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EX-31.1 - EXHIBIT 31.1 - METRO BANCORP, INC.exhibit31110-qcertificatio.htm
EX-32 - EXHIBIT 32 - METRO BANCORP, INC.exhibit3210-qcertification.htm
EX-11 - EXHIBIT 11 - METRO BANCORP, INC.exhibit1110-qcomputationof.htm
EXCEL - IDEA: XBRL DOCUMENT - METRO BANCORP, INC.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - METRO BANCORP, INC.exhibit31210-qcertificatio.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, 2014
[     ]
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)
888-937-0004
(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
X
 
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:
14,200,176
Common shares outstanding at
July 31, 2014


1




METRO BANCORP, INC.

INDEX
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets (Unaudited)
 
 
June 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income (Unaudited)
 
 
Three months and six months ended June 30, 2014 and June 30, 2013
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Three months and six months ended June 30, 2014 and June 30, 2013
 
 
 
 
Consolidated Statements of Stockholders' Equity  (Unaudited)
 
 
Three months and six months ended June 30, 2014 and June 30, 2013
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited)
 
 
Six months ended June 30, 2014 and June 30, 2013
 
 
 
 
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.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
 
 


2




Part I - FINANCIAL INFORMATION

Item 1. Financial Statements
 
Metro Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
 
June 30, 2014
 
December 31, 2013
(in thousands, except share and per share amounts)
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
59,203


$
44,996

Securities, available for sale at fair value
566,837


585,923

Securities, held to maturity at cost (fair value 2014: $268,243; 2013: $263,697)
278,019


283,814

Loans, held for sale
5,881


6,225

Loans receivable, net of allowance for loan losses
(allowance 2014: $24,271; 2013: $23,110)
1,827,544


1,727,762

Restricted investments in bank stock
23,955


20,564

Premises and equipment, net
74,393


75,783

Other assets
33,096


36,051

Total assets
$
2,868,928


$
2,781,118

 
 

 
 

Liabilities and Stockholders' Equity
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
508,012


$
443,287

Interest-bearing
1,678,968


1,796,334

      Total deposits
2,186,980


2,239,621

Short-term borrowings
401,675


277,750

Long-term debt
15,800


15,800

Other liabilities
15,703


17,764

Total liabilities
2,620,158


2,550,935

Stockholders' Equity:
 

 
 

Preferred stock - Series A noncumulative; $10.00 par value; $1,000 liquidation preference;
 
 
      (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 2014: 14,193,513;  2013: 14,157,219)
14,194


14,157

Surplus
159,476


158,650

Retained earnings
83,476


73,491

Accumulated other comprehensive loss
(8,776
)
 
(16,515
)
Total stockholders' equity
248,770


230,183

Total liabilities and stockholders' equity
$
2,868,928


$
2,781,118

 
See accompanying notes.



3




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
Loans receivable, including fees:
 
 
 
 
 
 
 
Taxable
$
19,938

 
$
18,516

 
$
39,148

 
$
36,487

Tax-exempt
834

 
905

 
1,695

 
1,836

Securities:
 
 
 
 
 
 
 
Taxable
5,018

 
5,007

 
10,064

 
10,366

Tax-exempt
191

 
184

 
381

 
368

Total interest income
25,981

 
24,612

 
51,288

 
49,057

Interest Expense
 
 
 
 
 

 
 

Deposits
1,401

 
1,525

 
2,835

 
3,144

Short-term borrowings
278

 
181

 
509

 
312

Long-term debt
307

 
307

 
614

 
667

Total interest expense
1,986

 
2,013

 
3,958

 
4,123

Net interest income
23,995

 
22,599

 
47,330

 
44,934

Provision for loan losses
1,100

 
1,800

 
2,000

 
4,100

 Net interest income after provision for loan losses
22,895

 
20,799

 
45,330

 
40,834

Noninterest Income
 
 
 
 
 

 
 

Service charges on deposit accounts
2,233

 
2,222

 
4,269

 
4,598

Card income
3,990

 
3,667

 
7,815

 
7,168

Other
1,134

 
1,204

 
2,204

 
2,259

Gains on sales of loans
138

 
250

 
274

 
663

Net gains (losses) on sales/calls of securities

 
(9
)
 
11

 
21

Total noninterest income
7,495

 
7,334

 
14,573

 
14,709

Noninterest Expenses
 
 
 
 
 

 
 

Salaries and employee benefits
11,055

 
10,391

 
22,482

 
21,216

Occupancy
2,104

 
2,150

 
4,579

 
4,273

Furniture and equipment
994

 
1,185

 
2,024

 
2,272

Advertising and marketing
376

 
389

 
769

 
745

Data processing
3,320

 
3,276

 
6,570

 
6,482

Regulatory assessments and related costs
584

 
551

 
1,153

 
1,085

Telephone
902

 
875

 
1,826

 
1,828

Loan expense
881

 
1,044

 
1,016

 
1,369

Pennsylvania shares tax
546

 
573

 
1,086

 
1,138

Other
2,259

 
1,926

 
4,298

 
4,281

Total noninterest expenses
23,021

 
22,360

 
45,803

 
44,689

Income before taxes
7,369

 
5,773

 
14,100

 
10,854

Provision for federal income taxes
2,288

 
1,725

 
4,075

 
3,161

Net income
$
5,081

 
$
4,048

 
$
10,025

 
$
7,693

Net Income per Common Share
 
 
 
 
 

 
 

Basic
$
0.36

 
$
0.28

 
$
0.70

 
$
0.54

Diluted
0.35

 
0.28

 
0.70

 
0.54

Average Common and Common Equivalent Shares Outstanding
 
 
 
 
 

 
 

Basic
14,184

 
14,137

 
14,172

 
14,134

Diluted
14,387

 
14,256

 
14,366

 
14,209

See accompanying notes.


4




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
(in thousands)
2014
2013
2014
2013
Net income
$
5,081

$
4,048

$
10,025

$
7,693

Other comprehensive income (loss), net of tax:
 
 
 
 
Net unrealized holding gains (losses) arising during the period
(net of taxes for the three months 2014: $1,207; 2013: ($6,759), net of taxes for the six months 2014: $4,167; 2013: ($8,137))
2,244

(12,554
)
7,739

(15,426
)
Reclassification adjustment for net realized losses on securities recorded in income [1]
(net of taxes for the three months 2013: $2,
net of taxes for the six months 2013: $124)

7


233

   Other comprehensive income (loss)
2,244

(12,547
)
7,739

(15,193
)
Total comprehensive income (loss)
$
7,325

$
(8,499
)
$
17,764

$
(7,500
)

[1] Amounts are included in net gains on sales/calls of securities on the Consolidated Statements of Income in total noninterest income.
See accompanying notes.



5




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, 2013
$
400

$
14,131

$
157,305

$
56,311

$
7,240

$
235,387

Net income



7,693


7,693

Other comprehensive loss




(15,193
)
(15,193
)
Dividends declared on preferred stock



(40
)

(40
)
Common stock of 6,255 shares issued under
stock option plans, including tax benefit of $7

6

73



79

Common stock of 10 shares issued under
employee stock purchase plan






Proceeds from issuance of 1,272 shares of
common stock in connection with dividend
reinvestment and stock purchase plan

2

41



43

Common stock share-based awards


499



499

June 30, 2013
$
400

$
14,139

$
157,918

$
63,964

$
(7,953
)
$
228,468


(in thousands, except share amounts)
Preferred Stock
Common Stock
Surplus
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
 Total
January 1, 2014
$
400

$
14,157

$
158,650

$
73,491

$
(16,515
)
$
230,183

Net income



10,025


10,025

Other comprehensive income




7,739

7,739

Dividends declared on preferred stock



(40
)

(40
)
Common stock of 34,846 shares issued under
stock option plans, including tax benefit of $68

35

485



520

Common stock of 30 shares issued under
employee stock purchase plan






Proceeds from issuance of 1,418 shares of
common stock in connection with dividend
reinvestment and stock purchase plan

2

28



30

Common stock share-based awards


313



313

June 30, 2014
$
400

$
14,194

$
159,476

$
83,476

$
(8,776
)
$
248,770


See accompanying notes.


6




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended
 
 
June 30,
(in thousands)
 
2014
 
2013
Operating Activities
 
 
 
 
Net income
 
$
10,025

 
$
7,693

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for loan losses
 
2,000

 
4,100

Provision for depreciation and amortization
 
2,450

 
2,646

Deferred income tax benefit
 
(228
)
 
(564
)
Amortization of securities premiums and accretion of discounts (net)
 
134

 
602

Losses on sales of available for sales securities (net)
 

 
357

Gains on sales/calls of held to maturity securities
 
(11
)
 
(379
)
Proceeds/payments from sales of loans originated for sale
 
15,677


41,581

Loans originated for sale
 
(15,059
)

(32,895
)
Gains on sales of loans (net)
 
(274
)

(663
)
Losses on write-down on foreclosed real estate
 

 
15

(Gains) losses on sales of foreclosed real estate (net)
 
(61
)
 
57

Losses on disposal of premises and equipment (net)
 
35

 
116

Stock-based compensation
 
313


499

Amortization of deferred loan origination fees and costs (net)
 
1,556


1,349

Increase in other assets
 
(1,687
)

(1,216
)
Increase (decrease) in other liabilities
 
(2,061
)

1,181

Net cash provided by operating activities
 
12,809


24,479

Investing Activities
 
 

 
 

Securities available for sale:
 
 

 
 

 Proceeds from principal repayments, calls and maturities
 
30,819

 
87,792

 Proceeds from sales
 

 
76,262

 Purchases
 

 
(157,777
)
Securities held to maturity:
 
 

 
 
 Proceeds from principal repayments, calls and maturities
 
6,249

 
57,767

 Proceeds from sales
 
614

 
13,600

 Purchases
 
(1,018
)
 
(20,000
)
Proceeds from sale of loans receivable
 
489

 

Proceeds from sales of foreclosed real estate
 
1,241

 
542

Increase in loans receivable (net)
 
(104,304
)
 
(110,455
)
Purchase of restricted investment in bank stock (net)
 
(3,391
)
 
(8,369
)
Proceeds from sale of premises and equipment
 

 
66

Purchases of premises and equipment
 
(1,095
)
 
(1,828
)
Net cash used in investing activities
 
(70,396
)
 
(62,400
)
Financing Activities
 
 

 
 

Decrease in demand, interest checking, money market, and savings deposits (net)
 
(50,065
)
 
(57,505
)
Decrease in time and other noncore deposits (net)
 
(2,576
)
 
(5,027
)
Increase in short-term borrowings (net)
 
123,925

 
116,800

Repayment of long-term borrowings
 

 
(25,000
)
Proceeds from common stock options exercised
 
452

 
72

Proceeds from dividend reinvestment and common stock purchase plan
 
30

 
43

Tax benefit on exercise of stock options
 
68

 
7

Cash dividends on preferred stock
 
(40
)
 
(40
)
Net cash provided by financing activities
 
71,794

 
29,350

Increase (decrease) in cash and cash equivalents
 
14,207

 
(8,571
)
Cash and cash equivalents at beginning of year
 
44,996

 
56,582

Cash and cash equivalents at end of period
 
$
59,203

 
$
48,011

Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid for interest on deposits and borrowings
 
$
4,016

 
$
3,924

Cash paid for income taxes
 
3,850

 
3,925

Supplemental schedule of noncash activities:
 
 
 
 
Transfer of loans to foreclosed assets
 
505

 
2,693

See accompanying notes.


7




METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)

NOTE 1.
Summary of Significant Accounting Policies
 
Consolidated Financial Statements
 
The consolidated balance sheet at December 31, 2013 has been derived from audited consolidated financial statements and the consolidated interim financial statements included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements were prepared in accordance with GAAP for interim financial statements and with instructions for Form 10-Q and Regulation S-X Section 210.10-01. Further information on Metro Bancorp, Inc.'s (Metro or the Company) accounting policies are available in Note 1 (Significant Accounting Policies) of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. 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, 2013. Events occurring subsequent to the balance sheet date through the date of issuance have been evaluated for potential recognition or disclosure in the consolidated financial statements. The results for the six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
 
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries including Metro Bank (the Bank). All material intercompany transactions have been eliminated.

Use of Estimates

The consolidated financial statements are prepared in conformity with GAAP. Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect reported amounts of assets and liabilities and require disclosure of contingent assets and liabilities. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal, recurring nature. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses (allowance or ALL), impaired loans, the valuation of foreclosed assets, the valuation of securities available for sale, the valuation of deferred tax assets, the determination of other-than-temporary impairment (OTTI) on the Company's investment securities portfolio and other fair value measurements.

Recent Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)(“ASU 2014-09”), which specifies how and when to recognize revenue and includes additional disclosures. ASU 2014-09 will be effective for financial statements issued for the first interim period within annual reporting periods beginning after December 15, 2016, and does not permit early adoption. We will adopt ASU 2014-09 in the first quarter of 2017 and are currently evaluating the impact it will have on our Financial Statements.

In July 2013, FASB issued guidance on the presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward, except as follows: to the extent a net operating loss carry forward, a similar tax loss, or a tax credit carry forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The effective date of


8




this update for public entities is for fiscal years and interim periods that began after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In January 2014, FASB clarified the Receivables – Troubled Debt Restructurings by Creditors guidance regarding Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The guidance clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. The effective date of the adoption of this guidance is for interim and annual reporting periods beginning after December 15, 2014. We do not believe the adoption of the amendment to this guidance will have a material impact on our consolidated financial statements.

Reclassifications
 
Certain amounts in the 2013 financial statements have been reclassified to conform to the 2014 presentation format. Such reclassifications had no impact on the Company's net operations and stockholders' equity.

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, 2014 and 2013, respectively: risk-free interest rates of 2.0% and 1.4%; volatility factors of the expected market price of the Company's common stock of 34% and 41%; assumed forfeiture rates of 10.30% and 11.16%; weighted-average expected lives of the options of 7.2 years and 7.5 years; and no cash dividends in either year. For the six months ended June 30, 2014 and 2013, respectively, options vest at 25% per year after one year from date of grant. Using these assumptions, the weighted-average fair value of options granted for the six months ended June 30, 2014 and 2013 was $7.72 and $7.54 per option, respectively. In the first six months of 2014, the Company granted 116,990 options to purchase shares of the Company's stock at exercise prices ranging from $19.55 to $21.57 per share.
 
The Company recorded net stock-based compensation expense of approximately $313,000 and $499,000 during the first six months ended June 30, 2014 and June 30, 2013, respectively. In accordance with Financial Accounting Standards Board (FASB) guidance on stock-based payments, during the first quarters of 2014 and 2013 the Company reversed $238,000 and $135,000, 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 2010 and 2009, respectively.

NOTE 3.    Securities

The amortized cost and fair value of securities are summarized in the following tables:
 
June 30, 2014
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
33,995

 
$

 
$
(2,353
)
 
$
31,642

Residential mortgage-backed securities
63,580

 
55

 
(898
)
 
62,737

Agency collateralized mortgage obligations
454,808

 
1,996

 
(11,892
)
 
444,912

Municipal securities
27,956

 
63

 
(473
)
 
27,546

Total
$
580,339

 
$
2,114

 
$
(15,616
)
 
$
566,837

Held to Maturity:
 

 
 

 
 

 
 

U.S. Government agency securities
$
149,105

 
$

 
$
(8,362
)
 
$
140,743

Residential mortgage-backed securities
7,515

 
405

 

 
7,920

Agency collateralized mortgage obligations
112,405

 
452

 
(2,363
)
 
110,494

Corporate debt securities
5,000

 
116

 

 
5,116

Municipal securities
3,994

 
16

 
(40
)
 
3,970

Total
$
278,019

 
$
989

 
$
(10,765
)
 
$
268,243




9




 
December 31, 2013
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
33,995

 
$

 
$
(4,069
)
 
$
29,926

Residential mortgage-backed securities
65,795

 

 
(3,295
)
 
62,500

Agency collateralized mortgage obligations
483,591

 
1,141

 
(17,668
)
 
467,064

Municipal securities
27,950

 

 
(1,517
)
 
26,433

Total
$
611,331

 
$
1,141

 
$
(26,549
)
 
$
585,923

Held to Maturity:


 


 


 


U.S. Government agency securities
$
149,096

 
$

 
$
(16,082
)
 
$
133,014

Residential mortgage-backed securities
7,849

 
197

 

 
8,046

Agency collateralized mortgage obligations
118,893

 
251

 
(4,465
)
 
114,679

Corporate debt securities
5,000

 
149

 

 
5,149

Municipal securities
2,976

 

 
(167
)
 
2,809

Total
$
283,814

 
$
597

 
$
(20,714
)
 
$
263,697


The amortized cost and fair value of debt securities by contractual maturity at June 30, 2014 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
3,878


3,821


5,000


5,116

Due after five years through ten years
48,682


46,266


71,018


66,702

Due after ten years
9,391


9,101


82,081


78,011

 
61,951


59,188


158,099


149,829

Residential mortgage-backed securities
63,580


62,737


7,515


7,920

Agency collateralized mortgage obligations
454,808


444,912


112,405


110,494

Total
$
580,339


$
566,837


$
278,019


$
268,243

 
During the second quarter of 2014, the Company did not sell any securities and had no securities that were called by their respective issuers.

During the second quarter of 2013, the Company sold 10 securities with a total fair market value of $29.0 million. The Company had no agency debentures that were called by their respective issuers. In total, the Company realized net securities losses of $9,000. Of the investments sold, none were from the held to maturity (HTM) portfolio.

During the first six months of 2014, the Company sold one security with a fair market value of $614,000 and realized a gain of $11,000. The security was from the HTM portfolio, however, it was an amortizing security that had already returned more than 85% of its principal and could be sold without tainting the remaining HTM portfolio. The Company had no securities that were called by their respective issuers.

During the first six months of 2013, the Company sold 21 securities with a total fair market value of $89.9 million. The Company also had $50.0 million of agency debentures that were called by their respective issuers. In total, the Company realized net security gains of $21,000. Of the investments sold, five were from the HTM portfolio, four of which were amortizing securities that had already returned at least 85% of their respective principal, and one of which was a corporate bond within three months of its maturity date. In all cases, these could be sold without tainting the remaining HTM portfolio.

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



10




At June 30, 2014, securities with a carrying value of $667.3 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 or calls of debt securities and credit losses (if any) recognized for the OTTI of investments:
(in thousands)
Gross Realized Gains
 
Gross Realized Losses
 
OTTI Credit Losses
 
Net Gains
Three Months Ended:
 
 
 
 
 
 
 
June 30, 2014
$

 
$

 
$

 
$

June 30, 2013
363

 
(372
)
 

 
(9
)
Six Months Ended:
 
 
 
 
 
 
 
June 30, 2014
$
11

 
$

 
$

 
$
11

June 30, 2013
1,183

 
(1,162
)
 

 
21


In determining fair market values for its portfolio holdings, the Company receives information from a third party provider which management evaluates and corroborates using amounts from one of its securities brokers. Under the current guidance, these values are considered Level 2 inputs, based upon mathematically derived matrix pricing and observed data from similar assets. They are not Level 1 direct quotes, nor do they reflect Level 3 inputs that would be derived from internal analysis or judgment. As the Company does not manage a trading portfolio and typically only sells from its AFS portfolio in order to manage interest rate risk or credit exposure, direct quotes, or street bids, are warranted on an as-needed basis.

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, 2014
 
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
$

$

$
31,642

$
(2,353
)
$
31,642

$
(2,353
)
Residential mortgage-backed securities
8,363

(2
)
32,423

(896
)
40,786

(898
)
Agency collateralized mortgage obligations
86,500

(859
)
205,715

(11,033
)
292,215

(11,892
)
Municipal securities
7,083

(21
)
11,446

(452
)
18,529

(473
)
Total
$
101,946

$
(882
)
$
281,226

$
(14,734
)
$
383,172

$
(15,616
)
Held to Maturity:
 
 
 
 
 
 
U.S. Government agency securities
$

$

$
140,743

$
(8,362
)
$
140,743

$
(8,362
)
Agency collateralized mortgage obligations
29,115

(646
)
16,438

(1,717
)
45,553

(2,363
)
Municipal securities
1,617

(11
)
1,236

(29
)
2,853

(40
)
Total
$
30,732

$
(657
)
$
158,417

$
(10,108
)
$
189,149

$
(10,765
)



11




 
December 31, 2013
 
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
$
8,077

$
(918
)
$
21,849

$
(3,151
)
$
29,926

$
(4,069
)
Residential mortgage-backed securities
62,500

(3,295
)


62,500

(3,295
)
Agency collateralized mortgage obligations
363,993

(16,182
)
15,574

(1,486
)
379,567

(17,668
)
Municipal securities
26,433

(1,517
)


26,433

(1,517
)
Total
$
461,003

$
(21,912
)
$
37,423

$
(4,637
)
$
498,426

$
(26,549
)
Held to Maturity:
 
 
 
 
 
 
U.S. Government agency securities
$
110,435

$
(13,661
)
$
22,579

$
(2,421
)
$
133,014

$
(16,082
)
Agency collateralized mortgage obligations
98,082

(4,465
)


98,082

(4,465
)
Municipal securities
2,809

(167
)


2,809

(167
)
Total
$
211,326

$
(18,293
)
$
22,579

$
(2,421
)
$
233,905

$
(20,714
)
 
The Company's investment securities portfolio consists of U.S. Government agency debentures, U.S. Government sponsored agency mortgage-backed securities (MBSs), agency collateralized mortgage obligations (CMOs), corporate bonds and municipal bonds. The Company considers securities of the U.S. Government sponsored agencies and the U.S. Government MBS/CMOs to have little credit risk because their principal and interest payments are backed by an agency of the U.S. Government.

The unrealized losses in the Company's investment portfolio at June 30, 2014 were associated with two distinct types of securities. The first type, those backed by the U.S. Government or one of its agencies, included 11 debentures, 34 CMOs and six MBSs. Management believes that the unrealized losses on these investments were primarily caused by the movement of interest rates from the date of purchase and notes the contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. The Company also owns 19 municipal bonds that were in an unrealized loss position as of June 30, 2014. In all cases, the bonds are general obligations of either a Pennsylvania municipality or school district and are backed by the ad valorem taxing power of the entity. In all cases, the bonds carry an investment grade rating of no lower than single-A by either Moody's or Standard and Poors. The Company, however, conducts its own periodic, independent review and believes the unrealized losses in its municipal bond portfolio are the result of movements in long-term interest rates and are not reflective of any credit deterioration. The Company does not intend to sell these debt securities prior to recovery and it is more likely than not that the Company will not have to sell these debt securities prior to recovery.

The Company did not incur any OTTI credit losses during either the first three or six months ended June 30, 2014 or 2013.

NOTE 4.
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 (allowance or ALL) and any deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan or to the first review date if the loan is on demand. Certain qualifying loans of the Bank totaling $689.7 million at June 30, 2014, collateralize a letter of credit and a line of credit commitment the Bank has with the Federal Home Loan Bank (FHLB).


12




A summary of the Bank's loans receivable at June 30, 2014 and December 31, 2013 is as follows:
(in thousands)
June 30, 2014
 
December 31, 2013
Commercial and industrial
$
467,587

 
$
447,144

Commercial tax-exempt
76,674

 
81,734

Owner occupied real estate
308,708

 
302,417

Commercial construction and land development
130,449

 
133,176

Commercial real estate
544,544

 
473,188

Residential
103,564

 
97,766

Consumer
220,289

 
215,447

 
1,851,815

 
1,750,872

Less: allowance for loan losses
24,271

 
23,110

Net loans receivable
$
1,827,544

 
$
1,727,762


The following table summarizes nonaccrual loans by loan type at June 30, 2014 and December 31, 2013:
(in thousands)
June 30, 2014
 
December 31, 2013
Nonaccrual loans:
 
 
 
   Commercial and industrial
$
4,291

 
$
10,217

   Commercial tax-exempt

 

   Owner occupied real estate
6,401

 
4,838

   Commercial construction and land development
9,028

 
8,587

   Commercial real estate
5,793

 
6,705

   Residential
6,341

 
7,039

   Consumer
2,479

 
2,577

Total nonaccrual loans
$
34,333

 
$
39,963


Generally, the Bank's policy is to move a loan to nonaccrual status when it becomes 90 days past due or when the Bank does not believe it will collect all of the contractual principal and interest payments. In addition, when a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the ALL. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. If a loan is substandard and accruing, accrued interest is recognized as income. Once a loan is on nonaccrual status, it is not returned to accrual status unless the loan has been current for at least six consecutive months and the borrower and/or any guarantors demonstrate the ability to repay the loan in accordance with its contractual terms. 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. The total nonaccrual loan balance of $34.3 million exceeds the balance of total loans that are 90 days past due of $23.1 million at June 30, 2014 as presented in the aging analysis tables that follow.

No additional funds were committed on nonaccrual loans including restructured loans that were nonaccruing. Typically, commitments are canceled and no additional advances are made when a loan is placed on nonaccrual.


13




The following tables are an age analysis of past due loans receivable as of June 30, 2014 and December 31, 2013:
 
 
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 Loans Receivable
June 30, 2014
 
 
 
 
 
 
 
Commercial and industrial
$
461,180

$
2,375

$
207

$
3,825

$
6,407

$
467,587

$

Commercial tax-exempt
76,674





76,674


Owner occupied real estate
300,679

1,738

2,714

3,577

8,029

308,708


Commercial construction and
land development
126,404

395


3,650

4,045

130,449


Commercial real estate
538,283

178

253

5,830

6,261

544,544

2,292

Residential
97,179


1,518

4,867

6,385

103,564

43

Consumer
216,397

1,776

805

1,311

3,892

220,289


Total
$
1,816,796

$
6,462

$
5,497

$
23,060

$
35,019

$
1,851,815

$
2,335


 
 
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 Loans Receivable
December 31, 2013
 
 
 
 
 
 
 
Commercial and industrial
$
438,522

$
1,830

$
1,041

$
5,751

$
8,622

$
447,144

$
17

Commercial tax-exempt
81,734





81,734


Owner occupied real estate
295,278

2,618

1,674

2,847

7,139

302,417


Commercial construction and
land development
124,240

3,355

342

5,239

8,936

133,176


Commercial real estate
465,765

2,142

444

4,837

7,423

473,188

235

Residential
85,352

4,194

6,304

1,916

12,414

97,766

117

Consumer
210,906

2,095

1,335

1,111

4,541

215,447


Total
$
1,701,797

$
16,234

$
11,140

$
21,701

$
49,075

$
1,750,872

$
369



14




A summary of the ALL and balance of loans receivable by loan class and by impairment method as of June 30, 2014 and December 31, 2013 is detailed in the tables that follow:
(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Con
sumer
Unallocated
Total
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated
for impairment
$
501

$

$
1,476

$
2,612

$

$
535

$
465

$

$
5,589

Collectively evaluated
for impairment
6,599

67

757

4,084

4,840

526

868

941

18,682

Total ALL
$
7,100

$
67

$
2,233

$
6,696

$
4,840

$
1,061

$
1,333

$
941

$
24,271

Loans receivable:
 
 
 
 
 
 
 
 
 
Loans evaluated
  individually
$
9,848

$

$
6,667

$
9,656

$
9,920

$
7,287

$
3,095

$

$
46,473

Loans evaluated
  collectively
457,739

76,674

302,041

120,793

534,624

96,277

217,194


1,805,342

Total loans receivable
$
467,587

$
76,674

$
308,708

$
130,449

$
544,544

$
103,564

$
220,289

$

$
1,851,815


(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Con
sumer
Unallocated
Total
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated
for impairment
$
1,559

$

$
1,366

$
1,660

$

$
524

$
476

$

$
5,585

Collectively evaluated
for impairment
6,619

72

814

3,899

4,161

436

827

697

17,525

Total ALL
$
8,178

$
72

$
2,180

$
5,559

$
4,161

$
960

$
1,303

$
697

$
23,110

Loans receivable:
 
 
 
 
 
 
 
 
 
Loans evaluated
  individually
$
13,055

$

$
5,822

$
11,669

$
10,953

$
7,979

$
3,121

$

$
52,599

Loans evaluated
  collectively
434,089

81,734

296,595

121,507

462,235

89,787

212,326


1,698,273

Total loans receivable
$
447,144

$
81,734

$
302,417

$
133,176

$
473,188

$
97,766

$
215,447

$

$
1,750,872


The Bank may create a specific allowance for all of or a part of a particular loan in lieu of a charge-off or charge-down as a result of management's evaluation of impaired loans. In these instances, the Bank has determined that a loss is not imminent based upon available information surrounding the credit at the time of the analysis including, but not limited to, unresolved legal matters; however, management believes an allowance is appropriate to acknowledge the probable risk of loss.

Typically, commercial construction and land development and commercial real estate loans present a greater risk of nonpayment by a borrower than other types of loans. The market value of and cash flow from real estate, particularly real estate held for investment, can fluctuate significantly in a relatively short period of time. Commercial and industrial, tax exempt and owner occupied real estate loans generally carry a lower risk factor comparatively within the commercial portfolio because the repayment of these loans relies primarily on the cash flow from a business which is typically more stable and predictable.

Consumer loan collections are dependent on the borrower's continued financial stability and thus are more likely to be affected by adverse personal circumstances. Consumer and residential loans are also impacted by the market value of real estate. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. The risk of nonpayment is affected by changes in economic conditions, the credit risks of a


15




particular borrower, the term of the loan and, in the case of a collateralized loan, uncertainties as to the value of the collateral and other factors.

Management bases its quantitative analysis of probable future loan losses (when determining the ALL) on those loans collectively reviewed for impairment on a two-year period of actual historical losses. Management may increase or decrease the historical loss period at some point in the future based on the state of the local, regional and national economies and other factors.

The qualitative factors such as changes in levels and trends of charge-offs and delinquencies; material changes in the mix, volume or duration of the loan portfolio; changes in lending policies and procedures including underwriting standards; changes in the experience, ability and depth of lending management and other relevant staff; the existence and effect of any concentrations of credit; changes in the overall values of collateral; changes in the quality of the loan review program and changes in national and local economic trends and conditions among other things, are factors which have not been identified by the quantitative processes. The determination of qualitative factors inherently involves a higher degree of subjectivity and considers risk factors that may not have yet manifested themselves in historical loss experience.

The following tables summarize the transactions in the ALL for the three and six months ended June 30, 2014 and 2013
(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Consumer
Unallocated
Total
2014
 
 
 
 
 
 
 
 
 
Balance at April 1
$
7,914

$
68

$
2,236

$
5,842

$
4,640

$
1,023

$
1,329

$
882

$
23,934

Provision charged to operating expenses
(557
)
(1
)
125

1,270

99

37

68

59

1,100

Recoveries of loans previously charged-off
244


43

111

101

20

16


535

Loans charged-off
(501
)

(171
)
(527
)

(19
)
(80
)

(1,298
)
Balance at June 30
$
7,100

$
67

$
2,233

$
6,696

$
4,840

$
1,061

$
1,333

$
941

$
24,271

(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Consumer
Unallocated
Total
2014
 
 
 
 
 
 
 
 
 
Balance at January 1
$
8,178

$
72

$
2,180

$
5,559

$
4,161

$
960

$
1,303

$
697

$
23,110

Provision charged to operating expenses
(1,472
)
(5
)
(37
)
1,465

1,221

383

201

244

2,000

Recoveries of loans previously charged-off
1,249


286

211

174

20

39


1,979

Loans charged-off
(855
)

(196
)
(539
)
(716
)
(302
)
(210
)

(2,818
)
Balance at June 30
$
7,100

$
67

$
2,233

$
6,696

$
4,840

$
1,061

$
1,333

$
941

$
24,271

(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Consumer
Unallocated
Total
2013
 
 
 
 
 
 
 
 
 
Balance at April 1
$
10,408

$
75

$
2,208

$
7,967

$
5,038

$
338

$
787

$
651

$
27,472

Provision charged to operating expenses
1,175

(1
)
51

(161
)
162

539

468

(433
)
1,800

Recoveries of loans previously charged-off
194



12



22


228

Loans charged-off
(1,228
)

(52
)
(8
)
(141
)
(14
)
(19
)

(1,462
)
Balance at June 30
$
10,549

$
74

$
2,207

$
7,810

$
5,059

$
863

$
1,258

$
218

$
28,038



16




(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residential
Consumer
Unallocated
Total
2013
 
 
 
 
 
 
 
 
 
Balance at January 1
$
9,959

$
83

$
2,129

$
7,222

$
3,983

$
324

$
793

$
789

$
25,282

Provision charged to operating expenses
1,522

(9
)
311

115

1,299

666

767

(571
)
4,100

Recoveries of loans previously charged-off
332


3

498


3

58


894

Loans charged-off
(1,264
)

(236
)
(25
)
(223
)
(130
)
(360
)

(2,238
)
Balance at June 30
$
10,549

$
74

$
2,207

$
7,810

$
5,059

$
863

$
1,258

$
218

$
28,038


The following table presents information regarding the Company's impaired loans as of June 30, 2014 and December 31, 2013. The recorded investment represents the contractual obligation less any charged off principal.
 
June 30, 2014
December 31, 2013
(in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
Recorded Investment
Unpaid Principal Balance
Related Allowance
Loans with no related allowance:
 
 
 
 
 
 
   Commercial and industrial
$
9,347

$
10,106

$

$
9,838

$
12,587

$

   Commercial tax-exempt






   Owner occupied real estate
4,355

4,692


4,456

4,664


   Commercial construction and land
     development
4,929

5,988


8,514

9,047


   Commercial real estate
9,920

12,202


10,953

12,795


   Residential
4,218

4,419


4,901

5,366


   Consumer
2,630

2,891


2,645

2,868


Total impaired loans with no related
  allowance
35,399

40,298


41,307

47,327


Loans with an allowance recorded:
 
 
 
 
 
 
   Commercial and industrial
501

501

501

3,217

3,217

1,559

   Owner occupied real estate
2,312

2,312

1,476

1,366

1,366

1,366

   Commercial construction and land
     development
4,727

4,727