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  • 10-Q (May 9, 2013)
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MetroCorp Bancshares 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
mbs_10q-033112.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
þ
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
  
 
 
o
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  

Commission file number: 0-25141
________________
 
MetroCorp Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of
incorporation or organization)
76-0579161
(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 R     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 £
       
 
Non-accelerated Filer £  (Do not check if a smaller reporting company)
  
Smaller Reporting Company R
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £    No R

As of April 30, 2012, the number of outstanding shares of Common Stock was 13,333,047.
 
 
 
 
 
PART I
FINANCIAL INFORMATION

 Item 1.
Financial Statements.
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
   
March 31,
    
December 31,
  
   
2012
    
2011
  
ASSETS
            
             
Cash and due from banks
  
$
25,692
    
$
28,798
  
Federal funds sold and other short-term investments
    
157,620
      
164,811
  
Total cash and cash equivalents
    
183,312
      
193,609
  
Securities available-for-sale, at fair value
    
141,405
      
121,633
  
Securities available-for-sale pledged with creditors’ right to repledge, at fair value
    
49,810
      
50,756
  
Total securities available-for-sale
    
191,215
      
172,389
  
Securities held-to-maturity (fair value $4,577 and $4,536 at March 31, 2012 and December 31, 2011, respectively)
    
4,046
      
4,046
  
Other investments
    
6,375
      
6,484
  
Loans, net of allowance for loan losses of $28,066 and $28,321, respectively
    
1,018,483
      
1,015,095
  
Loans, held-for-sale
    
–
      
1,200
  
Accrued interest receivable
    
4,367
      
4,327
  
Premises and equipment, net
    
4,496
      
4,697
  
Goodwill
    
14,327
      
14,327
  
Deferred tax asset, net
    
14,785
      
14,995
  
Customers' liability on acceptances
    
5,075
      
5,152
  
Foreclosed assets, net
    
15,638
      
19,018
  
Cash value of bank owned life insurance
    
31,775
      
31,427
  
Prepaid FDIC assessment
    
4,822
      
5,204
  
Other assets
    
2,291
      
2,561
  
Total assets
  
$
1,501,007
    
$
1,494,531
  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                
Deposits:
                
Noninterest-bearing
  
$
258,043
    
$
259,397
  
Interest-bearing
    
998,784
      
992,178
  
Total deposits
    
1,256,827
      
1,251,575
  
Junior subordinated debentures
    
36,083
      
36,083
  
Other borrowings
    
26,000
      
26,315
  
Accrued interest payable
    
285
      
310
  
Acceptances outstanding
    
5,075
      
5,152
  
Other liabilities
    
9,341
      
9,913
  
Total liabilities
    
1,333,611
      
1,329,348
  
Commitments and contingencies
    
–
      
–
  
                 
Shareholders' equity:
                
Preferred stock, $1.00 par value, 2,000,000 shares authorized; 45,000 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
    
45,039 
      
45,003
  
Common stock, $1.00 par value, 50,000,000 shares authorized; 13,346,815 and 13,340,815 shares issued and 13,333,047 and 13,340,815 outstanding at March 31, 2012 and December 31, 2011, respectively
    
13,347
      
13,341
  
Additional paid-in-capital
    
33,874
      
33,816
  
Retained earnings
    
75,357
      
73,188
  
Accumulated other comprehensive loss
    
(109
)
    
(165
)
Treasury stock, at cost, 13,768 and no shares at March 31, 2012 and December 31, 2011, respectively
    
(112
)
    
–
  
Total shareholders' equity
    
167,396
      
165,183
  
Total liabilities and shareholders' equity
  
$
1,501,007
    
$
1,494,531
  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
1
 
   
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
   
For the Three Months
  
   
Ended March 31,
  
   
2012
    
2011
  
Interest income:
            
Loans
  
$
14,999
    
$
16,002
  
Securities:
                
Taxable
    
1,027
      
1,228
  
Tax-exempt
    
117
      
98
  
Other investments
    
43
      
42
  
Federal funds sold and other short-term investments
    
212
      
81
  
Total interest income
    
16,398
      
17,451
  
Interest expense:
                
Time deposits
    
1,536
      
2,226
  
Demand and savings deposits
    
635
      
920
  
Junior subordinated debentures
    
336
      
324
  
Other borrowings
    
247
      
281
  
Total interest expense
    
2,754
      
3,751
  
Net interest income
    
13,644
      
13,700
  
Provision for loan losses
    
400
      
330
  
Net interest income after provision for loan losses
    
13,244
      
13,370
  
Noninterest income:
                
Service fees
    
1,117
      
1,056
  
Loan-related fees
    
70
      
97
  
Letters of credit commissions and fees
    
197
      
184
  
Loss (gain) on securities transactions, net
    
12
      
(50
)
Total other-than-temporary-impairment (“OTTI”) on securities
    
(39
)
    
(105
)
Less: Noncredit portion of  OTTI
    
–
      
(17
)
Net impairments on securities
    
(39
)
    
(88
)
Other noninterest income
    
446
      
460
  
Total noninterest income
    
1,803
      
1,659
  
Noninterest expenses:
                
Salaries and employee benefits
    
5,921
      
5,245
  
Occupancy and equipment
    
1,689
      
1,802
  
Foreclosed assets, net
    
1,001
      
675
  
FDIC assessment
    
397
      
861
  
Other noninterest expense
    
1,925
      
3,180
  
Total noninterest expenses
    
10,933
      
11,763
  
                 
Income before provision  for income taxes
    
4,114
      
3,266
  
Provision for income taxes
    
1,346
      
1,140
  
Net income
  
$
2,768
    
$
2,126
  
                 
Dividends and discount – preferred stock
    
(598
)
    
(605
)
Net income available to common shareholders
  
$
2,170
    
$
1,521
  
                 
Earnings per common share:
                
Basic
  
$
0.16
    
$
0.12
  
Diluted
  
$
0.16
    
$
0.12
  
Weighted average common shares outstanding:
                
Basic
    
13,169
      
13,136
  
Diluted
    
13,309
      
13,205
  
Dividends per common share
  
$
–
    
$
–
  

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
2
 
 
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

   
For the Three Months
  
   
Ended March 31,
  
   
2012
    
2011
  
             
Net income
  
$
2,768
    
$
2,126
  
Other comprehensive income (loss), net of tax:
                
                 
Change in accumulated gain on effective cash flow hedging derivatives
    
43
      
149
  
                 
Change in unrealized losses on investment securities, net of tax:
                
Securities with OTTI charges during the period
    
(25
)
    
(67
)
Less: OTTI charges recognized in net income
    
(25
)
    
(56
)
Net unrealized gains (losses) on investment securities with OTTI
    
–
      
(11
)
                 
Unrealized holding losses arising during the period
    
21
      
(462
) 
Less: reclassification adjustment for losses included in net income
    
8
      
(32
)
Net unrealized gains on investment securities
    
13
      
(430
) 
                 
Other comprehensive income (loss)
    
56
      
(292
) 
Total comprehensive income
  
$
2,824
    
$
1,834
  
 
METROCORP BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2012
(In thousands)
(Unaudited)

   
Preferred Stock
    
Common Stock
    
Additional
paid-in
    
Retained
    
Accumulated other comprehensive income
    
Treasury Stock at
        
   
Shares
    
At par
    
Shares
    
At par
    
capital
    
earnings
    
(loss)
    
cost
    
Total
  
Balance at December 31, 2011
     45     $ 45,003       13,341     $ 13,341     $ 33,816     $ 73,188     $ (165 )     –     $ 165,183  
Issuance of common stock
     –       –       6       6       38       –       –       –       44  
Repurchase of common stock
     –       –       –       –       –       –       –       (112 )     (112 )
Stock-based compensation expense related to stock options recognized in earnings
     –       –       –       –       20       –       –       –       20  
Net income
     –       –       –       –       –       2,768       –       –       2,768  
Amortization  of preferred stock discount
     –       36       –       –       –       (36 )     –       –       –  
Other comprehensive income
     –       –       –       –       –       –       56       –       56  
Dividends – preferred stock
     –       –       –       –       –       (563 )     –               (563 )
Balance at March 31, 2012
     45     $ 45,039       13,347     $ 13,347     $ 33,874     $ 75,357     $ (109 )     (112 )   $ 167,396  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3
 
 
METROCORP BANCSHARES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
For the Three Months Ended
March 31,
  
   
2012
    
2011
  
Cash flows from operating activities:
            
Net income
  
$
2,768
    
$
2,126
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation
    
284
      
363
  
Provision for loan losses
    
400
      
330
  
Impairment on securities
    
39
      
88
  
(Gain) loss on securities transactions, net
    
(12
) 
    
50
  
Loss on sale of foreclosed assets
    
782
      
144
  
Amortization of premiums and discounts on securities
    
128
      
7
  
Amortization of deferred loan fees and discounts
    
(244
)
    
(301
)
Amortization of core deposit intangibles
    
14
      
21
  
Stock-based compensation
    
20
      
28
  
Change in:
                
Accrued interest receivable
    
(40
) 
    
262
  
Other assets
    
538
      
845
  
Accrued interest payable
    
(25
)
    
(27
) 
Other liabilities
    
(529
) 
    
723
  
Net cash provided by operating activities
    
4,123
      
4,659
  
                 
Cash flows from investing activities:
                
Purchases of securities available-for-sale
    
(31,565
)
    
(103
)
Purchases of other investments
    
(1
)
    
(1
)
Proceeds from sales of securities available-for-sale
    
–
      
106
  
Proceeds from maturities, calls and principal paydowns of securities available-for-sale
    
12,603
      
16,301
  
Proceeds from sales and maturities of other investments
    
110
      
108
  
Net change in loans
    
(2,546
) 
    
40,001
  
Proceeds from sales of foreclosed assets
    
2,800
      
9,482
  
Purchases of premises and equipment
    
(83
)
    
(189
)
Net cash (used in) provided by investing activities
    
(18,682
) 
    
65,705
  
                 
Cash flows from financing activities:
                
Net change in:
                
Deposits
    
5,252
      
(23,021
) 
Other borrowings
    
(315
)
    
(260
) 
Repurchase of common stock
    
(112
)
    
–
  
Cash dividends paid on preferred stock
    
(563
)
    
(570
)
Net cash provided by (used in) financing activities
    
4,262
 
    
(23,851
) 
                 
Net (decrease) increase in cash and cash equivalents
    
(10,297
) 
    
46,513
  
Cash and cash equivalents at beginning of period
    
193,609
      
151,725
  
Cash and cash equivalents at end of period
  
$
183,312
    
$
198,238
  
                 
Supplemental information:
                
                 
Interest paid
  
$
2,778
    
$
3,777
  
Income taxes paid
    
1,160
      
–
  
Noncash investing and financing activities:
                
Issuance of common stock pursuant to incentive plan
    
44
      
–
  
Foreclosed assets acquired
    
202
      
6,199
  
Loans originated to finance foreclosed assets
    
–
      
115
  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4
 
 
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.

A legal entity is referred to as a Variable Interest Entity (“VIE”) if any of the following conditions exist: (1) the total equity at risk is insufficient to permit the legal entity to finance its activities without additional subordinated financial support from other parties, or (2) the entity has equity investors that cannot make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or receive the expected returns of the entity.  In addition, as specified in VIE accounting guidance, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE’s economic performance, and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.  All facts and circumstances are taken into consideration when determining whether the Company has variable interest that would deem it the primary beneficiary and, therefore, require consolidation of the related VIE or otherwise rise to the level where disclosure would provide useful information to the users of the Company’s financial statements.  In the case of the Company’s sole VIE, MCBI Statutory Trust I,  it is qualitatively clear based on the extent of the Company’s involvement that the Company is not the primary beneficiary of the VIE.  Accordingly, the accounts of this entity are not consolidated in the Company’s financial statements.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the Company’s financial position at March 31, 2012, results of operations for the three months ended March 31, 2012 and 2011, and cash flows for the three months ended March 31, 2012 and 2011. Interim period results are not necessarily indicative of results for a full-year period.  The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting  principles.

Certain items in prior financial statements have been reclassified to conform to the 2012 presentation, with no impact on the balance sheet, net income (loss), shareholders’ equity or cash flows.
 
These unaudited 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, 2011.
 
 
5
 
 
2.
SECURITIES
     
The amortized cost and approximate fair value of securities is as follows:

   
As of March 31, 2012
  
   
Amortized
    
Unrealized
    
Fair
  
   
Cost
    
Gains
    
Losses
    
OTTI
    
Value
  
   
(Dollars in thousands)
  
Securities available-for-sale
                              
Debt securities
                              
U.S. Treasury and other U.S. government sponsored enterprises and agencies
  
$
107,722
    
$
328
    
$
(144
)
  
$
-
    
$
107,906
  
Obligations of state and political subdivisions
    
12,038
      
300
      
(110
)
    
-
      
12,228
  
Corporate
    
6,097
      
177
      
-
              
6,274
  
Mortgage-backed securities and collateralized mortgage obligations
                                        
Government issued or guaranteed
    
48,748
      
1,367
      
-
      
-
      
50,115
  
Privately issued residential
    
840
      
256
      
(9
)
    
(425
)
    
662
  
Asset backed securities
    
222
      
88
      
-
      
(184
)
    
126
  
Equity Securities
                                        
CRA funds
    
13,794
      
110
      
-
      
-
      
13,904
  
Total available-for-sale securities
  
$
189,461
    
$
2,626
    
$
(263
)
  
$
(609
)
  
$
191,215
  
                                         
Securities held-to-maturity
                                        
Obligations of state and political subdivisions
  
$
4,046
    
$
531
    
$
-
    
$
-
    
$
4,577
  
Total held-to-maturity securities
  
$
4,046
    
$
531
    
$
-
    
$
-
    
$
4,577
  
                                         
Other investments
                                        
FHLB/Federal Reserve Bank stock(1)
  
$
5,292
    
$
-
    
$
-
    
$
-
    
$
5,292
  
Investment in subsidiary trust(1)
    
1,083
      
-
      
-
      
-
      
1,083
  
Total other investments
  
$
6,375
    
$
-
    
$
-
    
$
-
    
$
6,375
  

 
6
 
 
   
As of December 31, 2011
  
   
Amortized
Cost
    
Unrealized
    
Fair
Value
  
   
Gains
    
Losses
    
OTTI
  
Securities available-for-sale
                              
Debt securities
                              
U.S. Treasury and other U.S. government corporations and agencies
  
$
91,660
    
$
546
    
$
(7
)
  
$
—
    
$
92,199
  
Obligations of state and political subdivisions
    
5,467
      
279
      
(40
)
    
—
      
5,706
  
Corporate
    
6,102
      
57
      
(18
)
    
—
      
6,141
  
Mortgage-backed securities and collateralized mortgage obligations:
                                        
Government issued or guaranteed
    
52,594
      
1,160
      
(15
)
    
—
      
53,739
  
Privately issued residential
    
900
      
232
      
(23
)
    
(442
)
    
667
  
Asset backed securities
    
231
      
56
      
—
      
(185
)
    
102
  
Equity securities
                                        
Investment in CRA funds
    
13,700
      
135
      
—
      
—
      
13,835
  
                                         
Total available-for-sale securities
  
$
170,654
    
$
2,465
    
$
(103
)
  
$
(627
)
  
$
172,389
  
                                         
Securities held-to-maturity
                                        
Obligations of state and political subdivisions
  
$
4,046
    
$
490
    
$
—
    
$
—
    
$
4,536
  
                                         
Total held-to-maturity securities
  
$
4,046
    
$
490
    
$
—
    
$
—
    
$
4,536
  
                                         
Other investments
                                        
FHLB /Federal Reserve Bank stock(1)
    
5,401
      
—
      
—
      
—
      
5,401
  
Investment in subsidiary trust(1)
    
1,083
      
—
      
—
      
—
      
1,083
  
                                         
Total other investments
  
$
6,484
    
$
—
    
$
—
    
$
—
    
$
6,484
  
 
(1) Represents securities with limited marketability and are carried at cost.

The following table displays the fair value and gross unrealized losses of securities available for sale as of March 31, 2012 for which OTTI has not been recognized, that were in a continuous unrealized loss position for the periods indicated.   There were no securities held to maturity in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011.

   
March 31, 2012
  
   
Less Than 12 Months
    
Greater Than 12 Months
    
Total
  
   
Fair Value
    
Gross Unrealized Losses
    
Fair Value
    
Gross Unrealized Losses
    
Fair Value
    
Gross Unrealized Losses
  
   
(Dollars in thousands)
  
Securities available-for-sale
                                    
U.S. Treasury and other U.S. government sponsored enterprises and agencies
  
$
23,840
    
$
(144
)
  
$
—
    
$
—
    
$
23,840
    
$
(144
)
Obligations of state and political subdivisions
    
6,468
      
(110
)
    
—
      
—
      
6,468
      
(110
)
Mortgage-backed securities and collateralized mortgage obligations
                                                
Government issued or guaranteed
    
16
      
—
      
—
      
—
      
16
      
—
  
Privately issued residential
    
—
      
—
      
181
      
(9
)
    
181
      
(9
)
Total securities
  
$
30,324
    
$
(254
)
  
$
181
    
$
(9
)
  
$
30,505
    
$
(263
)

 
7
 
 
   
As of December 31, 2011
  
   
Less Than 12
Months
    
Greater Than 12
Months
    
Total
  
   
Fair
Value
    
Unrealized
Loss
    
Fair
Value
    
Unrealized
Loss
    
Fair
Value
    
Unrealized
Loss
  
U.S. Treasury and other U.S. government corporations and agencies
  
$
4,993
    
$
(7
)
  
$
—
    
$
—
    
$
4,993
    
$
(7
)
Obligations of state and political subdivisions
    
1,580
      
(40
)
    
—
      
—
      
1,580
      
(40
)
Corporate
    
3,017
      
(18
)
    
—
      
—
      
3,017
      
(18
)
Mortgage-backed securities and collateralized mortgage obligations:
                                                
Government issued or guaranteed
    
8,786
      
(15
)
    
10
      
—
      
8,796
      
(15
)
Privately issued residential
    
—
      
—
      
168
      
(23
)
    
168
      
(23
)
                                                 
Total securities
  
$
18,376
    
$
(80
)
  
$
178
    
$
(23
)
  
$
18,554
    
$
(103
)
 
As of March 31, 2012, management did not have the intent to sell any of the securities classified as available-for-sale in unrealized loss positions and believes it is not more likely than not that the Company will have to sell any such securities before a recovery of the cost. However, if strategic opportunities arise, the Company may consider selling selected securities.  Any unrealized losses on such selected securities would be charged to earnings.

The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such securities decline. Management does not believe any of the unrealized losses above are due to credit quality. Accordingly, management believes the $263,000 of unrealized losses is temporary and the remaining $609,000 of OTTI as of March 31, 2012 represents an unrealized loss for which an impairment has been recognized in other comprehensive loss.
 
Other-Than-Temporary Impairments (OTTI)

The following table represents the impairment activity related to debt securities (in thousands):

Impairment related to credit losses
  
Three months ended
March 31, 2012
    
Three months ended
March 31, 2011
  
             
Beginning balance at beginning of period
  
$
1,594
    
$
1,600
  
Addition of OTTI that was not previously recognized
    
—
      
—
  
Additions to OTTI that was previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis
    
21
      
—
  
Transfers from accumulated other comprehensive income (“AOCI”) to OTTI related to credit losses
    
18
      
88
  
Reclassifications from OTTI to realized losses
    
—
      
(199
) 
Ending balance at end of period
  
$
1,633
    
$
1,489
  
 
For the three months ended March 31, 2012, the Company recognized credit-related losses of $38,000 on 5 non-agency residential mortgage-backed securities and $1,000 on one asset-backed security. The noncredit portion of these impairments of $17,000 on non-agency residential mortgage-backed securities was included in accumulated other comprehensive income (loss) for the three months ended March 31, 2012.

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 income (loss).
 
 
8
 
 
Other Securities Information

The following sets forth information concerning sales (excluding calls and maturities) of available-for-sale securities (in thousands).  There were no sales or transfers of held-to-maturity securities for the three months ended March 31, 2012 or 2011.

   
Three Months Ended
March 31,
  
   
2012
    
2011
  
Amortized cost
  
$
—
    
$
173
  
Proceeds
    
—
      
106
  
Gross realized gains
    
—
      
—
  
Gross realized losses
    
—
      
(67
) 
 
At March 31, 2012, 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
    
24,322
      
24,500
      
—
      
—
  
Within six to ten years
    
90,587
      
90,857
      
—
      
—
  
After ten years
    
11,170
      
11,177
      
4,046
      
4,577
  
Mortgage-backed securities and collateralized mortgage obligations
    
49,588
      
50,777
      
—
      
—
  
Total debt securities
  
$
175,667
    
$
177,311
    
$
4,046
    
$
4,577
  

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.

 
9
 
 
3.
 LOANS

The loan portfolio is classified by major type as follows:
 
   
As of March 31, 2012
    
As of December 31, 2011
  
   
Amount
    
Percent
    
Amount
    
Percent
  
   
(Dollars in thousands)
  
                         
Commercial and industrial
  
$
344,694
      
32.86
%
  
$
345,265
      
32.98
%
Real estate mortgage
                                
Residential
    
41,619
      
3.97
      
42,682
      
4.08
  
Commercial
    
648,338
      
61.82
      
644,727
      
61.58
  
     
689,957
      
65.79
      
687,409
      
65.66
  
Real estate construction
                                
Residential
    
5,938
      
0.57
      
6,984
      
0.67
  
Commercial
    
3,263
      
0.31
      
3,324
      
0.32
  
     
9,201
      
0.88
      
10,308
      
0.99
  
Consumer and other
    
4,937
      
0.47
      
3,936
      
0.37
  
Gross loans
    
1,048,789
      
100.00
%
    
1,046,918
      
100.00
%
Unearned discounts, interest and deferred fees
    
(2,240
)
            
(2,302
)
        
Total loans
    
1,046,549
              
1,044,616
          
Allowance for loan losses
    
(28,066
)
            
(28,321
)
        
Loans, net
  
$
1,018,483
            
$
1,016,295
          

The recorded investment in loans is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount or finance charges, and may also reflect a previous direct write-down of the loan.
 
The recorded investment in loans at the dates indicated is determined as follows (in thousands):

  March 31, 2012
  
Gross Loan
Balance
    
Deferred Loan
Fees
    
Accrued Interest
Receivable
    
Recorded Investment in Loans
  
                         
Commercial and industrial
  
$
344,694
    
$
(746
)
  
$
1,027
    
$
344,975
  
Real estate mortgage
    
689,957
      
(1,328
)
    
2,442
      
691,071
  
Real estate construction
    
9,201
      
(11
)
    
18
      
9,208
  
Consumer and other
    
4,937
      
(155
)
    
13
      
4,795
  
                                 
Total
  
$
1,048,789
    
$
(2,240
)
  
$
3,500
    
$
1,050,049
  
 
  December 31, 2011
  
Gross Loan
Balance
    
Deferred Loan
Fees
    
Accrued Interest
Receivable
    
Recorded Investment in Loans
  
                         
Commercial and industrial
  
$
345,265
    
$
(777
)
  
$
1,077
    
$
345,565
  
Real estate mortgage
    
687,409
      
(1,327
)
    
2,270
      
688,352
  
Real estate construction
    
10,308
      
(2
)
    
29
      
10,335
  
Consumer and other
    
3,936
      
(196
)
    
14
      
3,754
  
                                 
Total
  
$
1,046,918
    
$
(2,302
)
  
$
3,390
    
$
1,048,006
  
 
 
10
 
 
Loan Origination/Risk Management

The Company selectively extends credit for the purpose of establishing long-term relationships with its customers. The Company mitigates the risks inherent in lending by focusing on businesses and individuals with demonstrated payment history, historically favorable profitability trends and stable cash flows. In addition to these primary sources of repayment, the Company looks to tangible collateral and personal guarantees as secondary sources of repayment. Lending officers are provided with detailed underwriting policies covering all lending activities in which the Company is engaged and that require all lenders to obtain appropriate approvals for the extension of credit. The Company also maintains documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered may be reduced.

