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EXCEL - IDEA: XBRL DOCUMENT - METRO BANCORP, INC.Financial_Report.xls
EX-11 - EXHIBIT 11 - METRO BANCORP, INC.exhibit1110-qcomputationof.htm
EX-3.II - EXHIBIT 3(II) - METRO BANCORP, INC.exhibit3ii-metrobancorpbyl.htm
EX-31.1 - EXHIBIT 31.1 - METRO BANCORP, INC.exhibit31110-qcertificatio.htm
EX-31.2 - EXHIBIT 31.2 - METRO BANCORP, INC.exhibit31210-qcertificatio.htm
EX-32 - EXHIBIT 32 - METRO BANCORP, INC.exhibit3210-qcertification.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
 
September 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:
14,206,703
Common shares outstanding at
October 31, 2014


1




METRO BANCORP, INC.

INDEX
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets (Unaudited)
 
 
September 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income (Unaudited)
 
 
Three months and nine months ended September 30, 2014 and September 30, 2013
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Three months and nine months ended September 30, 2014 and September 30, 2013
 
 
 
 
Consolidated Statements of Stockholders' Equity  (Unaudited)
 
 
Nine months ended September 30, 2014 and September 30, 2013
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine months ended September 30, 2014 and September 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
 
September 30, 2014
 
December 31, 2013
(in thousands, except share and per share amounts)
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
45,621


$
44,996

Securities, available for sale at fair value
557,098


585,923

Securities, held to maturity at cost (fair value 2014: $320,140; 2013: $263,697)
330,417


283,814

Loans, held for sale
5,088


6,225

Loans receivable, net of allowance for loan losses
(allowance 2014: $24,540; 2013: $23,110)
1,889,080


1,727,762

Restricted investments in bank stock
21,660


20,564

Premises and equipment, net
74,587


75,783

Other assets
36,296


36,051

Total assets
$
2,959,847


$
2,781,118

 
 

 
 

Liabilities and Stockholders' Equity
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
494,082


$
443,287

Interest-bearing
1,837,767


1,796,334

      Total deposits
2,331,849


2,239,621

Short-term borrowings
359,200


277,750

Long-term debt


15,800

Other liabilities
15,436


17,764

Total liabilities
2,706,485


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: 14,205,904;  2013: 14,157,219)
14,206


14,157

Surplus
159,882


158,650

Retained earnings
88,957


73,491

Accumulated other comprehensive loss
(10,083
)
 
(16,515
)
Total stockholders' equity
253,362


230,183

Total liabilities and stockholders' equity
$
2,959,847


$
2,781,118

See accompanying notes.



3




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Interest Income
 
 
 
 
 
 
 
Loans receivable, including fees:
 
 
 
 
 
 
 
Taxable
$
20,761

 
$
18,752

 
$
59,909

 
$
55,239

Tax-exempt
824

 
908

 
2,519

 
2,744

Securities:
 
 
 
 
 
 
 
Taxable
5,187

 
5,021

 
15,251

 
15,387

Tax-exempt
229

 
185

 
610

 
553

Total interest income
27,001

 
24,866

 
78,289

 
73,923

Interest Expense
 
 
 
 
 

 
 

Deposits
1,490

 
1,503

 
4,325

 
4,647

Short-term borrowings
331

 
189

 
840

 
501

Long-term debt
325

 
307

 
939

 
974

Total interest expense
2,146

 
1,999

 
6,104

 
6,122

Net interest income
24,855

 
22,867

 
72,185

 
67,801

Provision for loan losses
2,100

 
1,200

 
4,100

 
5,300

 Net interest income after provision for loan losses
22,755

 
21,667

 
68,085

 
62,501

Noninterest Income
 
 
 
 
 

 
 

Card income
3,828

 
3,778

 
11,643

 
10,946

Service charges on deposit accounts
2,399

 
2,347

 
6,668

 
6,945

Other
1,122

 
1,243

 
3,326

 
3,502

Net gains on sales of loans
254

 
148

 
528

 
811

Net gains on sales/calls of securities
26

 

 
37

 
21

Total noninterest income
7,629

 
7,516

 
22,202

 
22,225

Noninterest Expenses
 
 
 
 
 

 
 

Salaries and employee benefits
11,204

 
10,761

 
33,686

 
31,977

Occupancy
2,133

 
2,205

 
6,712

 
6,478

Furniture and equipment
908

 
1,114

 
2,932

 
3,386

Advertising and marketing
519

 
358

 
1,288

 
1,103

Data processing
3,223

 
3,206

 
9,793

 
9,688

Regulatory assessments and related costs
544

 
588

 
1,697

 
1,673

Telephone
838

 
888

 
2,664

 
2,716

Loan expense
153

 
306

 
1,169

 
1,675

Pennsylvania shares tax
545

 
552

 
1,631

 
1,690

Other
2,309

 
2,465

 
6,607

 
6,746

Total noninterest expenses
22,376

 
22,443

 
68,179

 
67,132

Income before taxes
8,008

 
6,740

 
22,108

 
17,594

Provision for federal income taxes
2,507

 
2,064

 
6,582

 
5,225

Net income
$
5,501

 
$
4,676

 
$
15,526

 
$
12,369

Net Income per Common Share
 
 
 
 
 

 
 

Basic
$
0.39

 
$
0.33

 
$
1.09

 
$
0.87

Diluted
0.38

 
0.32

 
1.07

 
0.86

Average Common and Common Equivalent Shares Outstanding
 
 
 
 
 

 
 

Basic
14,201

 
14,145

 
14,182

 
14,138

Diluted
14,442

 
14,335

 
14,391

 
14,262

See accompanying notes.


4




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
(in thousands)
2014
2013
2014
2013
Net income
$
5,501

$
4,676

$
15,526

$
12,369

Other comprehensive income (loss), net of tax:
 
 
 
 
Net unrealized holding gains (losses) arising during the period
(net of taxes for the three months 2014: ($695); 2013: ($1,450);
net of taxes for the nine months 2014: $3,472; 2013: ($9,586))
(1,290
)
(2,692
)
6,449

(18,118
)
Reclassification adjustment for net realized (gains) losses on securities recorded in income [1]
(net of taxes for the three months 2014: ($9);
net of taxes for the nine months 2014: ($9); 2013: $125)
(17
)

(17
)
233

   Other comprehensive income (loss)
(1,307
)
(2,692
)
6,432

(17,885
)
Total comprehensive income (loss)
$
4,194

$
1,984

$
21,958

$
(5,516
)

[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



12,369


12,369

Other comprehensive loss




(17,885
)
(17,885
)
Dividends declared on preferred stock



(60
)

(60
)
Common stock of 17,510 shares issued under
stock option plans, including tax benefit of $34

18

234



252

Common stock of 30 shares issued under
employee stock purchase plan


1



1

Proceeds from issuance of 1,934 shares of
common stock in connection with dividend
reinvestment and stock purchase plan

2

68



70

Common stock share-based awards


807



807

September 30, 2013
$
400

$
14,151

$
158,415

$
68,620

$
(10,645
)
$
230,941


(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



15,526


15,526

Other comprehensive income




6,432

6,432

Dividends declared on preferred stock



(60
)

(60
)
Common stock of 46,670 shares issued under
stock option plans, including tax benefit of $110

47

647



694

Common stock of 60 shares issued under
employee stock purchase plan






Proceeds from issuance of 1,955 shares of
common stock in connection with dividend
reinvestment and stock purchase plan

2

41



43

Common stock share-based awards


544



544

September 30, 2014
$
400

$
14,206

$
159,882

$
88,957

$
(10,083
)
$
253,362


See accompanying notes.


6




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended
 
 
September 30,
(in thousands)
 
2014
 
2013
Operating Activities
 
 
 
 
Net income
 
$
15,526

 
$
12,369

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

 
 

Provision for loan losses
 
4,100

 
5,300

Provision for depreciation and amortization
 
3,517

 
3,907

Deferred income tax benefit
 
(192
)
 
(781
)
Amortization of securities premiums and accretion of discounts (net)
 
174

 
722

(Gains) losses on sales of available for sales securities (net)
 
(26
)
 
358

Gains on sales/calls of held to maturity securities
 
(11
)
 
(379
)
Proceeds/payments from sales of loans originated for sale
 
26,563


55,836

Loans originated for sale
 
(24,927
)

(44,796
)
Gains on sales of loans (net)
 
(528
)

(811
)
Losses on write-down on foreclosed real estate
 

 
27

(Gains) losses on sales of foreclosed real estate (net)
 
(73
)
 
48

Losses on disposal of premises and equipment (net)
 
94

 
216

Stock-based compensation
 
544


807

Amortization of deferred loan origination fees and costs (net)
 
2,560


2,031

Increase in other assets
 
(1,182
)

(74
)
Increase (decrease) in other liabilities
 
(2,328
)

1,127

Net cash provided by operating activities
 
23,811


35,907

Investing Activities
 
 

 
 

Securities available for sale:
 
 

 
 

 Proceeds from principal repayments, calls and maturities
 
50,598

 
116,049

 Proceeds from sales
 
10,652

 
76,262

 Purchases
 
(22,749
)
 
(157,777
)
Securities held to maturity:
 
 

 
 
 Proceeds from principal repayments, calls and maturities
 
10,573

 
62,629

 Proceeds from sales
 
614

 
13,600

 Purchases
 
(57,708
)
 
(83,292
)
Proceeds from sale of loans receivable
 
1,506

 
4,952

Proceeds from sales of foreclosed real estate
 
1,927

 
1,547

Increase in loans receivable (net)
 
(173,643
)
 
(186,249
)
Purchase of restricted investment in bank stock (net)
 
(1,096
)
 
(3,088
)
Proceeds from sale of premises and equipment
 

 
316

Purchases of premises and equipment
 
(2,415
)
 
(2,098
)
Net cash used in investing activities
 
(181,741
)
 
(157,149
)
Financing Activities
 
 

 
 

Increase (decrease) in demand, interest checking, money market, and savings deposits (net)
 
61,661

 
(40,477
)
Increase (decrease) in time and other noncore deposits (net)
 
30,567

 
(13,743
)
Increase in short-term borrowings (net)
 
81,450

 
203,000

Repayment of long-term borrowings
 
(15,800
)
 
(25,000
)
Proceeds from common stock options exercised
 
584

 
218

Proceeds from dividend reinvestment and common stock purchase plan
 
43

 
70

Tax benefit on exercise of stock options
 
110

 
34

Cash dividends on preferred stock
 
(60
)
 
(60
)
Net cash provided by financing activities
 
158,555

 
124,042

Increase in cash and cash equivalents
 
625

 
2,800

Cash and cash equivalents at beginning of year
 
44,996

 
56,582

Cash and cash equivalents at end of period
 
$
45,621

 
$
59,382

Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid for interest on deposits and borrowings
 
$
6,029

 
$
6,211

Cash paid for income taxes
 
5,950

 
4,925

Supplemental schedule of noncash activities:
 
 
 
 
Transfer of loans to foreclosed assets
 
4,264

 
2,732

See accompanying notes.


7




METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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 nine months ended September 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 11.20%; weighted-average expected lives of the options of 7.2 years and 7.5 years; and no cash dividends in either year. For the nine months ended September 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 nine months ended September 30, 2014 and 2013 was $7.72 and $7.55 per option, respectively. In the first nine 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 $544,000 and $807,000 during the first nine months ended September 30, 2014 and September 30, 2013, respectively. In accordance with Financial Accounting Standards Board (FASB) guidance on stock-based payments, during the first nine months of 2014 and 2013 the Company reversed $268,000 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:
 
September 30, 2014
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
33,995

 
$

 
$
(2,168
)
 
$
31,827

Residential mortgage-backed securities
61,585

 
26

 
(1,109
)
 
60,502

Agency collateralized mortgage obligations
447,049

 
1,408

 
(13,528
)
 
434,929

Municipal securities
29,982

 
177

 
(319
)
 
29,840

Total
$
572,611

 
$
1,611

 
$
(17,124
)
 
$
557,098

Held to Maturity:
 

 
 

 
 

 
 

U.S. Government agency securities
$
149,109

 
$

 
$
(8,089
)
 
$
141,020

Residential mortgage-backed securities
14,387

 
344

 
(45
)
 
14,686

Agency collateralized mortgage obligations
152,215

 
307

 
(2,949
)
 
149,573

Corporate debt securities
5,000

 
89

 

 
5,089

Municipal securities
9,706

 
77

 
(11
)
 
9,772

Total
$
330,417

 
$
817

 
$
(11,094
)
 
$
320,140




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 September 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
$


$


$
5,000


$
5,089

Due after one year through five years
3,879


3,838





Due after five years through ten years
49,554


47,435


77,831


73,976

Due after ten years
10,544


10,394


80,984


76,816

 
63,977


61,667


163,815


155,881

Residential mortgage-backed securities
61,585


60,502


14,387


14,686

Agency collateralized mortgage obligations
447,049


434,929


152,215


149,573

Total
$
572,611


$
557,098


$
330,417


$
320,140

 
During the third quarter of 2014, the Company sold one security from the available for sale portfolio with a total fair market value of $10.7 million. The Company had no securities that were called by their respective issuers. The Company realized a securities gain of $26,000 on the sale.

During the third quarter of 2013, the Company did not sell any securities and had no securities that were called by their respective issuers.

During the first nine months of 2014, the Company sold two securities with a total fair market value of $11.3 million and realized total net gains of $37,000. One security was from the held to maturity (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 nine 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 September 30, 2014, securities with a carrying value of $666.1 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:
 
 
 
 
 
 
 
September 30, 2014
$
26

 
$

 
$

 
$
26

September 30, 2013

 

 

 

Nine Months Ended:
 
 
 
 
 
 
 
September 30, 2014
$
37

 
$

 
$

 
$
37

September 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: 
 
September 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
$

$

$
31,827

$
(2,168
)
$
31,827

$
(2,168
)
Residential mortgage-backed securities
26,051

(19
)
31,547

(1,090
)
57,598

(1,109
)
Agency collateralized mortgage obligations
110,667

(1,181
)
204,489

(12,347
)
315,156

(13,528
)
Municipal securities
1,017

(4
)
8,337

(315
)
9,354

(319
)
Total
$
137,735

$
(1,204
)
$
276,200

$
(15,920
)
$
413,935

$
(17,124
)
Held to Maturity:
 
 
 
 
 
 
U.S. Government agency securities
$

$

$
141,020

$
(8,089
)
$
141,020

$
(8,089
)
Residential mortgage-backed securities
6,926

(45
)


6,926

(45
)
Agency collateralized mortgage obligations
87,527

(631
)
34,961

(2,318
)
122,488

(2,949
)
Municipal securities
1,013

(3
)
632

(8
)
1,645

(11
)
Total
$
95,466

$
(679
)
$
176,613

$
(10,415
)
$
272,079

$
(11,094
)



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 September 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, 43 CMOs and 11 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 nine municipal bonds that were in an unrealized loss position as of September 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 three or nine months ended September 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 $591.9 million at September 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 September 30, 2014 and December 31, 2013 is as follows:
(in thousands)
September 30, 2014
 
December 31, 2013
Commercial and industrial
$
478,605

 
$
447,144

Commercial tax-exempt
75,986

 
81,734

Owner occupied real estate
312,032

 
302,417

Commercial construction and land development
122,314

 
133,176

Commercial real estate
594,004

 
473,188

Residential
107,707

 
97,766

Consumer
222,972

 
215,447

 
1,913,620

 
1,750,872

Less: allowance for loan losses
24,540

 
23,110

Net loans receivable
$
1,889,080

 
$
1,727,762


The following table summarizes nonaccrual loans by loan type at September 30, 2014 and December 31, 2013:
(in thousands)
September 30, 2014
 
December 31, 2013
Nonaccrual loans:
 
 
 
   Commercial and industrial
$
7,974

 
$
10,217

   Commercial tax-exempt

 

   Owner occupied real estate
6,954

 
4,838

   Commercial construction and land development
3,254

 
8,587

   Commercial real estate
6,407

 
6,705

   Residential
6,157

 
7,039

   Consumer
2,421

 
2,577

Total nonaccrual loans
$
33,167

 
$
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 loan payments have 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 $33.2 million exceeds the balance of total loans that are 90 days past due of $20.0 million at September 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 September 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
September 30, 2014
 
 
 
 
 
 
 
Commercial and industrial
$
468,201

$
6,450

$

$
3,954

$
10,404

$
478,605

$

Commercial tax-exempt
75,986





75,986


Owner occupied real estate
303,016

2,175

1,201

5,640

9,016

312,032


Commercial construction and
land development
122,262

52



52

122,314


Commercial real estate
587,144

1,951

969

3,940

6,860

594,004

8

Residential
101,929

90

1,171

4,517

5,778

107,707


Consumer
219,405

1,399

231

1,937

3,567

222,972


Total
$
1,877,943

$
12,117

$
3,572

$
19,988

$
35,677

$
1,913,620

$
8


 
 
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 September 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
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated
for impairment
$
3,243

$

$
1,142

$

$

$
1,114

$
465

$

$
5,964

Collectively evaluated
for impairment
6,741

67

830

4,022

4,747

490

901

778

18,576

Total ALL
$
9,984

$
67

$
1,972

$
4,022

$
4,747

$
1,604

$
1,366

$
778

$
24,540

Loans receivable:
 
 
 
 
 
 
 
 
 
Loans evaluated
  individually
$
13,336

$

$
6,987

$
3,876

$
10,523

$
6,843

$
2,977

$

$
44,542

Loans evaluated
  collectively
465,269

75,986

305,045

118,438

583,481

100,864

219,995


1,869,078

Total loans receivable
$
478,605

$
75,986

$
312,032

$
122,314

$
594,004

$
107,707

$
222,972

$

$
1,913,620


(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 nine months ended September 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 July 1
$
7,100

$
67

$
2,233

$
6,696

$
4,840

$
1,061

$
1,333

$
941

$
24,271

Provision charged to operating expenses
3,047


(98
)
(1,954
)
260

581

427

(163
)
2,100

Recoveries of loans previously charged-off
137


24

34

2


58


255

Loans charged-off
(300
)

(187
)
(754
)
(355
)
(38
)
(452
)

(2,086
)
Balance at September 30
$
9,984

$
67

$
1,972

$
4,022

$
4,747

$
1,604

$
1,366

$
778

$
24,540

(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
1,575

(5
)
(135
)
(489
)
1,481

964

628

81

4,100

Recoveries of loans previously charged-off
1,386


310

245

176

20

97


2,234

Loans charged-off
(1,155
)

(383
)
(1,293
)
(1,071
)
(340
)
(662
)

(4,904
)
Balance at September 30
$
9,984

$
67

$
1,972

$
4,022

$
4,747

$
1,604

$
1,366

$
778

$
24,540

(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 July 1
$
10,549

$
74

$
2,207

$
7,810

$
5,059

$
863

$
1,258

$
218

$
28,038

Provision charged to operating expenses
(437
)
1

4

(33
)
801

45

562

257

1,200

Recoveries of loans previously charged-off
613



(21
)

7

11


610

Loans charged-off
(1,462
)

(34
)
(267
)
(109
)
(36
)
(515
)

(2,423
)
Balance at September 30
$
9,263

$
75

$
2,177

$
7,489

$
5,751

$
879

$
1,316

$
475

$
27,425



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
1,085

(8
)
315

82

2,100

711

1,329

(314
)
5,300

Recoveries of loans previously charged-off
945


3

477


10

69


1,504

Loans charged-off
(2,726
)

(270
)
(292
)
(332
)
(166
)
(875
)

(4,661
)
Balance at September 30
$
9,263

$
75

$
2,177

$
7,489

$
5,751

$
879

$
1,316

$
475

$
27,425


The following table presents information regarding the Company's impaired loans as of September 30, 2014 and December 31, 2013. The recorded investment represents the contractual obligation less any charged off principal.
 
September 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
$
8,367

$
9,136

$

$
9,838

$
12,587

$

   Commercial tax-exempt






   Owner occupied real estate
5,845

6,208


4,456

4,664


   Commercial construction and land
     development
3,876

3,876


8,514

9,047


   Commercial real estate
10,523

10,644


10,953

12,795


   Residential
3,774

4,014


4,901

5,366


   Consumer
2,512

2,723


2,645

2,868


Total impaired loans with no related
  allowance
34,897

36,601


41,307

47,327


Loans with an allowance recorded:
 
 
 
 
 
 
   Commercial and industrial
4,969

4,969

3,243

3,217

3,217

1,559

   Owner occupied real estate
1,142

1,142

1,142