UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Exact name of registrant as specified in its charter)
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METRO BANCORP, INC.
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
Metro Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
See accompanying notes.
Consolidated Statements of Operations (Unaudited)
See accompanying notes.
Consolidated Statements of Stockholders’ Equity (Unaudited)
See accompanying notes.
Consolidated Statements of Cash Flows (Unaudited)
See accompanying notes.
METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note 1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated 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 the Company’s 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, 2009. 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 financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
The consolidated financial statements include the accounts of Metro Bancorp, Inc. (the Company) and its consolidated subsidiaries including Metro Bank (Metro or the Bank). All material intercompany transactions have been eliminated. Certain amounts from prior year have been reclassified to conform to the 2010 presentation. Such reclassifications had no impact on the Company’s stockholders’ equity or net income.
Note 2. STOCK-BASED COMPENSATION
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, 2010 and 2009, respectively: risk-free interest rates of 3.3% and 2.3%; volatility factors of the expected market price of the Company's common stock of .45 and .29; weighted-average expected lives of the options of 7.5 years for both June 30, 2010 and for June 30, 2009; and no cash dividends. Using these assumptions, the weighted-average fair value of options granted for the six months ended June 30, 2010 and 2009 was $6.47 and $6.09 per option, respectively. In the first half of 2010, the Company granted 188,400 options to purchase shares of the Company’s stock at exercise prices ranging from $12.28 per share to $13.20 per share.
The Company recorded stock-based compensation expense of approximately $527,000 and $693,000 during the six months ended June 30, 2010 and June 30, 2009, respectively. In accordance with Financial Accounting Standards Board (FASB) guidance on stock-based payments, during the first quarter of 2010 the Company reversed $200,000 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 quarter of 2006.
Note 3. NEW ACCOUNTING STANDARDS
In June 2009, the FASB issued guidance that prescribes the information that a reporting entity must provide in its financial reports about any transfers of financial assets; the effects of such transfers on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. The concept of a qualifying special-purpose entity is no longer part of this guidance. The guidance also modifies the de-recognition conditions related to legal isolation and effective control and adds additional disclosure requirements for transfers of financial assets. This guidance was effective for fiscal years beginning after November 15, 2009. The Company adopted this guidance during the first quarter of 2010. During the second quarter of 2010 we transferred $7.3 million of Small Business Administration (SBA) loans that include a 90 day warranty period, with a deferred gain of $560,000. The gain will be recognized at the expiration of the 90 day warranty period.
In January 2010, the FASB issued additional guidance to improve the disclosures for fair value measurements. The guidance requires new disclosures that report separately the amounts of significant transfers into and out of Level 1 and Level 2 fair value measurements and that describe the reasons for the transfers. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance also provides clarity to existing disclosures regarding the level of disaggregation and input and valuation techniques. This update, with the exception of the Level 3 requirements, was effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance has not had a material impact on our consolidated financial statements. The Level 3 requirements have a delayed effective date for interim and annual reporting periods beginning after December 15, 2010. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In July 2010, the FASB updated guidance to provide greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Entities will be required to provide the following disclosures on a disaggregated basis: 1) the nature of credit risk inherent in the entity’s portfolio of financing receivables, 2) how the risk is analyzed and assessed in arriving at the allowance for credit losses and 3) the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
Note 4. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain routine legal proceedings and claims arising in the ordinary course of business. It is management’s opinion that the ultimate resolution of these claims will not have a material adverse effect on the Company’s financial position and results of operations.
In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and unadvanced loan commitments. At June 30, 2010, the Company had $361.4 million in unused commitments. Management does not anticipate any material losses as a result of these transactions.
On November 10, 2008, Metro announced it had entered into a service agreement with Fiserv Solutions, Inc. (Fiserv). The agreement, effective November 7, 2008, is for a period of seven years, subject to automatic renewal for additional terms of two years unless either party gives the other written notice of non-renewal at least 180 days prior to the expiration date of the term. Future obligation for support, license fees and processing services of $43.3 million is expected over the next six years. The various services include: core system hosting, item processing,
deposit and loan processing, electronic banking, data warehousing and other banking functions. The transition was successfully completed in June 2009.
The Company owns a parcel of land at the corner of Carlisle Road and Alta Vista Road in Dover Township, York County, Pennsylvania. The Company plans to construct a full-service store on this property to be opened in the future.
The Company has entered into a land lease for the premises located at 2121 Lincoln Highway East, East Lampeter Township, Lancaster County, Pennsylvania. The Company plans to construct a full-service store on this property to be opened in the future.
The Company has purchased land at 105 N. George Street, York City, York County, Pennsylvania. The Company plans to open a store on this property in the future.
Note 5. 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 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 other comprehensive income items that the Company presently has are net unrealized gains on securities available for sale and unrealized losses for noncredit-related impairment losses. The federal income taxes allocated to the net unrealized gains are presented in the following table:
Note 6. GUARANTEES
The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, when issued, letters of credit have expiration dates within two years. The credit risk associated with letters of credit is essentially the same as that of traditional loan facilities. The Company generally requires collateral and/or personal guarantees to support these commitments. The Company had $34.3 million of standby letters of credit at June 30, 2010. Management believes that the proceeds obtained through a liquidation of collateral, the enforcement of guarantees and normal collection activities against the borrower would be sufficient to cover the potential amount of future payment required under the corresponding letters of credit. There was no current amount of the liability at June 30, 2010 and December 31, 2009 for guarantees under standby letters of credit issued.
Note 7. FAIR VALUE DISCLOSURE
The Company uses its best judgment in estimating the fair value of its financial instruments; however, there are inherent weaknesses in any estimation technique due to assumptions that are susceptible to significant change. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following fair value hierarchy in selecting inputs with the highest priority given to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements):
As required, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets that were measured at fair value on a recurring basis at June 30, 2010 by level within the fair value hierarchy:
For financial assets measured at fair value on a recurring basis at December 31, 2009, the fair value measurements by level within the fair value hierarchy were as follows:
As of June 30, 2010 and December 31, 2009, the Company did not have any liabilities that were measured at fair value on a recurring basis.
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy at June 30, 2010 were as follows:
For financial assets measured at fair value on a nonrecurring basis at December 31, 2009, the fair value measurements by level within the fair value hierarchy were as follows:
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2010 and at December 31, 2009:
Cash and Cash Equivalents (Carried at Cost)
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Loans Held for Sale (Carried at Lower of Cost or Fair Value)
The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the six months ended June 30, 2010 or the year ended December 31, 2009.
Loans Receivable (Carried at Cost)
The fair value of loans, excluding impaired loans with specific loan allowances, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired Loans (Generally Carried at Fair Value)
Impaired loans are those that the Bank has measured impairment of generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows. At June 30, 2010, the fair value consisted of an impaired loan balance with reserve allocation, of $757,000, after a valuation allowance of $193,000. At December 31, 2009, the fair value consisted of impaired loan balances with reserve allocations, and their associated loan relationships, of $383,000, after a valuation allowance of $900,000. The Bank's impaired loans are more fully discussed in the Loan and Asset Quality section of this Form 10-Q.
Restricted Investments in Bank Stock (Carried at Cost)
The carrying amount of restricted investments in bank stock approximates fair value, and considers the limited marketability of such securities. The restricted investments in bank stock consisted of Federal Home Loan Bank (FHLB) stock and Atlantic Central Bankers Bank (ACBB) at June 30, 2010 and FHLB stock at December 31, 2009.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Foreclosed Assets (Carried at Lower of Cost or Fair Value)
Fair value of real estate acquired through foreclosure was based on independent third party appraisals of the properties, recent offers, or prices on comparable properties. These values were determined based on the sales prices of similar properties in the proximate vicinity. The carrying values of foreclosed assets, with valuation allowances recorded subsequent to initial foreclosure, was $5.4 million and $446,000 at June 30, 2010 and December 31, 2009, respectively which are net of valuation allowances of $481,000 and $55,000 that were established in 2010 and 2009, respectively.
Deposit Liabilities (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings (Carried at Cost)
The carrying amounts of short-term borrowings approximate their fair values.
Long-Term Debt (Carried at Cost)
The fair value of the FHLB advance was estimated using discounted cash flow analysis, based on a quoted price for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. The price obtained from this active market represents a fair value that is deemed to represent the transfer price if the liability were assumed by a third party. Other long-term debt was estimated using discounted cash flow analysis, based on quoted prices from a third party broker for new debt with similar characteristics, terms and remaining maturity. The price for the other long-term debt was obtained in an inactive market where these types of instruments are not traded regularly.
Off-Balance Sheet Financial Instruments (Disclosed at Cost)
Fair values for the Bank’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Company’s financial instruments were as follows at June 30, 2010 and December 31, 2009:
Note 8. SECURITIES
The amortized cost and fair value of securities are summarized in the following tables:
The amortized cost and fair value of debt securities at June 30, 2010 by contractual maturity 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 2010, the Company sold three mortgage-backed securities with a fair market value of $19.9 million. All of the securities had been classified as available for sale and the Company realized a pretax gross gain of $298,000. The securities sold included two private-label mortgage-backed securities with a fair market value of $9.2 million. During the second quarter of 2009, the Company sold 11 mortgage-backed securities that were classified as available for sale. These securities had a fair market value of $649,000 and the Company realized a pretax gross gain of $31,000. The Company also sold nine mortgage-backed securities that were classified as held to maturity. In each case, the individual current par value had fallen below 15% of its original value. These securities had a fair market value of $446,000 and the Company realized a pretax gross gain of $23,000. All 20 securities were agency mortgage-backed issues.
During the first six months of 2010, the Company sold 15 mortgage-backed securities with a fair market value of $44.9 million. All of the securities had been classified as available for sale and the Company realized a pretax gross gain of $919,000. The securities sold included 11 private-label mortgage-backed securities with a fair market value of $21.7 million. As described above, the Company sold 11 mortgage-backed securities that were classified as available for sale and nine mortgage-backed securities that were classified as held to maturity during the second quarter of 2009. These accounted for all transactions during the first six months of 2009, as there were none in the first quarter last year.
The Company does not maintain a trading portfolio and there were no transfers of securities between the available for sale and held to maturity portfolios. The Company uses the specific identification method to record security sales.
The following table summarizes the Company’s gains and losses on the sales or calls of debt securities and credit losses recognized for the other-than-temporary impairment (OTTI) of investments:
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 and private-label collateralized mortgage obligations (CMOs). The securities of the U.S. Government sponsored agencies and the U.S. Government mortgage-backed obligations have little credit risk because their principal and interest payments are backed by an agency of the U.S. Government. 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, rising foreclosures and the general decline in the residential housing market in the U.S. in recent years have led to several ratings downgrades and subsequent OTTI of many private-label CMOs.
In determining fair market values for its portfolio holdings, the Company relies upon a third-party provider. Under the current guidance, these values are considered Level 2 inputs, based upon matrix pricing and observed data from similar assets. They do not reflect the Level 3 inputs that would be derived from internal analysis or judgment. While street bids provide definitive fair market values, they do so only when the bidders believe there is a legitimate transaction occurring. Otherwise, the street will “bid” using Level 2 matrix pricing. The Bank does not manage a trading portfolio, and is not typically a seller from either its available-for-sale or held-to-maturity portfolios. Therefore, the street bids will converge with matrix pricing, will add no value, and will potentially damage our reputation when legitimate bids are wanted. Absent direct quotes, or Level 1 inputs, the Bank must rely upon an independent, third party to provide consistently reasonable valuations. Metro has significantly enhanced its portfolio analysis over the past two years, including cash flow projections and loss analytics. Through these enhancements, the Company has an improved understanding of the forces affecting the fair market values of its portfolio holdings and can more appropriately manage these assets. The Bank cannot, however, replicate the overview of the investment community which sees the entire marketplace and can provide greater guidance on values of similar assets. In short, these Level 2 inputs provide the best, most consistent pricing and the Company expects to continue to rely upon and report their valuations. The Bank has no investment securities with price indications based on Level 1 or on Level 3 inputs and, as such, there have been no transfers among the three categories.
The unrealized losses in the Company’s investment portfolio at June 30, 2010 were associated with two distinct types of securities. The first type includes three government agency-backed CMOs and one corporate bond. Management believes that the unrealized losses on these investments were caused by the overall very low level of market interest rates, including the London Interbank Offered Rate (LIBOR) and notes the contractual cash flows of the CMOs are guaranteed by an agency of the U.S. Government. Additionally, the sole corporate bond is a shorter-term holding in an investment grade company. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because management believes the decline in fair value is attributable to changes in interest rates and not credit quality, and the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, and it is also unlikely that the Bank will be required to sell the securities before a full recovery is made, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2010.
The second type of security in the Company’s investment portfolio with unrealized losses at June 30, 2010 was private-label CMOs. As of June 30, 2010, the Company owned 19 such non-agency CMO securities in its investment portfolio with a total amortized cost of $88.6 million. Management performs no less than quarterly assessments of these securities for OTTI and 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 Bank’s cost
basis. This assertion is based, in part, upon the most recent liquidity analysis prepared for the Bank’s Asset/Liability Committee (ALCO) which indicates if the Bank 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 Bank knows of no contractual or regulatory obligations that would require these bonds to be sold.
Next, in order to bifurcate the impairment into its components, the Bank uses the Bloomberg analytical service to analyze each individual security. The Bank 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 Bank analyzes each bond under a variety of scenarios. As the results may vary depending upon the historic time period analyzed, the Bank uses this information for the purpose of managing the investment portfolio and its inherent risk. However, the Bank 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 Bank 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 impairment 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 Bank determined that to-date, ten of its private-label CMOs have had losses attributable to credit. This was due to a number of factors including the securities’ credit ratings and rising trends for delinquencies, bankruptcies and foreclosures on the underlying collateral. Of the ten, five no longer indicated a loss position due to credit as of June 30, 2010 while one security with losses attributable to credit is included for the first time as of June 30, 2010. The Bank previously recognized a loss attributable to credit on four of the securities, however, as of June 30, 2010, the present value of the cash flows for these four securities was greater than the carrying value, and therefore no further write-downs were required. Total losses attributable to credit issues during the quarter ending June 30, 2010 were $3,000 and total life-to-date losses attributable to credit issues on all ten securities were $3.3 million. There has been no recapture of the previous write-downs. The noncredit losses in other comprehensive income on the ten private-label CMOs considered to have credit impairment totaled $13.5 million at June 30, 2010. This compares to cumulative noncredit loss in other comprehensive income on those same private-label CMOs of $13.0 million at December 31, 2009.
The table below rolls forward the cumulative life to date credit losses for the quarter ended June 30, 2010 which have been recognized in earnings for the private-label CMOs previously mentioned.
During the second quarter of 2010, the Bank sold two private-label CMOs, each of which had previously been in an unrealized loss position but had subsequently recovered their cost basis. Neither security was recognized in the table of OTTI credit losses above. Both securities had been classified as available for sale and had a total carrying value of $9.1 million. The Company realized proceeds of $9.2 million for a pretax gain of $89,000.
The following table rolls forward the cumulative life to date credit losses during six months ended June 30, 2010 which have been recognized in earnings for the private-label CMOs previously mentioned.
The table below rolls forward the cumulative life to date credit losses for the quarter ended June 30, 2009 which were recognized in earnings for the private-label CMOs previously mentioned.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company’s balance sheets and statements of operations. This section should be read in conjunction with the Company's financial statements and accompanying notes.
This Form 10-Q and the documents incorporated by reference contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act and Section 21E of the Securities Exchange Act of 1934, which we refer to as the Exchange Act, with respect to the financial condition, liquidity, results of operations, future performance and business of Metro Bancorp, Inc. These forward-looking statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond our control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.
While we believe our plans, objectives, goals, expectations, anticipations, estimates and intentions as reflected in these forward-looking statements are reasonable, we can give no assurance that any of them will be achieved. You should understand that various factors, in addition to those discussed elsewhere in this Form 10-Q, in the Company’s Form 10-K and incorporated by reference in this Form 10-Q, could affect our future results and could cause results to differ materially from those expressed in these forward-looking statements, including:
Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these factors or any of our forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us except as required by applicable law.
The Company recorded net income of $360,000, or $0.02 per fully-diluted share, for the second quarter of 2010 versus a net loss of $1.4 million, or $(0.21) per share, for the same period one year
ago. Net income for the six months ended June 30, 2010 was $366,000, or $0.02 per fully-diluted share, compared to a net loss of $518,000, or $(0.09) per share, for the six months ended June 30, 2009. Total revenues for the three months ended June 30, 2010 were $27.2 million, up $3.3 million, or 14%, over the same period in 2009. Total revenues for the six months ended June 30, 2010 were $52.6 million, up $3.8 million, or 8%, over the same period in 2009.
The net interest margin on a fully tax-equivalent basis for the three months ended June 30, 2010 was 4.01% compared to 3.95% for the same period in 2009. Average interest-earning assets for the second quarter of 2010 were $2.04 billion versus $1.97 billion for the second quarter of 2009. The net interest margin on a fully tax-equivalent basis for the six months ended June 30, 2010 was also 4.01% compared to 3.94% for the same period in 2009. Average interest-earning assets for the first half of 2010 were $2.02 billion versus $1.99 billion for the same period of 2009.
The 14% increase in revenues mentioned above for the quarter was partially offset by an 8% increase in noninterest expenses, resulting in an increase in net income and net income per share for the three months ended June 30, 2010 over the same period one year ago. For the first six months of the year total revenues were up 8% offset by an increase in noninterest expenses of 12%, however still resulting in an increase in net income and net income per share over the same period one year ago.
Noninterest income totaled $7.3 million for the second quarter of 2010, up $2.3 million, or 47%, over the same period one year ago. Noninterest income for the second quarter of 2010 included increased service charges and fees of $973,000 and an increase in securities gains of $243,000. The second quarter of 2009 was impacted by a $1.4 million charge for other-than-temporary impairment on three private-label collateralized mortgage obligations (CMOs) compared to a $3,000 charge on one private-label CMO in the second quarter of 2010.
The increase in noninterest expenses were primarily a result of the transition of operational services away from TD Bank (TD) in June 2009. Expenses were also higher as a result of increased costs related to foreclosed assets, problem loans and consulting fees for services related to regulatory compliance efforts. These higher expenses were partially offset by lower salaries and benefits and lower FDIC premiums in the second quarter of 2010.
For the first six months of 2010, total net loans decreased by $4.5 million from $1.43 billion at December 31, 2009 to $1.42 billion at June 30, 2010. Over the past twelve months, total net loans (excluding loans held for sale) declined by $8.2 million, or 1%. Our loan to deposit ratio, which excludes loans held for sale, was 79% at June 30, 2010 compared to 80% at December 31, 2009.
Total deposits increased $18.9 million, or 1%, from $1.81 billion at December 31, 2009 to $1.83 billion at June 30, 2010. Over the past twelve months, our total consumer core deposits increased by $50.9 million, or 6%, and now account for 50% of total core deposits.
Total borrowings and long-term debt increased by $26.3 million from $105.5 million at December 31, 2009 to $131.8 million at June 30, 2010. Of the total at June 30, 2010, $77.4 million were short-term borrowings and $54.4 million were considered long-term debt.
Nonperforming assets at June 30, 2010 totaled $70.6 million, or 3.22%, of total assets, as compared to $45.6 million, or 2.12%, of total assets, at December 31, 2009 and $33.4 million, or 1.61%, of total assets one year ago. The Company’s second quarter provision for loan losses totaled $2.6 million compared to $3.7 million recorded in the second quarter of 2009. The allowance for loan losses totaled $16.2 million as of June 30, 2010, a decrease of $3.2 million, or 16%, from the total allowance at June 30, 2009 but an increase of $1.8 million compared to $14.4 million at December 31, 2009. The allowance represented 1.12% and 1.33% of gross loans outstanding at June 30, 2010 and 2009, respectively and compared to 1.00% of gross loans at December 31, 2009. More detailed discussion of nonperforming assets is provided in the Loan and
Asset Quality section of this Form 10-Q.
Total net charge-offs for the second quarter were $1.6 million, the same as for the first quarter of 2010 and compared to $594,000 for the second quarter of 2009. Approximately $1.4 million, or 89%, of total charge-offs for the second quarter of 2010 were associated with four separate loan relationships. Total net charge-offs for the first six months of 2010 were $3.2 million compared to $4.3 million for the first half of 2009. For the first half of 2010 approximately $2.7 million, or 84%, of total net charge-offs were concentrated in six total relationships. Charge-offs are more fully discussed in the Loan and Asset Quality section of this Form 10-Q.
Stockholders’ equity increased by $90.7 million, or 77%, over the past twelve months to $208.8 million primarily as a result of the stock offering which occurred in the third quarter of 2009. Total stockholders’ equity increased by $8.8 million, or 4%, from December 31, 2009. The Company’s consolidated leverage ratio as of June 30, 2010 was 10.99% and its total risk-based capital ratio was 14.72%.
A summary of financial highlights for the first six months of 2010 compared to the same period in 2009 is summarized below: