XNAS:MCBI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



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 loans typically involve a modification of terms such as a reduction of the stated interest rate and an extension of the maturity date(s). Generally, a nonaccrual loan that is restructured remains on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. Once performance has been demonstrated, the loan may be returned to performing status after the calendar year end.
 
The Company requires that nonperforming assets be monitored by the special assets department or senior lenders for MetroBank, and the special asset team consisting of internal credit personnel with the assistance of third party consultants and attorneys for Metro United. All nonperforming assets are actively managed pursuant to the Company’s loan policy. Senior management is apprised on a weekly basis of the workout endeavors and provides assistance as necessary to determine the best strategy for problem loan resolution and maximizing repayment on nonperforming assets.
 
In addition to the Banks’ loan review process described in the preceding paragraphs, the Office of the Comptroller of the Currency (“OCC”) periodically examines and evaluates MetroBank, while the Federal Deposit Insurance Corporation (“FDIC”) and California Department of Financial Institutions (“CDFI”) periodically examine and evaluate Metro United. Based upon such examinations, the regulators may revalue the assets of the institution and require that it charge-off certain assets, establish specific reserves to compensate for the difference between the regulators-determined value and the book value of such assets or take other regulatory action designed to lessen the risk in the asset portfolio.

 
13

 
 
The following table provides an analysis of the age of the recorded investment in loans by portfolio segment at the date indicated (in thousands):
 
As of March 31, 2012
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days
   
Total Past
Due
   
Current
   
Total Recorded Investment in Loans
   
Recorded Investment 90 Days and Accruing
 
                                           
Commercial and industrial
 
$
7,642
   
$
1,892
   
$
7,792
   
$
17,326
   
$
327,649
   
$
344,975
   
$
-
 
Real estate mortgage:
                                                       
Residential
   
456
     
-
     
243
     
699
     
41,038
     
41,737
     
-
 
Commercial
   
8,137
     
9,916
     
15,258
     
33,311
     
616,023
     
649,334
     
-
 
Real estate construction:
                                                       
Residential
   
-
     
-
     
-
     
-
     
5,945
     
5,945
     
-
 
Commercial
   
-
     
-
     
3,263
     
3,263
     
-
     
3,263
     
-
 
Consumer and other
   
3
     
-
     
1
     
4
     
4,791
     
4,795
     
-
 
                                                         
Total
 
$
16,238
   
$
11,808
   
$
26,557
   
$
54,603
   
$
995,446
   
$
1,050,049
   
$
-
 
 

As of December 31, 2011
 
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Total Recorded Investment in Loans
   
Recorded Investment 90 Days and Accruing
 
                                           
Commercial and industrial
 
$
2,018
   
$
121
   
$
9,433
   
$
11,572
   
$
333,993
   
$
345,565
   
$
 
Real estate mortgage:
                                                       
Residential
   
105
     
     
251
     
356
     
42,440
     
42,796
     
 
Commercial
   
7,361
     
4,002
     
15,559
     
26,922
     
618,634