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EX-31.2 - EXHIBIT 31.2 - METRO BANCORP, INC.exhibit31210-qcertificatio.htm
EX-11 - EXHIBIT 11 - METRO BANCORP, INC.exhibit1110-qcomputationof.htm
EX-31.1 - EXHIBIT 31.1 - METRO BANCORP, INC.exhibit31110-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, 2015
[     ]
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:
14,162,138
Common shares outstanding at
October 31, 2015


1




METRO BANCORP, INC.

INDEX
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets (Unaudited)
 
 
September 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income (Unaudited)
 
 
Three months and nine months ended September 30, 2015 and September 30, 2014
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Three months and nine months ended September 30, 2015 and September 30, 2014
 
 
 
 
Consolidated Statements of Stockholders' Equity  (Unaudited)
 
 
Nine months ended September 30, 2015 and September 30, 2014
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine months ended September 30, 2015 and September 30, 2014
 
 
 
 
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, 2015
 
December 31, 2014
(in thousands, except share and per share amounts)
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
47,995


$
42,832

Securities, available for sale at fair value
401,610


528,038

Securities, held to maturity at cost (fair value 2015: $326,410; 2014: $319,923)
325,378


324,994

Loans, held for sale
5,380


4,996

Loans receivable, net of allowance for loan losses
(allowance 2015: $26,742; 2014: $24,998)
2,070,962


1,973,536

Restricted investments in bank stock
11,775


15,223

Premises and equipment, net
72,640


75,182

Other assets
30,420


32,771

Total assets
$
2,966,160


$
2,997,572

 
 

 
 

Liabilities and Stockholders' Equity
 

 
 

Deposits:
 

 
 

Noninterest-bearing
$
541,060


$
478,724

Interest-bearing
1,904,427


1,901,948

      Total deposits
2,445,487


2,380,672

Short-term borrowings
200,295


333,475

Long-term debt
25,000



Other liabilities
17,780


17,902

Total liabilities
2,688,562


2,732,049

Stockholders' Equity:
 

 
 

Preferred stock - Series A noncumulative; $10.00 par value; $1,000 aggregate 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 shares 2015: 14,434,329;  2014: 14,232,844;
outstanding shares 2015: 14,133,129; 2014: 14,220,544)
14,434


14,233

Surplus
165,886


160,588

Retained earnings
106,180


94,496

Accumulated other comprehensive loss
(1,571
)
 
(3,875
)
Treasury stock, at cost (common shares 2015: 301,200; 2014: 12,300)
(7,731
)
 
(319
)
Total stockholders' equity
277,598


265,523

Total liabilities and stockholders' equity
$
2,966,160


$
2,997,572

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)
2015
 
2014
 
2015
 
2014
Interest Income
 
 
 
 
 
 
 
Loans receivable, including fees:
 
 
 
 
 
 
 
Taxable
$
22,767

 
$
20,761

 
$
66,494

 
$
59,909

Tax-exempt
627

 
824

 
2,036

 
2,519

Securities:
 
 
 
 
 
 
 
Taxable
4,238

 
5,187

 
13,945

 
15,251

Tax-exempt
240

 
229

 
721

 
610

Total interest income
27,872

 
27,001

 
83,196

 
78,289

Interest Expense
 
 
 
 
 

 
 

Deposits
1,603

 
1,490

 
4,710

 
4,325

Short-term borrowings
259

 
331

 
693

 
840

Long-term debt
85

 
325

 
238

 
939

Total interest expense
1,947

 
2,146

 
5,641

 
6,104

Net interest income
25,925

 
24,855

 
77,555

 
72,185

Provision for loan losses
2,250

 
2,100

 
6,350

 
4,100

 Net interest income after provision for loan losses
23,675

 
22,755

 
71,205

 
68,085

Noninterest Income
 
 
 
 
 

 
 

Card income
3,948

 
3,828

 
11,948

 
11,643

Service charges on deposit accounts
2,247

 
2,399

 
6,440

 
6,668

Other noninterest income
1,169

 
1,122

 
3,614

 
3,326

Net gains on sales of loans
99

 
254

 
1,044

 
528

Net gains on sales/call of securities
12

 
26

 
428

 
37

Total noninterest income
7,475

 
7,629

 
23,474

 
22,202

Noninterest Expenses
 
 
 