The Company has certain lending procedures in place that are designed to maximize loan income within an acceptable level of risk. These procedures include the approval of lending policies and underwriting guidelines by the Board of Directors of each Bank, and separate policy, administrative and approval oversight by the Directors’ Loan Committee of MetroBank, and by the Directors’ Credit Committee of Metro United.  Additionally, MetroBank’s loan portfolio is reviewed by its internal loan review department, and Metro United's loan portfolio is reviewed by an external third-party company. These procedures also serve to timely identify changes in asset quality and to ensure proper recording and reporting of nonperforming assets.

Inherent in all lending is the risk of nonpayment. The types of collateral required, the terms of the loans and the underwriting practices discussed under each loan category below are all designed to minimize the risk of nonpayment. In addition, as further risk protection, the Banks rarely make loans at their respective legal lending limit. MetroBank generally does not make loans larger than $12 million to one borrower and Metro United generally does not make loans larger than $6 million to one borrower. Loans greater than the Banks’ lending limits are subject to participation with other financial institutions, including with each other. Loans originated by MetroBank are approved by the Chief Credit Officer, Chief Lending Officer, Senior Credit Officer, MetroBank’s Loan Committee or the Director’s Credit Committee based on the size of the loan relationship and its risk rating. Loans originated by Metro United are approved by the Director’s Credit Committee except for certain consumer loans. Control systems and procedures are in place to ensure all loans are approved in accordance with credit policies.

Commercial and Industrial Loans. Generally, the Company’s commercial loans are underwritten on the basis of the borrower’s ability to service such debt as reflected by cash flow projections. Commercial loans are generally collateralized by business assets, which may include real estate, accounts receivable and inventory, certificates of deposit, securities, guarantees or other collateral. The Company also generally obtains personal guarantees from the principals of the business. Working capital loans are primarily collateralized by short-term assets, whereas term loans are primarily collateralized by long-term assets. As a result, commercial loans involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans. Indigenous to individuals in the Asian business community is the desire to own the building and land which house their businesses. Accordingly, while a loan may be principally driven and classified by the type of business operated, real estate is frequently the primary source of collateral.
 
Real Estate Mortgage - Commercial  and Residential Mortgage Loans. The Company makes commercial mortgage loans to finance the purchase of real property, which generally consists of developed real estate. The Company’s commercial mortgage loans are collateralized by first liens on real estate. For MetroBank, these loans typically have variable rates and amortize over a 15 to 20 year period, with balloon payments due at the end of five to seven years. For Metro United, these loans have both variable and fixed rates and amortize over a 25 to 30 year period, with balloon payments due at the end of five to ten years. Payments on loans collateralized by such properties are dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans. In underwriting commercial mortgage loans, consideration is given to the property’s historical cash flow, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit checks, appraisals, environmental impact reports and a review of the financial condition of the borrower. The Company also originates two to seven year balloon residential mortgage loans with a 15 to 30-year amortization primarily collateralized by owner occupied residential properties, which are retained in the Company’s residential mortgage portfolio.
 
Real Estate Construction Loans. The Company makes loans to finance the construction of residential and non-residential properties. The majority of the Company’s residential construction loans in Texas are for single-family dwellings that are pre-sold or are under earnest money contracts. The Company also originates loans to finance the construction of commercial properties such as multi-family, office, industrial, warehouse and retail centers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company will be able to recover the entire unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminable period of time. While the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.  
 
 
11
 
  
Consumer Loans. The Company, through its subsidiary Metro United, offers a variety of loan products to retail customers through its branch network. Loans to retail customers include automobile loans, lines of credit and other personal loans. The terms of these loans typically range from 12 to 60 months depending on the nature of the collateral and the size of the loan.

 Loan review process. In addition to MetroBank’s loan portfolio review by its internal loan review department and Metro United's loan portfolio review by an external third-party company, other ongoing reviews are performed by loan officers and involve the grading of each loan by its respective loan officer. Depending on the grade, a loan will be aggregated with other loans of similar grade and a loss factor is applied to the total loans in each group to establish the required level of allowance for loan losses. For both Banks, grades of 1-10 are applied to each loan, with loans graded 7-10 requiring the most allowance for loan losses. Factors utilized in the grading process include but are not limited to historical performance, payment status, collateral value and financial strength of the borrower. Oversight of the loan review process is the responsibility of the Loan Review/Compliance Officer. Differences of opinion are resolved among the loan officer, compliance officer and the Chief Credit Officer. See “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” for additional discussion on loan grades.

MetroBank’s credit department reports credit risk grade changes on a monthly basis to its management and the Board of Directors. MetroBank performs monthly and quarterly, and Metro United performs monthly concentration analyses based on industries, collateral types and business lines. Findings are reported to the Directors’ Loan Committee of MetroBank and the Directors’ Credit Committee of Metro United. Loan concentration reports based on type are prepared, monitored and reviewed quarterly and presented to the Directors’ Loan Committee for MetroBank, the Directors’ Credit Committee for Metro United and the Board of Directors of each respective Bank.

In addition, the Company reviews the real estate values, and when necessary, orders new appraisals on loans collateralized by real estate when loans are renewed, prior to foreclosure and at other times as necessary, particularly in problem loan situations. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible charge-offs or appropriate additions to the allowance for loan losses. The Company records other real estate at fair value at the time of acquisition less estimated costs to sell.

The following table presents the recorded investment in loans by credit risk profile, and which were updated as of the date indicated (in thousands):

As of March 31, 2012
  
Commercial and industrial
    
Real estate-mortgage
    
Real estate - construction
    
Consumer and other
    
Total
  
                               
Grade:
                              
1-6 - “Pass”
  
$
309,006
    
$
564,108
    
$
2,043
    
$
4,794
    
$
879,951
  
7 - “Special Mention”/ “Watch”
    
9,294
      
21,149
      
-
      
-
      
30,443
  
8 - “Substandard”
    
26,675
      
105,814
      
7,165
      
1
      
139,655
  
9 -“Doubtful"
    
-
      
-
      
-
      
-
      
-
  
                                         
Total
  
$
344,975
    
$
691,071
    
$
9,208
    
$
4,795
    
$
1,050,049
  

 
12
 
 
As of December 31, 2011
  
Commercial and industrial
    
Real estate-mortgage
    
Real estate - construction
    
Consumer and other
    
Total
  
                               
Grade:
                              
1-6 - “Pass”
  
$
310,626
    
$
551,496
    
$
3,078
    
$
3,753
    
$
868,953
  
7 - “Special Mention”/ “Watch”
    
10,735
      
30,491
      
—
      
—
      
41,226
  
8 - “Substandard”
    
24,204
      
106,160
      
7,257
      
1
      
137,622
  
9 -“Doubtful"
    
—
      
205
      
—
      
—
      
205
  
                                         
Total
  
$
345,565
    
$
688,352
    
$
10,335
    
$
3,754
    
$
1,048,006
  
 
There can be no assurance, however, that the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrowers’ financial condition due to general economic and other factors. While future deterioration in the loan portfolio is possible, management is continuing its risk assessment and resolution program. In addition, management is focusing its attention on minimizing the Company’s credit risk through diversification.
 
Nonperforming Assets
 
            The Company generally places a loan on nonaccrual status and ceases accruing interest when, in the opinion of management, full payment of loan principal or interest is in doubt. All loans past due 90 days are placed on nonaccrual status unless the loan is both well collateralized and in the process of collection. Cash payments received while a loan is classified as nonaccrual are recorded as a reduction of principal as long as significant doubt exists as to collection of the principal. Loans are restored to accrual status only when interest and principal payments are brought current and, in management’s judgment, future payments are reasonably assured.  In addition to nonaccrual loans, the Company evaluates on an ongoing basis other loans which are potential problem loans as to risk exposure in determining the adequacy of the allowance for loan losses.
 
A loan is considered impaired based on current information and events if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual basis for other loans.  The measurement of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price or based on the fair value of the collateral if the loan is collateral-dependent.
 
Loans are classified as a troubled debt restructuring in cases where a borrower is experiencing financial difficulty and the Banks make concessionary modifications to contractual terms. Restructured loa