|• METRO BANCORP, INC. FORM 10-Q • EXHIBIT 11 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
METRO BANCORP, INC.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Metro Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
See accompanying notes.
Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
See accompanying notes.
Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
See accompanying notes.
Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Unaudited)
See accompanying notes.
Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
See accompanying notes.
METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
Consolidated Financial Statements
The consolidated balance sheet at December 31, 2011 has been derived from audited consolidated financial statements and the consolidated interim financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements were prepared in accordance with GAAP for interim financial statements and with instructions for Form 10-Q and Regulation S-X Section 210.10-01. Further information on Metro Bancorp, Inc.'s (Metro or the Company) accounting policies are available in Note 1 (Significant Accounting Policies) of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods presented. Such adjustments are of a normal, recurring nature.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements. The results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries including Metro Bank (the Bank). All material intercompany transactions have been eliminated. Certain amounts from the prior year have been reclassified to conform to the 2012 presentation. Such reclassifications had no impact on the Company's stockholders' equity or net income.
Use of Estimates
The financial statements are prepared in conformity with GAAP. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and require disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses (allowance or ALL), impaired loans, the valuation of deferred tax assets, the valuation of foreclosed assets, the valuation of securities available for sale, the determination of other-than-temporary impairment (OTTI) on the Bank's investment securities portfolio and fair value measurements.
Other Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale (AFS) securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income. The only comprehensive income items that the Company presently has other than net income are net unrealized gains on securities available for sale and unrealized losses for noncredit-related losses on debt securities. These items are presented net of tax in the Statement of Comprehensive Income.
Recent Accounting Standards
In May 2011, the Financial Accounting Standards Board (FASB) amended fair value measurement guidance to clarify the guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity's stockholders' equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The update also creates an exception to fair value measurement guidance for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell
the net asset position or transfer a net liability position in an orderly transaction. In addition, the update allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the updated standard contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. The effective date of this update for public entities was for interim and annual periods beginning after December 15, 2011. Early adoption was not permitted. The adoption of this guidance resulted in expanded disclosures but did not have a material impact on our consolidated financial statements.
In June 2011, the FASB updated the guidance on Comprehensive Income. The update prohibits the presentation of the components of comprehensive income in the statements of stockholders' equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate statements of net income and other comprehensive income. Under previous GAAP, all three presentations were acceptable. Regardless of the presentation selected, the Company is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this update are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. The Company elected to present separate Statements of Operations and Statements of Comprehensive Income. The adoption of this guidance did not have a material impact on our consolidated financial statements.
The fair value of each stock option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted-average assumptions for options granted during the three months ended March 31, 2012 and 2011, respectively: risk-free interest rates of 1.7% and 3.1%; volatility factors of the expected market price of the Company's common stock of .48 and .46; assumed forfeiture rates of 8.73% and 1.52%; weighted-average expected lives of the options of 7.5 years for both March 31, 2012 and March 31, 2011; and no cash dividends. Using these assumptions, the weighted-average fair value of options granted for the three months ended March 31, 2012 and 2011 was $5.99 and $6.44 per option, respectively. In the first three months of 2012, the Company granted 235,225 options to purchase shares of the Company's stock at exercise prices ranging from $10.86 to $11.77 per share.
The Company recorded stock-based compensation expense of approximately $96,000 and $193,000 during the three months ended March 31, 2012 and March 31, 2011, respectively. In accordance with FASB guidance on stock-based payments, during the first quarters of 2012 and 2011 the Company reversed $230,000 and $165,000, respectively, of expense that had been recorded in prior periods as a result of the reconcilement of projected option forfeitures to actual option forfeitures for all stock options granted during the first quarters of 2008 and 2007, respectively.
The amortized cost and fair value of securities are summarized in the following tables:
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2012 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.
During the first quarter of 2012, the Company executed a portfolio strategy designed to remove some of the lower-yielding bonds from the investment portfolio and to capture value on accelerating prepayments. As part of this program, the Company sold twenty-one agency collateralized mortgage obligations (CMOs) and two private-label CMOs with a total fair market value of $209.7 million and realized a net pretax gain of $984,000. One of the bonds sold had been classified as held to maturity, however, its remaining par value was less than 15% of its originally purchased par value and, therefore, could be sold without tainting the remaining held to maturity (HTM) portfolio. The Company also had $110.3 million of agency debentures that were called by their issuing agency during the first quarter of 2012. To meet collateral needs, the proceeds were reinvested into similar callable debentures.
During the first quarter of 2011, the Company sold a total of 10 securities with a combined fair market value of $86.8 million and realized a net pretax gain of $34,000. All of the securities sold were agency CMOs and all had been classified as available for sale.
The Company does not maintain a trading portfolio and there were no transfers of securities between the AFS and HTM portfolios. The Company uses the specific identification method to record security sales.
At March 31, 2012, securities with a carrying value of $566.9 million were pledged to secure public deposits and for other purposes as required or permitted by law.
The following table summarizes the Company's gains and losses on the sales of debt securities and credit losses recognized for the OTTI of investments:
In determining fair market values for its portfolio holdings, the Company receives information from a third party provider which management evaluates and corroborates using amounts from one of its securities brokers. Under the current guidance, these values are considered Level 2 inputs, based upon mathematically derived matrix pricing and observed data from similar assets. They are not Level 1 direct quotes, nor do they reflect Level 3 inputs that would be derived from internal analysis or judgment. As the Company does not manage a trading portfolio and typically only sells from its AFS portfolio in order to manage interest rate risk or credit exposure, direct quotes, or street bids, are warranted on an as-needed basis only.
The following table shows the fair value and gross unrealized losses associated with the Company's investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
The Company's investment securities portfolio consists primarily of U.S. Government agency securities, U.S. Government sponsored agency mortgage-backed obligations (MBSs), private-label CMOs, municipal bonds and corporate bonds of the financial sector. The Company considers securities of the U.S. Government sponsored agencies and the U.S. Government MBS/CMOs to have little credit risk because their principal and interest payments are backed by an agency of the U.S. Government.
The unrealized losses in the Company's investment portfolio at March 31, 2012 were associated with three distinct types of securities. The first type, those backed by the U.S. Government or one of its agencies, includes five government agency debentures and four government agency sponsored MBS/CMOs. Management believes that the unrealized losses on these investments were primarily caused by the movement of interest rates and notes the contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Secondly, the Company owns five investment-grade corporate bonds and ten investment-grade municipal bonds that were in an unrealized loss position as of March 31, 2012. Due to their structure and credit rating, the Company does not anticipate incurring any credit-related losses on these bonds and the full return of principal and income is expected. Because management believes the decline in fair value is primarily attributable to changes in interest rates and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider any of these investments to be other-than-temporarily impaired at March 31, 2012.
The third type of security in the Company's investment portfolio with unrealized losses at March 31, 2012 were private-label
CMOs. Private-label CMOs are not backed by the full faith and credit of the U.S. Government nor are their principal and interest payments guaranteed. Historically, most private-label CMOs have carried a AAA bond rating on the underlying issuer, however, the subprime mortgage problems and decline in the residential housing market in the U.S. in recent years have led to ratings downgrades and subsequent OTTI of many CMOs. As of March 31, 2012, Metro owned five such non-agency CMO securities in an unrealized loss position. In addition, Metro owned one private-label CMO that was in an unrealized gain position. The total carrying value of all six non-agency CMOs was $16.4 million at March 31, 2012. Management performs no less than quarterly assessments of these securities for OTTI to determine what, if any, portion of the impairment may be credit related. As part of this process, management asserts that (a) we do not have the intent to sell the securities and (b) it is more likely than not we will not be required to sell the securities before recovery of the Company's cost basis. This assertion is based, in part, upon the most recent liquidity analysis prepared for the Company's Asset/Liability Committee (ALCO) which indicates if the Company has sufficient excess funds to consider the potential purchase of investment securities and sufficient unused borrowing capacity available to meet any potential outflows. Furthermore, the Company knows of no contractual or regulatory obligations that would require these bonds to be sold.
In order to bifurcate the impairment into its components, the Company uses the Bloomberg analytical service to analyze each individual security. The Company looks at the overall bond ratings as well as specific, underlying characteristics such as pool factor, weighted-average coupon, weighted-average maturity, weighted-average life, loan to value, delinquencies, credit score, prepayment speeds, geographic concentration, etc. Using reported data for prepayment speeds, default rates, loss severity rates and lag times, the Company analyzes each bond under a variety of scenarios. As the results may vary depending upon the historic time period analyzed, the Company uses this information for the purpose of managing the investment portfolio and its inherent risk. However, the Company reports it findings based upon the three month data points for constant prepayment rate (CPR) speed, default rate and loss severity as it believes this time point best captures both current and historic trends. For management purposes, the Company also analyzes each bond using an assumed, projected default rate based upon each pool's most recent level of 90-day delinquencies, bankruptcies and foreclosed real estate. This projected analysis also assumes loss severity percentages subjectively assigned to each pool based upon credit ratings.
When the analysis shows a bond to have no projected loss, there is considered to be no credit-related loss. When the analysis shows a bond to have a projected loss, a cash flow projection is created, including the projected loss, for the duration of the bond. This projection is then used to calculate the present value of the cash flows expected to be collected and compared to the amortized cost basis. The difference between these two figures is recognized as the amount of OTTI due to credit loss. The difference between the total impairment and this credit loss portion is determined to be the amount related to all other factors. The amount of impairment related to credit loss is to be recognized in current earnings while the amount of impairment related to all other factors is to be recognized in other comprehensive income.
Using this method, the Company determined that on March 31, 2012, it owned two private-label CMOs that had never had losses attributable to credit and four private-label CMOs that had losses attributable to credit at some point. This was due to a number of factors including the bonds' credit ratings and rising trends for delinquencies, bankruptcies and foreclosures on the underlying collateral. An analysis of all four bonds with previous credit losses indicated a loss position as of March 31, 2012, however, the present value of the cash flows for two of the four bonds was greater than the carrying value and, therefore, no further write-downs were required. For the other two bonds, the present value of their cash flows was less than their carrying value and, therefore, a write-down was required. In total, for the quarter ended March 31, 2012, the Company recognized $649,000 of losses related to credit issues on its private-label CMOs holdings and the Company did not recapture any of the previous write-downs.
During the quarter ended March 31, 2012, two private-label CMOs experienced actual principal losses for the first time and were also downgraded to payment default status. With this downgrade, the Company made the decision to sell one of the bonds with a loss of $583,000 realized on the sale. The second one was charged down to fair value with an OTTI charge of $582,000 during the quarter and will be sold when deemed appropriate by management. In addition, one private-label CMO that had experienced losses in a prior year attributable to credit but had never experienced an actual principal loss was sold during the quarter when its fair market value had recovered and a small gain was realized. A total of six private-label CMOs are still held in portfolio.
The table below rolls forward the cumulative life to date credit losses which have been recognized in earnings for the private-label CMOs previously mentioned for the three months ended March 31, 2012 and March 31, 2011:
Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at their outstanding unpaid principal balances, net of an ALL and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan or to the loan's call date. Certain qualifying loans of the Bank totaling $259.0 million, collateralize a letter of credit, a line of credit commitment and a long-term borrowing the Bank has with the Federal Home Loan Bank (FHLB).
A summary of the Bank's loans receivable at March 31, 2012 and December 31, 2011 is as follows:
The following table summarizes nonaccrual loans by loan type at March 31, 2012 and December 31, 2011:
Generally, the Bank's policy is to move a loan to nonaccrual status as soon as it becomes 90 days past due or when the Company does not believe it will collect all of its principal and interest payments. In addition, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. If a loan is substandard and accruing, interest is recognized as accrued. Once a loan is on nonaccrual status, it is not returned to accrual status unless the loan has been current for at least six consecutive months and the borrower and/or any guarantors demonstrate evidence of the ability to repay the loan. Under certain circumstances such as bankruptcy, if a loan is under collateralized, or if the borrower and/or guarantors do not show evidence of the ability to pay, the loan may be placed on nonaccrual status even though it is not past due by 90 days or more. During the three months ended March 31, 2012, several large relationships improved their payment status but remained on nonaccrual under policy guidelines. In addition several large nonaccrual relationships were under forbearance agreements and were in compliance to the terms, which placed them in a current status. Therefore, the total nonaccrual loan balance of $32.5 million exceeds the balance of total loans that are 90 days past due of $18.2 million at March 31, 2012 as presented in the aging analysis tables.
Typically, commitments are canceled and no additional advances are made when a loan is placed on nonaccrual. At March 31, 2012 there was $128,000 available to be advanced on two nonaccrual commercial construction and land development loans.
The following tables are an age analysis of past due loan receivables as of March 31, 2012 and December 31, 2011:
The increase in the 30-59 days past due column was primarily the result of three relationships totaling approximately $9.1 million that fluctuate between being current and 30 - 59 days past due. At December 31, 2011 these three relationships were current. In addition, a relationship of approximately $1.5 million moved from the current category to 30-59 at March 31, 2012. This same relationship was current at December 31, 2011 and consistently had been current in prior periods.
A summary of the ALL and balance of loans receivable by loan class and by impairment method as of March 31, 2012 and December 31, 2011 is detailed in the tables that follow.
The Bank may create a specific allowance for all of or a part of a particular loan in lieu of a charge-off or charge-down as a result of management's evaluation of impaired loans. In these instances, the Bank has determined that a loss is not imminent based upon available information surrounding the credit at the time of the analysis including, but not limited to, unresolved legal matters; however, management believes an allowance is appropriate to acknowledge the risk of loss.
Generally, construction and land development and commercial real estate loans present a greater risk of non-payment by a borrower than other types of loans. The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a relatively short period of time. Commercial and industrial, tax exempt and owner occupied real estate loans generally carry a lower risk factor because the repayment of these loans relies primarily on the cash flow from a business which is more stable and predictable. However, the significance and duration of the economic downturn caused the Bank to experience an elevated level of charge-offs in the commercial and industrial loan category in 2011.
Consumer loan collections are dependent on the borrower's continued financial stability and thus are more likely to be affected by adverse personal circumstances. Consumer and residential loans are also impacted by the market value of real estate. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. The risk of non-payment is affected by changes in economic conditions, the credit risks of a particular borrower, the duration of the loan and, in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors.
Management bases its quantitative analysis of probable future loan losses (when determining the ALL) on those loans collectively reviewed for impairment on a two-year period of actual historical losses. Given the continued state of the economy and its impact on borrowers' financial conditions and on loan collateral values, management feels a two-year period is an appropriate historical time frame, valid until such time that the economy, borrower repayment ability and loan collateral values show sustained signs of improvement. Management may increase or decrease the historical loss period at some point in the future based on the state of the economy and other circumstances.
The qualitative factors such as changes in levels and trends of charge-offs and delinquencies; material changes in the mix, volume or duration of the loan portfolio; changes in lending policies and procedures including underwriting standards; changes in the experience, ability and depth of lending management and other relevant staff; the existence and effect of any concentrations of credit; changes in the overall values of collateral; changes in the quality of the loan review program and changes in national and local economic trends and conditions among other things, are factors which have not been identified by the quantitative processes. The determination of qualitative factors inherently involves a higher degree of subjectivity and considers risk factors that may not have yet manifested themselves in historical loss experience.
The following tables summarize the transactions in the ALL for the three months ended March 31, 2012 and 2011:
The following table presents additional information regarding the Company's impaired loans as of March 31, 2012 and December 31, 2011:
The following table presents additional information regarding the Company's impaired loans for the three months ended March 31, 2012 and 2011:
Impaired loans averaged approximately $64.3 million and $68.9 million for the three months ended March 31, 2012 and 2011, respectively. All nonaccrual loans are considered impaired and interest income is handled as discussed earlier in the nonaccrual section of this footnote. Interest income continued to accrue on impaired loans that were still accruing and totaled $330,000 and $333,000 for the three months ended March 31, 2012 and 2011, respectively.
The Bank assigns loan risk ratings as credit quality indicators of its loan portfolio: pass, special mention, substandard accrual, substandard nonaccrual and doubtful. Monthly, we track commercial loans that are no longer pass rated. We review the cash flow, operating results and financial condition of the borrower and any guarantors, as well as the collateral position against established policy guidelines as a means of providing a targeted list of loans and loan relationships that require additional attention within the loan portfolio. We categorize loans possessing increased risk as either special mention, substandard accrual, substandard nonaccrual or doubtful. Special mention loans are those loans that are currently adequately protected, but potentially weak. The potential weaknesses may, if not corrected, weaken the loan's credit quality or inadvertently jeopardize our credit position in the future. Substandard accrual and substandard nonaccrual assets are characterized by well-defined weaknesses that jeopardize the liquidation of the debt and by the possibility that the Bank will sustain some loss if the weaknesses are not corrected. Substandard accrual loans would move from accrual to nonaccrual when the Bank does not believe it will collect all of its principal and interest payments. Some identifiers to determine the collectability are as follows: when the loan is 90 days past due in principal or interest, there are triggering events in the borrower's or any guarantor's financial statements that show continuing deterioration, the borrower's or
any guarantor's source of repayment is depleting, or if bankruptcy or other legal matters are present, regardless if the loan is 90 days past due or not. Doubtful loans have all of the weaknesses inherent in those classified as substandard accrual and substandard nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Pass rated loans are reviewed throughout the year through the recurring review process of an independent loan review function and through the application of other credit metrics.
Credit quality indicators for commercial loans broken out by loan type are presented in the following tables for the periods ended March 31, 2012 and December 31, 2011. There were no loans classified as doubtful for periods ended March 31, 2012 and December 31, 2011.
Consumer loan credit exposures are rated either performing or nonperforming as detailed below at March 31, 2012 and December 31, 2011: