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EX-31.1 - METRO BANCORP, INC.exhibit311certificationofc.htm
EX-11 - METRO BANCORP, INC.exhibit11computationofneti.htm
EX-32 - METRO BANCORP, INC.exhibit32certificationofco.htm
EX-31.2 - METRO BANCORP, INC.exhibit312certificationofc.htm
 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
 
March 31, 2011
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
 
to
 
Commission File Number:
 
000-50961
 
 
 
 
 
METRO BANCORP, INC.
 
 
(Exact name of registrant as specified in its charter)
 
 
Pennsylvania
25-1834776
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
3801 Paxton Street,  Harrisburg, PA
 
17111
(Address of principal executive offices)
 
(Zip Code)
800-653-6104
(Registrant's telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
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.
 
Yes
X
 
No
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
 
 
No
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
 
 
Accelerated filer
X
 
Non-accelerated filer
 
 
Smaller Reporting Company
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
 
No
X
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
13,857,331 Common shares outstanding at 4/30/2011

 
1

 
 

METRO BANCORP, INC.
 
INDEX
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets (Unaudited)
 
 
March 31, 2011 and December 31, 2010
 
 
 
 
Consolidated Statements of Operations (Unaudited)
 
 
Three months ended March 31, 2011 and March 31, 2010
 
 
 
 
Consolidated Statements of Stockholders' Equity  (Unaudited)
 
 
Three months ended March 31, 2011 and March 31, 2010
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited)
 
 
Three months ended March 31, 2011 and March 31, 2010
 
 
 
 
Notes to the Interim Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition
 
 
and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
(Removed and Reserved)
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
 
 

 
2

 
 

Part I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Metro Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share amounts)
March 31, 2011
 
December 31, 2010
 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
44,795
 
 
$
32,858
 
Securities, available for sale at fair value
471,719
 
 
438,012
 
Securities, held to maturity at cost (fair value 2011: $215,690;  2010: $224,202)
220,087
 
 
227,576
 
Loans, held for sale
14,628
 
 
18,605
 
Loans receivable, net of allowance for loan losses
  allowance 2011: $21,850; 2010: $21,618
1,424,827
 
 
1,357,587
 
Restricted investments in bank stock
19,586
 
 
20,614
 
Premises and equipment, net
86,626
 
 
88,162
 
Other assets
38,363
 
 
51,058
 
Total assets
$
2,320,631
 
 
$
2,234,472
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
Deposits:
 
 
 
 
 
Noninterest-bearing
$
396,214
 
 
$
340,956
 
Interest-bearing
1,488,756
 
 
1,491,223
 
      Total deposits
1,884,970
 
 
1,832,179
 
Short-term borrowing and repurchase agreements
182,525
 
 
140,475
 
Long-term debt
29,400
 
 
29,400
 
Other liabilities
14,300
 
 
27,067
 
Total liabilities
2,111,195
 
 
2,029,121
 
Stockholders' Equity:
 
 
 
 
 
Preferred stock - Series A noncumulative; $10.00 par value;
 
 
 
      1,000,000 shares authorized; 40,000 shares issued and outstanding
400
 
 
400
 
Common stock - $1.00 par value; 25,000,000 shares authorized;
 
 
 
 
 
      (issued and outstanding shares 2011: 13,838,409;  2010: 13,748,384)
13,838
 
 
13,748
 
Surplus
152,705
 
 
151,545
 
Retained earnings
46,800
 
 
45,288
 
Accumulated other comprehensive loss
(4,307
)
 
(5,630
)
Total stockholders' equity
209,436
 
 
205,351
 
Total liabilities and stockholders' equity
$
2,320,631
 
 
$
2,234,472
 
 
See accompanying notes.
 

 
3

 
 

Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,
(in thousands, except per share amounts)
 
 
 
 
2011
 
2010
Interest Income
 
 
 
 
 
 
 
Loans receivable, including fees:
 
 
 
 
 
 
 
Taxable
 
 
 
 
$
17,513
 
 
$
17,537
 
Tax-exempt
 
 
 
 
986
 
 
1,144
 
Securities:
 
 
 
 
 
 
 
 
Taxable
 
 
 
 
5,395
 
 
5,399
 
Tax-exempt
 
 
 
 
 
 
14
 
Federal funds sold
 
 
 
 
1
 
 
1
 
Total interest income
 
 
 
 
23,895
 
 
24,095
 
Interest Expense
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
2,997
 
 
3,667
 
Short-term borrowings
 
 
 
 
220
 
 
66
 
Long-term debt
 
 
 
 
661
 
 
929
 
Total interest expense
 
 
 
 
3,878
 
 
4,662
 
Net interest income
 
 
 
 
20,017
 
 
19,433
 
Provision for loan losses
 
 
 
 
1,792
 
 
2,400
 
 Net interest income after provision for loan losses
 
 
 
 
18,225
 
 
17,033
 
Noninterest Income
 
 
 
 
 
 
 
 
 
Service charges, fees and other operating income
 
 
 
 
6,724
 
 
6,044
 
Gains on sales of loans
 
 
 
 
1,198
 
 
194
 
Total fees and other income
 
 
 
 
7,922
 
 
6,238
 
Other-than-temporary impairment losses
 
 
 
 
 
 
(3,337
)
Portion recognized in other comprehensive income (before taxes)
 
 
 
 
 
 
2,424
 
Net impairment loss on investment securities
 
 
 
 
 
 
(913
)
Net gains on sales/calls of securities
 
 
 
 
34
 
 
621
 
Total noninterest income
 
 
 
 
7,956
 
 
5,946
 
Noninterest Expenses
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
 
 
 
10,379
 
 
10,254
 
Occupancy
 
 
 
 
2,462
 
 
2,285
 
Furniture and equipment
 
 
 
 
1,335
 
 
1,144
 
Advertising and marketing
 
 
 
 
399
 
 
832
 
Data processing
 
 
 
 
3,395
 
 
3,140
 
Regulatory assessments and related fees
 
 
 
 
1,085
 
 
1,169
 
Telephone
 
 
 
 
872
 
 
923
 
Loan expense
 
 
 
 
324
 
 
352
 
Foreclosed real estate
 
 
 
 
1,052
 
 
568
 
Consulting fees
 
 
 
 
407
 
 
742
 
Other
 
 
 
 
2,597
 
 
2,466
 
Total noninterest expenses
 
 
 
 
24,307
 
 
23,875
 
Income (loss) before taxes
 
 
 
 
1,874
 
 
(896
)
Provision (benefit) for federal income taxes
 
 
 
 
342
 
 
(902
)
Net income
 
 
 
 
$
1,532
 
 
$
6
 
Net Income per Common Share
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
$
0.11
 
 
$
 
Diluted
 
 
 
 
0.11
 
 
 
Average Common and Common Equivalent Shares Outstanding
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
13,779
 
 
13,469
 
Diluted
 
 
 
 
13,779
 
 
13,469
 
See accompanying notes.

 
4

 
 

Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Unaudited)
(in thousands, except share amounts)
Preferred Stock
Common Stock
Surplus
Retained Earnings
Accumulated Other Comprehensive Loss
Total
January 1, 2010
$
400
 
$
13,448
 
$
147,340
 
$
49,705
 
$
(10,871
)
$
200,022
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
6
 
 
6
 
Other comprehensive income, net
of tax impact
 
 
 
 
2,550
 
2,550
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
2,556
 
Dividends declared on preferred
stock
 
 
 
(20
)
 
(20
)
Common stock of 11,378 shares
issued under stock option plans,
including tax benefit of $25
 
12
 
91
 
 
 
103
 
Common stock of 110 shares
issued under employee stock
purchase plan
 
 
1
 
 
 
1
 
Proceeds from issuance of 31,369
shares of common stock in
connection with dividend
reinvestment and stock purchase
plan
 
31
 
353
 
 
 
384
 
Common stock share-based awards
 
 
173
 
 
 
173
 
March 31, 2010
$
400
 
$
13,491
 
$
147,958
 
$
49,691
 
$
(8,321
)
$
203,219
 
 
(in thousands, except share amounts)
Preferred Stock
Common Stock
Surplus
Retained Earnings
Accumulated Other Comprehensive Loss
 Total
January 1, 2011
$
400
 
$
13,748
 
$
151,545
 
$
45,288
 
$
(5,630
)
$
205,351
 
Comprehensive income:
 
 
 
 
 
 
Net income
 
 
 
1,532
 
 
1,532
 
Other comprehensive income, net
of tax impact
 
 
 
 
1,323
 
1,323
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
2,855
 
Dividends declared on preferred
stock
 
 
 
(20
)
 
(20
)
Common stock of 10 shares
  issued under employee stock
  purchase plan
 
 
 
 
 
 
Proceeds from issuance of 90,015
shares of common stock in
connection with dividend
reinvestment and stock purchase
plan
 
90
 
967
 
 
 
1,057
 
Common stock share-based awards
 
 
193
 
 
 
193
 
March 31, 2011
$
400
 
$
13,838
 
$
152,705
 
$
46,800
 
$
(4,307
)
$
209,436
 
 
See accompanying notes.

 
5

 
 

Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2011
 
2010
Operating Activities
 
 
 
 
Net income
 
$
1,532
 
 
$
6
 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
 
 
Provision for loan losses
 
1,792
 
 
2,400
 
Provision for depreciation and amortization
 
1,709
 
 
1,355
 
Deferred income taxes (benefit)
 
172
 
 
(843
)
Amortization of securities premiums and accretion of discounts (net)
 
521
 
 
17
 
Gains on sales/calls of securities (net)
 
(34
)
 
(621
)
Other-than-temporary impairment losses on investment securities
 
 
 
913
 
Proceeds from sales and transfers of SBA loans originated for sale
 
1,969
 
 
 
Proceeds from sales of other loans originated for sale
 
17,289
 
 
9,931
 
Loans originated for sale
 
(13,887
)
 
(7,233
)
Gains on sales of loans originated for sale
 
(1,198
)
 
(194
)
Loss on write-down on foreclosed real estate
 
1,018
 
 
378
 
Gains on sales of foreclosed real estate (net)
 
(31
)
 
(14
)
Loss on disposal of equipment
 
 
 
47
 
Stock-based compensation
 
193
 
 
173
 
Amortization of deferred loan origination fees and costs (net)
 
522
 
 
427
 
Decrease (increase) in other assets
 
11,186
 
 
(15,609
)
Decrease in other liabilities
 
(12,963
)
 
(13,012
)
Net cash provided (used) by operating activities
 
9,790
 
 
(21,879
)
Investing Activities
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 Proceeds from principal repayments, calls and maturities
 
16,504
 
 
41,165
 
 Proceeds from sales
 
86,765
 
 
24,405
 
 Purchases
 
(135,439
)
 
(114,782
)
Securities held to maturity:
 
 
 
 
 
 Proceeds from principal repayments, calls and maturities
 
7,470
 
 
6,879
 
Proceeds from sales of foreclosed real estate
 
645
 
 
744
 
(Increase) decrease in loans receivable (net)
 
(70,530
)
 
31,597
 
Redemption of restricted investment in bank stock (net)
 
1,028
 
 
 
Proceeds from sale of premises and equipment
 
1
 
 
4
 
Purchases of premises and equipment
 
(175
)
 
(666
)
Net cash used by investing activities
 
(93,731
)
 
(10,654
)
Financing Activities
 
 
 
 
 
 
Increase in demand, interest checking, money market, and savings deposits
 
61,067
 
 
57,448
 
Decrease in time deposits
 
(8,276
)
 
(24,486
)
Increase in short-term borrowings
 
42,050
 
 
700
 
Proceeds from common stock options exercised
 
 
 
78
 
Proceeds from dividend reinvestment and common stock purchase plan
 
1,057
 
 
384
 
Tax benefit on exercise of stock options
 
 
 
25
 
Cash dividends on preferred stock
 
(20
)
 
(20
)
Net cash provided by financing activities
 
95,878
 
 
34,129
 
Increase in cash and cash equivalents
 
11,937
 
 
1,596
 
Cash and cash equivalents at beginning of year
 
32,858
 
 
40,264
 
Cash and cash equivalents at end of period
 
$
44,795
 
 
$
41,860
 
Supplementary cash flow information:
 
 
 
 
 
 
Transfer of loans to foreclosed assets
 
$
976
 
 
$
570
 
See accompanying notes.

 
6

 
 

METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Consolidated Financial Statements
 
The consolidated balance sheet at December 31, 2010 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 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, 2010. 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, 2010. 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
 
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 the prior year have been reclassified to conform to the 2011 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, impaired loans, the valuation of deferred tax assets, the valuation of securities available for sale, and the determination of other-than-temporary impairment (OTTI) on the Bank's investment securities portfolio.
 
During the third quarter of 2010, as part of the quantitative analysis of the adequacy of the allowance for loan losses, management adjusted its projection of probable loan losses based upon a much shorter and more recent period of actual historical losses.  This was done as a result of the much higher level of loan charge-offs experienced by the Company over the past two years compared to previous years.  The change in this estimate would have resulted in an additional $3.6 million of provision in the first quarter of 2010. The impact to the net income after taxes was a loss of $2.4 million and a decrease of $0.18 to earnings per share.
 
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 three months ended March 31, 2011 and 2010, respectively: risk-free interest rates of 3.1% and 3.3%; volatility factors of the expected market price of the Company's common stock of .46 and .45; weighted-average expected lives of the options of 7.5 years for both March 31, 2011 and March 31, 2010; and no cash dividends. Using these assumptions, the weighted-average fair value of options granted for both the three months ended March 31, 2011 and 2010 was $6.44 per option, respectively. In the first three months of 2011, the Company granted 234,350 options to purchase shares of the Company's stock at exercise prices ranging from $12.05 to $12.40 per share.
 
The Company recorded stock-based compensation expense of approximately $193,000 and $173,000 during the months ended March 31, 2011 and March 31, 2010, respectively. In accordance with Financial Accounting Standards Board (FASB) guidance

 
7

 
 

on stock-based payments, during the first quarters of 2011 and 2010 the Company reversed $165,000 and $200,000, 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 2007 and 2006, respectively.
 
Note 3. RECENT ACCOUNTING STANDARDS
 
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 Level 3 requirements had a delayed effective date for interim and annual reporting periods beginning after December 15, 2010. The adoption of this guidance has not had 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 are 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 were 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. The adoption of this guidance has not had a material impact on our consolidated financial statements. In January 2011, the FASB delayed the disclosures about troubled debt restructurings that were originally part of the new guidance.
 
In April 2011, the FASB issued guidance that clarifies whether a restructuring constitutes a concession and defines whether or not a debtor is experiencing financial difficulties. The effective date for this guidance for public companies is for interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to restructurings occurring on or after the beginning of 2011. Early adoption is permitted. 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 March 31, 2011, the Company had $349.2 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 $38.1 million is expected over the next five years. The various services include: core system hosting, item processing, deposit and loan processing, electronic banking, data warehousing and other banking functions.
 
 
 
 
 
 
 
 
 
 
 

 
8

 
 

Aggregate Contractual Obligations
 
The following table represents our on-and-off balance sheet aggregate contractual obligations to make future payments as of March 31, 2011:
 
March 31, 2011
(in thousands)
Less than
1 Year
 
1 to 3
Years
 
3 to 5
Years
 
Over 5
Years
 
Total
Time deposits
$
183,179
 
 
$
63,498
 
 
$
15,700
 
 
$
 
 
$
262,377
 
Long-term debt
 
 
 
 
 
 
29,400
 
 
29,400
 
Fiserv obligation
7,170
 
 
15,703
 
 
15,209
 
 
 
 
38,082
 
Operating leases
2,444
 
 
4,396
 
 
4,177
 
 
21,452
 
 
32,469
 
Sponsorship obligation
393
 
 
677
 
 
677
 
 
677
 
 
2,424
 
Total
$
193,186
 
 
$
84,274
 
 
$
35,763
 
 
$
51,529
 
 
$
364,752
 
 
Future Facilities
 
The Company has purchased the 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 to be opened 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 tax effect allocated to the net unrealized gains (losses) are presented in the following table:
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
March 31,
(in thousands)
 
 
 
 
 
2011
 
2010
Net unrealized holding gains arising during the period
 
 
 
 
 
$
3,625
 
 
$
701
 
Reclassification adjustment on securities
 
 
 
 
 
(1,620
)
 
992
 
OTTI losses on securities not expected to be sold
 
 
 
 
 
 
 
2,424
 
Subtotal
 
 
 
 
 
2,005
 
 
4,117
 
Income tax impact
 
 
 
 
 
(682
)
 
(1,567
)
Other comprehensive income, net of tax impact
 
 
 
 
 
$
1,323
 
 
$
2,550
 
 
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 $33.3 million and $32.3 million of standby letters of credit at March 31, 2011 and December 31, 2010, respectively. 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 liability at

 
9

 
 

March 31, 2011 and December 31, 2010 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 and certain nonfinancial assets; however, there are inherent weaknesses in any estimation technique due to assumptions that are susceptible to significant change.  Therefore, for substantially all financial instruments and certain nonfinancial assets, 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 reevaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments and certain nonfinancial assets 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): 
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
As required, financial and certain nonfinancial 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 March 31, 2011 by level within the fair value hierarchy:
 
 
 
 
 Fair Value Measurements at Reporting Date Using
Description
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
(in thousands)
March 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
21,274
 
 
$
 
 
$
21,274
 
 
$
 
Residential mortgage-backed
  securities
2,196
 
 
 
 
2,196
 
 
 
Agency collateralized mortgage
  obligations
418,107
 
 
 
 
418,107
 
 
 
Private-label collateralized
  mortgage obligations
30,142
 
 
 
 
30,142
 
 
 
Securities available for sale
$
471,719
 
 
$
 
 
$
471,719
 
 
$
 
  
 
 
 
 
 
 
 
 
 
 
 

 
10

 
 

 
For financial assets measured at fair value on a recurring basis at December 31, 2010, the fair value measurements by level within the fair value hierarchy used were as follows:
 
 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
(in thousands)
December 31, 2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
21,409
 
 
$
 
 
$
21,409
 
 
$
 
Residential mortgage-backed
  securities
2,386
 
 
 
 
2,386
 
 
 
Agency collateralized mortgage
  obligations
383,214
 
 
 
 
383,214
 
 
 
Private-label collateralized
  mortgage obligations
31,003
 
 
 
 
31,003
 
 
 
Securities available for sale
$
438,012
 
 
$
 
 
$
438,012
 
 
$
 
 
As of March 31, 2011 and December 31, 2010, the Company did not have any liabilities that were measured at fair value on a recurring basis.
 
Impaired Loans (Generally Carried at Fair Value)
 
Impaired loans are those that the Company has measured impairment of 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 March 31, 2011 the fair value of nine related impaired loans with reserve allocations totaled $9.6 million, net of a valuation allowance of $4.2 million. At December 31, 2010, the fair value of impaired loans with reserve allocations and their associated loan relationships totaled $10.4 million, net of a valuation allowance of $3.6 million. The Company's impaired loans are more fully discussed in Note 9.
 
Foreclosed Assets (Carried at Lower of Cost or Fair Value)
 
The fair value of real estate acquired through foreclosure was based on independent third party appraisals of the properties. The carrying value of foreclosed assets, with valuation allowances recorded subsequent to initial foreclosure, was $3.8 million at March 31, 2011 and $4.8 million at December 31, 2010, respectively, which are net of valuation allowances of $1.0 million and $410,000 that were established in 2011 and 2010, respectively.
 
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used were as follows:
 
 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
(in thousands)
March 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
$
9,621
 
 
$
 
 
$
 
 
$
9,621
 
Foreclosed assets
3,757
 
 
 
 
 
 
3,757
 
Total
$
13,378
 
 
$
 
 
$
 
 
$
13,378
 
 

 
11

 
 

 
 
 
Fair Value Measurements at Reporting Date Using
 Description
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
(in thousands)
December 31, 2010
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
$
10,444
 
 
$
 
 
$
 
 
$
10,444
 
Foreclosed assets
4,774
 
 
 
 
 
 
4,774
 
Total
$
15,218
 
 
$
 
 
$
 
 
$
15,218
 
 
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 valuation techniques were used to estimate the fair values of the Company's financial instruments at March 31, 2011 and December 31, 2010:
  
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.
 
Securities
 
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 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 three months ended March 31, 2011 or the year ended December 31, 2010.
 
Loans Receivable (Carried at Cost)
 
The fair value of loans, excluding impaired loans with specific loan allowances, are estimated using discounted cash flow analysis, 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.
 
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 and Atlantic Central Bankers Bank (ACBB) stock at March 31, 2011 and December 31, 2010.
 
Accrued Interest Receivable and Payable (Carried at Cost)
 
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
 
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 deposits (CDs) 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.
 
 

 
12

 
 

Short-Term Borrowings (Carried at Cost)
 
The carrying amounts of short-term borrowings approximate their fair values.
 
Long-Term Debt (Carried at Cost)
 
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 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 Company'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 March 31, 2011 and December 31, 2010:
 
 
2011
 
2010
(in thousands)
Carrying
Amount
 
Fair 
Value
 
Carrying
Amount
 
Fair 
Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
44,795
 
 
$
44,795
 
 
$
32,858
 
 
$
32,858
 
Securities
691,806
 
 
687,409
 
 
665,588
 
 
662,214
 
Loans, net (including loans held for sale)
1,439,455
 
 
1,416,532
 
 
1,376,192
 
 
1,358,509
 
Restricted investments in bank stock
19,586
 
 
19,586
 
 
20,614
 
 
20,614
 
Accrued interest receivable
7,330
 
 
7,330
 
 
7,347
 
 
7,347
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
1,884,970
 
 
$
1,888,293
 
 
$
1,832,179
 
 
$
1,835,782
 
Long-term debt
29,400
 
 
19,118
 
 
29,400
 
 
18,431
 
Short-term borrowings
182,525
 
 
182,525
 
 
140,475
 
 
140,475
 
Accrued interest payable
703
 
 
703
 
 
669
 
 
669
 
Off-balance sheet instruments:
 
 
 
 
 
 
 
 
 
 
 
Standby letters of credit
$
 
 
$
 
 
$
 
 
$
 
Commitments to extend credit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
13

 
 

Note 8. SECURITIES
 
 The amortized cost and fair value of securities are summarized in the following tables:
 
March 31, 2011
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
22,500
 
 
$
 
 
$
(1,226
)
 
$
21,274
 
Residential mortgage-backed securities
2,211
 
 
 
 
(15
)
 
2,196
 
Agency collateralized mortgage obligations
422,383
 
 
1,067
 
 
(5,343
)
 
418,107
 
Private-label collateralized mortgage obligations
31,150
 
 
47
 
 
(1,055
)
 
30,142
 
Total
$
478,244
 
 
$
1,114
 
 
$
(7,639
)
 
$
471,719
 
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
140,000
 
 
$
 
 
$
(7,417
)
 
$
132,583
 
Residential mortgage-backed securities
45,338
 
 
2,629
 
 
(359
)
 
47,608
 
Agency collateralized mortgage obligations
24,749
 
 
772
 
 
 
 
25,521
 
Corporate debt securities
10,000
 
 
 
 
(22
)
 
9,978
 
Total
$
220,087
 
 
$
3,401
 
 
$
(7,798
)
 
$
215,690
 
 
 
December 31, 2010
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
22,500
 
 
$
 
 
$
(1,091
)
 
$
21,409
 
Residential mortgage-backed securities
2,383
 
 
3
 
 
 
 
2,386
 
Agency collateralized mortgage obligations
388,414
 
 
2,025
 
 
(7,225
)
 
383,214
 
Private-label collateralized mortgage obligations
33,246
 
 
 
 
(2,243
)
 
31,003
 
Total
$
446,543
 
 
$
2,028
 
 
$
(10,559
)
 
$
438,012
 
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
140,000
 
 
$
 
 
$
(6,408
)
 
$
133,592
 
Residential mortgage-backed securities
48,497
 
 
2,727
 
 
(311
)
 
50,913
 
Agency collateralized mortgage obligations
29,079
 
 
878
 
 
(209
)
 
29,748
 
Corporate debt securities
10,000
 
 
 
 
(51
)
 
9,949
 
Total
$
227,576
 
 
$
3,605
 
 
$
(6,979
)
 
$
224,202
 
 
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2011 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.
 

 
14

 
 

 
Available for Sale
 
Held to Maturity
(in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
 
 
$
 
 
$
 
 
$
 
Due after one year through five years
 
 
 
 
10,000
 
 
9,978
 
Due after five years through ten years
 
 
 
 
50,000
 
 
47,806
 
Due after ten years
22,500
 
 
21,274
 
 
90,000
 
 
84,777
 
 
22,500
 
 
21,274
 
 
150,000
 
 
142,561
 
Residential mortgage-backed securities
2,211
 
 
2,196
 
 
45,338
 
 
47,608
 
Agency collateralized mortgage obligations
422,383
 
 
418,107
 
 
24,749
 
 
25,521
 
Private-label collateralized mortgage obligations
31,150
 
 
30,142
 
 
 
 
 
Total
$
478,244
 
 
$
471,719
 
 
$
220,087
 
 
$
215,690
 
 
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 collateralized mortgage obligations (CMOs) and all had been classified as available for sale.
 
In the first quarter of 2010, the Company sold a total of 12 securities with a combined fair market value of $24.4 million.  All of the securities had been classified as available for sale and had a combined amortized cost of $23.8 million.  The Company realized net pretax gains of $621,000 on the combined sales.  The securities sold included three mortgage-backed securities (MBSs) with a combined fair market value of $11.9 million and nine private-label CMOs with a combined fair market value of $12.5 million.  During the first quarter of 2010, the Company had two agency debentures called, at par, by their issuing agencies.  Both were classified as available for sale and had a combined carrying value of $20.0 million. Also during the first quarter of 2010, the Company had four municipal bonds, with a combined value of $1.6 million, called at par. The bonds were classified as held to maturity and carried at a slight discount.
 
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.
 
At March 31, 2011 securities with a carrying value of $419.2 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 losses recognized for the OTTI of investments:
 
(in thousands)
Gross Realized Gains
 
Gross Realized (Losses)
 
OTTI Credit Losses
 
Net Gains (Losses)
Three Months Ended:
 
 
 
 
 
 
 
March 31, 2011
$
667
 
 
$
(633
)
 
$
 
 
$
34
 
March 31, 2010
621
 
 
 
 
(913
)
 
(292
)
 
In determining fair market values for its portfolio holdings, the Company has consistently relied 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 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.
 
 
 
 
 
 
 
 
 

 
15

 
 

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:
 
 
March 31, 2011
 
Less than 12 months
 
12 months or more
 
Total
 (in thousands)
Fair Value
 
Unrealized
(Losses)
 
Fair Value
 
Unrealized
(Losses)
 
Fair Value
 
Unrealized
(Losses)
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
21,274
 
 
$
(1,226
)
 
$
 
 
$
 
 
$
21,274
 
 
$
(1,226
)
Residential MBSs
2,196
 
 
(15
)
 
 
 
 
 
2,196
 
 
(15
)
Agency CMOs
320,788
 
 
(5,343
)
 
4,090
 
 
 
 
324,878
 
 
(5,343
)
Private-label CMOs
2,356
 
 
(3
)
 
22,409
 
 
(1,052
)
 
24,765
 
 
(1,055
)
Total
$
346,614
 
 
$
(6,587
)
 
$
26,499
 
 
$
(1,052
)
 
$
373,113
 
 
$
(7,639
)
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
132,583
 
 
$
(7,417
)
 
$
 
 
$
 
 
$
132,583
 
 
$
(7,417
)
Residential MBSs
7,197
 
 
(359
)
 
 
 
 
 
7,197
 
 
(359
)
Corporate debt securities
9,978
 
 
(22
)
 
 
 
 
 
9,978
 
 
(22
)
Total
$
149,758
 
 
$
(7,798
)
 
$
 
 
$
 
 
$
149,758
 
 
$
(7,798
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
Less than 12 months
 
12 months or more
 
Total
 (in thousands)
Fair Value
 
Unrealized
(Losses)
 
Fair Value
 
Unrealized
(Losses)
 
Fair Value
 
Unrealized
(Losses)
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
21,409
 
 
$
(1,091
)
 
$
 
 
$
 
 
$
21,409
 
 
$
(1,091
)
Agency CMOs
261,330
 
 
(7,216
)
 
9,092
 
 
(9
)
 
270,422
 
 
(7,225
)
Private-label CMOs
2,644
 
 
(9
)
 
28,359
 
 
(2,234
)
 
31,003
 
 
(2,243
)
Total
$
285,383
 
 
$
(8,316
)
 
$
37,451
 
 
$
(2,243
)
 
$
322,834
 
 
$
(10,559
)
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
133,592
 
 
$
(6,408
)
 
$
 
 
$
 
 
$
133,592
 
 
$
(6,408
)
Residential MBSs
7,287
 
 
(311
)
 
 
 
 
 
7,287
 
 
(311
)
Agency CMOs
7,957
 
 
(209
)
 
 
 
 
 
7,957
 
 
(209
)
Corporate debt securities
9,949
 
 
(51
)
 
 
 
 
 
9,949
 
 
(51
)
Total
$
158,785
 
 
$
(6,979
)
 
$
 
 
$
 
 
$
158,785
 
 
$
(6,979
)
 
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 CMOs. The securities of the U.S. Government sponsored agencies and the U.S. Government MBSs 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, 2011 were associated with two distinct types of securities. The first type, those backed by the U.S. Government or one of its agencies,  includes nine agency debentures, four residential MBSs and 27 government agency sponsored CMOs. Management believes that the unrealized losses on these investments were primarily caused by the sharp rise in mid-term to long-term interest rates that occurred at the end of 2010 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. The Company also owns one investment-grade corporate bond that was in an unrealized loss position as of March 31, 2011. Due to its structure and credit rating, the Company does not anticipate incurring any credit-related losses on this bond. Because management believes the declines in fair value of these securities are attributable to changes in interest rates and not credit quality 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, 2011.

 
16

 
 

 
The second type of security in the Company's investment portfolio with unrealized losses at March 31, 2011 was 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 the 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, 2011, Metro owned seven such non-agency CMO securities in its investment portfolio with unrealized losses and one non-agency CMO in an unrealized gain position. The total book value for all eight securities was $31.1 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 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.  
 
Next, 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 during the first quarter of 2011, a total of six private-label CMOs had losses attributable to credit from prior years. Of these six bonds, two were no longer projected to be in a loss position as of March 31, 2011. Losses were projected for the remaining four bonds as of March 31, 2011, however, the present value of the cash flows for these bonds was greater than the carrying value and no further write-downs were required. The Company also owns two private-label CMOs that have never had losses attributable to credit. 
 
The tables below roll 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, 2011 and March 31, 2010:
 
 
Private-label CMOs
 
 
 (in thousands)
Available for Sale
 
Held to Maturity
 
Total
Cumulative OTTI credit losses at January 1, 2011
$
2,625
 
 
$
 
 
$
2,625
 
Additions for which OTTI was not previously recognized
 
 
 
 
 
Additional increases for OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis
 
 
 
 
 
Cumulative OTTI credit losses recognized for securities still held at March 31, 2011
$
2,625
 
 
$
 
 
$
2,625
 
 
 
 
 
 
 
 

 
17

 
 

 
Private-label CMOs
 
 
 (in thousands)
Available for Sale
 
Held to Maturity
 
Total
Cumulative OTTI credit losses at January 1, 2010
$
2,338
 
 
$
3
 
 
$
2,341
 
Additions for which OTTI was not previously recognized
647
 
 
 
 
647
 
Additional increases for OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis
266
 
 
 
 
266
 
Cumulative OTTI credit losses recognized for securities still held at March 31, 2010
$
3,251
 
 
$
3
 
 
$
3,254
 
 
 
 
 
 
 
 
Note 9.      LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 
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 losses 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. The Bank has a line of credit commitment from the FHLB and certain qualifying assets of the Bank collateralize the line including loans held at the Bank.
 
During the first quarter of 2011, certain types of loans were reclassified due to their purpose and overall risk characteristics. Therefore, certain loan balances as of December 31, 2010 balances were restated to conform to the 2011 presentation.
 
A summary of loans receivable is as follows:
 
(in thousands)
March 31, 2011
 
December 31, 2010
Commercial and industrial
$
369,257
 
 
$
337,398
 
Commercial tax-exempt
85,456
 
 
85,863
 
Owner occupied real estate
257,008
 
 
241,553
 
Commercial construction and land development
125,872
 
 
112,094
 
Commercial real estate
326,659
 
 
313,194
 
Residential
79,562
 
 
81,124
 
Consumer
202,863
 
 
207,979
 
 
1,446,677
 
 
1,379,205
 
Less: allowance for loan losses
21,850
 
 
21,618
 
Net loans receivable
$
1,424,827
 
 
$
1,357,587
 
 
Generally, the Company'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. 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. Therefore, our nonaccrual loan balance of $51.9 million exceeds the balance of loans that are 90 days past due and greater presented in the following table.
 
 
 
 
 
 

 
18

 
 

A loan is considered past due or delinquent if payment is not received on or before the due date. The following table summarizes nonperforming loans by loan type at March 31, 2011 and December 31, 2010:
 
(in thousands)
March 31, 2011
 
December 31, 2010
Nonaccrual loans:
 
 
 
   Commercial and industrial
$
22,454
 
 
$
23,103
 
   Commercial tax-exempt
 
 
 
   Owner occupied real estate
4,552
 
 
4,318
 
   Commercial construction and land development
13,674
 
 
14,155
 
   Commercial real estate
5,043
 
 
5,424
 
   Residential
3,833
 
 
3,609
 
   Consumer
2,357
 
 
1,579
 
Total nonaccrual loans
51,913
 
 
52,188
 
Loans past due 90 days or more and still accruing
90
 
 
650
 
Renegotiated loan
 
 
177
 
Total nonperforming loans
$
52,003
 
 
$
53,015
 
 
No additional funds were committed on nonaccrual and renegotiated loans. Generally commitments are canceled and no additional advances are made when a loan is placed on nonaccrual. Included in nonaccrual loans are two relationships of which the Company took a partial charge-off and the terms were modified.
 
The following tables are an age analysis of past due loan receivables as of March 31, 2011 and December 31, 2010:
 
(in thousands)
30-59 Days Past Due
60-89 Days Past Due
90 Days Past Due and Greater
Total Past Due
Current
Total Loan Receivables
Recorded Investment in Loans 90 Days and Greater and Still Accruing
March 31, 2011
 
 
 
 
 
 
 
Commercial and industrial
$
3,285
 
$
4,109
 
$
9,985
 
$
17,379
 
$
351,878
 
$
369,257
 
$
90
 
Commercial tax-exempt
 
 
 
 
85,456
 
85,456
 
 
Owner occupied real estate
2,140
 
56
 
4,381
 
6,577
 
250,431
 
257,008
 
 
Commercial construction and
land development
677
 
217
 
13,674
 
14,568
 
111,304
 
125,872
 
 
Commercial real estate
3,585
 
1,180
 
4,786
 
9,551
 
317,108
 
326,659
 
 
Residential
3,763
 
357
 
2,329
 
6,449
 
73,113
 
79,562
 
 
Consumer
2,030
 
231
 
2,040
 
4,301
 
198,562
 
202,863
 
 
Total
$
15,480
 
$
6,150
 
$
37,195
 
$
58,825
 
$
1,387,852
 
$
1,446,677
 
$
90
 
 
 

 
19

 
 

(in thousands)
30-59 Days Past Due
60-89 Days Past Due
90 Days Past Due and Greater
Total Past Due
Current
Total Loan Receivables
Recorded Investment in Loans 90 Days and Greater and Still Accruing
December 31, 2010
 
 
 
 
 
 
 
Commercial and industrial
$
1,213
 
$
521
 
$
18,914
 
$
20,648
 
$
316,750
 
$
337,398
 
$
23
 
Commercial tax-exempt
 
 
 
 
85,863
 
85,863
 
 
Owner occupied real estate
1,314
 
258
 
4,243
 
5,815
 
235,738
 
241,553
 
 
Commercial construction and
land development
 
 
14,155
 
14,155
 
97,939
 
112,094
 
 
Commercial real estate
1,214
 
77
 
5,871
 
7,162
 
306,032
 
313,194
 
624
 
Residential
3,724
 
1,606
 
2,124
 
7,454
 
73,670
 
81,124
 
 
Consumer
2,547
 
903
 
1,294
 
4,744
 
203,235
 
207,979
 
3
 
Total
$
10,012
 
$
3,365
 
$
46,601
 
$
59,978
 
$
1,319,227
 
$
1,379,205
 
$
650
 
 
A summary of the allowance for loan losses by loan class and by impairment method as of March 31, 2011 and December 31, 2010 is detailed in the table that follows. As mentioned previously, during the first quarter of 2011, certain types of loans were reclassified due to their purpose and overall risk characteristics. This impacted the allocation of the allowance for loan losses as reported at December 31, 2010, therefore the allocation as of that date has been restated to conform to the 2011 presentation.
 
(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Consumer
Unallo-cated
Total
 
 
 
 
 
 
 
 
 
 
March 31, 2011
 
 
 
 
 
 
 
 
 
Quantitative analysis:
 
 
 
 
 
 
 
 
 
Individually evaluated
for impairment
$
2,113
 
$
 
$
260
 
$
1,810
 
$
 
$
 
$
 
$
 
$
4,183
 
Collectively evaluated
for impairment
3,612
 
 
352
 
1,859
 
3,037
 
272
 
361
 
 
9,493
 
Qualitative analysis:
3,136
 
83
 
330
 
2,347
 
1,546
 
189
 
400
 
 
8,031
 
Unallocated