 basis points compared with 4.00% for the same period in 2008. The decrease was primarily the result of a decline in the yield on earning assets of 102 basis points, partially offset by a decrease in the cost of earning assets of 60 basis points. The net interest margin for the six months ended June 30, 2009 was 3.51%, down 53 basis points compared with 4.04% for the same period in 2008. For the six months ended June 30, 2009, the yield on average earning assets decreased 126 basis points, which was partially offset by a decrease in the cost of average earning assets of 73 basis points. The decrease in yield on earning assets and the cost of earning assets for the three and six months ended June 30, 2009 was due primarily to interest rate cuts and an increase in nonperforming assets.
24
Total Interest Income. Total interest income for the three months ended June 30, 2009 was $22.1 million, a decrease of approximately $2.5 million or 10.4% compared with $24.6 million for the same period in 2008. Total interest income for the six months ended June 30, 2009 was $43.8 million, a decrease of $5.9 million or 11.9% compared with $49.7 million for the same period in 2008. The decrease for the three and six months ended June 30, 2009 was primarily due to lower loan yields and an increase in nonperforming assets.
Interest Income from Loans. Interest income from loans for the three months ended June 30, 2009 was $20.7 million, a decrease of $2.3 million or 9.9% compared with $23.0 million for the same quarter in 2008. Average total loans for the three months ended June 30, 2009 were $1.32 billion compared to $1.29 billion for the same period in 2008, an increase of $27.6 million or 2.1%. For the second quarter of 2009, the average yield on loans was 6.31% compared to 7.17% for the same quarter in 2008, a decrease of 86 basis points. Interest income from loans for the six months ended June 30, 2009 was $41.1 million, a decrease of $5.3 million or 11.4% compared with $46.4 million for the same period in 2008. The decrease for the three and six months ended June 30, 2009 was the result of lower loan yields and an increase in nonperforming assets. Average total loans for the six months ended June 30, 2009 were $1.33 billion compared with average total loans for the same period in 2008 of $1.25 billion, an increase of $76.9 million or 6.1%. For the six months ended June 30, 2009, the yield on average total loans was 6.23%, down 122 basis points compared with 7.45% for the same period in 2008.
Approximately $891.1 million or 67.3% of the total loan portfolio are variable rate loans that periodically reprice and are sensitive to changes in market interest rates. To lessen interest rate sensitivity in the event of a falling interest rate environment, the Company originates variable rate loans with interest rate floors. At June 30, 2009, the average yield on total loans was approximately 306 basis points above the prime rate primarily because of interest rate floors. At June 30, 2009, approximately $725.5 million in loans or 54.8% of the total loan portfolio were variable rate loans with interest rate floors that carried a weighted average interest rate of 6.39%. At June 30, 2008, variable rate loans with interest rate floors carried a weighted average interest rate of 6.92% and comprised 49.3% 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 June 30, 2009 was $1.3 million, a decrease of $274,000 or 17.3% compared to $1.6 million for the same period in 2008. Average total investments for the three months ended June 30, 2009 were $212.2 million compared to average total investments for the same period in 2008 of $163.7 million, an increase of $48.5 million or 29.6%. For the second quarter 2009, the average yield on total investments was 2.47% compared to 3.88% for the same quarter in 2008, a decrease of 141 basis points. Interest income from investments for the six months ended June 30, 2009 was $2.6 million, down $624,000 or 19.2% compared with $3.3 million for the same period in 2008. The decrease in interest income from investments for the three and six months ended June 30, 2009 was primarily the result of declining interest rates, in addition to the effect of paydowns, calls and maturities of securities. Average total investments for the six months ended June 30, 2009 were $190.6 million compared with average total investments for the same quarter in 2008 of $161.9 million, an increase of $28.7 million or 17.7%. The increase in average total investments for the three and six months ended June 30, 2009 was primarily the result of an increase in Federal funds sold, partially offset by a decrease in taxable securities. For the six months ended June 30, 2009, the average yield on investments was 2.78% compared with 4.04% for the same quarter in 2008, a decrease of 126 basis points.
Total Interest Expense. Total interest expense for the three months ended June 30, 2009 was $8.4 million, a decrease of $1.7 million or 17.2% compared to $10.1 million for the same period in 2008. Total interest expense for the six months ended June 30, 2009 was $17.3 million, down $3.9 million or 18.4% compared with $21.2 million for the same period in 2008. Interest expense decreased for both the three and six months ended June 30, 2009 primarily due to lower cost of funds and the effects of a decrease in other borrowings that was partially offset by an increase in interest-bearing deposits.
Interest Expense on Deposits. Interest expense on interest-bearing deposits for the three months ended June 30, 2009 was $7.6 million, a decrease of $1.1 million or 12.6% compared to $8.7 million for the same period in 2008. Average interest-bearing deposits for the three months ended June 30, 2009 were $1.18 billion compared to average interest-bearing deposits for the same period in 2008 of $1.00 billion, an increase of $177.5 million or 17.7%. The average interest rate paid on interest-bearing deposits for the second quarter of 2009 was 2.60% compared to 3.51% for the same quarter in 2008, a decrease of 91 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.
Interest expense on interest-bearing deposits for the six months ended June 30, 2009 was $15.7 million, down $2.7 million or 14.5% compared with $18.4 million for the same period in 2008. Average interest-bearing deposits for the six months ended June 30, 2009 were $1.15 billion compared with average interest-bearing deposits for the same period in 2008 of $991.4 million, an increase of $159.2 million or 16.1%. The average interest rate incurred on interest-bearing deposits for the six months ended June 30, 2009 was 2.76% compared with 3.73% for the same period in 2008, a decrease of 97 basis points. The decline in interest expense and the average interest rate paid on interest-bearing deposits was primarily due to declining interest rates in the deposit market.
25
Interest Expense on Junior Subordinated Debentures. Interest expense on junior subordinated debentures for the three months ended June 30, 2009 and 2008 was $520,000. Interest expense on junior subordinated debentures for the six months ended June 30, 2009 and 2008 was $1.0 million. Average junior subordinated debentures for the three and six months ended June 30, 2009 and 2008 were $36.1 million. The average interest rate incurred on junior subordinated debentures for the three and six months ended June 30, 2009 and 2008 was 5.76%. The junior subordinated debentures accrue interest at a fixed rate of 5.76% 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%.
Interest Expense on Other Borrowings. Interest expense on other borrowings for the three months ended June 30, 2009 was $236,000, a decrease of $644,000 compared to $880,000 for the same period in 2008. Interest expense on other borrowed funds for the six months ended June 30, 2009 was $528,000, down $1.2 million compared with $1.8 million for the same period in 2008. Average borrowed funds, consisting primarily of security repurchase agreements and borrowings from the Federal Home Loan Bank (“FHLB”), for the three months ended June 30, 2009 was $28.3 million a decrease of $121.8 million compared to $150.1 million for the same period in 2008. Other borrowings decreased primarily due to liquidity provided by deposit growth and funds received from participation in the CPP. The average interest rate paid on borrowed funds for the second quarter of 2009 was 3.34% compared to 2.36% for the same quarter in 2008. The average interest rate increased as lower cost short-term FHLB borrowings were repaid and higher cost long-term borrowings remained outstanding. Average borrowed funds for the six months ended June 30, 2009 was $46.0 million, a decrease of $85.9 million compared to $131.9 million for the same period in 2008. Other borrowings decreased primarily due to liquidity provided by deposit growth and funds received from participation in the CPP. The average interest rate paid on borrowed funds for the six months ended June 30, 2009 was 2.32% compared to 2.70% for the same period in 2008.
26
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 June 30, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Rate(1) | Balance | Paid | Rate(1) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 1,319,125 | $ | 20,747 | 6.31 | % | $ | 1,291,494 | $ | 23,020 | 7.17 | % | ||||||||||||
Taxable securities | 103,479 | 999 | 3.87 | 119,572 | 1,276 | 4.29 | ||||||||||||||||||
Tax-exempt securities | 6,212 | 77 | 4.97 | 5,202 | 64 | 4.95 | ||||||||||||||||||
Other investments (2) | 18,637 | 154 | 3.31 | 8,801 | 95 | 4.34 | ||||||||||||||||||
Federal funds sold and other short-term investments | 83,899 | 77 | 0.37 | 30,155 | 146 | 1.95 | ||||||||||||||||||
Total interest-earning assets | 1,531,352 | 22,054 | 5.78 | 1,455,224 | 24,601 | 6.80 | ||||||||||||||||||
Allowance for loan losses | (24,952 | ) | (15,065 | ) | ||||||||||||||||||||
Total interest-earning assets, net of allowance for loan losses | 1,506,400 | 1,440,159 | ||||||||||||||||||||||
Noninterest-earning assets | 121,803 | 109,378 | ||||||||||||||||||||||
Total assets | $ | 1,628,203 | $ | 1,549,537 | ||||||||||||||||||||
Liabilities and shareholders' equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 54,316 | $ | 69 | 0.51 | % | $ | 58,892 | $ | 114 | 0.78 | % | ||||||||||||
Savings and money market accounts | 417,875 | 2,126 | 2.04 | 281,310 | 1,788 | 2.56 | ||||||||||||||||||
Time deposits | 707,147 | 5,439 | 3.09 | 661,655 | 6,830 | 4.15 | ||||||||||||||||||
Junior subordinated debentures | 36,083 | 520 | 5.76 | 36,083 | 520 | 5.76 | ||||||||||||||||||
Other borrowings | 28,343 | 236 | 3.34 | 150,136 | 880 | 2.36 | ||||||||||||||||||
Total interest-bearing liabilities | 1,243,764 | 8,390 | 2.71 | 1,188,076 | 10,132 | 3.43 | ||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Noninterest-bearing demand deposits | 209,085 | 219,318 | ||||||||||||||||||||||
Other liabilities | 12,138 | 19,935 | ||||||||||||||||||||||
Total liabilities | 1,464,987 | 1,427,329 | ||||||||||||||||||||||
Shareholders' equity | 163,216 | 122,208 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,628,203 | $ | 1,549,537 | ||||||||||||||||||||
Net interest income | $ | 13,664 | $ | 14,469 | ||||||||||||||||||||
Net interest spread | 3.07 | % | 3.37 | % | ||||||||||||||||||||
Net interest margin | 3.58 | % | 4.00 | % |
(1) | Annualized. |
(2) | Other investments include CDARS, Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust. |
27
For The Six Months Ended June 30, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||||||||||
Balance | Paid | Rate(1) | Balance | Paid | Rate(1) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 1,330,551 | $ | 41,137 | 6.23 | % | $ | 1,253,615 | $ | 46,420 | 7.45 | % | ||||||||||||
Taxable securities | 100,490 | 2,083 | 4.18 | 124,048 | 2,648 | 4.29 | ||||||||||||||||||
Tax-exempt securities | 5,101 | 125 | 4.94 | 5,569 | 137 | 4.95 | ||||||||||||||||||
Other investments (2) | 21,524 | 297 | 2.78 | 8,181 | 182 | 4.47 | ||||||||||||||||||
Federal funds sold and other short-term investments | 63,486 | 121 | 0.38 | 24,090 | 283 | 2.36 | ||||||||||||||||||
Total interest-earning assets | 1,521,152 | 43,763 | 5.80 | 1,415,503 | 49,670 | 7.06 | ||||||||||||||||||
Allowance for loan losses | (24,325 | ) | (14,499 | ) | ||||||||||||||||||||
Total interest-earning assets, net of allowance for loan losses | 1,496,827 | 1,401,004 | ||||||||||||||||||||||
Noninterest-earning assets | 119,833 | 108,996 | ||||||||||||||||||||||
Total assets | $ | 1,616,660 | $ | 1,510,000 | ||||||||||||||||||||
Liabilities and shareholders' equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 54,801 | $ | 140 | 0.52 | % | $ | 58,943 | $ | 257 | 0.88 | % | ||||||||||||
Savings and money market accounts | 391,042 | 4,289 | 2.21 | 276,898 | 3,710 | 2.69 | ||||||||||||||||||
Time deposits | 704,787 | 11,304 | 3.23 | 655,553 | 14,431 | 4.43 | ||||||||||||||||||
Junior subordinated debentures | 36,083 | 1040 | 5.76 | 36,083 | 1,040 | 5.76 | ||||||||||||||||||
Other borrowings | 45,985 | 528 | 2.32 | 131,867 | 1,768 | 2.70 | ||||||||||||||||||
Total interest-bearing liabilities | 1,232,698 | 17,301 | 2.83 | $ | 1,159,344 | 21,206 | 3.68 | |||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||
Noninterest-bearing demand deposits | 207,860 | 209,567 | ||||||||||||||||||||||
Other liabilities | 14,826 | 20,155 | ||||||||||||||||||||||
Total liabilities | 1,455,384 | 1,389,066 | ||||||||||||||||||||||
Shareholders' equity | 161,276 | 120,934 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,616,660 | $ | 1,510,000 | ||||||||||||||||||||
Net interest income | $ | 26,462 | $ | 28,464 | ||||||||||||||||||||
Net interest spread | 2.97 | % | 3.38 | % | ||||||||||||||||||||
Net interest margin | 3.51 | % | 4.04 | % |
(1) | Annualized. |
(2) | Other investments include CDARS, Federal Reserve Bank stock, Federal Home Loan Bank stock and investment in subsidiary trust. |
28
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 and six months ended June 30, 2009 compared with the three and six months ended June 30, 2008. For purposes of this table, changes attributable to both rate and volume have been allocated to each accordingly.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2009 vs 2008 | 2009 vs 2008 | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
Due to | Due to | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 557 | $ | (2,830 | ) | $ | (2,273 | ) | $ | 2,712 | $ | (7,995 | ) | $ | (5,283 | ) | ||||||||
Taxable securities | (169 | ) | (108 | ) | (277 | ) | (509 | ) | (56 | ) | (565 | ) | ||||||||||||
Tax-exempt securities | 13 | - | 13 | (12 | ) | - | (12 | ) | ||||||||||||||||
Other investments | 107 | (48 | ) | 59 | 296 | (181 | ) | 115 | ||||||||||||||||
Federal funds sold and other short-term investments | 261 | (330 | ) | (69 | ) | 461 | (623 | ) | (162 | ) | ||||||||||||||
Total increase (decrease) in interest income | 769 | (3,316 | ) | (2,547 | ) | 2,948 | (8,855 | ) | (5,907 | ) | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | (9 | ) | (36 | ) | (45 | ) | (19 | ) | (98 | ) | (117 | ) | ||||||||||||
Savings and money market accounts | 875 | (537 | ) | 338 | 1,515 | (936 | ) | 579 | ||||||||||||||||
Time deposits | 490 | (1,881 | ) | (1,391 | ) | 1,041 | (4,168 | ) | (3,127 | ) | ||||||||||||||
Junior subordinated debentures | - | - | - | - | - | - | ||||||||||||||||||
Other borrowings | (713 | ) | 69 | (644 | ) | (1,153 | ) | (87 | ) | (1,240 | ) | |||||||||||||
Total increase (decrease) in interest expense | 643 | (2,385 | ) | (1,742 | ) | 1,384 | (5,289 | ) | (3,905 | ) | ||||||||||||||
Increase (decrease) in net interest income | $ | 126 | $ | (931 | ) | $ | (805 | ) | $ | 1,564 | $ | (3,566 | ) | $ | (2,002 | ) |
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 June 30, 2009 was $1.8 million, an increase of $362,000, compared to $1.5 million for the same period in 2008. The increase was primarily due to an increase in nonperforming assets since June 30, 2008 and higher net charge-offs for the second quarter of 2009. The provision for loan losses for the six months ended June 30, 2009 was $9.1 million, an increase of $6.1 million, compared with $3.0 million for the same period in 2008. The increase was primarily due to an increase in net charge-offs and nonperforming assets since June 30, 2008. The allowance for loan losses as a percent of total loans was 1.84% at June 30, 2009 and 1.80% at December 31, 2008, and increased compared with 1.18% at June 30, 2008.
Noninterest Income. Noninterest income for the three months ended June 30, 2009 was $1.9 million, down $440,000 or 18.5% compared with the same period in 2008. Noninterest income for the six months ended June 30, 2009 was $3.9 million, down $639,000 or 14.2% compared with the same period in 2008. The decrease for the three and six months ended June 30, 2009 was primarily due to declines in gain on sale of loans, gain on securities transactions and service fees, partially offset by an increase in other noninterest income that was the result of rental income received on other real estate property and an increase in the cash value of bank owned life insurance.
Noninterest Expense. Noninterest expense for the three months ended June 30, 2009 was $12.1 million, an increase of $335,000 or 2.8% compared with the same period in 2008. Noninterest expense for the six months ended June 30, 2009 was $22.7 million, a decrease of $57,000 or 0.25% compared with the same period in 2008. For the three and six months ended June 30, 2009, decreases in salaries and employee benefit expenses further described below and other-than-temporary impairment (“OTTI”) charges were partially offset by increases in expenses related to foreclosed assets and the FDIC assessment further described below.
29
In the second quarter of 2009, a $59,000 write down of investment securities was recorded through earnings for OTTI, in accordance with the adoption of FSP FAS 115-2 and FAS 124-2 on April 1, 2009. This new guidance requires that credit-related OTTI on securities be recognized through earnings while noncredit-related OTTI be recognized through equity. Noncredit-related OTTI on securities of $881,000 was recognized through equity in the second quarter of 2009.
Salaries and employee benefits expense for the three months ended June 30, 2009 was $5.2 million, a decrease of $688,000 or 11.6% compared with $5.9 million for the same period in 2008. Salaries and employee benefits expense for the six months ended June 30, 2009 was $10.6 million, a decrease of $1.8 million or 14.4% compared with $12.4 million for the same period in 2008. Salaries and employee benefits expense for the three and six months ended June 30, 2009 declined primarily due to streamlined operations and decreases in amount of bonus accrual, stock-based compensation expense, and employee health care benefit expenses. The number of full-time equivalent employees at June 30, 2009 was 297, a decrease of 9.2% compared with 327 at June 30, 2008.
Occupancy and equipment expense of $2.0 million for the three months ended June 30, 2009 was approximately the same compared with the second quarter of 2008. Occupancy and equipment expense for the six months ended June 30, 2008 was $4.0 million, an increase of $51,000 or 1.3% compared with $3.9 million for the same period in 2008.
The FDIC assessment was $1.4 million and $1.7 million for the three and six months ended June 30, 2009, an increase of $1.3 million and $1.5 million, respectively, compared with the same periods in 2008, primarily due to the one-time special FDIC assessment and the higher assessment rate effective in 2009. The FDIC assessed an emergency special assessment of 5 basis points on total assets less tier one capital as of June 30, 2009. In addition, the FDIC assessment was higher because of utilization of remaining available credits during the first quarter of 2008, and participation in the FDIC’s Temporary Liquidity Guarantee Program.
Other noninterest expense for the three months ended June 30, 2009 was $2.4 million, a decrease of $215,000 compared with the same quarter in 2008. Other noninterest expense for the six months ended June 30, 2009 was $4.7 million, a decrease of $335,000 compared with the same period in 2008. The decline for both the three and six months ended June 30, 2009 was primarily due to decreases in travel expenses and legal fees, partially offset by an increase in the provision for unfunded commitments.
The Company’s efficiency ratio is calculated by dividing total noninterest expense, excluding loan loss provisions and impairment on securities, by net interest income plus noninterest income. The efficiency ratio for the three months ended June 30, 2009 was 77.39%, an increase from 60.89% for the same quarter in 2008, and was primarily the result of decreased net interest income. The Company’s efficiency ratio for the six months ended June 30, 2009 was 73.87%, compared with 64.36% for the same period in 2008.
Income Taxes. Income tax expense for the three months ended June 30, 2009 was $490,000, compared with $1.3 million for the same period in 2008. The Company’s effective tax rate was 29.8% and 36.7% for the three months ended June 30, 2009 and 2008, respectively. The decrease in the effective tax rate was due primarily to several factors including a change in the relationship of taxable income to tax exempt income, non-deductible expenses and certain state income taxes which are based principally on gross receipts rather than net income. Income tax benefit for the six months ended June 30, 2009 was $606,000, compared with income tax expense of $2.7 million for the same period in 2008. The Company’s effective tax rate was 40.7% and 37.1% for the six months ended June 30, 2009 and 2008, respectively. The increase in the effective tax rate was due primarily to the change in the relationship of taxable income to tax exempt income, non-deductible expenses and certain state income taxes based principally on gross receipts rather than net income.
Financial Condition
Loan Portfolio. Total loans at June 30, 2009 were $1.32 billion, a decrease of $24.6 million or 1.8% compared with $1.35 billion at December 31, 2008. Compared to the loan level at December 31, 2008, commercial and industrial loans, real estate construction loans and consumer loans decreased $49.4 million, $14.9 million and $596,000, respectively, while real estate mortgage loans increased $39.9 million during the six months ended June 30, 2009. At June 30, 2009 and December 31, 2008, the ratio of total loans to total deposits was 96.22%, and 106.06%, respectively. Total loans represented 81.9% and 85.2% of total assets at June 30, 2009 and December 31, 2008, respectively.
30
The following table summarizes the loan portfolio by type of loan at the dates indicated:
As of June 30, 2009 | As of December 31, 2008 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial and industrial | $ | 418,170 | 31.58 | % | $ | 467,546 | 34.65 | % | ||||||||
Real estate mortgage | ||||||||||||||||
Residential | 19,348 | 1.46 | 12,399 | 0.92 | ||||||||||||
Commercial | 753,017 | 56.86 | 720,052 | 53.37 | ||||||||||||
772,365 | 58.32 | 732,451 | 54.29 | |||||||||||||
Real estate construction | ||||||||||||||||
Residential | 40,215 | 3.04 | 43,242 | 3.20 | ||||||||||||
Commercial | 89,297 | 6.74 | 101,125 | 7.50 | ||||||||||||
129,512 | 9.78 | 144,367 | 10.70 | |||||||||||||
Consumer and other | 4,268 | 0.32 | 4,864 | 0.36 | ||||||||||||
Gross loans | 1,324,315 | 100.00 | % | 1,349,228 | 100.00 | % | ||||||||||
Unearned discounts, interest and deferred fees | (2,837 | ) | (3,180 | ) | ||||||||||||
Total loans | 1,321,478 | 1,346,048 | ||||||||||||||
Allowance for loan losses | (24,266 | ) | (24,235 | ) | ||||||||||||
Loans, net | $ | 1,297,212 | $ | 1,321,813 |
Nonperforming Assets. Total nonperforming assets increased $45,000 to $57.7 million at June 30, 2009 from $57.6 million at December 31, 2008. At June 30, 2009, total nonperforming assets consisted of $32.6 million in nonaccrual loans, $422,000 in accruing loans 90 days or more past due, $1.1 million of troubled debt restructurings, and $23.6 million in other real estate (“ORE”).
The following table summarizes nonaccrual loans by type of loan at the dates indicated:
As of June 30, 2009 | As of December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Commercial and industrial loans | $ | 2,632 | $ | 7,742 | ||||
Commercial real estate mortgage | 11,724 | 11,287 | ||||||
Residential real estate mortgage | 189 | — | ||||||
Commercial real estate construction | 957 | 12,105 | ||||||
Residential real estate construction | 7,236 | 7,069 | ||||||
Commercial land | 8,498 | 6,108 | ||||||
Residential land | 1,288 | 3,897 | ||||||
Other | 32 | 31 | ||||||
Total nonaccrual loans(1) | $ | 32,556 | $ | 48,239 |
(1) 60.2% of nonaccrual loans are from Texas and 39.8% are from California at June 30, 2009; 80.8% of nonaccrual loans are from Texas and 19.2% are from California at December 31, 2008.
31
The following table presents information regarding nonperforming assets at the dates indicated:
As of | As of | |||||||
June 30, 2009 | December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Nonaccrual loans | $ | 32,556 | $ | 48,239 | ||||
Accruing loans 90 days or more past due | 422 | 103 | ||||||
Troubled debt restructurings | 1,059 | 4,474 | ||||||
Other real estate (“ORE”) | 23,649 | 4,825 | ||||||
Total nonperforming assets | 57,686 | 57,641 | ||||||
Nonperforming loans guaranteed by the SBA, Ex-Im Bank and OCCGF | (2,120 | ) | (1,843 | ) | ||||
Total net nonperforming assets | $ | 55,566 | $ | 55,798 | ||||
Total nonperforming assets to total assets | 3.58 | % | 3.65 | % | ||||
Total nonperforming assets to total loans and ORE | 4.29 | % | 4.27 | % | ||||
Net nonperforming assets to total assets (1) | 3.45 | % | 3.53 | % | ||||
Net nonperforming assets to total loans and ORE (1) | 4.13 | % | 4.13 | % |
(1) | Net nonperforming assets are net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. |
Nonaccrual loans decreased by $15.6 million to $32.6 million compared with $48.2 million at December 31, 2008, mainly as a result of loans transferred to ORE and from loan charge-offs. ORE increased by approximately $18.8 million compared with December 31, 2008, to $23.6 million at June 30, 2009. ORE increased by approximately $15.1 million when compared with March 31, 2009, which included $16.6 million of new foreclosed properties, partially offset by $6.2 million of ORE sales in Texas, and a net increase of $4.6 million in California.
Net nonperforming assets at June 30, 2009 were $55.6 million compared to $55.8 million at December 31, 2008, a decrease of $232,000 or 0.4%. The ratios for net nonperforming assets to total loans and ORE at June 30, 2009 and December 31, 2008 were 4.13%. The ratios for net nonperforming assets to total assets were 3.45% and 3.53% 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 $2.1 million at June 30, 2009 compared to $1.8 million at December 31, 2008.
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 at its option 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 is a summary of loans considered to be impaired as of the dates indicated:
As of June 30, 2009 | As of December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Impaired loans with no SFAS No. 114 valuation reserve | $ | 31,201 | $ | 35,640 | ||||
Impaired loans with a SFAS No. 114 valuation reserve | 2,414 | 17,073 | ||||||
Total recorded investment in impaired loans | $ | 33,615 | $ | 52,713 | ||||
Valuation allowance related to impaired loans | $ | 1,072 | $ | 3,280 |
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.
32
The average recorded investment in impaired loans during the six months ended June 30, 2009 and the year ended December 31, 2008 was $47.7 million and $17.5 million, respectively. Interest income on impaired loans recognized for cash payments received during the three and six months ended June 30, 2009 and 2008 was immaterial.
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments. At June 30, 2009 and 2008, the allowance for loan losses was $24.3 million and $15.5 million, respectively, or 1.84% and 1.18% of total loans, respectively. At December 31, 2008, the allowance for loan losses was $24.2 million, or 1.80% of total loans. Net charge-offs for the three months ended June 30, 2009 and 2008 were $1.7 million and $533,000, respectively. The second quarter 2009 charge-offs primarily consisted of $1.8 million in loans from Texas and $347,000 in loans from California, partially offset by recoveries of $430,000 from both banks. Net charge-offs for the six months ended June 30, 2009 were $9.1 million compared with $654,000 for the same period in 2008. The net charge-offs for the six months ended June 30, 2009 consisted of $7.2 million from Texas and $1.9 million from California.
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 below.
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 component for individual loan impairment recognized and measured pursuant to FASB Statement No. 114, (2) one or more components of collective loan impairment recognized pursuant to FASB Statement No. 5 – Accounting for Contingencies, (3) a component that assesses the impact of current conditions and determines how estimated future credit losses might be expected to deviate from historical trends, 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 nonperforming 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.
33
The following table presents an analysis of the allowance for credit losses and other related data for the periods indicated:
As of and for the Three Months Ended June 30, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Average total loans outstanding for the period | $ | 1,319,125 | $ | 1,291,494 | ||||
Total loans outstanding at end of period | $ | 1,321,478 | $ | 1,311,565 | ||||
Allowance for loan losses at beginning of period | $ | 24,158 | $ | 14,588 | ||||
Provision for loan losses | 1,827 | 1,465 | ||||||
Charge-offs: | ||||||||
Commercial and industrial | (1,592 | ) | (370 | ) | ||||
Real estate mortgage | (175 | ) | (1 | ) | ||||
Real estate construction | (347 | ) | (210 | ) | ||||
Consumer and other | (34 | ) | (42 | ) | ||||
Total charge-offs | (2,148 | ) | (623 | ) | ||||
Recoveries: | ||||||||
Commercial and industrial | 340 | 88 | ||||||
Real estate mortgage | – | – | ||||||
Real estate construction | 88 | – | ||||||
Consumer and other | 1 | 2 | ||||||
Total recoveries | 429 | 90 | ||||||
Net (charge-offs) recoveries | (1,719 | ) | (533 | ) | ||||
Allowance for loan losses at end of period | 24,266 | 15,520 | ||||||
Reserve for unfunded lending commitments at beginning of period | 1,204 | 907 | ||||||
Provision for unfunded lending commitments | 274 | 10 | ||||||
Reserve for unfunded lending commitments at end of period | 1,478 | 917 | ||||||
Allowance for credit losses at end of period | $ | 25,744 | $ | 16,437 | ||||
Ratio of net (charge-offs) recoveries to end of period total loans | (0.13 | ) % | (0.04 | ) % |
34
As of and for the Six Months Ended June 30, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Average total loans outstanding for the period | $ | 1,330,551 | $ | 1,253,615 | ||||
Total loans outstanding at end of period | $ | 1,321,478 | $ | 1,311,565 | ||||
Allowance for loan losses at beginning of period | $ | 24,235 | $ | 13,125 | ||||
Provision for loan losses | 9,114 | 3,049 | ||||||
Charge-offs: | ||||||||
Commercial and industrial | (8,222 | ) | (417 | ) | ||||
Real estate mortgage | (608 | ) | (90 | ) | ||||
Real estate construction | (686 | ) | (210 | ) | ||||
Consumer and other | (72 | ) | (42 | ) | ||||
Total charge-offs | (9,588 | ) | (759 | ) | ||||
Recoveries: | ||||||||
Commercial and industrial | 414 | 101 | ||||||
Real estate mortgage | 1 | – | ||||||
Real estate construction | 88 | – | ||||||
Consumer and other | 2 | 4 | ||||||
Total recoveries | 505 | 105 | ||||||
Net (charge-offs) recoveries | (9,083 | ) | (654 | ) | ||||
Allowance for loan losses at end of period | 24,266 | 15,520 | ||||||
Reserve for unfunded lending commitments at beginning of period | 1,092 | 816 | ||||||
Provision for unfunded lending commitments | 386 | 101 | ||||||
Reserve for unfunded lending commitments at end of period | 1,478 | 917 | ||||||
Allowance for credit losses at end of period | $ | 25,744 | $ | 16,437 | ||||
Ratio of allowance for loan losses to end of period total loans | 1.84 | % | 1.18 | % | ||||
Ratio of net (charge-offs) recoveries to end of period total loans | (0.69 | ) % | (0.05 | ) % | ||||
Ratio of allowance for loan losses to end of period total nonperforming loans (1) | 71.29 | % | 182.65 | % | ||||
Ratio of allowance for loan losses to end of period net nonperforming loans (2) | 76.03 | % | 248.64 | % |
(1) | Total nonperforming loans are nonaccrual loans, loans over 90 days past due and troubled debt restructurings. |
(2) | Net nonperforming loans are comprised of nonaccrual loans, loans over 90 days past due and troubled debt restructurings, net of the loan portions guaranteed by the SBA, Ex-Im Bank and OCCGF. |
Securities. At June 30, 2009, the available-for-sale securities portfolio was $121.9 million, an increase of $19.8 million or 19.3% compared with $102.1 million at December 31, 2008. The increase was primarily due to additional investments in U.S. Treasury and other U.S. government corporations and agencies offset by principal payments on mortgage-backed securities and collateralized mortgage obligations. At June 30, 2009, the held-to-maturity portfolio was $3.0 million. There were no held-to-maturity securities at December 31, 2008. The securities portfolio is primarily comprised of mortgage-backed securities, collateralized mortgage obligations, municipal securities and obligations of U.S. Treasury and other U.S. government corporations and agencies. The securities portfolio has been funded primarily by the liquidity created from deposit growth and loan repayments in excess of loan funding requirements. Other investments, which include CDARS One-Way Sell investments (“CDARS”), Federal Reserve Bank (“FRB”) and FHLB stock, and the investment in subsidiary trust, were $17.5 million at June 30, 2009, a decrease of $11.7 million or 40.0% compared with $29.2 million at December 31, 2008. The decrease is primarily the result of maturities of CDARS.
Deposits. At June 30, 2009, total deposits were $1.37 billion, up $104.3 million or 8.2% compared with $1.27 billion at December 31, 2008, primarily due to growth in money market accounts and savings accounts from a deposit campaign which ended in the second quarter of 2009. The Company’s ratio of noninterest-bearing demand deposits to total deposits at June 30, 2009 and December 31, 2008 was 15.3% and 16.1%, respectively. Interest-bearing deposits at June 30, 2009 were $1.16 billion, an increase of $98.5 million or 9.2% compared with $1.07 billion at December 31, 2008.
Junior Subordinated Debentures. Junior subordinated debentures at June 30, 2009 and December 31, 2008 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 debentures issued to the Company’s unconsolidated subsidiary trust MCBI Statutory Trust I, were used to fund the Company’s acquisition of Metro United.
35
Other Borrowings. Other borrowings at June 30, 2009 were $27.6 million, a decrease of $111.4 million or 80.2% compared to other borrowings of $139.0 million at December 31, 2008. Other borrowings decreased primarily due to liquidity provided by deposit growth and funds from the CPP. Other borrowings at June 30, 2009 primarily include a $2.0 million advance from the FHLB of San Francisco and $25.0 million in security repurchase agreements. The advance from the FHLB of San Francisco has an overnight maturity, and bears a rate of 0.11%. Since June 30, 2009, the advance from the FHLB has been renewed with similar terms. The security repurchase agreements bear an average rate of 3.71% and mature on December 31, 2014. The securities collateralizing the repurchase agreements are transferred to the applicable counterparty. The counterparty, in certain instances, is contractually entitled to sell or repledge securities accepted as collateral. In January 2009, all outstanding amounts of the $4.0 million subordinated debentures, including accrued interest were repaid.
36
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 | As of and for the | |||||||
Six Months Ended | Year Ended | |||||||
June 30, 2009 | December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Federal Funds Purchased: | ||||||||
at end of period | $ | – | $ | – | ||||
average during the period | – | 84 | ||||||
maximum month-end balance during the period | – | 4,500 | ||||||
FHLB Notes and Advances: | ||||||||
at end of period | $ | 2,000 | $ | 109,000 | ||||
average during the period | 19,948 | 112,118 | ||||||
maximum month-end balance during the period | 55,000 | 133,000 | ||||||
Interest rate at end of period | 0.11 | % | 0.48 | % | ||||
Interest rate during the period | 0.54 | 2.21 | ||||||
Security Repurchase Agreements: | ||||||||
at end of period | $ | 25,000 | $ | 25,000 | ||||
average during the period | 25,000 | 25,000 | ||||||
maximum month-end balance during the period | 25,000 | 25,000 | ||||||
Interest rate at end of period | 3.71 | % | 3.71 | % | ||||
Interest rate during the period | 3.71 | 2.91 | ||||||
Subordinated debentures: | ||||||||
at end of period | $ | – | $ | 4,000 | ||||
average during the period | 309 | 2,060 | ||||||
maximum month-end balance during the period | – | 4,000 | ||||||
Interest rate at end of period | – | % | 6.50 | % | ||||
Interest rate during the period | 7.18 | 5.05 | ||||||
Federal Reserve TT&L: | ||||||||
at end of period | $ | 574 | $ | 1,046 | ||||
average during the period | 728 | 731 | ||||||
maximum month-end balance during the period | 1,020 | 1,283 |
Liquidity. The Company’s loan to deposit ratio at June 30, 2009 and 2008 was 96.22% and 105.54%, respectively. As of June 30, 2009, the Company had commitments to fund loans in the amount of $190.1 million. At this same date, the Company had stand-by letters of credit of $12.6 million. Available sources to fund these commitments and other cash demands of the Company come from loan and investment securities repayments, deposit inflows, and 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 $467.4 million from the FHLBs, $35.7 million from the FRB discount window, and $10.0 million from other correspondent banks.
Capital Resources. Shareholders’ equity at June 30, 2009 was $162.8 million compared to $119.2 million at December 31, 2008, an increase of $43.6 million. The increase was primarily the result of the $45.0 million preferred stock issuance, partially offset by the $882,000 net loss for the six months ended June 30, 2009 and the payment of common stock and preferred stock dividends. In April 2009, the Company suspended regular cash dividends on its common stock for an indefinite period of time.
37
The following table provides a comparison of the Company’s and each of the Banks’ leverage and risk-weighted capital ratios as of June 30, 2009 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 June 30, 2009 | ||||||||||
The Company | ||||||||||||
Leverage ratio | 4.00%(1) | N/A | % | 10.96 | % | |||||||
Tier 1 risk-based capital ratio | 4.00 | N/A | 12.30 | |||||||||
Risk-based capital ratio | 8.00 | N/A | 13.56 | |||||||||
MetroBank | ||||||||||||
Leverage ratio | 4.00%(2) | 5.00 | % | 10.55 | % | |||||||
Tier 1 risk-based capital ratio | 4.00 | 6.00 | 12.13 | |||||||||
Risk-based capital ratio | 8.00 | 10.00 | 13.39 | |||||||||
Metro United | ||||||||||||
Leverage ratio | 4.00%(3) | 5.00 | % | 11.10 | % | |||||||
Tier 1 risk-based capital ratio | 4.00 | 6.00 | 11.69 | |||||||||
Risk-based capital ratio | 8.00 | 10.00 | 12.95 |
(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.
Allowance for loan losses. 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”.
Goodwill. The Company believes goodwill is a critical accounting estimate that requires significant judgment and estimates to be used in the preparation of its consolidated financial statements. The Company reviews goodwill for impairment on an annual basis, or more often, if events or circumstances indicate that it is more likely than not that the fair value of Metro United, the Company's only reporting unit with assigned goodwill, is below the carrying value of its equity. The Company's annual evaluation is performed as of August 31 of each year.
Annual Evaluation
In determining the fair value of Metro United, the Company primarily uses a review of the valuation of recent guideline bank acquisitions as well as discounted cash flow analysis. The guideline bank transactions were selected from a similar geographic footprint as Metro United or having a similar market focus, based on publicly available information. Valuation multiples such as price-to-book, price-to-tangible book, price-to-deposits, and price-to-earnings from the guideline transactions are compared with Metro United’s operating results to derive its implied goodwill as of the valuation date. The Company also uses the discounted cash flow method to estimate the value of Metro United. The discounted cash flow method estimates the value of interest rate sensitive instruments by discounting the expected future cash flows using the current interest rates at which similar instruments with similar terms would be made. In addition, as a third method of determining fair value, quoted stock prices as of the valuation date for the Company and its peer guideline banks were used as a current comparative proxy. The values separately derived from each valuation technique (i.e., guideline transactions, discounted cash flows, and quoted market prices) are evaluated to assess whether goodwill was impaired. The results of these valuation techniques are equally weighted to derive the fair value of goodwill.
38
Additional Evaluation
As a result of the Company’s stock continuing to trade below book value during the first quarter of 2009, continued deterioration in the economy during the first quarter of 2009, and a net loss recorded by Metro United for the three months ended March 31, 2009, the Company performed an additional valuation of goodwill as of March 31, 2009.
For periods prior to the second quarter of 2009, due to a lack of guideline bank acquisitions, the Company utilized a discounted cash flow analysis to determine the fair value of Metro United. Multi-year financial forecasts were developed by projecting net income for the next five years and discounting the average terminal values based on the valuation multiples listed in the previous paragraph in a normalized market. The financial forecasts considered several key business drivers such as anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations. For the period ending March 31, 2009, the Company used an average growth rate of 5% for the 5-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 Company also considered the fair value of Metro United in relationship to the Company’s stock price and performed a reconciliation to 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 segments, Metro Bank and Metro United. The allocation was based upon an average of the following internal ratios:
• | Metro United’s assets as a percentage of total assets |
• | Metro United’s loans as a percentage of total loans |
• | Metro United’s deposits as a percentage of total deposits |
• | Metro United’s stockholder's equity as a percentage of total stockholders' equity |
The derived fair value of Metro United was then compared to the carrying value of its equity. As the carrying value of its equity exceeded the fair value, an additional goodwill impairment evaluation was performed which involves calculating the implied fair value of the Metro United’s goodwill.
The implied fair value of goodwill is determined in the same manner as goodwill is recognized in a business combination. The fair value of goodwill is determined by applying a weight of 50% to the implied fair value of Metro United and the remaining 50% is equally distributed among the valuation techniques mention above. The fair value of Metro United’s assets and liabilities, including previously unrecognized intangible assets, is individually determined. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of Metro United. The value of the implied goodwill is highly sensitive to the estimated fair value of Metro United’s net assets. The excess fair value of Metro United over the fair value of its net assets is the implied goodwill. The fair value of Metro United’s net assets is estimated using recent data observed in the market, including similar assets and liabilities.
Observable market information is utilized to the extent available and relevant. The estimated fair values reflect management’s assumptions regarding how a market participant would value the net assets and includes appropriate credit, liquidity, and market risk adjustments that are indicative of the current environment. The estimated liquidity and market risk adjustments on certain loan categories ranged from 20% to 50% due to the distressed nature of the market in California. The size of the implied goodwill was significantly affected by the estimated fair value of the loans pertaining to Metro United. 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.
If the implied fair value of the goodwill for Metro United exceeds its carrying value of the goodwill, no goodwill impairment is recorded. Changes in the estimated fair value of the individual assets and liabilities may result in a different amount of implied goodwill, and ultimately the amount of goodwill impairment, if any. Sensitivity analysis is performed to assess the potential ranges of implied goodwill.
Based on the fair value of Metro United’s assets and liabilities at March 31, 2009, the implied fair value of goodwill exceeded its carrying value. However, it is possible that future changes in the fair value of Metro United’s net assets could result in future goodwill impairment. For example, to the extent that market liquidity returns and the fair value of the individual assets 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, resulting in goodwill impairment. Ultimately, future potential changes in valuation assumptions may impact the estimated fair value of Metro United and cause its fair value to be below its carrying value, therefore resulting in an impairment of the goodwill.
During the second quarter of 2009, the Company performed an analysis that considered the Company’s stock price, loan values of Metro United, and other factors and determined that as of June 30, 2009, goodwill was not impaired. The Company’s stock price recovered during the second quarter of 2009 and closed above the average closing price for the first quarter of 2009. The loan value of Metro United remained at the same level as the first quarter. Subsequent to the second quarter of 2009, should the Company’s stock continue to trade below book value a reassessment of goodwill may be required.
39
Impairment of investment securities. Investments classified as available-for-sale are carried at fair value and the impact of changes in fair value are recorded on the consolidated balance sheet as an unrealized gain or loss in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Securities classified as available-for-sale or held-to-maturity are subject to review to identify when a decline in value is other-than-temporary. Factors considered in determining whether a decline in value is other-than-temporary include: the extent and the duration of the decline; the reasons for the decline in value (credit event, and interest-rate related including general credit spread widening); the financial condition of and near-term prospects of the issuer, and 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. When it is determined that a decline in value is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings.
For debt securities, determining credit-related impairment is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates including prepayment assumptions, are based on data from widely accepted third-party data sources. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The Company has developed these estimates using information based on historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security. See Note 2 Securities for additional discussion on other-than-temporary impairment.
Stock-based compensation. 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.
Fair Value. The Company believes estimates of fair value is a critical accounting estimate that requires significant judgment and estimates used in the preparation of its consolidated financial statements. 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. The extent to which fair value is used on a recurring basis was significantly expanded upon the adoption of SFAS No. 159 and SFAS No. 157 effective on January 1, 2008. An example of this recurring use of fair value includes available-for-sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets for impairment or for disclosure purposes in accordance with SFAS No. 107. Examples of these non-recurring uses of fair value include goodwill and intangible assets. Depending on the nature of the asset various valuation techniques and assumptions are used when estimating fair value. These valuation techniques and assumptions are in accordance with SFAS No. 157. FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” which applies SFAS 157 for non-financial assets and non-financial liabilities was adopted January 1, 2009.
Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with SFAS No. 157 requires that a number of significant judgments are made. First, where prices for identical assets and liabilities are not available, application of the three-level hierarchy established by SFAS No. 157 would require that similar assets are identified. If observable market prices are unavailable or impracticable to obtain, then fair value is estimated using modeling techniques such as discounted cash flow analyses. These modeling techniques incorporate the Company’s assessments regarding assumptions that market participants would use in pricing the asset or the liability, including assumptions about the risks inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Assessments with respect to assumptions that market participants would make are inherently difficult to determine and use of different assumptions could result in material changes to these fair value measurements. As required under SFAS No. 157, any use of significant, unobservable inputs would be described in Note 11, “Fair Value,” to the Consolidated Financial Statements.
In estimating the fair values for investment securities the Company believes that independent, third-party market prices are the best evidence of exit price and where available, estimates are based on such prices. If such third-party market prices are not available on the exact securities owned, fair values are based on the market prices of similar instruments, independent pricing service estimates or are estimated using industry-standard or proprietary models whose inputs may be unobservable. When market observable data is not available, the valuation of financial instruments becomes more subjective and involves substantial judgment. The need to use unobservable inputs generally results from the lack of market liquidity for certain types of loans and securities, which results in diminished observability of both actual trades and assumptions that would otherwise be available to value these instruments.
40
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, 2008. 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.”
Item 4. 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”)) were effective as of the end of the period covered by this report.
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.
41
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. |
Except for the addition of the risk factor described below, there have been no material changes in the risk factors previously described under "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 16, 2009.
MetroBank's failure to comply with the provisions of its formal agreement with the OCC could subject it to further enforcement action and restrictions.
MetroBank is subject to a formal agreement with the OCC entered into on August 10, 2009. The agreement is based on the results of an annual examination by the OCC on financial information as of and for the year ended December 31, 2008. The agreement is primarily related to matters concerning MetroBank's asset quality and provides for, among other things, the review, revision and adherence to its existing programs related to asset quality. The requirements of the agreement must be implemented within 30 to 90 days as specified in the agreement. At this time, management believes that all requirements of the agreement will be met within the required time parameters. However, failure to comply with the provisions of the agreement could result in more severe enforcement actions and further restrictions.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
Item 3. | Defaults Upon Senior Securities. |
Not applicable
Item 4. | Submission of Matters to a Vote of Security Holders. |
The Company’s 2009 Annual Meeting of Shareholders was held on May 8, 2009. At the meeting, the shareholders considered and acted upon the proposals listed below:
1. May Chu, John Lee and Don Wang were each elected as a Class II director and Robert W. Hsueh was elected as a Class III director. The three Class II directors were elected to serve until the Company’s 2012 annual meeting of shareholders, and the one Class III director was elected to serve until the Company’s 2010 annual meeting of shareholders, and each until their successors are duly elected and qualify. The shares voted for or withheld with respect to each director were as follows:
Director | For | Withheld | ||
Class II | ||||
May Chu | 8,940,342 | 586,165 | ||
John Lee | 8,347,916 | 1,178,591 | ||
Don Wang | 8,936,792 | 589,715 | ||
Class III | ||||
Robert W. Hsueh | 8,940,692 | 585,815 |
The following Class I and Class III directors continued in office after the 2009 Annual Meeting of Shareholders: Helen Chen, Shirley Clayton, George M. Lee, David Tai, Krishnan Balasubramanian, Charles Roff, David Tai and Joe Ting.
2. The shareholders ratified the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the Company for the year ending December 31, 2009. A total of 9,471,225 shares were voted in favor of the proposal, 100 shares were voted against the proposal and 55,183 shares abstained from voting on the proposal.
3. The shareholders approved the amendment to the MetroCorp Bancshares, Inc. 2007 Stock Awards and Incentive Plan to increase the number of shares of Common Stock issuable thereunder from 350,000 to 650,000 shares. A total of 7,214,409 shares were voted in favor of the amendment, 315,104 shares were voted against the amendment and 10,775 shares abstained from voting on the amendment.
4. The shareholders approved the advisory (non-binding) resolution approving the compensation of the Company’s named executive officers. A total of 8,046,848 shares were voted in favor of the resolution, 1,412,725 shares were voted against the resolution and 66,929 shares abstained from voting on the resolution.
42
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, 2007). | |
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 on 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). | |
4.3 | Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009). | |
10.1* | Agreement dated August 10, 2009 by and between MetroBank, National Association, Houston, Texas and The Comptroller of the Currency. | |
11 | Computation of Earnings Per Common Share, included as Note (6) 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.
43
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 | ||
Date: August 10, 2009 | George M. Lee Executive Vice Chairman, President and | ||
Chief Executive Officer (principal executive officer) | |||
Date: August 10, 2009 | By: | /s/ David C. Choi | |
David C. Choi | |||
Chief Financial Officer (principal financial officer/ principal accounting officer) |
44
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, 2007). | |
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 on 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). | |
4.3 | Form of Certificate for the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on January 21, 2009). | |
Agreement dated August 10, 2009 by and between MetroBank, National Association, Houston, Texas and The Comptroller of the Currency. | ||
11 | Computation of Earnings Per Common Share, included as Note (6) 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.
45