Attached files

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EX-32 - EXHIBIT 32 - METRO BANCORP, INC.exhibit32certificationofco.htm
EX-11 - EXHIBIT 11 - METRO BANCORP, INC.exhibit11computationofneti.htm
EX-31.1 - EXHIBIT 31.1 - METRO BANCORP, INC.exhibit311certificationofc.htm
EX-31.2 - EXHIBIT 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
 
June 30, 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:
13,957,134 Common shares outstanding at 7/31/2011


1




METRO BANCORP, INC.

INDEX
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets (Unaudited)
 
 
June 30, 2011 and December 31, 2010
 
 
 
 
Consolidated Statements of Operations (Unaudited)
 
 
Three months and six months ended June 30, 2011 and June 30, 2010
 
 
 
 
Consolidated Statements of Stockholders' Equity  (Unaudited)
 
 
Six months ended June 30, 2011 and June 30, 2010
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited)
 
 
Six months ended June 30, 2011 and June 30, 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)
June 30, 2011
 
December 31, 2010
Assets
 
 
 
Cash and due from banks
$
42,271

 
$
32,858

Federal funds sold
9,675

 

Cash and cash equivalents
51,946

 
32,858

Securities, available for sale at fair value
488,258

 
438,012

Securities, held to maturity at cost (fair value 2011: $223,153;  2010: $224,202)
225,386

 
227,576

Loans, held for sale
8,847

 
18,605

Loans receivable, net of allowance for loan losses
  (allowance 2011: $21,723; 2010: $21,618)
1,434,965

 
1,357,587

Restricted investments in bank stock
18,610

 
20,614

Premises and equipment, net
84,643

 
88,162

Other assets
74,351

 
51,058

Total assets
$
2,387,006

 
$
2,234,472

 
 

 
 

Liabilities and Stockholders' Equity
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
389,992

 
$
340,956

Interest-bearing
1,501,384

 
1,491,223

      Total deposits
1,891,376

 
1,832,179

Short-term borrowings
160,000

 
140,475

Long-term debt
54,400

 
29,400

Other liabilities
64,168

 
27,067

Total liabilities
2,169,944

 
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: 13,926,440;  2010: 13,748,384)
13,926

 
13,748

Surplus
153,935

 
151,545

Retained earnings
48,772

 
45,288

Accumulated other comprehensive income (loss)
29

 
(5,630
)
Total stockholders' equity
217,062

 
205,351

Total liabilities and stockholders' equity
$
2,387,006

 
$
2,234,472

 
See accompanying notes.



3




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands, except per share amounts)
2011
 
2010
 
2011
 
2010
Interest Income
 
 
 
 
 
 
 
Loans receivable, including fees:
 
 
 
 
 
 
 
Taxable
$
18,070

 
$
17,589

 
$
35,583

 
$
35,126

Tax-exempt
989

 
1,156

 
1,975

 
2,300

Securities:
 
 
 
 
 
 
 
Taxable
5,599

 
5,651

 
10,994

 
11,050

Tax-exempt

 

 

 
14

Federal funds sold
1

 

 
2

 
1

Total interest income
24,659

 
24,396

 
48,554

 
48,491

Interest Expense
 
 
 
 
 

 
 

Deposits
2,990

 
3,358

 
5,987

 
7,025

Short-term borrowings
127

 
121

 
337

 
187

Long-term debt
725

 
933

 
1,396

 
1,862

Total interest expense
3,842

 
4,412

 
7,720

 
9,074

Net interest income
20,817

 
19,984

 
40,834

 
39,417

Provision for loan losses
1,700

 
2,600

 
3,492

 
5,000

 Net interest income after provision for loan losses
19,117

 
17,384

 
37,342

 
34,417

Noninterest Income
 
 
 
 
 

 
 

Service charges, fees and other operating income
7,025

 
6,831

 
13,749

 
12,875

Gains on sales of loans
1,137

 
133

 
2,335

 
327

Total fees and other income
8,162

 
6,964

 
16,084

 
13,202

Other-than-temporary impairment losses
(315
)
 
(63
)
 
(315
)
 
(4,858
)
Portion recognized in other comprehensive income (before taxes)

 
60

 

 
3,942

Net impairment loss on investment securities
(315
)
 
(3
)
 
(315
)
 
(916
)
Net gains on sales/calls of securities
309

 
298

 
343

 
919

Total noninterest income
8,156

 
7,259

 
16,112

 
13,205

Noninterest Expenses
 
 
 
 
 

 
 

Salaries and employee benefits
10,254

 
10,377

 
20,633

 
20,631

Occupancy
2,219

 
2,151

 
4,681

 
4,436

Furniture and equipment
1,536

 
1,404

 
2,871

 
2,548

Advertising and marketing
350

 
610

 
749

 
1,442

Data processing
3,832

 
3,396

 
7,227

 
6,536

Regulatory assessments and related fees
856

 
1,045

 
1,941

 
2,214

Telephone
834

 
872

 
1,706

 
1,795

Loan expense
83

 
430

 
407

 
782

Foreclosed real estate
18

 
381

 
1,070

 
949

Branding
1,720

 

 
1,747

 

Consulting fees
416

 
960

 
823

 
1,702

Other
2,503

 
2,895

 
5,073

 
5,361

Total noninterest expenses
24,621

 
24,521

 
48,928

 
48,396

Income (loss) before taxes
2,652

 
122

 
4,526

 
(774
)
Provision (benefit) for federal income taxes
660

 
(238
)
 
1,002

 
(1,140
)
Net income
$
1,992

 
$
360

 
$
3,524

 
$
366

Net Income per Common Share
 
 
 
 
 

 
 

Basic
$
0.14

 
$
0.02

 
$
0.25

 
$
0.02

Diluted
0.14

 
0.02

 
0.25

 
0.02

Average Common and Common Equivalent Shares Outstanding
 
 
 
 
 

 
 

Basic
13,860

 
13,509

 
13,820

 
13,489

Diluted
13,860

 
13,514

 
13,820

 
13,494

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 Income (Loss)
Total
January 1, 2010
$
400

$
13,448

$
147,340

$
49,705

$
(10,871
)
$
200,022

Comprehensive income:
 

 

 

 

 

 

Net income



366


366

Other comprehensive income, net
of tax impact




6,725

6,725

Total comprehensive income
 

 

 

 

 

7,091

Dividends declared on preferred
stock



(40
)

(40
)
Common stock of 11,378 shares
issued under stock option plans,
including tax benefit of $25

12

91



103

Common stock of 150 shares
issued under employee stock
purchase plan


2



2

Proceeds from issuance of 89,893
shares of common stock in
connection with dividend
reinvestment and stock purchase
plan

90

1,042



1,132

Common stock share-based awards


527



527

June 30, 2010
$
400

$
13,550

$
149,002

$
50,031

$
(4,146
)
$
208,837


(in thousands, except share amounts)
Preferred Stock
Common Stock
Surplus
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
 Total
January 1, 2011
$
400

$
13,748

$
151,545

$
45,288

$
(5,630
)
$
205,351

Comprehensive income:
 
 
 
 
 
 
Net income



3,524


3,524

Other comprehensive income, net
of tax impact




5,659

5,659

Total comprehensive income
 

 

 

 

 

9,183

Dividends declared on preferred stock



(40
)

(40
)
Common stock of 50 shares issued under employee stock purchase plan


1



1

Proceeds from issuance of 178,006
shares of common stock in
connection with dividend
reinvestment and stock purchase
plan

178

1,845



2,023

Common stock share-based awards


544



544

June 30, 2011
$
400

$
13,926

$
153,935

$
48,772

$
29

$
217,062


See accompanying notes.


5




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
 
June 30,
(in thousands)
 
2011
 
2010
Operating Activities
 
 
 
 
Net income
 
$
3,524

 
$
366

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 

 
 

Provision for loan losses
 
3,492

 
5,000

Provision for depreciation and amortization
 
3,287

 
3,040

Deferred income taxes (benefit)
 
(128
)
 
(1,528
)
Amortization of securities premiums and accretion of discounts (net)
 
1,041

 
38

Gains on sales/calls of securities (net)
 
(343
)
 
(919
)
Other-than-temporary impairment losses on investment securities
 
315

 
916

Proceeds from sales and transfers of SBA loans originated for sale
 
12,063

 
7,885

Proceeds from sales of other loans originated for sale
 
27,972

 
23,856

Loans originated for sale
 
(27,942
)
 
(42,252
)
Gains on sales of loans originated for sale
 
(2,335
)
 
(327
)
Loss on write-down on foreclosed real estate
 
1,018

 
532

Gains on sales of foreclosed real estate (net)
 
(86
)
 
(14
)
Loss on disposal of equipment
 
1,250

 
36

Stock-based compensation
 
544

 
527

Amortization of deferred loan origination fees and costs (net)
 
1,234

 
806

Decrease (increase) in other assets
 
13,735

 
2,678

Increase (decrease) in other liabilities
 
(13,314
)
 
(6,686
)
Net cash provided (used) by operating activities
 
25,327

 
(6,046
)
Investing Activities
 
 

 
 

Securities available for sale:
 
 

 
 

 Proceeds from principal repayments, calls and maturities
 
28,215

 
73,671

 Proceeds from sales
 
86,765

 
44,315

 Purchases
 
(155,733
)
 
(152,538
)
Securities held to maturity:
 
 

 
 
 Proceeds from principal repayments, calls and maturities
 
12,140

 
12,939

 Purchases
 

 
(10,000
)
Proceeds from sales of foreclosed real estate
 
1,693

 
973

Increase in loans receivable (net)
 
(86,010
)
 
(2,510
)
Redemption (purchase) of restricted investment in bank stock (net)
 
2,004

 
(65
)
Proceeds from sale of premises and equipment
 
1

 
25

Purchases of premises and equipment
 
(1,019
)
 
(1,335
)
Net cash used by investing activities
 
(111,944
)
 
(34,525
)
Financing Activities
 
 

 
 

Increase in demand, interest checking, money market, and savings deposits (net)
 
72,097

 
30,737

Decrease in time deposits (net)
 
(12,900
)
 
(11,844
)
Increase in short-term borrowings (net)
 
19,525

 
26,325

Proceeds from long-term borrowings
 
25,000

 

Proceeds from common stock options exercised
 

 
78

Proceeds from dividend reinvestment and common stock purchase plan
 
2,023

 
1,132

Tax benefit on exercise of stock options
 

 
25

Cash dividends on preferred stock
 
(40
)
 
(40
)
Net cash provided by financing activities
 
105,705

 
46,413

Increase in cash and cash equivalents
 
19,088

 
5,842

Cash and cash equivalents at beginning of year
 
32,858

 
40,264

Cash and cash equivalents at end of period
 
$
51,946

 
$
46,106

Supplementary cash flow information on noncash activities:
 
 

 
 

Transfer of loans to foreclosed assets
 
$
3,905

 
$
1,177

Trade date accounting settlements for investment sales
 
38,534

 

Trade date accounting settlements for investment purchases
 
50,415

 

See accompanying notes.


6




METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six months ended June 30, 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 calculation 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 six months of 2010. The impact to the net income after taxes would have been a loss of $2.4 million and a decrease of $0.17 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 six months ended June 30, 2011 and 2010, respectively: risk-free interest rates of 3.0% 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 June 30, 2011 and June 30, 2010; and no cash dividends. Using these assumptions, the weighted-average fair value of options granted for the six months ended June 30, 2011 and 2010 was $6.43 and $6.47 per option, respectively. In the first six months of 2011, the Company granted 239,350 options to purchase shares of the Company's stock at exercise prices ranging from $11.11 to $12.40 per share.
 
The Company recorded stock-based compensation expense of approximately $544,000 and $527,000 during the six months ended June 30, 2011 and June 30, 2010, respectively. In accordance with Financial Accounting Standards Board (FASB) guidance on


7




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 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. The adoption of this guidance will not have a material impact on our consolidated financial statements. 
In May 2011, the FASB amended fair value measurement guidance to clarify the guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity's stockholders' equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The update also creates an exception to fair value measurement guidance for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. In addition, the update allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the updated standard contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. The effective date of this update for public entities, is for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2011, the FASB updated the guidance on Comprehensive Income. The update prohibits the presentation of the components of comprehensive income in the statements of stockholders' equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate statements of net income and other comprehensive income. Under previous GAAP, all three presentations were acceptable. Regardless of the presentation selected, the Company will be required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this update are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. Early adoption is permitted. The adoption of this guidance will not 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, 2011, the Company had $369.9 million in unused commitments. Management does not anticipate any material losses as a result of these transactions.

















8





Aggregate Contractual Obligations
 
The following table represents our on-and-off balance sheet aggregate contractual obligations to make future payments as of June 30, 2011:

 
June 30, 2011
(in thousands)
Less than
1 Year
 
1 to 3
Years
 
3 to 5
Years
 
Over 5
Years
 
Total
Time deposits
$
177,530

 
$
65,703

 
$
14,521

 
$

 
$
257,754

Long-term debt

 
25,000

 

 
29,400

 
54,400

Fiserv obligation
7,307

 
15,907

 
13,110

 

 
36,324

Operating leases
2,522

 
4,561

 
4,265

 
20,944

 
32,292

Sponsorship obligation
393

 
677

 
677

 
677

 
2,424

Total
$
187,752

 
$
111,848

 
$
32,573

 
$
51,021

 
$
383,194


During 2011, the Company entered into a new debt agreement that consisted of one $25.0 million FHLB advance bearing interest at 1.01%, due March 18, 2013.

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 (AFS) securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income are components of comprehensive income. The only 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
 
Six Months Ended
 
 
June 30,
 
June 30,
(in thousands)
 
2011
 
2010
 
2011
 
2010
Net unrealized holding gains arising during the period
 
$
6,209

 
$
5,616

 
$
9,835

 
$
4,858

Reclassification adjustment on securities
 
360

 
650

 
(1,260
)
 
1,643

Noncredit related other-than-temporary impairment losses on securities not expected to be sold
 

 
60

 

 
3,942

Subtotal
 
6,569

 
6,326

 
8,575

 
10,443

Income tax impact
 
(2,234
)
 
(2,151
)
 
(2,916
)
 
(3,718
)
Other comprehensive income, net of tax impact
 
$
4,335

 
$
4,175

 
$
5,659

 
$
6,725

 
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


9




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 $33.6 million and $32.3 million of standby letters of credit at June 30, 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 June 30, 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 June 30, 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)
June 30, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
21,647

 
$

 
$
21,647

 
$

Residential mortgage-backed
  securities
12,397

 

 
12,397

 

Agency collateralized mortgage
  obligations
427,287

 

 
427,287

 

Private-label collateralized
  mortgage obligations
26,927

 

 
26,927

 

Securities available for sale
$
488,258

 
$

 
$
488,258

 
$

  








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 June 30, 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 or it is calculated based on collateral values if the loans are collateral dependent. The collateral values are further reduced by a discount factor specific to the nature of the collateral. At June 30, 2011 the fair value of four related impaired loans with allowance allocations totaled $7.7 million, net of a valuation allowance of $3.2 million. At December 31, 2010, the fair value of impaired loans with allowance 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, less estimated selling costs. The carrying value of foreclosed assets, with valuation allowances recorded subsequent to initial foreclosure, was $3.6 million at June 30, 2011 and $4.8 million at December 31, 2010, 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)
June 30, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
$
7,652

 
$

 
$

 
$
7,652

Foreclosed assets
3,559

 

 

 
3,559

Total
$
11,211

 
$

 
$

 
$
11,211

 


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 June 30, 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 six months ended June 30, 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 (FHLB) and Atlantic Central Bankers Bank (ACBB) stock at June 30, 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 June 30, 2011 and December 31, 2010:

 
June 30, 2011
 
December 31, 2010
(in thousands)
Carrying
Amount
 
Fair 
Value
 
Carrying
Amount
 
Fair 
Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
51,946

 
$
51,946

 
$
32,858

 
$
32,858

Securities
713,644

 
711,411

 
665,588

 
662,214

Loans, net (including loans held for sale)
1,443,812

 
1,424,907

 
1,376,192

 
1,358,509

Restricted investments in bank stock
18,610

 
18,610

 
20,614

 
20,614

Accrued interest receivable
7,686

 
7,686

 
7,347

 
7,347

Financial liabilities:
 

 
 

 
 

 
 

Deposits
$
1,891,376

 
$
1,894,285

 
$
1,832,179

 
$
1,835,782

Long-term debt
54,400

 
44,153

 
29,400

 
18,431

Short-term borrowings
160,000

 
160,000

 
140,475

 
140,475

Accrued interest payable
595

 
595

 
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:

 
June 30, 2011
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
22,500

 
$

 
$
(853
)
 
$
21,647

Residential mortgage-backed securities
12,407

 
19

 
(29
)
 
12,397

Agency collateralized mortgage obligations
424,709

 
3,269

 
(691
)
 
427,287

Private-label collateralized mortgage obligations
28,598

 
37

 
(1,708
)
 
26,927

Total
$
488,214

 
$
3,325

 
$
(3,281
)
 
$
488,258

Held to Maturity:
 

 
 

 
 

 
 

U.S. Government agency securities
$
140,000

 
$

 
$
(5,465
)
 
$
134,535

Residential mortgage-backed securities
42,890

 
2,773

 
(227
)
 
45,436

Agency collateralized mortgage obligations
32,496

 
721

 
(100
)
 
33,117

Corporate debt securities
10,000

 
65

 

 
10,065

Total
$
225,386

 
$
3,559

 
$
(5,792
)
 
$
223,153


 
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

 

















14




The amortized cost and fair value of debt securities by contractual maturity at June 30, 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.
 
 
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

 
10,065

Due after five years through ten years

 

 
50,000

 
48,798

Due after ten years
22,500

 
21,647

 
90,000

 
85,737

 
22,500

 
21,647

 
150,000

 
144,600

Residential mortgage-backed securities
12,407

 
12,397

 
42,890

 
45,436

Agency collateralized mortgage obligations
424,709

 
427,287

 
32,496

 
33,117

Private-label collateralized mortgage obligations
28,598

 
26,927

 

 

Total
$
488,214

 
$
488,258

 
$
225,386

 
$
223,153

 
During the second quarter of 2011 the Company sold a total of two securities with a combined fair market value of $38.5 million and realized a net pretax gain of $309,000. Both securities sold had been classified as available for sale. During the second quarter of 2010, the Company sold three mortgage-backed securities (MBSs) 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.

During the first six months of 2011, the Company sold a total of 12 securities with a combined fair market value of $125.3 million. All of the securities were U.S. agency collateralized mortgage obligations (CMOs), had been classified as available for sale and had a combined amortized cost of $125.0 million. The Company realized net pretax gains of $343,000 on the combined sales.  During the first six months of 2010, the Company sold 15 MBSs 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 MBSs with a fair market value of $21.7 million.

The Company does not maintain a trading portfolio and there were no transfers of securities between the AFS and held to maturity (HTM) portfolios. The Company uses the specific identification method to record security sales.

At June 30, 2011 securities with a carrying value of $438.5 million were pledged to secure public deposits and for other purposes as required or permitted by law.
 
The following table summarizes the Company's gains and losses on the sales of debt securities and credit losses recognized for the OTTI of investments:

(in thousands)
Gross Realized Gains
 
Gross Realized (Losses)
 
OTTI Credit Losses
 
Net Gains (Losses)
Three Months Ended:
 
 
 
 
 
 
 
June 30, 2011
$
309

 
$

 
$
(315
)
 
$
(6
)
June 30, 2010
298

 

 
(3
)
 
295

Six Months Ended:
 
 
 
 
 
 
 
June 30, 2011
976

 
(633
)
 
(315
)
 
28

June 30, 2010
919

 

 
(916
)
 
3


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:
 
 
June 30, 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
$
21,647

 
$
(853
)
 
$

 
$

 
$
21,647

 
$
(853
)
Residential MBSs
10,236

 
(29
)
 

 

 
10,236

 
(29
)
Agency CMOs
147,919

 
(691
)
 

 

 
147,919

 
(691
)
Private-label CMOs
2,092

 
(45
)
 
19,744

 
(1,663
)
 
21,836

 
(1,708
)
Total
$
181,894

 
$
(1,618
)
 
$
19,744

 
$
(1,663
)
 
$
201,638

 
$
(3,281
)
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agency securities
$
134,535

 
$
(5,465
)
 
$

 
$

 
$
134,535

 
$
(5,465
)
Residential MBSs
7,286

 
(227
)
 

 

 
7,286

 
(227
)
Agency CMOs
5,706

 
(100
)
 

 

 
5,706

 
(100
)
Total
$
147,527

 
$
(5,792
)
 
$

 
$

 
$
147,527

 
$
(5,792
)
 
 
 
 
 
 
 
 
 
 
 
 

 
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 June 30, 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 13 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 towards 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. 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 June 30, 2011.
 



16




Private-label CMOs were the second type of security in the Company's investment portfolio with unrealized losses at June 30, 2011. 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 June 30, 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 $28.6 million. Management performs no less than quarterly assessments of these securities for OTTI to determine what, if any, portion of the impairment may be credit related. As part of this process, management asserts that (a) we do not have the intent to sell the securities and (b) it is more likely than not we will not be required to sell the securities before recovery of the Company's cost basis. This assertion is based, in part, upon the most recent liquidity analysis prepared for the Company's Asset/Liability Committee (ALCO) which indicates if the Company has sufficient excess funds to consider the potential purchase of investment securities and sufficient unused borrowing capacity available to meet any potential outflows. Furthermore, the Company knows of no contractual or regulatory obligations that would require these bonds to be sold.  

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 its 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 six months of 2011, a total of six private-label CMOs had losses attributable to credit from prior years and two private-label CMOs have never had losses attributable to credit. Of these six bonds with credit losses, one was no longer projected to be in a loss position as of June 30, 2011. Losses were projected for the remaining five bonds as of June 30, 2011, however, the present value of the cash flows for one of these bonds was greater than its carrying value so that no further write-down was required on it. The remaining four bonds had combined losses attributable to credit of $315,000 at June 30, 2011.
 
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 June 30, 2011 and June 30, 2010:

 
Private-label CMOs
 
 
 (in thousands)
Available for Sale
 
Held to Maturity
 
Total
Cumulative OTTI credit losses at April 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
315

 

 
315

Cumulative OTTI credit losses recognized for securities still held at June 30, 2011
$
2,940

 
$

 
$
2,940

 
 
 
 
 
 
 


17




 
Private-label CMOs
 
 
 (in thousands)
Available for Sale
 
Held to Maturity
 
Total
Cumulative OTTI credit losses at April 1, 2010
$
3,251

 
$
3

 
$
3,254

Additions for which OTTI was not previously recognized
3

 

 
3

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 June 30, 2010
$
3,254

 
$
3

 
$
3,257

 
 
 
 
 
 

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 six months ended June 30, 2011 and June 30, 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
315

 

 
315

Cumulative OTTI credit losses recognized for securities still held at June 30, 2011
$
2,940

 
$

 
$
2,940

 
 
 
 
 
 
 
 
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
650

 

 
650

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 June 30, 2010
$
3,254

 
$
3

 
$
3,257

 
 
 
 
 
 

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 reclassified to conform to the 2011 presentation.









18




A summary of loans receivable is as follows:
 
(in thousands)
June 30, 2011
 
December 31, 2010
Commercial and industrial
$
357,652

 
$
337,398

Commercial tax-exempt
83,711

 
85,863

Owner occupied real estate
269,637

 
241,553

Commercial construction and land development
122,308

 
112,094

Commercial real estate
341,961

 
313,194

Residential
80,481

 
81,124

Consumer
200,938

 
207,979

 
1,456,688

 
1,379,205

Less: allowance for loan losses
21,723

 
21,618

Net loans receivable
$
1,434,965

 
$
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. Typically commitments are canceled and no additional advances are made when a loan is placed on nonaccrual. In addition, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal.  If a loan is substandard and accruing, interest is recognized as accrued. Once a loan is on nonaccrual status, it is not returned to accrual status unless the loan has been current for at least six consecutive months and the borrower and/or any guarantors demonstrate evidence of the ability to repay the loan. Under certain circumstances such as bankruptcy, if a loan is under collateralized, or if the borrower and/or guarantors do not show evidence of the ability to pay, the loan may be placed on nonaccrual status even though it is not past due by 90 days or more. Therefore, the nonaccrual loan balance of $45.5 million exceeds the balance of total loans that are 90 days past due of $29.6 million at June 30, 2011 as presented in the aging analysis.

The Company properly charges down loans based on the fair value of the collateral as determined by the current appraisal or other collateral valuations less any costs to sell before the properties are transferred to foreclosed real estate.

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 June 30, 2011 and December 31, 2010:

(in thousands)
June 30, 2011
 
December 31, 2010
Nonaccrual loans:
 
 
 
   Commercial and industrial
$
19,312

 
$
23,103

   Commercial tax-exempt

 

   Owner occupied real estate
2,450

 
4,318

   Commercial construction and land development
12,629

 
14,155

   Commercial real estate
5,125

 
5,424

   Residential
3,663

 
3,609

   Consumer
2,310

 
1,579

Total nonaccrual loans
45,489

 
52,188

Loans past due 90 days or more and still accruing

 
650

Renegotiated loan

 
177

Total nonperforming loans
$
45,489

 
$
53,015








19




The following tables are an age analysis of past due loan receivables as of June 30, 2011 and December 31, 2010:

 
 
Past Due Loans
 
 
Recorded Investment in Loans 90 Days and Greater and Still Accruing
(in thousands)
Current
30-59 Days Past Due
60-89 Days Past Due
90 Days Past Due and Greater
Total Past Due
Total Loan Receivables
June 30, 2011
 
 
 
 
 
 
 
Commercial and industrial
$
345,278

$
851

$
4,558

$
6,965

$
12,374

$
357,652

$

Commercial tax-exempt
83,711





83,711


Owner occupied real estate
265,650

909

834

2,244

3,987

269,637


Commercial construction and
land development
107,760

794

1,125

12,629

14,548

122,308


Commercial real estate
329,448

1,177

6,628

4,708

12,513

341,961


Residential
77,220

267

645

2,349

3,261