 
 

 
 

Salaries and employee benefits
10,481

 
11,204

 
33,444

 
33,686

Occupancy
2,096

 
2,133

 
7,237

 
6,712

Furniture and equipment
689

 
908

 
2,143

 
2,932

Advertising and marketing
432

 
519

 
1,194

 
1,288

Data processing
3,658

 
3,223

 
10,888

 
9,793

Regulatory assessments and related fees
535

 
544

 
1,658

 
1,697

Telephone
855

 
838

 
2,506

 
2,664

Loan expense
473

 
153

 
2,081

 
1,169

Merger-related expenses
1,691

 

 
1,691

 

Professional services
300

 
371

 
1,759

 
973

State shares tax
485

 
545

 
1,583

 
1,631

Other
1,881

 
1,938

 
6,223

 
5,634

Total noninterest expenses
23,576

 
22,376

 
72,407

 
68,179

Income before taxes
7,574

 
8,008

 
22,272

 
22,108

Provision for federal income taxes
2,759

 
2,507

 
7,558

 
6,582

Net income
$
4,815

 
$
5,501

 
$
14,714

 
$
15,526

Net Income per Common Share
 
 
 
 
 

 
 

Basic
$
0.34

 
$
0.39

 
$
1.04

 
$
1.09

Diluted
0.33

 
0.38

 
1.02

 
1.07

Cash Dividends per Common Share
0.07

 

 
0.21

 

Average Common and Common Equivalent Shares Outstanding
 
 
 
 
 

 
 

Basic
14,067

 
14,201

 
14,116

 
14,182

Diluted
14,350

 
14,442

 
14,381

 
14,391

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)
2015
2014
2015
2014
Net income
$
4,815

$
5,501

$
14,714

$
15,526

Other comprehensive income (loss), net of tax:
 
 
 
 
Net unrealized holding gains (losses) arising during the period
(tax effects for the three months 2015: $2,178; 2014: ($695),
tax effects for the nine months 2015: $1,338; 2014: $3,472)
4,045

(1,290
)
2,485

6,449

Reclassification adjustment for net realized (gains) losses on securities recorded in income [1]
(tax effects for the three months 2014: ($9),
tax effects for the nine months 2015: ($97); 2014: ($9))


(17
)
(181
)
(17
)
   Other comprehensive income (loss)
4,045

(1,307
)
2,304

6,432

Total comprehensive income
$
8,860

$
4,194

$
17,018

$
21,958


[1] Amounts are included in net gains on sales 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)
Treasury Stock
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


(in thousands, except share amounts)
Preferred Stock
Common Stock
Surplus
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
 Total
January 1, 2015
$
400

$
14,233

$
160,588

$
94,496

$
(3,875
)
$
(319
)
$
265,523

Net income



14,714



14,714

Other comprehensive income




2,304


2,304

Dividends declared on preferred stock



(60
)


(60
)
Dividends declared on common stock



(2,970
)


(2,970
)
Common stock of 199,721 shares issued under
stock option plans, including tax benefit of $754

199

3,519




3,718

Common stock of 100 shares issued under
employee stock purchase plan


2




2

Proceeds from issuance of 1,664 shares of
common stock in connection with dividend
reinvestment and stock purchase plan

2

43




45

Common stock share-based awards


1,734




1,734

Purchase of 288,900 shares of treasury stock





(7,412
)
(7,412
)
September 30, 2015
$
400

$
14,434

$
165,886

$
106,180

$
(1,571
)
$
(7,731
)
$
277,598


See accompanying notes.


6




Metro Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
Nine months ended September 30,
(in thousands)
 
2015
 
2014
Operating Activities
 
 
 
 
Net income
 
$
14,714

 
$
15,526

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

 
 

Provision for loan losses
 
6,350

 
4,100

Depreciation, amortization and accretion
 
2,544

 
2,853

Deferred income tax expense
 
(1,103
)
 
(192
)
Gain on sales of available for sales securities (net)
 
(278
)
 
(26
)
Gain on sales/calls of held to maturity securities
 
(150
)
 
(11
)
Proceeds/payments from sales of loans originated for sale
 
41,169


26,563

Loans originated for sale
 
(40,887
)

(24,927
)
Gains on sales of loans (net)
 
(1,044
)

(528
)
Losses on write-down on foreclosed assets
 
116

 

(Gains) losses on sales of foreclosed assets (net)
 
12

 
(73
)
Losses on disposal of premises and equipment (net)
 
540

 
94

Stock-based compensation
 
1,734


544

(Increase) decrease in other assets
 
624


(1,182
)
Decrease in other liabilities
 
(122
)

(2,328
)
Net cash provided by operating activities
 
24,219


20,413

Investing Activities
 
 

 
 

Securities available for sale:
 
 

 
 

 Proceeds from principal repayments and maturities
 
58,386

 
50,598

 Proceeds from sales
 
71,666

 
10,652

 Purchases
 

 
(22,749
)
Securities held to maturity:
 
 

 
 
 Proceeds from principal repayments, calls and maturities
 
50,535

 
10,573

 Proceeds from sales
 
1,448

 
614

 Purchases
 
(52,105
)
 
(57,708
)
Proceeds from sales of loans not originated for sale
 
1,012

 
1,506

Proceeds from sales of foreclosed assets
 
2,717

 
1,927

Increase in loans receivable (net)
 
(104,390
)
 
(170,245
)
(Purchase) redemption of restricted investment in bank stock (net)
 
3,448

 
(1,096
)
Purchases of premises and equipment
 
(1,729
)
 
(2,415
)
Net cash provided by (used in) investing activities
 
30,988

 
(178,343
)
Financing Activities
 
 

 
 

Increase in demand, interest checking, money market, and savings deposits (net)
 
66,638

 
66,818

Increase (decrease) in time and other noncore deposits (net)
 
(1,823
)
 
25,410

Increase (decrease) in short-term borrowings (net)
 
(133,180
)
 
81,450

Repayment of long-term borrowings
 

 
(15,800
)
Proceeds from long-term borrowings
 
25,000

 

Proceeds from common stock options exercised
 
2,964

 
584

Proceeds from dividend reinvestment and common stock purchase plan
 
45

 
43

Tax benefit on exercise of stock options
 
754

 
110

Cash dividends on preferred stock
 
(60
)
 
(60
)
Cash dividends on common stock
 
(2,970
)
 

Purchase of treasury stock
 
(7,412
)
 

Net cash provided by (used in) financing activities
 
(50,044
)
 
158,555

Increase in cash and cash equivalents
 
5,163

 
625

Cash and cash equivalents at beginning of year
 
42,832

 
44,996

Cash and cash equivalents at end of period
 
$
47,995

 
$
45,621

Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid for interest on deposits and borrowings
 
$
5,616

 
$
6,029

Cash paid for income taxes
 
8,400

 
5,950

Supplemental schedule of noncash activities:
 
 
 
 
Transfer of loans to foreclosed assets
 
931

 
4,264

See accompanying notes.


7




METRO BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

NOTE 1.
Summary of Significant Accounting Policies
 
Consolidated Financial Statements
 
The consolidated balance sheet at December 31, 2014 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, 2014. 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, 2014. 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
 
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 January 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which 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. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company adopted this guidance on January 1, 2015 using a prospective transition method; it did not have a material impact on our consolidated financial statements. The guidance requires disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The Company has included these disclosures in Note 5 Foreclosed Assets.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which specifies how and when to recognize revenue and includes additional disclosures. On August 12, 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. ASU 2014-09 allows for either full retrospective or modified retrospective application. Early application is not permitted. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements.


8





On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability instead of presented as a deferred charge. On August 18, 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which codifies SEC Staff Guidance related to issuance costs related to line-of-credit arrangements. For public business entities, the standards are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

On April 15, 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software.  Additionally, ASU 2015-05 supersedes the requirement in ASC 350-04 to determine the accounting for a software license by analogy to the lease classification test.  The ASU 2015-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted. Entities may adopt the guidance either (1) prospectively to arrangements entered into or materially modified after the effective date or (2) retrospectively.  We are currently evaluating the impact ASU 2015-05 will have on our consolidated financial statements.

Reclassifications
 
Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation format. Such reclassifications had no impact on the Company's net operations and stockholders' equity.

NOTE 2.
Stock-based Compensation
 
The following table presents the number of options granted to purchase shares of the Company’s stock and the respective ranges of exercise prices per share and the weighted-average fair value of those granted options:
 
Nine months ended September 30,
 
2015
2014
Options granted
133,279

116,990

Range of exercise prices, per share
$25.43 to $26.97

$19.55 to $21.57

Weighted-average fair value, per option
$
8.19

$
7.72


The fair value of each option grant was established at the date of the grant using the Black-Scholes option pricing model, with the following assumptions:
 
Nine months ended September 30,
 
2015
2014
Weighted-average risk-free interest rate
1.8
%
2.0
%
Expected dividend yield
1.1
%
%
Weighted-average volatility of Company's common stock
32.2
%
34.0
%
Weighted-average assumed forfeiture rate
9.0
%
10.3
%
Weighted-average expected term of options, in years
7.5

7.2

Options vesting annually
25.0
%
25.0
%
 
The following table details the Company's stock-based compensation expense and related tax benefit associated with this expense:
 
Nine months ended September 30,
(in thousands)
2015
2014
Stock-based compensation expense
$
1,734

$
544

Tax benefit associated with compensation expense
371

130




9




During the first nine months of 2015 and 2014 the Company reversed $253,000 and $268,000, respectively, of previously recognized stock-based compensation expense due to differences between actual and estimated forfeiture rates of stock options granted during the first quarters of 2011 and 2010, respectively, primarily related to incentive stock options (ISOs), for which the Company generally does not receive a tax deduction on employee exercise of options.

Due to a material change in the number of members on the Company's board of directors over the previous twelve months, on June 19, 2015, a change in control was deemed to have occurred under a provision in the Company's 2006 Employee Stock Option and Restricted Stock Plan, whereby all outstanding employee stock options immediately became fully vested and exercisable.  As a consequence, the Company recorded accelerated stock-based compensation expense totaling $1.4 million during the second quarter of 2015, $724,000 of which was related to ISOs and, therefore, not deductible for federal income tax purposes. The Company will not recognize any further compensation expense related to these vested options. The change in the number of members of the board of directors did not have an impact on the 2011 Directors Stock Option and Restricted Stock Plan (the 2011 Plan) and the outstanding options under this plan continue to vest over a four-year period.  As of September 30, 2015, there was $775,000 of total unrecognized compensation cost related to nonvested stock option awards issued under the 2011 Plan.

NOTE 3.    Securities

The amortized cost and fair value of securities are summarized in the following tables:
 
September 30, 2015
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
33,996

 
$

 
$
(302
)
 
$
33,694

Residential mortgage-backed securities
54,963

 
511

 
(351
)
 
55,123

Agency collateralized mortgage obligations
285,073

 
2,208

 
(4,620
)
 
282,661

Municipal securities
29,994

 
264

 
(126
)
 
30,132

Total
$
404,026

 
$
2,983

 
$
(5,399
)
 
$
401,610

Held to Maturity:
 

 
 

 
 

 
 

U.S. Government agency securities
$
139,139

 
$
357

 
$
(1,375
)
 
$
138,121

Residential mortgage-backed securities
11,674

 
266

 

 
11,940

Agency collateralized mortgage obligations
164,865

 
2,855

 
(1,153
)
 
166,567

Municipal securities
9,700

 
108

 
(26
)
 
9,782

Total
$
325,378

 
$
3,586

 
$
(2,554
)
 
$
326,410


 
December 31, 2014
(in thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available for Sale:
 
 
 
 
 
 
 
U.S. Government agency securities
$
33,995

 
$

 
$
(1,207
)
 
$
32,788

Residential mortgage-backed securities
60,196

 
442

 
(489
)
 
60,149

Agency collateralized mortgage obligations
409,823

 
2,250

 
(7,064
)
 
405,009

Municipal securities
29,985

 
225

 
(118
)
 
30,092

Total
$
533,999

 
$
2,917

 
$
(8,878
)
 
$
528,038

Held to Maturity:


 


 


 


U.S. Government agency securities
$
149,112

 
$

 
$
(4,658
)
 
$
144,454

Residential mortgage-backed securities
14,226

 
480

 

 
14,706

Agency collateralized mortgage obligations
146,952

 
649

 
(1,711
)
 
145,890

Corporate debt securities
5,000

 
63

 

 
5,063

Municipal securities
9,704

 
107

 
(1
)
 
9,810

Total
$
324,994

 
$
1,299

 
$
(6,370
)
 
$
319,923




10




The amortized cost and fair value of debt securities by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations.

 
 
September 30, 2015
 
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
8,145


8,203





Due after five years through ten years
50,425


50,289


111,382


110,107

Due after ten years
5,420


5,334


37,457


37,796

 
63,990


63,826


148,839


147,903

Residential mortgage-backed securities
54,963


55,123


11,674


11,940

Agency collateralized mortgage obligations
285,073


282,661


164,865


166,567

Total
$
404,026


$
401,610


$
325,378


$
326,410

 
During the third quarter of 2015, the Company did not sell any securities. However, a $10.0 million agency debenture from the held to maturity (HTM) portfolio that the Company previously purchased at a discount was called in August 2015 resulting in a $12,000 gain on the call.

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

During the first nine months of 2015, the Company sold nine securities from the AFS portfolio with a total fair market value of $71.7 million and realized net gains of $278,000. One security with a net carrying value of $1.3 million was sold by the Company from the HTM portfolio with a realized gain of $138,000, however, it was an amortizing security that had returned more than 85% of its principal and could be sold without tainting the remaining HTM portfolio. An agency debenture from the HTM portfolio with a net carrying value of $10.0 million was called in August 2015 resulting in a $12,000 gain on the call.

During the first nine months of 2014, the Company sold one security from the AFS portfolio with a total fair market value of $10.7 million and realized a net gain of $26,000. One security with a net carrying value of $603,000 was sold by the Company from the HTM portfolio with a realized gain of $11,000, 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.

The following table summarizes the Company's gross realized gains and losses on the sales or calls of AFS debt securities:
(in thousands)
Gross Realized Gains
 
Gross Realized Losses
 
Net Gains
Three Months Ended:
 
 
 
 
 
September 30, 2015
$

 
$

 
$

September 30, 2014
26

 

 
26

Nine months ended:
 
 
 
 
 
September 30, 2015
$
451

 
$
(173
)
 
$
278

September 30, 2014
26

 

 
26


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. There were no transfers of securities between the AFS and HTM portfolios. The Company uses the specific identification method to record security sales.


11





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, 2015
 
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
$
24,727

$
(272
)
$
8,967

$
(30
)
$
33,694

$
(302
)
Residential mortgage-backed securities
14,648

(206
)
8,391

(145
)
23,039

(351
)
Agency collateralized mortgage obligations
39,929

(589
)
123,337

(4,031
)
163,266

(4,620
)
Municipal securities
1,941

(49
)
2,293

(77
)
4,234

(126
)
Total
$
81,245

$
(1,116
)
$
142,988

$
(4,283
)
$
224,233

$
(5,399
)
Held to Maturity:
 
 
 
 
 
 
U.S. Government agency securities
$

$

$
101,571

$
(1,375
)
$
101,571

$
(1,375
)
Agency collateralized mortgage obligations
9,364

(377
)
15,636

(776
)
25,000

(1,153
)
Municipal securities
1,849

(26
)


1,849

(26
)
Total
$
11,213

$
(403
)
$
117,207

$
(2,151
)
$
128,420

$
(2,554
)

 
December 31, 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
$

$

$
32,788

$
(1,207
)
$
32,788

$
(1,207
)
Residential mortgage-backed securities


24,636

(489
)
24,636

(489
)
Agency collateralized mortgage obligations
21,687

(77
)
212,908

(6,987
)
234,595

(7,064
)
Municipal securities


5,021

(118
)
5,021

(118
)
Total
$
21,687

$
(77
)
$
275,353

$
(8,801
)
$
297,040

$
(8,878
)
Held to Maturity:
 
 
 
 
 
 
U.S. Government agency securities
$

$

$
144,454

$
(4,658
)
$
144,454

$
(4,658
)
Agency collateralized mortgage obligations
31,289

(255
)
27,282

(1,456
)
58,571

(1,711
)
Municipal securities
1,013

(1
)


1,013

(1
)
Total
$
32,302

$
(256
)
$
171,736

$
(6,114
)
$
204,038

$
(6,370
)
 
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) 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, 2015 were associated with two distinct types of securities. The first type, those backed by the U.S. Government or one of its agencies, included 9 debentures, 18 CMOs and 4 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. The full and timely payment of all principal and interest is expected. The second type, municipal bonds, included six securities that were in an unrealized loss position as of September 30, 2015. 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. The municipal bonds carry an investment grade rating of no lower than single-A by either Moody's or Standard & Poor's. 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.



12




The Company did not recognize any credit losses related to the OTTI of investments during either the first three or nine months ended September 30, 2015 or 2014.

At September 30, 2015, securities with a carrying value of $649.5 million were pledged to secure public deposits and for other purposes as required or permitted by law.

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. At September 30, 2015, certain qualifying loans of the Bank totaling $398.0 million, collateralize a letter of credit, a line of credit commitment and borrowings the Bank has with the Federal Home Loan Bank (FHLB).

A summary of the Bank's loans receivable is as follows:
(in thousands)
September 30, 2015
 
December 31, 2014
Commercial and industrial
$
607,084

 
$
525,127

Commercial tax-exempt
58,999

 
71,151

Owner occupied real estate
315,555

 
332,070

Commercial construction and land development
140,135

 
138,064

Commercial real estate
639,135

 
594,276

Residential
119,083

 
110,951

Consumer
217,713

 
226,895

Gross loans receivable
2,097,704

 
1,998,534

Less: allowance for loan losses
26,742

 
24,998

Net loans receivable
$
2,070,962

 
$
1,973,536


The following table summarizes nonaccrual loans by loan type:
(in thousands)
September 30, 2015
 
December 31, 2014
Nonaccrual loans:
 
 
 
   Commercial and industrial
$
10,850

 
$
11,634

   Commercial tax-exempt

 

   Owner occupied real estate
9,290

 
7,416

   Commercial construction and land development
3,017

 
3,228

   Commercial real estate
6,722

 
5,824

   Residential
5,133

 
4,987

   Consumer
1,200

 
1,877

Total nonaccrual loans
$
36,212

 
$
34,966


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 $36.2 million exceeds the $27.5 million balance of total loans that are 90 days past due at September 30, 2015, as presented in the aging analysis tables that follow.


13





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.

The following tables present an aging analysis of loans receivable:
 
 
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, 2015
 
 
 
 
 
 
 
Commercial and industrial
$
595,694

$
547

$
171

$
10,672

$
11,390

$
607,084

$

Commercial tax-exempt
58,999





58,999


Owner occupied real estate
304,978

2,238

737

7,602

10,577

315,555


Commercial construction and
land development
133,987

6,118


30

6,148

140,135


Commercial real estate
630,455

1,626

1,390

5,664

8,680

639,135


Residential
114,986

474

831

2,792

4,097

119,083


Consumer
213,390

2,589

1,021

713

4,323

217,713


Total
$
2,052,489

$
13,592

$
4,150

$
27,473

$
45,215

$
2,097,704

$


 
 
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, 2014
 
 
 
 
 
 
 
Commercial and industrial
$
514,428

$
1,574

$
3,398

$
5,727

$
10,699

$
525,127

$

Commercial tax-exempt
71,151





71,151


Owner occupied real estate
325,681

606

44

5,739

6,389

332,070

445

Commercial construction and
land development
137,263

611

190


801

138,064


Commercial real estate
591,383

1,104

175

1,614

2,893

594,276


Residential
101,233

5,067

1,900

2,751

9,718

110,951


Consumer
222,767

2,650

437

1,041

4,128

226,895


Total
$
1,963,906

$
11,612

$
6,144

$
16,872

$
34,628

$
1,998,534

$
445



14




A summary of the ALL and balance of loans receivable by loan class and by impairment method is presented 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
Residen-tial
Con-
sumer
Unallo-cated
Total
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated
for impairment
$
2,836

$

$
2,441

$

$

$

$

$

$
5,277

Collectively evaluated
for impairment
8,880

46

572

4,470

5,241

818

852

586

21,465

Total ALL
$
11,716

$
46

$
3,013

$
4,470

$
5,241

$
818

$
852

$
586

$
26,742

Loans receivable:
 
 
 
 
 
 
 
 
 
Loans evaluated
  individually
$
15,451

$

$
9,330

$
3,613

$
10,806

$
6,438

$
1,850

$

$
47,488

Loans evaluated
  collectively
591,633

58,999

306,225

136,522

628,329

112,645

215,863


2,050,216

Total loans receivable
$
607,084

$
58,999

$
315,555

$
140,135

$
639,135

$
119,083

$
217,713

$

$
2,097,704


(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residen-tial
Con-
sumer
Unallo-cated
Total
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Individually evaluated
for impairment
$
4,401

$

$
1,242

$

$

$

$

$

$
5,643

Collectively evaluated
for impairment
7,313

55

689

4,242

4,707

796

931

622

19,355

Total ALL
$
11,714

$
55

$
1,931

$
4,242

$
4,707

$
796

$
931

$
622

$
24,998

Loans receivable:
 
 
 
 
 
 
 
 
 
Loans evaluated
  individually
$
16,982

$

$
7,464

$
3,810

$
9,976

$
5,657

$
2,433

$

$
46,322

Loans evaluated
  collectively
508,145

71,151

324,606

134,254

584,300

105,294

224,462


1,952,212

Total loans receivable
$
525,127

$
71,151

$
332,070

$
138,064

$
594,276

$
110,951

$
226,895

$

$
1,998,534


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 are generally of comparatively lower risk 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


15




that can be recovered on these loans. The risk of nonpayment is affected by changes in economic conditions, the credit risks of a particular borrower, the term of the loan and, in the case of a collateralized loan, 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 continuously assesses the quality of the Company's loan portfolio in conjunction with the current state of the economy and its impact on our borrowers repayment ability and on loan collateral values in order to determine the appropriate historical loss period to use in our quantitative analysis. 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 analysis. 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: 
(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residen-
tial
Consumer
Unallo-cated
Total
2015
 
 
 
 
 
 
 
 
 
Balance at July 1
$
12,038

$
45

$
1,934

$
4,476

$
5,178

$
855

$
959

$
386

$
25,871

Provision charged to operating expenses
946

1

1,079

(6
)
67

(31
)
(6
)
200

2,250

Recoveries of loans previously charged-off
53




12

17

17


99

Loans charged-off
(1,321
)



(16
)
(23
)
(118
)

(1,478
)
Balance at September 30
$
11,716

$
46

$
3,013

$
4,470

$
5,241

$
818

$
852

$
586

$
26,742

(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residen-tial
Consumer
Unallo-cated
Total
2015
 
 
 
 
 
 
 
 
 
Balance at January 1
$
11,714

$
55

$
1,931

$
4,242

$
4,707

$
796

$
931

$
622

$
24,998

Provision charged to operating expenses
3,088

(9
)
1,197

226

1,216

109

559

(36
)
6,350

Recoveries of loans previously charged-off
160


3

2

29

19

44


257

Loans charged-off
(3,246
)

(118
)

(711
)
(106
)
(682
)

(4,863
)
Balance at September 30
$
11,716

$
46

$
3,013

$
4,470

$
5,241

$
818

$
852

$
586

$
26,742



16




(in thousands)
Comm. and industrial
Comm. tax-exempt
Owner occupied real estate
Comm. construction and land development
Comm. real estate
Residen-tial
Consumer
Unallo-cated
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
Unallo-cated
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




17




The following table presents information regarding the Company's impaired loans. The recorded investment represents the contractual obligation less any charged off principal.
 
September 30, 2015
 
December 31, 2014
(in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
 
Recorded Investment
Unpaid Principal Balance
Related Allowance
Impaired loans with no related allowance: