|• 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
June 30, 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 six months ended June 30, 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.
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 six months ended June 30, 2012 and 2011, respectively: risk-free interest rates of 1.7% and 3.0%; volatility factors of the expected market price of the Company's common stock of 48% and 46%; assumed forfeiture rates of 8.97% and 1.64%; weighted-average expected lives of the options of 7.5 years for both June 30, 2012 and June 30, 2011; and no cash dividends. Using these assumptions, the weighted-average fair value of options granted for the six months ended June 30, 2012 and 2011 was $5.99 and $6.43 per option, respectively.
In the first six months of 2012, the Company granted 240,775 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 $423,000 and $544,000 during the six months ended June 30, 2012 and June 30, 2011, respectively. In accordance with Financial Accounting Standards Board (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 June 30, 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 second quarter of 2012, the Company sold four mortgage-backed securities (MBSs), six agency collateralized mortgage obligations (CMOs) and three private-label CMOs all with a total fair market value of $44.5 million and realized a net pretax gain of $12,000. Four of the bonds sold had been classified as held to maturity, however, each remaining par value was less than 15% of its originally purchased par value and, therefore, were sold without tainting the remaining held to maturity (HTM) portfolio. The Company also had $20.0 million of agency debentures that were called by their issuing agency during the second quarter of 2012.
During the second quarter of 2011, the Company sold a total of two securities with a combined fair market value of $38.5 million and realized a net pretax gain of $309,000. Both securities sold had been classified as available for sale.
During the first six months of 2012, the Company sold four MBSs, 27 agency CMOs and five private-label CMOs with a total fair market value of $254.1 million and realized a net pretax gain of $996,000. Five of the bonds sold had been classified as held to maturity, however, each remaining par value was less than 15% of its original purchased par value and, therefore, were sold without tainting the remaining HTM portfolio, Year-to-date, the Company has also had $130.3 million in a total of nine agency debenture that were called by their issuing agency.
During the first six months of 2011, the Company sold a total of 12 securities with a combined fair market value of $125.3 million. All of the securities were U.S. agency CMOs, had been classified as available for sale and had a combined amortized cost of $125.0 million. The Company realized net pretax gains of $343,000 on the combined sales.
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 June 30, 2012, securities with a carrying value of $573.6 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 of U.S. Government agency securities, U.S. Government sponsored agency MBSs, agency CMOs, 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 June 30, 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 one government agency debenture and two government agency sponsored MBS/CMOs. Management believes that the unrealized losses on these investments were primarily caused by the movement of interest rates from the date of purchase 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 thirteen investment-grade municipal bonds that were in an unrealized loss position as of June 30, 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 June 30, 2012.
The third type of security in the Company's investment portfolio with unrealized losses at June 30, 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 June 30, 2012, Metro owned three such non-agency CMO securities in an unrealized loss position with a total carrying value of $6.0 million. 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 different 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.
When the analysis shows a bond to have no projected loss, there is considered to be no credit-related impairment. 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 June 30, 2012, it owned one private-label CMO that had never had losses attributable to credit and two that had losses attributable to credit at some historical point since Metro has owned the security. 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 the bonds indicated that two were in a loss position as of June 30, 2012, however, the present value of the cash flows for both bonds was greater than the carrying value and, therefore, no further write-downs were required. In total, for the quarter ended June 30, 2012, the Company had no losses related to credit impairment on its private-label CMOs holdings and the Company did not recapture any of the previous periods write-downs.
During the quarter ended June 30, 2012, one private-label CMO, that had previously been downgraded to payment default status, continued to experience actual principal losses and it was sold. In addition, another private-label CMO was projected to begin experiencing an actual loss of principal in the second quarter of 2012 as all support and mezzanine tranches were paid off and no tranches remained to absorb continuing losses. The sale of both bonds resulted in a realized pretax loss of $572,000. In both cases, it was predetermined that the deteriorating credit conditions were sufficient to permit the sales without tainting the Company's assertion to hold the remaining private-label CMOs with OTTI losses due to credit until recovery of their fair market value. In addition, one private-label CMO that had never experienced an OTTI loss due to credit was sold during the second quarter of 2012 at a small loss. A total of three private-label CMOs were still held in the Company's portfolio at June 30, 2012, one of which has never incurred an OTTI loss due to credit, and two bonds that have incurred OTTI losses due to credit and were still in an unrealized loss position at June 30, 2012.
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 and six months ended June 30, 2012 and June 30, 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 allowance for loan loss (allowance or 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 first review date if the loan is on demand. Certain qualifying loans of the Bank totaling $259.7 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 June 30, 2012 and December 31, 2011 is as follows:
The following table summarizes nonaccrual loans by loan type at June 30, 2012 and December 31, 2011:
Generally, the Bank's policy is to move a loan to nonaccrual status when 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 ALL. 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 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 six months ended June 30, 2012, several large relationships improved their payment status but remained on nonaccrual status under the Bank's policy guidelines. Therefore, the total nonaccrual loan balance of $35.4 million exceeds the balance of total loans that are 90 days past due of $20.7 million at June 30, 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 June 30, 2012 there was $9,000 available to be advanced on one nonaccrual commercial construction and land development loans that was restructured.
The following tables are an age analysis of past due loan receivables as of June 30, 2012 and December 31, 2011:
The decrease from December 31, 2011 to June 30, 2012 in the 30 - 59 days past due category was primarily the result of the improvement to current status of an approximately $1.0 million relationship, the pay off of another approximately $1.0 million relationship as well as a group of residential loans totaling approximately $3.7 million that fluctuate between current and 30 - 59 days past due depending on the number of days in the last month of the quarter. In addition, one large relationship totaling approximately $1.0 million moved from the 30 - 59 days category at December 31, 2011 to the 60 - 89 days category at June 30, 2012. The increase in the 60 - 89 days past due category included the addition of three larger relationships totaling approximately $8.3 million that were current at December 31, 2011. These relationships are being monitored according to the Bank's normal collection policies and one of the relationships, totaling approximately $3.4 million, is included in nonaccrual loans. In addition, one relationship totaling approximately $1.1 million that was greater than 90 days past due at December 31, 2011 improved its payment status during the first six months of 2012 and moved to the 60 - 89 days past due category at June 30, 2012. The remaining decrease in the 90 days past due and greater category was a combination of charge-offs and pay downs.
A summary of the ALL and balance of loans receivable by loan class and by impairment method as of June 30, 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 and six months ended June 30, 2012 and 2011: