Attached files
file | filename |
---|---|
EX-11 - EXHIBIT 11 - METRO BANCORP, INC. | ex11.htm |
EX-32 - EXHIBIT 32 - METRO BANCORP, INC. | ex32.htm |
EX-99.1 - EXHIBIT 99.1 - METRO BANCORP, INC. | ex99-1.htm |
EX-31.1 - EXHIBIT 31.1 - METRO BANCORP, INC. | ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - METRO BANCORP, INC. | ex31-2.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, 2009
|
OR
[ ]
|
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, P.O. Box 4999, Harrisburg, PA
|
17111-0999
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
800-653-6104
|
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes
|
X
|
No
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
|
No
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer
|
Accelerated
filer
|
X
|
|||
Non-accelerated
filer
|
Smaller
Reporting Company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
|
No
|
X
|
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock,
as
of the latest practicable date:
|
13,427,651
Common shares outstanding at
10/31/2009
|
1
METRO
BANCORP, INC.
INDEX
Page
|
||
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets (Unaudited)
|
||
September
30, 2009 and December 31,
2008
|
||
Consolidated
Statements of Operations (Unaudited)
|
||
Three
months and nine months ended September 30, 2009 and September 30,
2008
|
||
Consolidated
Statements of Stockholders' Equity (Unaudited)
|
||
Nine
months ended September 30, 2009 and September 30,
2008
|
||
Consolidated
Statements of Cash Flows (Unaudited)
|
||
Nine
months ended September 30, 2009 and September 30,
2008
|
||
Notes
to 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
|
|
Item
4T.
|
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.
|
Submission
of Matters to a Vote of Securities
Holders
|
|
Item
5.
|
Other
Information
|
|
Item
6.
|
Exhibits
|
|
2
Part
I – FINANCIAL INFORMATION
Item
1. Financial
Statements
Metro
Bancorp, Inc. and Subsidiaries
Consolidated
Balance Sheets (unaudited)
(in
thousands, except share and per share amounts)
|
September
30,
2009
|
December
31,
2008
|
|||||||
Assets
|
Cash
and cash equivalents
|
$ | 36,762 | $ | 49,511 | ||||
Securities,
available for sale at fair value
|
296,953 | 341,656 | |||||||
Securities,
held to maturity at cost
|
|||||||||
(fair
value 2009: $100,307; 2008: $154,357)
|
96,867 | 152,587 | |||||||
Loans,
held for sale
|
13,289 | 41,148 | |||||||
Loans
receivable, net of allowance for loan losses
|
|||||||||
(allowance
2009: $14,618; 2008: $16,719)
|
1,456,636 | 1,423,064 | |||||||
Restricted
investments in bank stocks
|
21,630 | 21,630 | |||||||
Premises
and equipment, net
|
93,567 | 87,059 | |||||||
Other
assets
|
70,791 | 23,872 | |||||||
Total
assets
|
$ | 2,086,495 | $ | 2,140,527 | |||||
Liabilities
|
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 307,192 | $ | 280,556 | |||||
Interest-bearing
|
1,429,769 | 1,353,429 | |||||||
Total
deposits
|
1,736,961 | 1,633,985 | |||||||
Short-term
borrowings and repurchase agreements
|
83,650 | 300,125 | |||||||
Long-term
debt
|
54,400 | 79,400 | |||||||
Other
liabilities
|
15,762 | 12,547 | |||||||
Total
liabilities
|
1,890,773 | 2,026,057 | |||||||
Stockholders’
Equity
|
Preferred
stock – Series A noncumulative; $10.00 par
value;
1,000,000 shares authorized; 40,000 shares
issued
and outstanding
|
400 | 400 | ||||||
Common
stock – $1.00 par value; 25,000,000 shares
authorized;
issued and outstanding –
2009:
12,793,634; 2008: 6,446,421
|
12,794 | 6,446 | |||||||
Surplus
|
140,192 | 73,221 | |||||||
Retained
earnings
|
50,615 | 51,683 | |||||||
Accumulated
other comprehensive loss
|
(8,279 | ) | (17,280 | ) | |||||
Total
stockholders’ equity
|
195,722 | 114,470 | |||||||
Total
liabilities and stockholders’ equity
|
$ | 2,086,495 | $ | 2,140,527 |
See
accompanying notes.
3
Metro
Bancorp, Inc. and Subsidiaries
Consolidated
Statements of Operations (unaudited)
Three
Months Ended
|
Nine
Months Ended
|
|||||||
(in
thousands,
|
September
30,
|
September
30,
|
||||||
except
per share amounts)
|
2009
|
2008
|
2009
|
2008
|
||||
Interest
|
Loans
receivable, including fees:
|
|||||||
Income
|
Taxable
|
$
18,548
|
$
20,179
|
$
56,334
|
$
58,917
|
|||
Tax-exempt
|
1,108
|
937
|
3,147
|
2,375
|
||||
Securities:
|
||||||||
Taxable
|
4,638
|
6,898
|
15,031
|
21,934
|
||||
Tax-exempt
|
16
|
16
|
49
|
49
|
||||
Total
interest income
|
24,310
|
28,030
|
74,561
|
83,275
|
||||
Interest
|
Deposits
|
4,314
|
5,659
|
13,038
|
17,554
|
|||
Expense
|
Short-term
borrowings
|
226
|
1,497
|
976
|
4,746
|
|||
Long-term
debt
|
1,091
|
1,222
|
3,516
|
3,653
|
||||
Total
interest expense
|
5,631
|
8,378
|
17,530
|
25,953
|
||||
Net interest
income
|
18,679
|
19,652
|
57,031
|
57,322
|
||||
Provision
for loan losses
|
3,725
|
1,700
|
10,625
|
4,075
|
||||
Net
interest income after provision for loan losses
|
14,954
|
17,952
|
46,406
|
53,247
|
||||
Noninterest
|
Service
charges and other fees
|
5,892
|
6,016
|
17,243
|
17,935
|
|||
Income
|
Other
operating income
|
160
|
172
|
497
|
499
|
|||
Gains
on sales of loans
|
238
|
177
|
294
|
574
|
||||
Total fees and other
income
|
6,290
|
6,365
|
18,034
|
19,008
|
||||
Other-than-temporary
impairment losses
|
(6,399)
|
-
|
(5,423)
|
-
|
||||
Portion
recognized in other comprehensive income (before taxes)
|
5,447
|
-
|
3,098
|
-
|
||||
Net impairment loss on
investment securities
|
(952)
|
-
|
(2,325)
|
-
|
||||
Gains
(losses) on sales/call of securities
|
1,515
|
-
|
1,570
|
(157)
|
||||
Total
noninterest income
|
6,853
|
6,365
|
17,279
|
18,851
|
||||
Noninterest
|
Salaries
and employee benefits
|
10,643
|
9,507
|
31,941
|
27,730
|
|||
Expenses
|
Occupancy
|
1,928
|
2,010
|
5,959
|
6,080
|
|||
Furniture
and equipment
|
1,300
|
1,068
|
3,416
|
3,254
|
||||
Advertising
and marketing
|
830
|
655
|
1,875
|
2,318
|
||||
Data
processing
|
2,537
|
1,803
|
6,739
|
5,337
|
||||
Postage
and supplies
|
617
|
426
|
1,565
|
1,427
|
||||
Regulatory
assessments and related fees
|
830
|
541
|
3,256
|
2,280
|
||||
Telephone
|
1,424
|
577
|
2,987
|
1,758
|
||||
Core
system conversion/branding (net)
|
(911)
|
-
|
(523)
|
-
|
||||
Merger/acquisition
|
250
|
-
|
655
|
-
|
||||
Other
|
3,351
|
2,774
|
8,194
|
7,155
|
||||
Total
noninterest expenses
|
22,799
|
19,361
|
66,064
|
57,339
|
||||
Income
(loss) before taxes
|
(992)
|
4,956
|
(2,379)
|
14,759
|
||||
Provision
(benefit) for federal income taxes
|
(502)
|
1,523
|
(1,371)
|
4,614
|
||||
Net
income (loss)
|
$ (490)
|
$
3,433
|
$ (1,008)
|
$
10,145
|
||||
Net
Income (loss) per Common Share:
|
||||||||
Basic
|
$ (0.08)
|
$ 0.54
|
$
(0.16)
|
$ 1.59
|
||||
Diluted
|
(0.08)
|
0.52
|
(0.16)
|
1.55
|
||||
Average
Common and Common Equivalent Shares Outstanding:
|
||||||||
Basic
|
6,591
|
6,358
|
6,520
|
6,342
|
||||
Diluted
|
6,591
|
6,531
|
6,520
|
6,511
|
See
accompanying notes.
4
Metro
Bancorp, Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity (unaudited)
(
in thousands, except share amounts)
|
Preferred
Stock
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other Comprehensive (Loss)
|
Total
|
||||
Balance:
January 1, 2008
|
$
400
|
$
6,314
|
$
70,610
|
$
38,862
|
$
(3,851)
|
$
112,335
|
||||
Comprehensive
income (loss):
|
||||||||||
Net
income
|
-
|
-
|
-
|
10,145
|
-
|
10,145
|
||||
Change
in unrealized losses on securities, net of tax
|
-
|
-
|
-
|
-
|
(10,434)
|
(10,434)
|
||||
Total
comprehensive loss
|
(289)
|
|||||||||
Dividends
declared on preferred stock
|
-
|
-
|
-
|
(60)
|
-
|
(60)
|
||||
Common
stock of 30,512 shares issued under stock option plans, including tax
benefit of $102
|
-
|
30
|
522
|
-
|
-
|
552
|
||||
Common
stock of 100 shares issued under employee stock purchase
plan
|
-
|
-
|
2
|
-
|
-
|
2
|
||||
Proceeds
from issuance of 26,848 shares of common stock in connection with dividend
reinvestment and stock purchase plan
|
-
|
27
|
663
|
-
|
-
|
690
|
||||
Common
stock share-based awards
|
-
|
-
|
840
|
-
|
-
|
840
|
||||
Balance,
September 30, 2008
|
$
400
|
$
6,371
|
$
72,637
|
$
48,947
|
$
(14,285)
|
$
114,070
|
(
in thousands, except share amounts)
|
Preferred
Stock
|
Common
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
|
||
Balance:
January 1, 2009
|
$
400
|
$ 6,446
|
$ 73,221
|
$
51,683
|
$
(17,280)
|
$
114,470
|
||
Comprehensive
income (loss):
|
||||||||
Net
loss
|
-
|
-
|
-
|
(1,008)
|
-
|
(1,008)
|
||
Other
comprehensive income
|
-
|
-
|
-
|
-
|
9,001
|
9,001
|
||
Total
comprehensive income
|
7,993
|
|||||||
Dividends
declared on preferred stock
|
-
|
-
|
-
|
(60)
|
-
|
(60)
|
||
Common
stock of 44,179 shares issued under stock option plans, including tax
benefit of $51
|
-
|
45
|
605
|
-
|
-
|
650
|
||
Common
stock of 370 shares issued under employee stock purchase
plan
|
-
|
-
|
7
|
-
|
-
|
7
|
||
Proceeds
from issuance of 52,664 shares of common stock in connection with dividend
reinvestment and stock purchase plan
|
-
|
53
|
824
|
-
|
-
|
877
|
||
Common
stock share-based awards
|
-
|
-
|
1,060
|
-
|
-
|
1,060
|
||
Proceeds
from issuance of 6,250,000 shares of common stock in connection
with stock offering
|
-
|
6,250
|
64,475
|
-
|
-
|
70,725
|
||
Balance,
September 30, 2009
|
$
400
|
$
12,794
|
$
140,192
|
$
50,615
|
$ (8,279)
|
$
195,722
|
See
accompanying notes.
5
Metro
Bancorp, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (unaudited)
Nine
Months Ending
September
30,
|
||||||
(in
thousands)
|
2009
|
2008
|
||||
Operating
Activities
|
Net
income (loss)
|
$ (1,008)
|
$ 10,145
|
|||
Adjustments
to reconcile net income (loss) to net cash provided (used) by operating
activities:
|
||||||
Provision
for loan losses
|
10,625
|
4,075
|
||||
Provision
for depreciation and amortization
|
3,760
|
3,779
|
||||
Deferred
income taxes
|
2,047
|
(1,262)
|
||||
Amortization
of securities premiums and accretion of discounts, net
|
387
|
353
|
||||
Net
(gains) losses on sales and calls of securities
|
(1,570)
|
157
|
||||
Other-than-temporary security impairment
losses
|
2,325
|
-
|
||||
Proceeds
from sales of loans originated for sale
|
129,633
|
47,845
|
||||
Loans
originated for sale
|
(101,474)
|
(65,063)
|
||||
Gains
on sales of loans originated for sale
|
(294)
|
(574)
|
||||
Loss
on disposal of equipment
|
839
|
-
|
||||
Stock-based
compensation
|
1,060
|
840
|
||||
Amortization
of deferred loan origination fees and costs
|
1,606
|
1,329
|
||||
(Increase)
decrease in other assets
|
(54,514)
|
1,085
|
||||
Increase in
other liabilities
|
3,215
|
2,316
|
||||
Net
cash provided (used) by operating activities
|
(3,363)
|
5,025
|
||||
Investing
Activities
|
Securities
held to maturity:
|
|||||
Proceeds
from principal repayments, calls and maturities
|
52,424
|
189,523
|
||||
Proceeds
from sales
|
3,425
|
1,843
|
||||
Purchases
|
-
|
(129,986)
|
||||
Securities
available for sale:
|
||||||
Proceeds
from principal repayments and maturities
|
80,489
|
38,377
|
||||
Proceeds
from sales
|
47,010
|
-
|
||||
Purchases
|
(70,218)
|
(23,212)
|
||||
Proceeds
from sales of loans receivable
|
5,639
|
-
|
||||
Net
increase in loans receivable
|
(51,393)
|
(227,924)
|
||||
Net
purchase of restricted investments in bank stock
|
-
|
(888)
|
||||
Proceeds
from sale of premises and equipment
|
18
|
-
|
||||
Proceeds
from sale of foreclosed real estate
|
652
|
304
|
||||
Purchases
of premises and equipment
|
(11,125)
|
(1,015)
|
||||
Net
cash provided (used) by investing activities
|
56,921
|
(152,978)
|
||||
Financing
Activities
|
Net
increase in demand, interest checking, money market, and savings
deposits
|
63,693
|
98,124
|
|||
Net
increase in time deposits
|
39,283
|
30,740
|
||||
Net
(decrease) increase in short-term borrowings
|
(216,475)
|
13,353
|
||||
Repayment
of long-term borrowings
|
(25,000)
|
-
|
||||
Proceeds
from common stock options exercised
|
599
|
450
|
||||
Proceeds
from dividend reinvestment and common stock purchase plan
|
877
|
690
|
||||
Proceeds
from issuance of common stock in connection with stock
offering
|
70,725
|
-
|
||||
Tax benefit
on exercise of stock options
|
51
|
102
|
||||
Cash
dividends on preferred stock
|
(60)
|
(60)
|
||||
Net
cash provided (used) by financing activities
|
(66,307)
|
143,399
|
||||
Decrease
in cash and cash equivalents
|
(12,749)
|
(4,554)
|
||||
Cash
and cash equivalents at beginning of year
|
49,511
|
50,955
|
||||
Cash
and cash equivalents at end of period
|
$ 36,762
|
$ 46,401
|
See
accompanying notes.
6
METRO
BANCORP, INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
September
30, 2009
(Unaudited)
Note
1. CONSOLIDATED
FINANCIAL STATEMENTS
The
consolidated 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 generally accepted
accounting principles (“GAAP”) in the United States have been condensed or
omitted pursuant to such rules and regulations. These consolidated financial
statements were prepared in accordance with GAAP for interim financial
statements and with instructions for Form 10-Q and Regulation S-X Section
210.10-01. Further information on the Company’s accounting policies are
available in Note 1 (Significant Accounting Policies) of the Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2008. 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.
In June
2009, the Federal Accounting Standards Board ("FASB") announced the FASB
Accounting Standards Codification (the Codification or ASC) as the single source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in preparation of financial statements in conformity
with GAAP. Rules and interpretative releases of the Securities and Exchange
Commission under federal securities laws are also sources of authoritative GAAP
for SEC registrants. The new standard became effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
adoption of this statement did not have a material impact on the Company’s
consolidated financial position or results of operations.
These
consolidated financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008. The Company has
evaluated subsequent events through November 9, 2009 which is the date the
consolidated financial statements have been issued. (See Note 10). The results
for the nine months ended September 30, 2009 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2009.
The
consolidated financial statements include the accounts of Metro Bancorp, Inc.
(the “Company”) and its consolidated subsidiaries including Metro Bank (the
“Bank”). All material intercompany transactions have been eliminated. Certain
amounts from prior years have been reclassified to conform to the 2009
presentation. Such reclassifications had no impact on the Company’s net
income.
Note
2. STOCK-BASED
COMPENSATION
The fair
value of each 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 September 30, 2009 and 2008,
respectively: risk-free interest rates of 2.3% and 3.3%; volatility factors
of the expected market price of the Company's common stock of .29 for both
years; weighted average expected lives of the options of 8.6 years for 2009 and
8.3 years for 2008; and no cash dividends. The calculated weighted average fair
value of options granted using these assumptions for September 30, 2009 and 2008
was $6.06 and $10.69 per option, respectively. In the first nine months of 2009,
the Company granted 182,770 options to purchase shares of the Company’s stock at
exercise prices ranging from $11.72 per share to $19.55 per share.
7
The
Company recorded stock-based compensation expense of approximately $1.1 million
and $840,000 during the nine months ended September 30, 2009 and September 30,
2008, respectively for stock options.
Note
3. NEW
ACCOUNTING STANDARDS
In
December of 2007, the Financial Accounting Standards Board (“FASB”) issued
guidance related to business combinations. This guidance establishes principles
and requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. The guidance also
provides instruction for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users
of the consolidated financial statements to evaluate the nature and financial
effects of the business combination. The guidance impacts business combinations
which occur after January 1, 2009. Given that the guidance requires
the expensing of direct acquisition costs, the Company expensed such costs in
2008 and in the first nine months of 2009 that were incurred in conjunction with
the pending acquisition of Republic First Bancorp, Inc., as more fully described
in Note 7, and will continue to expense such future costs as
incurred.
In June
2009, the FASB issued guidance that prescribes the information that a reporting
entity must provide in its financial reports about a transfer of financial
assets; the effects of a transfer on its financial position, financial
performance and cash flows; and a transferor’s continuing involvement in
transferred financial assets. The concept of a qualifying
special-purpose entity is no longer part of this guidance. The guidance also
modifies the de-recognition conditions related to legal isolation and effective
control and adds additional disclosure requirements for transfers of financial
assets. This guidance is effective for fiscal years beginning after
November 15, 2009. We have not determined the effect that the
adoption will have on our financial position or results of
operations.
In June
2009, the FASB issued guidance which requires a company to determine whether its
variable interest or interests give it a controlling financial interest in a
variable interest entity. The primary beneficiary of a variable
interest entity is the company that has both (1) the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance and (2) the obligation to absorb losses of
the entity that could potentially be significant to the variable interest entity
or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. The guidance also amends
existing consolidation guidance that required ongoing reassessments of whether a
company is the primary beneficiary of a variable interest
entity. This guidance is effective for fiscal years beginning after
November 15, 2009. We have not determined the effect the adoption
will have on our financial position or results of operations.
Note
4. COMMITMENTS
AND CONTINGENCIES
The
Company is subject to certain routine legal proceedings and claims arising in
the ordinary course of business. It is management’s opinion that the ultimate
resolution of these claims will not have a material adverse effect on the
Company’s financial position and results of operations.
In the
normal course of business, there are various outstanding commitments to extend
credit, such as letters of credit and unadvanced loan commitments. At
September 30, 2009, the Company had $474.4 million in unused commitments.
Management does not anticipate any material losses as a result of these
transactions.
On
November 10, 2008, Metro announced it had entered into a services agreement with
Fiserv Solutions, Inc. (Fiserv). The agreement, effective November 7, 2008, is
for a period of seven years, subject to automatic renewal for additional terms
of two years unless either party gives the
8
other
written notice of non-renewal at least 180 days prior to the expiration date of
the term. The agreement allowed the Bank to transition to Fiserv many of the
services that had been provided by Commerce Bank, N.A., now known as TD Bank,
N.A. The initial investment with Fiserv was $3.4 million with an expected
obligation for support, license fees and processing services of $24.6 million
over the next seven years. The various services include: core system hosting,
item processing, deposit and loan processing, electronic banking, data
warehousing and other banking functions. The transition was successfully
completed in June 2009.
Future
Facilities
The
Company owns a parcel of land at the corner of Carlisle Road and Alta Vista Road
in Dover Township, York County, Pennsylvania. The Company plans to construct a
full-service store on this property to be opened in the future.
The
Company has entered into a land lease for the premises located at 2121 Lincoln
Highway East, East Lampeter Township, Lancaster County, Pennsylvania. The
Company plans to construct a full-service store on this property to be opened in
the future.
The
Company has purchased land at 105 N. George Street, York City, York County,
Pennsylvania. The Company plans to open a store on this property in the
future.
Note
5. OTHER
COMPREHENSIVE INCOME
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance sheet,
such items, along with net income are components of comprehensive income. The
only other comprehensive income components that the Company presently
has are unrealized gains (losses) on securities available for sale and
noncredit related impairment losses. The federal income taxes allocated to the
unrealized gains (losses) are presented in the following table:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
|||||||
Unrealized
holding gains (losses) arising during the period
|
$ 6,137
|
$
(3,832)
|
$ 9,458
|
$
(16,052)
|
|||||||
Reclassification
for net realized gains and losses on securities recorded in
income
|
(57)
|
-
|
1,292
|
-
|
|||||||
Non-credit
related impairment losses on securities not expected to be
sold
|
5,447
|
-
|
3,098
|
-
|
|||||||
Subtotal
|
11,527
|
(3,832)
|
13,848
|
(16,052)
|
|||||||
Income
tax effect
|
(4,034)
|
1,341
|
(4,847)
|
5,618
|
|||||||
Other
comprehensive income (loss)
|
$ 7,493
|
$
(2,491)
|
$ 9,001
|
$
(10,434)
|
Note
6. GUARANTEES
The
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit. Standby letters of
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Generally, when issued, letters of
credit have expiration dates within two years. The credit risk associated with
letters of credit is essentially the same as that of traditional loan
facilities. The Company generally requires collateral and/or personal guarantees
to support these commitments. The Company had $35.5 million of standby letters
of credit at September 30, 2009. Management believes that the proceeds obtained
through a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payment
9
required
under the corresponding letters of credit. There was no current amount of the
liability at September 30, 2009 and December 31, 2008 for guarantees under
standby letters of credit issued.
Note
7. PENDING
ACQUISITION
On
November 10, 2008, the Company announced it had entered into a definitive
agreement to acquire Philadelphia-based Republic First Bancorp, Inc. ("Republic
First") in a tax-free all stock transaction. The combined company
will have total assets exceeding $3 billion and a network of 45 branches in
Central Pennsylvania, Metro Philadelphia and Southern New Jersey. Shareholders
of Republic First and the Company approved the merger on March 18,
2009 and March 19, 2009, respectively.
On July
31, 2009, the Company and Republic First entered into a First Amendment to the
parties November 7, 2008 Agreement and Plan of Merger. The First Amendment
extended the closing deadline of the merger to October 31, 2009, with the
provision that either Company, with notice to the other, could further extend
the closing deadline to December 31, 2009 in the event that the parties did not
have regulatory approvals by September 30, 2009. On October 29, 2009, the
Company and Republic First extended the merger closing deadline to December 31,
2009 to allow additional time to obtain necessary regulatory
approval.
Note
8. FAIR
VALUE DISCLOSURE
The
Company uses its best judgment in estimating the fair value of its assets and
liabilities; however, there are inherent weaknesses in any estimation technique
due to assumptions that are susceptible to significant
change. Therefore, for substantially all assets and liabilities, the
fair value estimates herein are not necessarily indicative of the amounts the
Company could have realized in a sale transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective period-ends and have not been re-evaluated or updated for
purposes of these consolidated financial statements subsequent to those
respective dates. As such, the estimated fair values of these
financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each period-end.
Fair
value is the price that would be received to sell an asset or paid to transfer a
liability. The Company uses the following fair value hierarchy in selecting
inputs with the highest priority given to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3
measurements):
Level 1: Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities;
|
Level 2: Quoted prices
in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the asset or
liability;
|
Level 3: Prices or
valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e., supported with little or no
market activity).
|
10
As
required, financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. The following table sets forth the Company’s financial assets that
were measured at fair value on a recurring basis at September 30, 2009 by level
within the fair value hierarchy:
Fair
Value Measurements at Reporting Date Using
|
||||
Description
|
September
30,
2009
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
(in
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
Securities
available for sale
|
$
296,953
|
$ -
|
$
296,953
|
$ -
|
For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
were as follows:
Fair
Value Measurements at Reporting Date Using
|
||||
Description
|
December
31,
2008
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
(in
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
Securities
available for sale
|
$
341,656
|
$ -
|
$
341,656
|
$ -
|
As of
September 30, 2009 and December 31, 2008, the Company did not have any
liabilities that were measured at fair value on a recurring basis.
For
assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at September 30, 2009
are as follows:
Fair
Value Measurements at Reporting Date Using
|
||||
Description
|
September
30,
2009
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable
Inputs
|
(in
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
Impaired
loans
|
$
1,524
|
$ -
|
$ -
|
$ 1,524
|
Foreclosed
assets
|
6,875
|
-
|
-
|
6,875
|
Total
|
$
8,399
|
$ -
|
$ -
|
$ 8,399
|
11
For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
were as follows:
Fair
Value Measurements at Reporting Date Using
|
||||
Description
|
December
31,
2008
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable
Inputs
|
(in
thousands)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
Impaired
loans
|
$
9,034
|
$ -
|
$ -
|
$
9,034
|
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and
assumptions were used to estimate the fair values of the Company’s financial
instruments at September 30, 2009 and at December 31, 2008:
Cash and Cash Equivalents (Carried at
Cost)
The
carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets’ fair values.
Securities
The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by matrix pricing (Level 2),
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted market prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted prices.
Loans Held for Sale (Carried at Lower
of Cost or Fair Value)
The fair
value of loans held for sale is determined, when possible, using quoted
secondary-market prices. If no such quoted prices exist, the fair
value of a loan is determined using quoted prices for a similar loan or loans,
adjusted for the specific attributes of that loan. The Company did
not write down any loans held for sale during the nine months ended September
30, 2009 or year ended December 31, 2008.
Loans Receivable (Carried at
Cost)
The fair
value of loans are estimated using discounted cash flow analyses, using market
rates at the balance sheet date that reflect the credit and interest rate-risk
inherent in the loans. Projected future cash flows are calculated
based upon contractual maturity, projected repayments and prepayments of
principal. Generally, for variable rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.
Impaired Loans (Generally Carried at
Fair Value)
Impaired
loans are those that the Bank has measured impairment of generally based on the
fair value of the loan’s collateral. Fair value is generally
determined based upon independent third-party appraisals of the properties, or
discounted cash flows based upon the expected proceeds. These assets
are included as Level 3 fair values, based upon the lowest level of
12
input
that is significant to the fair value measurements. The fair value
consists of the loan balances less any valuation allowance. The valuation
allowance amount is calculated as the difference between the recorded investment
in a loan and the present value of expected future cash flows. At September 30,
2009, the fair value consists of impaired loan balances and their associated
loan relationships with reserve allocations of $1.5 million, which includes a
valuation allowance of $918,000.
Restricted Investment in Bank Stock
(Carried at Cost)
The
carrying amount of restricted investment in bank stock approximates fair value,
and considers the limited marketability of such securities. The
restricted investments in bank stock consisted of Federal Home Loan Bank stock
at September 30, 2009 and December 31, 2008.
Accrued Interest Receivable and
Payable (Carried at Cost)
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Foreclosed
Assets (Carried at Lower of Cost or Fair Value)
Fair
value of real estate acquired through foreclosure was based on independent third
party appraisals of the properties, recent offers, or prices on comparable
properties. These values were determined based on the sales prices of similar
properties in the proximate vicinity.
Deposit Liabilities (Carried at
Cost)
The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-Term Borrowings (Carried at
Cost)
The
carrying amounts of short-term borrowings and repurchase agreements approximate
their fair values.
Long-Term Debt (Carried at
Cost)
The fair
value of the FHLB advance was estimated using discounted cash flow analysis,
based on a quoted price for new FHLB advances with similar credit risk
characteristics, terms and remaining maturity. The price obtained from this
active market represents a fair value that is deemed to represent the transfer
price if the liability were assumed by a third party. Other long-term
debt was estimated using discounted cash flow analysis, based on quoted prices
from a third party broker for new debt with similar characteristics, terms and
remaining maturity. The price for the other long-term debt was
obtained in an inactive market where these types of instruments are not traded
regularly.
Off-Balance Sheet Financial
Instruments (Disclosed at Cost)
Fair
values for the Bank’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged in the
market to enter into similar agreements, taking into account, the remaining
terms of the agreements and the counterparties’ credit standing.
13
The
estimated fair values of the Company’s financial instruments were as follows at
September 30, 2009 and December 31, 2008:
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
(in
thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash equivalents
|
$
|
36,762
|
$
|
36,762
|
$
|
49,511
|
$
|
49,511
|
||||||||
Securities
|
393,820
|
397,260
|
494,243
|
496,013
|
||||||||||||
Loans,
net (including loans held for sale)
|
1,469,925
|
1,446,854
|
1,464,212
|
1,472,037
|
||||||||||||
Restricted
investments in bank stock
|
21,630
|
21,630
|
21,630
|
21,630
|
||||||||||||
Accrued
interest receivable
|
6,725
|
6,725
|
7,686
|
7,686
|
||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
$
|
1,736,961
|
$
|
1,723,826
|
$
|
1,633,985
|
$
|
1,636,027
|
||||||||
Long-term
debt
|
54,400
|
33,104
|
79,400
|
71,424
|
||||||||||||
Short-term
borrowings
|
83,650
|
83,650
|
300,125
|
300,125
|
||||||||||||
Accrued
interest payable
|
902
|
902
|
1,164
|
1,164
|
||||||||||||
Off-balance
sheet instruments:
|
||||||||||||||||
Standby
letters of credit
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Commitments
to extend credit
|
-
|
-
|
-
|
-
|
.
Note
9. SECURITIES
The
amortized cost and fair value of securities are summarized in the following
tables:
September
30, 2009
|
|||||
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
(Losses)
|
Fair
Value
|
|
Available
for Sale:
U.S.
Government Agency securities
|
$ 30,009
|
$ 174
|
$ -
|
$ 30,183
|
|
Residential
mortgage-backed securities
|
279,681
|
3,112
|
(16,023)
|
266,770
|
|
Total
|
$
309,690
|
$
3,286
|
$
(16,023)
|
$
296,953
|
|
Held
to Maturity:
|
|||||
Municipal
securities
|
$ 1,624
|
$ 11
|
$ -
|
$ 1,635
|
|
Residential
mortgage-backed securities
|
93,247
|
3,423
|
(68)
|
96,602
|
|
Corporate
debt securities
|
1,996
|
74
|
-
|
2,070
|
|
Total
|
$ 96,867
|
$
3,508
|
$ (68)
|
$
100,307
|
December
31, 2008
|
|||||
(in
thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
(Losses)
|
Fair
Value
|
|
Available
for Sale:
|
|||||
U.S.
Government Agency securities
|
$ 5,000
|
$ 2
|
$ -
|
$ 5,002
|
|
Residential
mortgage-backed securities
|
363,241
|
2,253
|
(28,840)
|
336,654
|
|
Total
|
$
368,241
|
$
2,255
|
$
(28,840)
|
$
341,656
|
|
Held
to Maturity:
|
|||||
U.S.
Government Agency securities
|
$ 36,500
|
$ 258
|
$ -
|
$ 36,758
|
|
Municipal
securities
|
1,623
|
12
|
-
|
1,635
|
|
Residential
mortgage-backed securities
|
112,472
|
2,049
|
(557)
|
113,964
|
|
Corporate
debt securities
|
1,992
|
8
|
-
|
2,000
|
|
Total
|
$
152,587
|
$
2,327
|
$ (557)
|
$
154,357
|
14
The
amortized cost and fair value of debt securities at September 30, 2009 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.
Available
for Sale
|
Held
to Maturity
|
|||||
(in
thousands)
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||
Due
in one year or less
|
$ -
|
$ -
|
$ 1,996
|
$ 2,070
|
||
Due
after one year through five years
|
20,009
|
20,089
|
655
|
660
|
||
Due
after five years through ten years
|
10,000
|
10,094
|
-
|
-
|
||
Due
after ten years
|
-
|
-
|
969
|
975
|
||
30,009
|
30,183
|
3,620
|
3,705
|
|||
Residential
mortgage-backed securities
|
279,681
|
266,770
|
93,247
|
96,602
|
||
Total
|
$
309,690
|
$
296,953
|
$
96,867
|
$
100,307
|
During
the third quarter of 2009, the Company sold 45 mortgage-backed securities with a
fair market value of $48.6 million. Of this total, 31 securities had
been classified as available for sale with a carrying value of $44.3
million. The Company realized proceeds of $45.7 million for a pretax
gain of $1.5 million. The securities sold also included 14
mortgage-backed securities with a fair market value of $2.9 million and a
carrying value of $2.8 million that had been classified as held to maturity and
were sold due to their small remaining size. In every case, the
current face had fallen below 15% of the original purchase amount. A pretax gain
of $147,000 was recognized on the sale of securities classified as held to
maturity. The Company uses the specific identification method to record security
sales. During the first nine months of 2009, the Company sold a total
of 65 mortgage-backed securities with a fair market value of $49.7
million. Of this total, 42 securities had been classified as
available for sale with a carrying value of $44.8 million. The
Company realized proceeds of $46.3 million for a pre-tax gain of $1.5
million. The securities sold also included 22 mortgage-backed
securities with a fair market value of $3.4 million and a carrying value of $3.2
million that had been classified as held to maturity and were sold due to their
small remaining size. In every case, the current face had fallen
below 15% of the original purchase amount. A pre-tax gain of $171,000
was recognized on the sale of securities classified as held to
maturity.
The
following table summarizes the Company’s gains and losses on the sales of debt
securities and losses recognized for the other-than-temporary impairment of
investments:
(in
thousands)
|
Gross
Realized
Gains
|
Gross
Realized
(Losses)
|
Other-Than-
Temporary
Impairment
(Losses)
|
Net
Gains
(Losses)
|
Three
Months Ended:
|
||||
September
2009
|
$
1,527
|
$ (12)
|
$ (952)
|
$ 563
|
September
2008
|
-
|
-
|
-
|
-
|
Nine
Months Ended:
|
||||
September
2009
|
$
1,582
|
$ (12)
|
$
(2,325)
|
$
(755)
|
September
2008
|
-
|
(157)
|
-
|
(157)
|
Also
during the third quarter of 2009, the Company had $10.0 million of agency
debentures called, at par, by their issuing agencies. All of the
bonds were classified as held to maturity and each of the
securities were carried at par.
There
were no sales of securities in the available for sale portfolio in 2008. There
was one sale in the held to maturity portfolio during the second quarter of
2008. The Company sold a $2.0
15
million
corporate debt security due to significant deterioration in the creditworthiness
of the issuer. A pretax loss of $157,000 was recognized on this sale during the
second quarter of 2008.
At
September 30, 2009 and December 31, 2008, securities with a carrying value of $
386.9 million and $356.1 million respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
The
following table shows the Company’s investments’ fair value and gross unrealized
losses, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position:
September
30, 2009
|
|||||||||
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:
|
|||||||||
Residential
mortgage-backed securities
|
$ 42,697
|
$
(1,583)
|
$
138,009
|
$
(14,440)
|
$
180,706
|
$
(16,023)
|
|||
Total
|
$ 42,697
|
$
(1,583)
|
$
138,009
|
$
(14,440)
|
$
180,706
|
$
(16,023)
|
|||
Held
to Maturity:
|
|||||||||
Residential
mortgage-backed securities
|
$ -
|
$ -
|
$ 4,205
|
$ (68)
|
$ 4,205
|
$ (68)
|
|||
Total
|
$ -
|
$ -
|
$ 4,205
|
$ (68)
|
$ 4,205
|
$ (68)
|
|||
December
31, 2008
|
|||||||||
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:
|
|||||||||
Residential
mortgage-backed securities
|
$
60,927
|
$
(5,025)
|
$
144,387
|
$
(23,815)
|
$
205,314
|
$
(28,840)
|
|||
Total
|
$
60,927
|
$
(5,025)
|
$
144,387
|
$
(23,815)
|
$
205,314
|
$
(28,840)
|
|||
Held
to Maturity:
|
|||||||||
Residential
mortgage-backed securities
|
$ -
|
$ -
|
$ 4,916
|
$ (557)
|
$ 4,916
|
$ (557)
|
|||
Total
|
$ -
|
$ -
|
$ 4,916
|
$ (557)
|
$ 4,916
|
$ (557)
|
The
Company’s investment securities portfolio consists primarily of U.S. Government
agency securities, U.S. Government sponsored agency mortgage-backed obligations
and private-label collateralized mortgage obligations (CMO’s). The securities of
the U.S. Government sponsored agencies and the U.S. Government mortgage-backed
securities have little credit risk because their principal and interest payments
are backed by an agency of the U.S. Government. Private label CMO’s are not
backed by the full faith and credit of the U.S. Government nor are their
principal and interest payments guaranteed. Historically, most private label
CMO’s have carried a AAA bond rating on the underlying issuer, however, the
subprime mortgage problems and decline in the residential housing market in the
U.S. throughout 2008 and 2009 have led to some ratings downgrades and subsequent
other-than-temporary impairment (“OTTI”) of many types of CMO’s.
The unrealized losses in the Company’s
investment portfolio at September 30, 2009 are associated with two different
types of securities. The first type includes eight government agency sponsored
CMO’s, all of which have yields that are indexed to a spread over the one month
London Interbank Offered Rate (LIBOR). Management believes that the unrealized
losses on the Company’s investment in these federal agency CMO’s were primarily
caused by their low spread to LIBOR. The second type of security in the
Company’s investment portfolio with unrealized losses at September 30, 2009 was
private label CMO’s. As of
September 30, 2009, the Company owned thirty-one private label CMO securities in
its investment portfolio with a
16
total book value of $132.1
million. Management
performs quarterly assessments of these securities for other-than-temporary
impairment. As
part of this assessment, the Company uses a third-party source for the monthly
pricing of its portfolio. As a general rule, the Bank does not solicit firm
street bids for its investment holdings unless a reasonable sale program is
being considered. Neither does it receive unsolicited street bids
from any third-party sources. Rather, the Bank uses the third
party's econometric models and market-based inputs to provide reasonable
valuations used in its OTTI analysis. Both the third-party and the Bank
consider these indications to be based upon Level 2 inputs through matrix
pricing, observed quotes for similar assets, and/or market-corroborated
inputs.
Recognition
and Presentation of Other-Than-Temporary Impairments
Prior to
April 1, 2009, unrealized losses that were determined to be temporary were
recorded, net of tax, in other comprehensive income for available-for-sale
securities, whereas unrealized losses related to held to maturity securities
determined to be temporary were not recognized. Regardless of whether the
security was classified as available-for-sale or held to maturity, unrealized
losses that were determined to be other-than-temporary were recorded to earnings
in their entirety. An unrealized loss was considered other-than-temporary if
(i) it was not probable that the holder would collect all amounts due
according to the contractual terms of the debt security, or (ii) the fair
value was below the amortized cost of the debt security for a prolonged period
of time and we did not have the positive intent and ability to hold the security
until recovery or maturity.
During
the second quarter of 2009 the Company adopted fair value measurement guidance
that clarifies the interaction of the factors that should be considered when
determining whether a debt security is other-than-temporarily impaired. For debt
securities, management must assess whether (a) we have the intent to sell
the security; (b) it is more likely than not that we will be required to
sell the security prior to its anticipated recovery; or (c) the present value of
the expected cash flows is not sufficient to recover the entire amortized cost
basis. Previously, this assessment required management to assert we had both the
intent and the ability to hold a security for a period of time sufficient to
allow for an anticipated recovery in fair value to avoid recognizing an OTTI.
This change does not affect the need to forecast recovery of the value of the
security through either cash flows or market price.
In
instances when a determination is made that an OTTI exists but we do not intend
to sell the debt security and it is not more likely than not that we will be
required to sell the debt security prior to its anticipated recovery, the OTTI
is separated into (a) the amount of the total OTTI related to a decrease in
cash flows expected to be collected from the debt security (“the credit loss”)
and (b) the amount related to all other factors. The amount of the OTTI
related to the credit loss is recognized in earnings and the amount of the OTTI
related to all other factors is recognized in other comprehensive
income.
For all
securities held in the available-for-sale or held to maturity portfolio for
which unrealized losses have existed for a period of time, we do not have the
intention to sell and believe we will not be required to sell the securities
prior to their recovery or maturity for contractual, regulatory or liquidity
reasons as of the reporting date.
Based on
management’s assessment at September 30, 2009, with the exception of the
securities described below, the Company does not believe that the decreased
market prices associated with its mortgage-backed securities, constitute an
other-than-temporary impairment.
Through September 30,
2009, the Company recognized unrealized losses of $5.4 million related to three
private-label CMO’s classified as available for sale. This
compares to an unrealized loss of $12.3 million on June 30, 2009. The
improved position is primarily the result of increased fair market valuations
stemming from strengthening economic conditions as well as improved market
prices for mortgage-backed securities in general. Management does
not currently intend to sell these securities and believes it is not likely
that the Company will be required to sell the securities before recovery of its
amortized cost. The Company determined that $2.3
17
million
of the total unrealized loss of $5.4 million was deemed attributable to credit
losses and was therefore recognized in earnings through September 30,
2009. As of June 30, 2009, the Company had recognized credit losses
of $1.4 million and recognized an additional $952,000 during the third
quarter of 2009. The $3.1 million difference between the total
unrealized losses of $5.4 million and the $2.3 million of losses attributable to
credit has been recognized as a reduction in other comprehensive
income.
The
Company considers the following factors for determining whether a credit loss
exists: bond ratings, pool factor, default rates, weighted
average coupon, weighted average maturity, weighted average loan age, loan to
value, credit scores, geographic concentration and prepayment
rates. When consideration of the previous factors indicates that a
credit loss may occur, the Company utilized cash flow models to present value
any credit loss.
The
valuation model captures the composition of the underlying collateral and the
cash flow structure of the security. Significant inputs to the
model include delinquencies, collateral types and related contractual features,
estimated rates of default, loss severity and prepayment
assumptions.
The
roll-forward of the amount of the credit losses which have been recognized in
earnings for the 3 private label CMOs previously mentioned is as
follows:
(in
thousands)
|
January 1, 2009
Cumulative
OTTI
credit
losses
|
Additions
for which
OTTI
was not
previously
recognized
|
Additional
increases for
OTTI Previously recognized when
there
is no intent to
sell
and no
requirement
to sell
before
recovery of
amortized
cost basis
|
September
30,
2009
Cumulative
OTTI
credit
losses
recognized
for
securities
still held
|
||||||||||||
Available
for Sale:
|
||||||||||||||||
Residential
mortgage-backed
securities
|
$ | - | $ | 2,325 | $ | - | $ | 2,325 | ||||||||
Total
|
$ | - | $ | 2,325 | $ | - | $ | 2,325 | ||||||||
(in
thousands)
|
July 1, 2009
Cumulative
OTTI
credit
losses
|
Additions
for which
OTTI
was not
previously
recognized
|
Additional
increases for OTTI Previously recognized when
there
is no intent to
sell
and no
requirement
to sell
before
recovery of
amortized
cost basis
|
September
30,
2009
Cumulative
OTTI
credit
losses
recognized
for
securities
still held
|
||||||||||||
Available
for Sale:
|
||||||||||||||||
Residential
mortgage-backed
securities
|
$ | 1,373 | $ | - | $ | 952 | $ | 2,325 | ||||||||
Total
|
$ | 1,373 | $ | - | $ | 952 | $ | 2,325 |
Prior to
September 30, 2009, the Bank sold one private label CMO that had been in an
unrealized loss position as of June 30, 2009 but which had subsequently
recovered its cost basis. This was not one of the three securities
recognized in the table of OTTI credit losses above. The security had
been classified as available for sale and had a carrying value of $3.7 million.
The Company realized proceeds of $3.7 million for a pretax gain of
$2,300.
Restricted
stock, which represents required investments in the common stock of
correspondent banks, is carried at cost and as of September 30, 2009 and
December 31, 2008 consisted of the common stock of FHLB of Pittsburgh (“FHLB”).
In December 2008, the FHLB notified member banks that it was suspending dividend
payments and the repurchase of capital stock.
Management
evaluates the restricted stock for impairment in accordance with FASB guidance
on Accounting by Certain Entities (Including Entities with Trade Receivables
That Lend to or Finance the Activities of Others). Management’s determination of
whether these investments are impaired is based on their assessment of the
ultimate recoverability of their cost rather than by recognizing temporary
declines in value. The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as: (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB,
and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB.
Management
believes no impairment charge is necessary related to the restricted stock as of
September 30, 2009.
18
Note
10. SUBSEQUENT
EVENTS
Subsequent
to the Company’s capital offering of 6.25 million shares, at $12.00 per share,
for net new capital proceeds of $70.7 million which occurred on September 30,
2009, the offering underwriters exercised a 10% over allotment option and Metro
Bancorp issued an additional 625,000 common shares for net proceeds of $7.1
million on October 13, 2009. The initial offering of 6.25 million
shares increased the Company’s already “well-capitalized” ratios to: Tier 1
capital to risk-weighted assets of 13.07% and total capital to risk-weighted
assets of 13.89%.
19
Management’s
Discussion and Analysis of Financial Condition and Results
of
|
|
Operations.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
analyzes the major elements of the Company’s balance sheets and statements of
income. This section should be read in conjunction with the Company's financial
statements and accompanying notes.
Forward-Looking
Statements
This Form
10-Q and the documents incorporated by reference contain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, which we refer to as the Securities Act and Section 21E of the
Securities Exchange Act of 1934, which we refer to as the Exchange Act, with
respect to the proposed merger with Republic First and the financial
condition, liquidity, results of operations, future performance and business of
Metro. These forward-looking statements are intended to be covered by the safe
harbor for “forward-looking statements” provided by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are those that are not
historical facts. These forward-looking statements include statements with
respect to our beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions that are subject to significant risks and uncertainties
and are subject to change based on various factors (some of which are beyond our
control). The words “may,” “could,” “should,” “would,”
“believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar
expressions are intended to identify forward-looking statements.
While we
believe our plans, objectives, goals, expectations, anticipations, estimates and
intentions as reflected in these forward-looking statements are reasonable, we
can give no assurance that any of them will be achieved. You should
understand that various factors, in addition to those discussed elsewhere in
this Form 10-Q, in the Company’s Form 10-K and Prospectus Supplement filed with
the SEC on September 24, 2009, and incorporated by reference in this Form 10-Q,
could affect our future results and could cause results to differ materially
from those expressed in these forward-looking statements,
including:
·
|
whether
the transactions contemplated by the merger agreement with Republic First
will be approved by the applicable federal, state and local regulatory
authorities and, if approved, whether the other closing conditions to the
proposed merger will be satisfied;
|
·
|
our
ability to complete the proposed merger with Republic First and the merger
of Republic First Bank with and into Metro Bank, to integrate successfully
Republic First’s assets, liabilities, customers, systems and management
personnel into our operations, and to realize expected cost savings and
revenue enhancements within expected timeframes or at
all;
|
·
|
the
possibility that expected Republic First merger-related charges will be
materially greater than forecasted or that final purchase price
allocations based on fair value of the acquired assets and liabilities at
the effective date of the merger and related adjustments to yield and/or
amortization of the acquired assets and liabilities will be materially
different from those
forecasted;
|
20
·
|
adverse
changes in our or Republic First’s loan portfolios and the resulting
credit risk-related losses and expenses;
|
·
|
the
effects of, and changes in, trade, monetary and fiscal policies, including
interest rate policies of the Board of Governors of the Federal Reserve
System;
|
·
|
the
FDIC deposit fund is continually being used due to increased bank failures
and existing financial institutions have higher premiums
assessed in replenishing the fund;
|
·
|
general
economic or business conditions, either nationally, regionally or in the
communities in which either we do or Republic First does business, may be
less favorable than expected, resulting in, among other things, a
deterioration in credit quality and loan performance or a reduced demand
for credit;
|
·
|
continued
levels of loan quality and volume origination;
|
·
|
the
adequacy of loan loss reserves;
|
·
|
the
impact of changes in financial services’ laws and regulations (including
laws concerning taxes, banking, securities and
insurance);
|
·
|
the
willingness of customers to substitute competitors’ products and services
for our products and services and vice versa, based on price, quality,
relationship or otherwise;
|
·
|
unanticipated
regulatory or judicial proceedings and liabilities and other
costs;
|
·
|
interest
rate, market and monetary fluctuations;
|
·
|
the
timely development of competitive new products and services by us and the
acceptance of such products and services by customers;
|
·
|
changes
in consumer spending and saving habits relative to the financial services
we provide;
|
·
|
the
loss of certain key officers;
|
·
|
continued
relationships with major customers;
|
·
|
our
ability to continue to grow our business internally and through
acquisition and successful integration of new or acquired entities while
controlling costs;
|
·
|
compliance
with laws and regulatory requirements of federal, state and local
agencies;
|
·
|
the
ability to hedge certain risks
economically;
|
21
·
|
effect
of terrorist attacks and threats of actual war;
|
·
|
deposit
flows;
|
·
|
changes
in accounting principles, policies and guidelines;
|
·
|
rapidly
changing technology;
|
·
|
other
economic, competitive, governmental, regulatory and technological factors
affecting the Company’s operations, pricing, products and services;
and
|
·
|
our
success at managing the risks involved in the
foregoing.
|
Because
such forward-looking statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. The foregoing list of important factors is not exclusive
and you are cautioned not to place undue reliance on these factors or any of our
forward-looking statements, which speak only as of the date of this document or,
in the case of documents incorporated by reference, the dates of those
documents. We do not undertake to update any forward-looking statements, whether
written or oral, that may be made from time to time by or on behalf of us except
as required by applicable law.
EXECUTIVE
SUMMARY
On
September 30, 2009, the Company completed a common stock offering of 6.25
million shares, at $12.00 per share, for new capital proceeds of approximately
$70.7 million (net of expenses). Subsequent to the end of the quarter, the
underwriters of the offering exercised a 10% over-allotment option and Metro
Bancorp issued an additional 625,000 common shares for net proceeds of
approximately $7.1 million. This successful capital offering occurred
just one quarter after a successful conversion of our entire information
technology system from TD Bank, N.A. (“TD”) to our new service provider, Fiserv
Solutions, Inc. (“Fiserv”). The conversion included the transition of
data processing, item processing and many other ancillary services. At the same
time of the conversion, the Company rebranded to Metro Bancorp, Inc. and its
subsidiary bank, Commerce Bank/Harrisburg, changed its name to Metro
Bank.
The
Company recorded a net loss of $490,000, or $(0.08) per share, for the third
quarter versus net income of $3.4 million, or $0.52 per fully-diluted share, for
the same period one year ago. Impacting the third quarter results
were the following:
·
|
One-time
charges associated with the transition of data processing, item processing
and technology network services as well as the Company’s rebranding
totaled approximately $1.8 million during the third
quarter. The Company also incurred a higher level of salary and
benefits, data processing and telecommunication costs related to
additional personnel and information technology infrastructure to perform
certain services in-house which were previously performed by TD. These
higher expenses were partially offset by the recognition of the remaining
$2.75 million of the total $6.0 million fee Metro received from
TD. This fee was to partially defray the total costs of
transition and rebranding.
|
·
|
The
Company made a total provision for loan losses of $3.7 million for the
third quarter vs. $1.7 million for the third quarter of
2008.
|
22
·
|
Net
interest margin on a fully taxable basis for the three months ended
September 30, 2009 was 3.92% compared to 4.11% for the same period in
2008. Average interest earning assets for the quarter were the
same as the third quarter of 2008; however, the level of interest income
earned was offset by a decrease in the yield on those earning assets as a
result of a 175 basis point reduction in short-term market interest rates
by the Federal Reserve Bank over the past twelve
months.
|
Total
revenues for the three months ended September 30, 2009 were $25.5 million, down
$485,000, or 2%, from the same period in 2008. Total revenues for the nine
months ended September 30, 2009 were $74.3 million, down $1.9 million, or 2%,
from the same period in 2008. Net loss for the nine months ended September 30,
2009 was $1.0 million, or ($0.16) per share compared to net income of $10.1
million, or $1.55 per fully diluted share recorded during the first nine months
of 2008.
The
decrease in net income and net income per share was a direct result of the
increase in noninterest expenses associated with the transition of data
processing, item processing and technology network services to a new provider
and the costs associated with a rebranding of the Company as well as higher
provisions to the Bank’s allowance for loan losses.
For the
first nine months of 2009, total net loans increased by $33.6 million, or 2%,
from $1.42 billion at December 31, 2008 to $1.46 billion at September 30, 2009.
Over the past twelve months, total net loans excluding loans held for sale, grew
by $87.5 million, or 6%, from $1.37 billion to $1.46 billion. This growth was
represented across most loan categories, reflecting a continuing commitment to
the credit needs of our customers and our market footprint. Our loan to deposit
ratio, which includes loans held for sale, was 85% at September 30, 2009
compared to 90% at December 31, 2008.
Total
deposits increased $103.0 million, or 6%, from $1.63 billion at December 31,
2008 to $1.74 billion at September 30, 2009. During the same period, core
deposits grew by $96.8 million, or 6%, as well. Over the past twelve months, our
total consumer core deposits increased by $158.9 million, or 24%. Total
borrowings decreased by $241.5 million from $379.5 million at December 31, 2008
to $138.1 million at September 30, 2009, primarily as a result of our common
stock offering, continued deposit growth and principal paydowns on investment
securities. Of the total borrowings at September 30, 2009, $83.7 million were
short-term and $54.4 million were considered long-term.
Nonperforming
assets and loans past due 90 days at September 30, 2009 totaled $32.0 million,
or 1.53%, of total assets, as compared to $27.9 million, or 1.30% of total
assets, at December 31, 2008 and $12.2 million, or 0.57%, of total assets one
year ago. The Company’s third quarter provision for loan losses totaled $3.7
million, as compared to $1.7 million recorded in the third quarter of
2008. The increase in the provision for loan losses over the prior
year is a result of the Company’s gross loan growth (excluding loans held for
sale) of $88.2 million over the past twelve months as well as the increase in
the level of nonperforming loans from September 30, 2008 to September 30, 2009.
The allowance for loan losses totaled $14.6 million as of September 30, 2009, an
increase of $730,000, or 5%, over the total allowance at September 30, 2008 and
compared to $16.7 million at December 31, 2008. The allowance
represented 0.99% and 1.00% of gross loans outstanding at September 30, 2009 and
2008, respectively and compared to 1.16% of gross loans at December 31,
2008.
Total net
charge-offs for the third quarter were $8.4 million vs. $22,000 for the third
quarter of 2008. Total net charge-offs for the first nine months of 2009 were
$12.7 million compared to $929,000 for the first nine months of 2008.
Approximately $6.0 million, or 71%, of total charge-offs for the third quarter
of 2009 were associated with only five different relationships. And
23
approximately
$10.1 million, or 79%, of total loan charge-offs year-to-date 2009 were
associated with a total of seven different relationships.
The
financial highlights for the first nine months of 2009 compared to the same
period in 2008 are summarized below:
(in
millions, except per share amounts)
|
September
30,
2009
|
September
30,
2008
|
%
Change
|
|||||||||
Total
assets
|
$ | 2,086.5 | $ | 2,125.3 | (2 | ) % | ||||||
Total
loans (net)
|
1,456.6 | 1,369.1 | 6 | |||||||||
Total
deposits
|
1,737.0 | 1,689.8 | 3 | |||||||||
Total
revenues
|
$ | 74.3 | $ | 76.2 | (2 | ) % | ||||||
Total
noninterest expenses
|
66.1 | 57.3 | 15 | |||||||||
Net
income (loss)
|
(1.0 | ) | 10.1 | (110 | ) | |||||||
Diluted
net income (loss) per share
|
$ | (0.16 | ) | $ | 1.55 | (110 | )% |
We expect
to continue the pattern of expanding our footprint not only with the
aforementioned acquisition of Republic First but also by branching into
contiguous areas of our new and existing markets, and by filling gaps between
existing store locations. Accordingly, we anticipate notable balance sheet and
revenue growth as a result of the expansion. Additionally, we expect to incur
direct acquisition expenses as we consummate the merger with Republic First
including expenses to combine the operations of the two companies. We also
anticipate that the recent core system conversion will result in increased
levels of expense in future periods than in previous periods. Operating results
for the remainder of 2009 and the years that follow could also be heavily
impacted by the overall state of the local and global economy.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Our
accounting policies are fundamental to understanding Management’s Discussion and
Analysis of Financial Condition and Results of Operations. Our accounting
policies are more fully described in Note 1 of the Notes to Consolidated Financial
Statements described in
the Company’s annual report on Form 10-K for the year ended December 31, 2008.
Our consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. These principles
require our management to make estimates and assumptions about future events
that affect the amounts reported in our consolidated financial statements and
accompanying notes. Since future events and their effects cannot be determined
with absolute certainty, actual results may differ from those estimates.
Management makes adjustments to its assumptions and estimates when facts and
circumstances dictate. We evaluate our estimates and assumptions on an ongoing
basis and predicate those estimates and assumptions on historical experience and
on various other factors that are believed to be reasonable under the
circumstances. Management believes the following critical accounting policies
encompass the more significant assumptions and estimates used in preparation of
our consolidated financial statements.
Allowance for
Loan Losses. The allowance
for loan losses represents the amount available for estimated losses existing in
the loan portfolio. While the allowance for loan losses is maintained at a level
believed to be adequate by management for estimated losses in the loan
portfolio, the determination of the allowance is inherently subjective, as it
involves significant estimates by management, all of which may be susceptible to
significant change.
While
management uses available information to make such evaluations, future
adjustments to the allowance and the provision for loan losses may be necessary
if economic conditions or loan credit quality differ substantially from the
estimates and assumptions used in making the
24
evaluations.
The use of different assumptions could materially impact the level of the
allowance for loan losses and, therefore, the provision for loan losses to be
charged against earnings. Such changes could impact future financial
results.
We
perform monthly, systematic reviews of our loan portfolios to identify potential
losses and assess the overall probability of collection. These reviews include
an analysis of historical default and loss experience, which results in the
identification and quantification of loss factors. These loss factors are used
in determining the appropriate level of allowance necessary to cover the
estimated probable losses in various loan categories. Management judgment
involving the estimates of loss factors can be impacted by many variables, such
as the number of years of actual default and loss history included in the
evaluation.
The
methodology used to determine the appropriate level of the allowance for loan
losses and related provisions differs for commercial and consumer loans and
involves other overall evaluations. In addition, significant estimates are
involved in the determination of the appropriate level of allowance related to
impaired loans. The portion of the allowance related to impaired loans is based
on either (1) discounted cash flows using the loan’s effective interest rate,
(2) the fair value of the collateral for collateral-dependent loans, or (3) the
observable market price of the impaired loan. Each of these variables involves
judgment and the use of estimates. In addition to calculating and the testing of
loss factors, we periodically evaluate qualitative factors which
include:
|
·
|
changes
in lending policies and procedures, including changes in underwriting
standards and collection, charge-off and recovery practices not considered
elsewhere in estimating credit
losses;
|
|
·
|
changes
in the volume and severity of past due loans, the volume of nonaccrual
loans and the volume and severity of adversely classified or graded
loans;
|
|
·
|
changes
in the nature and volume of the portfolio and the terms of
loans;
|
|
·
|
changes
in the value of underlying collateral for collateral-dependent
loans;
|
|
·
|
changes
in the quality of the institution’s loan review
system;
|
|
·
|
changes
in the experience, ability and depth of lending management and other
relevant staff;
|
|
·
|
the
existence and effect of any concentrations of credit and changes in the
level of such concentrations;
|
|
·
|
changes
in international, national, regional and local economic and business
conditions and developments that affect the collectability of the
portfolio, including the condition of various market segments;
and
|
|
·
|
the
effect of other external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
institution’s existing portfolio.
|
Management
judgment is involved at many levels of these evaluations.
An
integral aspect of our risk management process is allocating the allowance for
loan losses to various components of the loan portfolio based upon an analysis
of risk characteristics, demonstrated losses, industry and other segmentations
and other more judgmental factors.
Stock-Based
Compensation. Effective
January 1, 2006, the Company adopted Share-Based Payment guidance using the
modified prospective method. The guidance requires compensation costs related to
share-based payment transactions to be recognized in the income statement (with
limited exceptions) based on the grant-date fair value of the stock-based
compensation issued.
25
Compensation
costs are recognized over the period that an employee provides service in
exchange for the award. The grant-date fair value and
ultimately the amount of compensation expense recognized is dependent upon
certain assumptions we make such as the expected term the options will remain
outstanding, the volatility and dividend yield of our company stock and risk
free interest rate. This critical Accounting policy is more fully described in
Note 14 of the Notes to Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Other than
Temporary Impairment of Investment Securities. We perform periodic
reviews of the fair value of the securities in the Company’s investment
portfolio and evaluate individual securities for declines in fair value that may
be other than temporary. If declines are deemed other than temporary, an
impairment loss is recognized against earnings and the security is written down
to its current fair value.
Effective
April 1, 2009, the Company adopted the provisions to fair value measurement
guidance regarding Recognition
and Presentation of
Other-Than-Temporary Impairments. This critical
Accounting policy is more fully described in Note 9 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-Q for the period ended
September 30, 2009.
Fair Value
Measurements.
Effective
January 1, 2008, the Company adopted fair value measurements guidance, which
defines fair value, establishes a framework for measuring fair value under
Generally Accepted Accounting Principles and expands disclosures about fair
value measurements. The Company is required to disclose the fair value of
financial assets and liabilities that are measured at fair value within a fair
value hierarchy. The fair value hierarchy prioritizes the inputs to
valuation techniques used to measure fair value, giving the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(level 1 measurement) and the lowest priority to unobservable inputs (level 3
measurements). These disclosures appear in Note 8 of the Notes to Consolidated Financial
Statements described in this interim report on Form 10-Q for the period
ended September 30, 2009. Judgment is involved not only with deriving the
estimated fair values but also with classifying the particular assets recorded
at fair value in the fair value hierarchy. Estimating the fair value
of impaired loans or the value of collateral securing foreclosed assets requires
the use of significant unobservable inputs (level 3 measurements). At September
30, 2009, the fair value of assets based on level 3 measurements constituted 3%
of the total assets measured at fair value. The fair value of collateral
securing impaired loans or constituting foreclosed assets is generally
determined based upon independent third party appraisals of the properties,
recent offers, or prices on comparable properties in the proximate
vicinity. Such estimates can differ significantly from the amounts
the Company would ultimately realize from the loan or disposition of underlying
collateral.
The
Company’s available for sale investment security portfolio constitutes 97% of
the total assets measured at fair value and is primarily classified as a level 2
fair value measurement (quoted prices in markets that are not active, or inputs
that are observable, either directly or indirectly, for substantially the full
term of the asset or liability). Management utilizes third party service
providers to aid in the determination of the fair value of the portfolio. If
quoted market prices are not available, fair values are generally based on
quoted market prices of comparable instruments. Securities that are debenture
bonds and pass through mortgage backed investments that are not quoted on an
exchange, but are traded in active markets, were obtained from matrix pricing on
similar securities.
RESULTS
OF OPERATIONS
Average
Balances and Average Interest Rates
Interest-earning
assets averaged $1.94 billion for the third quarter of 2009, the same as for the
26
third
quarter in 2008. For the quarter ended September 30, total loans receivable
including loans held for sale, averaged $1.48 billion in 2009 and $1.37 billion
in 2008, respectively. For the same two quarters, total securities averaged
$460.5 million and $568.7 million, respectively. The decrease is a result of
principal repayments, sales and calls which more than offset purchases during
the same period. These cash flows were used to fund loan growth and to reduce
the level of borrowed funds rather than redeploy the cash flows back into
investment securities at a reduced net interest spread given the overall low
interest rate environment.
The
average balance of total deposits increased $135.0 million, or 8%, for the third
quarter of 2009 compared to the third quarter of 2008. Total interest-bearing
deposits averaged $1.41 billion, compared to $1.31 billion for the third quarter
one year ago and average noninterest bearing deposits increased by $33.9
million, or 12%. Short-term borrowings, which consists of overnight advances
from the Federal Home Loan Bank, securities sold under agreements to repurchase
and overnight federal funds lines of credit, averaged $140.0 million for the
third quarter of 2009 versus $268.2 million for the same quarter of
2008.
The
fully-taxable equivalent yield on interest-earning assets for the third quarter
of 2009 was 5.07%, a decrease of 75 basis points (“bps”) from the
comparable period in 2008. This decrease resulted from lower yields on our loan
and securities portfolios during the third quarter of 2009 as compared to the
same period in 2008. Floating rate loans represent approximately 41% of our
total loans receivable portfolio. The majority of these loans are tied to the
New York prime lending rate which decreased 200 bps during the first quarter of
2008 and subsequently decreased another 200 bps throughout the remainder of
2008, following similar decreases in the overnight federal funds rate by the
Federal Open Market Committee. Approximately $98.9 million, or 24%, of our
investment securities have a floating interest rate and provide a yield that
consists of a fixed spread tied to the one month London Interbank Offered Rate
(“LIBOR”) interest rate. The average one month LIBOR interest rate decreased
approximately 235 bps over the past twelve months from an average rate of 2.62%
during the third quarter 2008 compared to a rate of 0.27% for the third quarter
of 2009. The Company experienced a decline in yield in the investment portfolio
primarily due to the call of seven agency debentures totaling $41.5 million with
a weighted average yield of 5.46%.
As a
result of the extremely low level of current general market interest rates,
including the one-month LIBOR and the New York prime lending rate, we expect the
yields we receive on our interest-earning assets will continue to be lower
throughout the remainder of 2009.
The
average rate paid on our total interest-bearing liabilities for the third
quarter of 2009 was 1.38%, compared to 2.00% for the third quarter of 2008. Our
deposit cost of funds decreased 43 bps from 1.42% in the third quarter of 2008
to 0.99% for the third quarter of 2009. The average cost of short-term
borrowings decreased from 2.18% to 0.63% during the same period. The aggregate
average cost of all funding sources for the Company was 1.15% for the third
quarter of 2009, compared to 1.71% for the same quarter of the prior year. The
decrease in the Company’s deposit cost of funds is primarily related to the
lower level of general market interest rates present during the third quarter as
compared to the same period in 2008. At September 30, 2009, $501.9 million, or
29%, of our total deposits were those of local municipalities, school districts,
not-for-profit organizations or corporate cash management customers, where the
interest rates paid are indexed to either the 91-day Treasury bill, the
overnight federal funds rate, or 30-day LIBOR interest rate. Late in the third
quarter and early fourth quarter each year our indexed deposits experience
seasonally high growth in balances and can comprise as much as 30-35% of our
total deposits during those periods. The average interest rate of the 91-day
Treasury bill decreased from 1.65% in the third quarter of 2008 to 0.17% in the
third quarter of 2009 thereby significantly reducing the average interest rate
paid on these deposits. The decrease in the Company’s borrowing cost of funds is
primarily related to the decrease in the overnight federal funds interest rate
which decreased by 175 bps between September 30, 2008 and September 30,
2009.
27
Interest-earning
assets averaged $1.98 billion for the first nine months of 2009, compared to
$1.87 billion for the same period in 2008. For the same two periods, total loans
receivable including loans held for sale, averaged $1.49 billion in 2009 and
$1.28 billion in 2008. Total securities averaged $487.8 million and $586.9
million for the first nine months of 2009 and 2008, respectively. The decrease,
as previously mentioned with respect to the third quarter, was due to utilizing
cash flows from the investment portfolio to fund loan growth and reduce the
level of borrowed funds rather than redeploy those dollars back into investment
securities.
The
overall net growth in interest-earning assets was funded primarily by an
increase in the average balance of total deposits. Total average deposits,
including noninterest bearing funds, increased by $125.5 million for the first
nine months of 2009 over the same period of 2008 from $1.55 billion to $1.67
billion. Short-term borrowings averaged $217.6 million and $245.4 million in the
first nine months of 2009 and 2008, respectively.
The
fully-taxable equivalent yield on interest-earning assets for the first nine
months of 2009 was 5.13%, a decrease of 86 bps versus the comparable period
in 2008. This decrease resulted from lower yields on our loan and securities
portfolios during the first nine months of 2009 as compared to the same period
in 2008, again, as a result of the lower level of general market interest rates
present during the first nine months of 2009 versus the same period in
2008.
The
average rate paid on interest-bearing liabilities for the first nine months of
2009 was 1.41%, compared to 2.16% for the first nine months of 2008. Our deposit
cost of funds decreased from 1.51% in the first nine months of 2008 to 1.04% for
the same period in 2009. The aggregate cost of all funding sources was 1.19% for
the first nine months of 2009, compared to 1.85% for the same period in
2008.
Net
Interest Income and Net Interest Margin
Net
interest income is the difference between interest income and interest expense.
Interest income is generated from interest earned on loans, investment
securities and other interest-earning assets. Interest expense is paid on
deposits and borrowed funds. Changes in net interest income and net interest
margin result from the interaction between the volume and composition of
interest-earning assets, related yields and associated funding costs. Net
interest income is our primary source of earnings. There are several factors
that affect net interest income, including:
|
·
|
the
volume, pricing mix and maturity of earning assets and interest-bearing
liabilities;
|
|
·
|
market
interest rate fluctuations; and
|
|
·
|
asset
quality.
|
Net
interest income, on a fully tax-equivalent basis, for the third quarter of 2009
decreased by $881,000, or 4.0%, from the same period in 2008. This decrease was
a result of a decrease in the yield on earning assets partially offset by a
reduction in interest rates paid on deposits and short-term borrowing sources,
both as previously discussed above. Interest income, on a tax-equivalent basis,
on interest-earning assets totaled $24.9 million for the third quarter of 2009,
a decrease of $3.6 million, or 13%, from 2008. Interest income on
loans receivable, on a tax-equivalent basis, decreased by $1.4 million, or 6%,
from the third quarter of 2008. This is primarily the result of a $2.5 million
decrease due to lower interest rates associated with our floating rate loans and
new fixed rate loans generated over the past twelve months partially offset by a
$1.1 million increase in loan interest income due to a higher level of loans
receivable outstanding. The lower rates are a direct result of the decreases in
the New York prime lending rate following similar decreases in the federal funds
rate. Interest income on the investment securities portfolio decreased by $2.3
million, or 33%, for the third quarter of 2009 as compared to the same period
last year. This was a result of a decrease in the average balance of the
investment securities portfolio of $108.2 million, or 19%, from the third
quarter one year ago combined with a decrease of 82 bps on the average rate
earned on those securities from third quarter 2008 to third quarter 2009. Due to
the significant decrease in short-term interest rates that occurred throughout
the past twelve months, the cash flows from principal repayments on the
investment securities portfolio accelerated dramatically. These cash flows were
used to fund the continued loan growth and were not redeployed back into the
securities portfolio.
28
Interest
expense for the third quarter decreased $2.7 million, or 33%, from $8.4 million
in 2008 to $5.6 million in 2009. Interest expense on deposits decreased by $1.3
million, or 24%, from the third quarter of 2008 while interest expense on
short-term borrowings decreased by $1.3 million, or 85%, for the same
period.
Net
interest income, on a fully tax-equivalent basis, for the first nine months of
2009 increased by $123,000, or 0.2%, over the same period in 2008. Interest
income on interest-earning assets totaled $76.3 million for the first nine
months of 2009 a decrease of $8.3 million, or 10%, below the same period in
2008. Interest income on loans outstanding decreased by $1.4 million, or 2.0%,
from the first nine months of 2008 and interest income on investment securities
decreased by $6.9 million, or 31%, compared to the same period last year. Total
interest expense for the first nine months decreased $8.4 million, or 32%, from
$26.0 million in 2008 to $17.5 million in 2009. Interest expense on deposits
decreased by $4.5 million, or 26%, for the first nine months of 2009 versus the
first nine months of 2008. Interest expense on short-term borrowings decreased
by $3.8 million, or 79%, for the first nine months of 2009 compared to the same
period in 2008. Interest expense on long-term debt totaled $3.5 million for the
first nine months of 2009, as compared to $3.7 million for the first nine months
of 2008. The decreases in interest income and interest expense directly relate
to the significantly lower level of general market interest rates present in the
first nine months of 2009 compared to the first nine months of
2008.
Changes
in net interest income are frequently measured by two statistics: net interest
rate spread and net interest margin. Net interest rate spread is the difference
between the average rate earned on interest-earning assets and the average rate
incurred on interest-bearing liabilities. Our net interest rate spread on a
fully taxable-equivalent basis was 3.69% during the third quarter of 2009
compared to 3.82% during the same period in the previous year. Our net interest
rate spread on a fully taxable-equivalent basis was 3.72% during the first nine
months of 2009 versus 3.83% during the first nine months of 2008. Net interest
margin represents the difference between interest income, including net loan
fees earned, and interest expense, reflected as a percentage of average
interest-earning assets. The fully tax-equivalent net interest margin decreased
19 bps, from 4.11% for the third quarter of 2008 to 3.92% for the third quarter
of 2009, as a result of the decreased yield on interest earning assets partially
offset by the decrease in the cost of funding sources as previously discussed.
For the first nine months of 2009 and 2008, the fully taxable-equivalent net
interest margin was 3.94% and 4.14%, respectively.
Provision
for Loan Losses
Management
undertakes a rigorous and consistently applied process in order to evaluate the
allowance for loan losses and to determine the level of provision for loan
losses, as previously stated in the Application of Critical Accounting Policies.
We recorded a provision of $3.7 million to the allowance for loan losses for the
third quarter of 2009 as compared to $1.7 million for the third quarter of 2008.
The loan loss provision for the first nine months was $10.6 million and $4.1
million for 2009 and 2008, respectively. The increase in the provision for loan
losses for both the quarter and year to date over the prior year is a result of
the Company’s gross loan growth of $88.2 million over the past twelve months,
combined with the level of nonperforming loans at September 30, 2009 and the
amount of net charge-offs incurred during the first nine months of 2009. Nonperforming loans
totaled $25.1 million at September 30, 2009, down from $27.1 million at December
31, 2009 and compared to $11.7 million at September 30, 2008. Total
nonperforming assets were $32.0 million at September 30, 2009 compared to $27.9
million as of December 31, 2008 and up from $12.2 million at September 30, 2008.
Nonperforming assets as a percentage of total assets increased from
1.30% at December 31, 2008 to 1.53% at September 30, 2009. This same ratio was
0.57% at September 30, 2008. See the sections in this Management’s Discussion
and Analysis on asset quality and the allowance for loan losses for further
discussion regarding nonperforming loans and our methodology for determining the
provision for loan losses.
29
Net loan
charge-offs for the third quarter of 2009 were $8.4 million, or 2.29%
(annualized) of average loans outstanding, compared to net charge-offs of
$22,000, or 0.01% of average loans outstanding, for the same period in 2008.
During the third quarter 2009, the Company charged off five relationships
totaling $6.0 million of the total $8.4 million of net charge offs for the
quarter. Of the
$10.1 million, approximately $6.0 million, or 60%, were commercial real estate
loans and $4.0 million, or 40%, were commercial business loans. At the time of
chargeoff, the Bank had existing provisions totaling approximately $8.0 million,
or 80%, of the aggregate amount charged off for the period.
Net
charge-offs for the first nine months of 2009 were $12.7 million, or 1.17%
(annualized) of average loans outstanding, compared to net charge-offs of
$929,000, or 0.10% of average loans outstanding for the same period in 2008.
Approximately $10.1 million, or 79%, of total loan charge-offs year-to-date were
associated with a total of seven different relationships. Of the
$6.0 million, approximately $3.7 million, or 62%, were commercial real estate
loans and $2.3 million, or 38%, were commercial business loans. At the time of
chargeoff, the Bank had existing provisions totaling approximately $5 million,
or 83%, of the aggregate amount charged off for the period.
The
allowance for loan losses as a percentage of period-end gross loans outstanding
was 0.99% at September 30, 2009, as compared to 1.16% at December 31, 2008, and
1.00% at September 30, 2008.
Noninterest
Income
Noninterest
income for the third quarter of 2009 increased by $488,000, or 8%, from the same
period in 2008. During the third quarter of 2009, the Company recorded net gains
of $1.5 million on sales of investment securities. These gains were partially
offset by a $952,000 charge for other-than-temporary impairment on three
private-label collateralized mortgage obligations in the Bank’s investment
securities portfolio. Further detailed discussion of the impairment charge can
be found in Note 9 of this Form 10-Q. Core noninterest income, comprised
primarily of deposit service charges and fees, totaled $6.3 million, a decrease
of $75,000, or 1%, from the third quarter of 2008. The decrease in core
noninterest income is due to a lower level of fee income associated with non
sufficient funds (“NSF”) activity as well as lower fee income associated with
debit cards and ATM transactions. Customer usage of these products was down
slightly in 2009 which resulted in lower levels of fee income as compared to the
third quarter one year ago. Noninterest income for the third quarter of 2009
included $238,000 of net gains on sales of loans compared to net gains of
$177,000 on sales of loans during the third quarter of 2008.
Noninterest
income for the first nine months of 2009 decreased by $1.6 million, or 8%,
compared to the same period in 2008. Deposit service charges and fees decreased
4%, from $17.9 million for the first nine months of 2008 to $17.2 million in the
first nine months of 2009. The decrease in deposit service charges and fees is
primarily attributable to a lower level of fee income associated with NSF
activity as well as debit card and ATM transactions as described above. The 2009
net gain on the sale of loans is comprised of $921,000 of gains on the sale of
residential and small business loans, partially offset by a $627,000 loss on the
sale of student loans. Total gains of $574,000 for the first nine months of 2008
were associated with sales of residential loans. The loss on the sale of student
loans was related to management’s decision to sell a $12.2 million portion of
the Bank’s student loan portfolio due to the low level of yields on those loans
combined with a higher level of servicing costs. Included in noninterest
income for the first nine months of 2009 was a $2.3 million charge for
other-than-temporary-impairment on private-label CMO’s in the Bank’s investment
portfolio.
Noninterest
Expenses
For the
third quarter of 2009, noninterest expenses increased by $3.4 million, or 18%,
over the same period in 2008. Included in noninterest expenses for the third
quarter of 2009 were one-time charges of approximately $1.8 million associated
with the transition of data processing, item processing and technology network
services to a new service provider as well as costs associated with rebranding
to Metro Bank. Salary and benefits expenses, data processing costs and related
expenses increased due to maintaining our own technological infrastructure which
was previously supported by TD. Prior to the third quarter of 2009, we paid TD
to maintain the network and technology infrastructure for our Company. A
comparison of noninterest expenses for certain categories for the three months
ended September 30, 2009 and September 30, 2008 is presented in the following
paragraphs.
30
Salary
and employee benefits expenses, which represent the largest component of
noninterest expenses, increased by $1.1 million, or 12%, for the third quarter
of 2009 over the third quarter of 2008. This increase includes the impact of
additional staffing in our operations and information technology departments to
facilitate the conversion process as well as to handle functions that were
previously performed by TD but are now performed in-house. The increase was also
partially a result of higher overall benefit plan costs.
Occupancy
expenses totaled $1.9 million for the third quarter of 2009, a decrease of
$82,000, or 4%, from the third quarter of 2008, while furniture and equipment
expenses increased 22%, or $232,000, from the third quarter of 2008. The
increase in furniture and equipment was related to an increase in depreciation
and maintenance expenses associated with 2009 fixed asset purchases that were
made as a result of our conversion and rebranding initiative.
Advertising
and marketing expenses totaled $830,000 for the three months ending September
30, 2009, an increase of $175,000, or 27%, from the same period in 2008. This is
primarily due to a higher level of brand promotional activity as a result of the
total rebranding of the Company which occurred in June 2009 and carried into the
third quarter.
Data
processing expenses increased by $734,000, or 41%, in the third quarter of 2009
over the three months ended September 30, 2008. The increase was due to costs
associated with processing additional transactions as a result of the growth in
the number of accounts serviced combined with expenses associated with
conversion of systems and processing from TD to Fiserv.
Regulatory
assessments and related fees totaled $830,000 for the third quarter of 2009 and
were $289,000, or 53%, higher than for the third quarter of 2008. The Bank, like
all financial institutions whose deposits are guaranteed by the FDIC, pays a
quarterly premium for such deposit coverage. The rates charged by the FDIC have
increased substantially in 2009 compared to prior
years.
Telephone
expenses totaled $1.4 million for the third quarter of 2009, an increase of
$847,000, or 147%, from the third quarter of 2008. This increase was related to
the increase in costs associated with supporting the newly enhanced
technological infrastructure built prior to our transition to Fiserv. In
addition we experienced increased call center volume and utilized higher call
center staffing levels throughout the third quarter to assist customers with
post conversion questions.
As
mentioned previously, included in noninterest expenses for the third quarter of
2009 were one-time charges of approximately $1.8 million associated with the
transition of all services from TD, along with rebranding costs associated with
changing the Bank’s name. Total noninterest expenses for the third quarter of
2009 were offset partially by the recognition of $2.75 million of the total $6.0
million fee paid to Metro Bank from TD. This fee was used to partially defray
the costs of transition and rebranding. The impact of the one-time charges
offset by this fee are reflected in the Core System Conversion/Branding expense
line on the Company’s Consolidated Statement of Operations. Also included in
noninterest expenses was $250,000 associated with the Company’s pending
acquisition of Republic First which is expected to close upon regulatory
approval. We expect to incur additional costs associated with the acquisition of
Republic First during the fourth quarter of 2009.
31
Other
noninterest expenses increased by $577,000, or 21%, for the three-month period
ended September 30, 2009, compared to the same period in 2008. The primary
reason for the increase related to lending expenses and noncredit related
losses.
For the
first nine months of 2009, noninterest expenses increased by $8.7 million, or
15%, over the same period in 2008. A comparison of noninterest expenses for
certain categories for the nine months ending September 30, 2009 and September
30, 2008 is presented in the following paragraphs.
Salary
expenses and employee benefits, increased by $4.2 million, or 15%, for the first
nine months of 2009 over the first nine months of 2008. This increase includes
the impact of additional staffing in our operations and information technology
departments to facilitate the conversion process as well as to handle functions
that were previously performed by TD but are now performed in-house. The
increase was also partially a result of higher overall employee benefit plan
costs.
Occupancy
expenses totaled $6.0 million for the first nine months of 2009, a decrease of
$121,000, or 2%, from the first nine months of 2008. Furniture and equipment
expenses increased 5%, or $162,000, from the first nine months of 2008. The
increases as compared to first nine months of 2008 were related to higher levels
of depreciation on fixed assets and maintenance expense as a result of our
conversion and rebranding initiative.
Advertising
and marketing expenses totaled $1.9 million for the nine months ending September
30, 2009, a decrease of $443,000, or 19%, from the same period in 2008.
This is primarily due to a large reduction in actively promoting our previous
brand during the first half of 2009 prior to the rebranding efforts which
occurred in June 2009 and the third quarter of this year. The impact of one-time
costs associated with the rebranding are included in the conversion/branding
line on the Company’s Consolidated Statements of Operations.
Data
processing expenses increased by $1.4 million, or 26%, for the first nine months
of 2009 over the nine months ended September 30, 2008. The increase was due to
costs associated with processing additional transactions as a result of the
growth in the number of accounts serviced combined with enhancements to current
systems prior to our conversion of data processing and item processing from TD.
Also included in data processing expenses were additional costs that resulted
from building a new network infrastructure to support the daily operations of
the Company post conversion.
Regulatory
assessments of $3.3 million were $976,000, or 43%, higher for the first nine
months of 2009 compared to the nine months ended September 30, 2008. The
increase primarily relates to a one-time special assessment fee levied by the
Federal Deposit Insurance Corporation against all FDIC-insured financial
institutions in the second quarter of 2009 to bolster the level of the Bank
Insurance Fund which is available to cover possible future bank failures. The
one time special assessment amounted to $960,000 for Metro Bank. Included in
total regulatory expenses for the first half of 2008 were costs incurred to
address the matters identified by the Office of the Comptroller of the Currency
(“OCC”) in a formal written agreement and a consent order which the Bank entered
into with the OCC in 2007 and 2008, respectively. Both the formal written
agreement and the consent order between the Bank and the OCC were terminated on
November 7, 2008. The absence of similar expenses during the first nine months
of 2009 has been offset by higher quarterly FDIC fees for deposit insurance
coverage.
Telephone
expenses totaled $3.0 million for the first nine months of 2009, an increase of
$1.2 million, or 70%, over the first nine months of 2008. This increase was
related to an increase in costs with supporting the newly enhanced technological
infrastructure built prior to our transition to Fiserv in addition to the
increased call center volume which we experienced post conversion. Costs
associated with call center services are higher with our new provider and this
impact is reflected in the increased level of telephone expenses for both the
third quarter and for the first nine months of 2009 over the respective periods
in 2008.
32
Merger/Acquisition
charges totaled $655,000 for the first nine months of 2009 versus no such
expense for the same period in 2008. We expect additional merger-related
expenses during the fourth quarter of 2009 as we work to close this transaction
upon the receipt of regulatory approval.
Other
noninterest expenses increased by $1.0 million, or 15%, for the nine-month
period ending September 30, 2009, compared to the same period in 2008. The
increase is primarily due to costs related to lending activities and noncredit
related losses.
One key
measure that management utilizes to monitor progress in controlling overhead
expenses is the ratio of annualized net noninterest expenses (less nonrecurring)
to average assets. For purposes of this calculation, net noninterest expenses
equal noninterest expenses less noninterest income. For the third quarter of
2009 this ratio equaled 2.75% and for the third quarter of 2008 this ratio
equaled 2.51%. For the nine month period ending September 30, 2009, this ratio
equaled 3.01% compared to 2.57% for the nine-month period ending September 30,
2008.
Another
productivity measure utilized by management is the operating efficiency ratio.
This ratio expresses the relationship of noninterest expenses (less
nonrecurring) to net interest income plus noninterest income (less
nonrecurring). For the quarter ending September 30, 2009, the operating
efficiency ratio was 88.6%, compared to 74.4% for the similar period in 2008.
This ratio equaled 87.1% for the first nine months of 2009, compared to 75.3%
for the first nine months of 2008. The increase in the operating efficiency
ratio primarily relates to the increase in noninterest expenses in 2009 relating
to supporting our change in the technological infrastructure.
Provision
for Federal Income Taxes
The
benefit realized for federal income taxes was $502,000 for the third quarter of
2009 as a result of a pretax loss of $992,000, compared to a provision for
federal income taxes of $1.5 million for the same period in 2008. For the nine
months ending September 30, the benefit realized was $1.4 million for 2009
compared to a provision of $4.6 million in 2008. The effective tax benefit rate
for the first nine months of 2009 was 57.6% due to the proportion of tax free
income to a total pretax loss as compared to the effective tax rate of 31.3% for
the first nine months of 2008. This change in effective tax rate and the
corresponding provision during 2009 was primarily due to recording a pre-tax
loss for both the three months and nine months ended September 30, 2009 compared
to pre-tax income for the comparable periods in 2008. The Company’s
statutory rate was 35% in both 2009 and in 2008.
Net
Income (Loss) and Net Income (Loss) per Share
Net loss
for the third quarter of 2009 was $490,000, a decrease of $3.9 million, or 114%,
from the $3.4 million of net income recorded in the third quarter of 2008. The
decrease was due to a $973,000 decrease in net interest income, a $2.0 million
increase in the provision for loan losses, and a $3.4 million increase in
noninterest expenses partially offset by a $488,000 increase in noninterest
income and a $2.0 million decrease in the provision for income
taxes.
Net loss
for the first nine months of 2009 was $1.0 million, a decrease of $11.2 million,
or 110%, from the $10.1 million of net income recorded in the first nine months
of 2008. The decrease was due to a $291,000 decrease in net interest income, a
$1.6 million decrease in noninterest income, a $6.6 million increase in the
provision for loan losses and an $8.7 million increase in noninterest expenses
partially offset by a $6.0 million decrease in the provision for income
taxes.
Basic
loss per common share was $(0.08) for the third quarter of 2009, compared to
earnings per share of $0.54 for the third quarter of 2008. For the first nine
months of 2009 and 2008, basic loss and earnings per share were $(0.16) and
$1.59, respectively. Diluted earnings per common share decreased $0.60, to a
loss of $(0.08), for the third quarter of 2009, compared to net income of $0.52
for the third quarter of 2008. For the first nine months in 2009, loss per
common share was $(0.16) compared to fully diluted earnings per share of $1.55
for the same period in 2008.
33
Return
on Average Assets and Average Equity
Return on
average assets (“ROA”) measures our net income (loss) in relation to our total
average assets. Our annualized ROA for the third quarter of 2009 was (0.09)%,
compared to 0.66% for the third quarter of 2008. The ROA for the first nine
months in 2009 and 2008 was (0.06)% and 0.68%, respectively. Return on average
equity (“ROE”) indicates how effectively we can generate net income on the
capital invested by our stockholders. ROE is calculated by dividing annualized
net income or loss by average stockholders' equity. The ROE was (1.47)% for the
third quarter of 2009, compared to 11.96% for the third quarter of 2008. The ROE
for the first nine months of 2009 was (1.10)%, compared to 11.98% for the first
nine months of 2008. Both ROA and ROE for the third quarter and year to date of
2009 were directly impacted by the net losses recorded for those two periods
compared to net income recorded for the same periods in 2008.
FINANCIAL
CONDITION
Securities
During
the first nine months of 2009, the total investment securities portfolio
decreased by $100.4 million from $494.2 million to $393.8 million. The cash
flows from principal repayments, calls of securities and investment sales were
used to fund loan growth and to reduce borrowed funds rather than redeploy these
cash flows back into investment securities at a reduced net interest spread. The
unrealized loss on available for sale securities decreased by $13.9 million from
$26.6 million at December 31, 2008 to $12.7 million at September 30, 2009 as a
result of improving market values in both agency and non-agency
securities.
Sales of
securities of $47.0 million and $3.4 million in the securities available for
sale (“AFS”) and held to maturity (“HTM”) portfolios, respectively occurred
during the first nine months of 2009. The sales from the HTM portfolio were
primarily mortgage-backed securities with small remaining residual principal
balances.
During
the first nine months of 2009, AFS decreased by $44.7 million, from $341.7
million at December 31, 2008 to $297.0 million at September 30, 2009 as a result
of principal repayments, investment sales, and calls partially offset by an
improvement in unrealized losses associated with those securities in the AFS
portfolio. The AFS portfolio is comprised of U.S. Government agency securities,
mortgage-backed securities and collateralized mortgage obligations. At September
30, 2009, the after-tax unrealized loss on AFS securities included in
stockholders’ equity totaled $8.3 million, compared to $17.3 million at December
31, 2008. The weighted average life of the AFS portfolio at September 30, 2009
was approximately 3.0 years compared to 4.9 years at December 31, 2008 and the
duration was 2.5 years at September 30, 2009 compared to 4.0 years at December
31, 2008. The current weighted average yield was 3.79% at September 30, 2009
compared to 4.19% at December 31, 2008. In addition to the normal run-off of
higher coupon mortgage-backed securities, the primary driver of this decline in
yield has been the anticipated call, throughout 2009, of seven agency debentures
totaling $41.5 million with a weighted average yield of 5.46%.
During
the first nine months of 2009, the carrying value of securities in the HTM
portfolio decreased by $55.7 million from $152.6 million to $96.9 million as a
result of calls of U.S. Government agency securities totaling $36.5 million
combined with principal repayments and sales as discussed above. The securities
held in this portfolio include tax-exempt municipal bonds, collateralized
mortgage obligations, corporate debt securities and mortgage-backed securities.
The weighted average life of the HTM portfolio at September 30, 2009 was
approximately 3.2 years compared to 4.1 years at December 31, 2008 and the
duration was 2.8 years at September 30, 2009 compared to 3.4 years at December
31, 2008. The current weighted average yield was 4.84% at September 30, 2009
compared to 5.02% at December 31, 2008. The reduction in yield was the result of
the above-mentioned calls on higher-yielding U.S. Government agency
securities.
34
Total
investment securities aggregated $393.8 million, or 19%, of total assets at
September 30, 2009 as compared to $494.2 million, or 23%, of total assets at
December 31, 2008.
The
average fully-taxable equivalent yield on the combined investment securities
portfolio for the first nine months of 2009 was 4.13% as compared to 5.00% for
the similar period of 2008.
The
Bank’s investment securities portfolio consists primarily of U.S. Government
agency securities, U.S. Government sponsored agency mortgage-backed obligations
and private-label collateralized mortgage obligations (CMO’s). The securities of
the U.S. Government sponsored agencies
and the U.S. Government mortgage-backed securities have little credit risk
because their principal and interest payments are backed by an agency of the
U.S. Government. Private label CMO’s are not backed by the full faith and credit
of the U.S. Government nor are their principal and interest payments guaranteed.
Historically, most private label CMO’s have carried a AAA bond rating on the
underlying issuer, however, the subprime mortgage problems and decline in the
residential housing market in the U.S. throughout 2008 and 2009 have led to
ratings downgrades and subsequent other-than-temporary impairment of many types
of CMO’s.
The
unrealized losses in the Company’s investment portfolio at September 30, 2009
are associated with two different types of securities. The first type includes
eight government agency sponsored CMO’s, all of which have yields that are
indexed to a spread over the one month London Interbank Offered Rate (LIBOR).
Management believes that the unrealized losses on the Company’s investment in
these federal agency CMO’s were primarily caused by their low spread to LIBOR.
The second type of security in the Company’s investment portfolio with
unrealized losses at September 30, 2009 was private label CMO’s. As of September
30, 2009, the Company owned thirty-one private label CMO securities in its
investment portfolio with a total book value of $132.1 million. Management
performs periodic assessments of these securities for other-than-temporary
impairment. As part of this assessment, the Bank uses a third-party
source for the monthly pricing of its portfolio. Under fair value
measurement guidance, both the third-party and the Bank consider these
indications to be based upon Level 2 inputs through matrix pricing, observed
quotes for similar assets, and/or market-corroborated inputs.
See the
detailed discussion in Note 9 to the Consolidated Financial Statements included
in this interim report on Form 10Q for details regarding our assessment and the
determination of other-than-temporary impairment.
Loans
Held for Sale
Loans
held for sale are comprised of student loans and selected residential loans the
Bank originates with the intention of selling in the future. Occasionally, loans
held for sale also include selected Small Business Administration (“SBA”) loans
and business and industry loans that the Bank decides to sell. These loans are
carried at the lower of cost or estimated fair value, calculated in the
aggregate. At the present time, the majority of the Bank’s residential loans are
originated with the intent to sell to the secondary market unless the loan is
nonconforming to the secondary market standards or if we agree not to sell the
loan due to a customer’s request. The residential mortgage loans that are
designated as held for sale are sold to other financial institutions in
correspondent relationships. The sale of these loans takes place typically
within 30 days of funding. At December 31, 2008 and September 30, 2009, there
were no past due or impaired residential mortgage loans held for sale. SBA loans
are held in the Company’s loan receivable portfolio unless or until the
Company’s management determines a sale of certain loans is appropriate. At the
time such a decision is made, the SBA loans are moved from the loans receivable
portfolio to the loans held for sale portfolio. Total loans held for sale were
$13.3 million at September 30, 2009 and $41.1 million at December 31, 2008. At
September 30, 2009, loans held for sale were comprised of $7.1 million of
student loans and $6.2 million of residential mortgages as compared to $34.4
million of student loans, $2.9 million of SBA loans and $3.8 million of
residential loans at December 31, 2008. The change was the result of sales of
$42.7 million in student loans, $5.7 million of SBA loans and $78.0 million in
residential loans, offset by originations of $101.5 million in new loans held
for sale. There were $5.7 million of SBA loans moved from the loans
receivable portfolio to the loans held for sale portfolio during the first nine
months of 2009. Loans held for sale, as a percent of total assets, were
less than 1% at September 30, 2009 and 2% at December 31, 2008.
35
Loans
Receivable
During
the first nine months of 2009, total gross loans receivable increased by $31.5
million, from $1.44 billion at December 31, 2008, to $1.47 billion at September
30, 2009. During this period, we moved $5.7 million of SBA loans to the loans
held for sale portfolio. Gross loans receivable represented 85% of total
deposits and 71% of total assets at September 30, 2009, as compared to 88% and
67%, respectively, at December 31, 2008. Total loan originations during the
first nine months of 2009 were below historical norms for the Bank as compared
to prior years. This is due to a combination of lower demand and the
current economic conditions combined with a much more stringent enforcement of
credit standards for new loans in the current economic
environment. As the economy slowly improves, we expect loan demand to
increase and therefore expect a higher level of originations during 2010 as
compared to 2009.
The
following table reflects the composition of the Company’s loan portfolio as of
September 30, 2009 and 2008, respectively.
(dollars
in thousands)
|
As
of
9/30/2009
|
%
of
Total
|
As
of
9/30/2008
|
%
of
Total
|
$
Change
|
%
Change
|
||||||||||||||||||
Commercial
|
$ | 498,669 | 34 | % | $ | 434,236 | 31 | % | $ | 64,433 | 15 | % | ||||||||||||
Owner-occupied
|
275,353 | 19 | 266,989 | 19 | 8,364 | 3 | ||||||||||||||||||
Total
Commercial
|
774,022 | 53 | 701,225 | 50 | 72,797 | 10 | ||||||||||||||||||
Consumer
/ residential
|
309,156 | 21 | 325,778 | 24 | (16,622 | ) | (5 | ) | ||||||||||||||||
Commercial
real estate
|
388,076 | 26 | 356,034 | 26 | 32,042 | 9 | ||||||||||||||||||
Gross
Loans
|
1,471,254 | 100 | % | 1,383,037 | 100 | % | $ | 88,217 | 6 | % | ||||||||||||||
Less:
Allowance for loan losses
|
(14,618 | ) | (13,888 | ) | ||||||||||||||||||||
Net
Loans
|
$ | 1,456,636 | $ | 1,369,149 |
Loan
and Asset Quality
Nonperforming
assets include nonperforming loans and foreclosed real estate. Nonperforming
assets at September 30, 2009, were $32.0 million, or 1.53%, of total assets as
compared to $27.9 million, or 1.30%, of total assets at December 31, 2008. Total
nonperforming loans (nonaccrual loans, loans past due 90 days and still accruing
interest and restructured loans) were $25.1 million at September 30, 2009
compared to $27.1 million at December 31, 2008. Foreclosed real estate totaled
$6.9 million at September 30, 2009 and $743,000 at December 31, 2008. At
September 30, 2009, forty-two loans were in the nonaccrual commercial category
ranging from $5,000 to $3.0 million and twenty-nine loans were in the nonaccrual
commercial real estate category ranging from $25,000 to $3.8 million. At
December 31, 2008, twenty-two loans were in the nonaccrual commercial category
ranging from $11,000 to $3.1 million and eighteen loans were in the nonaccrual
commercial real estate category ranging from $22,000 to $6.6 million. Loans past
due 90 days or more and still accruing were $5,000 at September 30, 2009 and $0
at December 31, 2008. Management’s Allowance for Loan Loss Committee has
performed a detailed review of the nonperforming loans and of the collateral
related to these credits and believes the allowance for loan losses remains
adequate for the level of risk inherent in these loans.
36
Impaired
loans and other loans related to the same borrowers total $2.4 million at
September 30, 2009. Those impaired loans required a specific allocation of
$918,000 at September 30, 2009. This was a decrease of $6.8 million
compared to impaired loans requiring a specific allocation at December 31, 2008.
During the first nine months of 2009, there were forty-seven loans added
totaling $12.7 million to the loans requiring a specific allocation and sixty
loans totaling $23.1 million that no longer required a specific allocation at
September 30, 2009. Additional loans of $39.3 million, considered by our
internal loan review department as potential problem loans at September 30,
2009, have been evaluated as to risk exposure in determining the adequacy for
the allowance for loan losses. Additional loans that were evaluated as to risk
exposure increased from $8.8 million at December 31, 2008 to $39.3 million at
September 30, 2009.
Nonperforming
loans increased from $11.7 million at September 30, 2008 to $25.1 million at
September 30, 2009. The increase in nonperforming loans experienced by the
Bank from September 30, 2008 to September 30, 2009 primarily resulted from the
addition of nineteen commercial relationships totaling $14.7 million at
September 30, 2009. The nineteen relationships mentioned account for
$894,000 of the total specific allocation at September 30, 2009. After the
additional of the nineteen relationships, nonperforming commercial loans
consisted of 35 relationships. At September 30, 2008, total nonperforming
commercial loans were $10 million and consisted of 20
relationships.
The Bank
obtains third-party appraisals by a Bank pre-approved certified general
appraiser on nonperforming loans secured by real estate at the time the loan is
determined to be non-performing. Appraisals are ordered by the Bank’s
Real Estate Loan Administration Department which is independent of both loan
workout and loan production functions.
No
charged-off amount was different from what was determined to be fair value of
the collateral (net of estimated costs to sell) as presented in the appraisal
for any period presented.
Any
provision or charge-off is accounted for upon receipt and satisfactory review of
the appraisal and in no event, later than the end of the quarter in which the
loan was determined to be non-performing. No significant time lapses
during this process have occurred for any period presented.
The Bank
also considers the volatility of the fair value of the collateral, timing and
reliability of the appraisal, timing of the third party’s inspection of the
collateral, confidence in the Bank’s lien on the collateral, historical losses
on similar loans, and other factors based on the type of real estate securing
the loan. As deemed necessary, the Bank will perform inspections of the
collateral to determine if an adjustment of the value of the collateral is
necessary.
Partially
charged off loans with an updated appraisal remain on non-performing status and
are subject to the Bank’s standard recovery policies and procedures, including,
but not limited to, foreclosure proceedings, a forbearance agreement, or
classified as a Troubled Debt Restructure, unless collectability of the entire
contractual balance of principal and interest (book and charged off amounts) is
no longer in doubt, and the loan is current or will be brought current within a
short period of time.
37
The table
below presents information regarding nonperforming loans and assets at September
30, 2009 and 2008 and at December 31, 2008.
Nonperforming
Loans and Assets
|
|||||||||
(dollars
in thousands)
|
September
30,
2009
|
December
31,
2008
|
September
30,
2008
|
||||||
Nonaccrual
loans:
|
|||||||||
Commercial
|
$ 8,833
|
$ 6,863
|
$ 7,083
|
||||||
Consumer
|
984
|
492
|
164
|
||||||
Real
Estate:
|
|||||||||
Construction
|
4,580
|
7,646
|
731
|
||||||
Mortgage
|
10,694
|
12,121
|
3,657
|
||||||
Total
nonaccrual loans
|
25,091
|
27,122
|
11,635
|
||||||
Loans
past due 90 days or more and still accruing
|
5
|
-
|
33
|
||||||
Restructured
loans
|
-
|
-
|
-
|
||||||
Total
nonperforming loans
|
25,096
|
27,122
|
11,668
|
||||||
Foreclosed
real estate
|
6,875
|
743
|
535
|
||||||
Total
nonperforming assets
|
$
31,971
|
$
27,865
|
$
12,203
|
||||||
Nonperforming
loans to total loans
|
1.71
|
%
|
1.88
|
%
|
0.84
|
%
|
|||
Nonperforming
assets to total assets
|
1.53
|
%
|
1.30
|
%
|
0.57
|
%
|
|||
Nonperforming
loan coverage
|
58
|
%
|
62
|
%
|
119
|
%
|
|||
Nonperforming
assets / capital plus allowance for loan losses
|
15
|
%
|
21
|
%
|
10
|
%
|
Allowance
for Loan Losses
The
following table sets forth information regarding the Company’s provision and
allowance for loan losses.
Allowance
for Loan Losses
|
||||||||||
Three
Months Ended
|
Year
Ended
|
Nine
Months Ended
|
||||||||
September
30,
|
September
30,
|
|||||||||
(dollars
in thousands)
|
2009
|
2008
|
December
31,
2008
|
2009
|
2008
|
|||||
Balance
at beginning of period
|
$
19,337
|
$
12,210
|
$
10,742
|
$
16,719
|
$
10,742
|
|||||
Provisions
charged to operating expense
|
3,725
|
1,700
|
7,475
|
10,625
|
4,075
|
|||||
23,062
|
13,910
|
18,217
|
27,344
|
14,817
|
||||||
Recoveries
of loans previously charged-off:
|
||||||||||
Commercial
|
19
|
1
|
145
|
139
|
132
|
|||||
Consumer
|
-
|
1
|
25
|
5
|
24
|
|||||
Real
estate
|
35
|
-
|
-
|
41
|
-
|
|||||
Total
recoveries
|
54
|
2
|
170
|
185
|
156
|
|||||
Loans
charged-off:
|
||||||||||
Commercial
|
(3,878)
|
-
|
(1,426)
|
(6,224)
|
(884)
|
|||||
Consumer
|
(2)
|
(24)
|
(173)
|
(21)
|
(132)
|
|||||
Real
estate
|
(4,618)
|
-
|
(69)
|
(6,666)
|
(69)
|
|||||
Total
charged-off
|
(8,498)
|
(24)
|
(1,668)
|
(12,911)
|
(1,085)
|
|||||
Net
charge-offs
|
(8,444)
|
(22)
|
(1,498)
|
(12,726)
|
(929)
|
|||||
Balance
at end of period
|
$
14,618
|
$
13,888
|
$
16,719
|
$
14,618
|
$
13,888
|
|||||
Net
charge-offs (annualized) as a percentage of average loans
outstanding
|
2.29
|
%
|
0.01
|
%
|
0.11
|
%
|
1.17
|
%
|
0.10
|
%
|
Allowance
for loan losses as a percentage of period-end loans
|
0.99
|
%
|
1.00
|
%
|
1.16
|
%
|
0.99
|
%
|
1.00
|
%
|
38
The
Company recorded provisions of $10.6 million to the allowance for loan losses
during the first nine months of 2009, compared to $4.1 million for the same
period in 2008. Net charge-offs for the first nine months of 2009 totaled $12.7
million, or 1.17% (annualized) of average loans outstanding compared to
$929,000, or 0.10%, for the same period last year.
The
allowance for loan losses as a percentage of total loans receivable was 0.99% at
September 30, 2009, compared to 1.16% at December 31, 2008; the decrease was
primarily due to increased charge-offs throughout the first nine months of 2009
partially offset by the increased provision and loan growth.
Premises
and Equipment
During
the first nine months of 2009, premises and equipment increased by $6.5 million,
or 7%, from $87.1 million at December 31, 2008 to $93.6 million at September 30,
2009. This increase was due to the purchase of $11.1 million of new fixed assets
offset by depreciation and amortization on existing assets of $3.8 million and
the loss on disposal of fixed assets of $839,000 primarily related to rebranding
and conversion activities.
Other
Assets
Other
assets increased by $46.9 million from December 31, 2008 to September 30,
2009. The increase related to $43.0 million receivable for investment
securities sold that had not settled at the end of September 2009 and a $6.1
million increase on foreclosed real estate, partially offset by reductions of
other miscellaneous assets. The proceeds of the investment sales were
subsequently received in October 2009 and the receivable balance was reduced
accordingly. Approximately $4.5 million, or 73%, of the increase in foreclosed
assets was associated with one property purchased at a sheriff’s sale during the
third quarter of 2009 as collateral for a nonperforming loan.
Deposits
Total
deposits at September 30, 2009 were $1.74 billion, up $103.0 million, or 6%,
from total deposits of $1.63 billion at December 31, 2008. Core deposits totaled
$1.72 billion at September 30, 2009, compared to $1.63 billion at December 31,
2008, an increase of $96.8 million, or 6%,. During the first nine months of
2009, core consumer deposits increased $92.1 million, or 13%, core commercial
deposits decreased $70.4 million while core government deposits increased by
$75.1 million. Total noninterest bearing deposits increased by $26.6 million, or
9%, from $280.6 million at December 31, 2008 to $307.2 million at September 30,
2009.
The
average balances and weighted average rates paid on deposits for the first nine
months of 2009 and 2008 are presented in the table below.
Nine
Months Ending September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(
in thousands)
|
Average
Balance
|
Average
Rate
|
Average
Balance
|
Average
Rate
|
||||||||||||
Demand
deposits:
|
||||||||||||||||
Noninterest-bearing
|
$ | 303,227 | $ | 277,212 | ||||||||||||
Interest-bearing
(money market and checking)
|
764,587 | 0.93 | % | 719,092 | 1.66 | % | ||||||||||
Savings
|
336,821 | 0.59 | 347,100 | 1.19 | ||||||||||||
Time
deposits
|
268,720 | 3.09 | 204,446 | 3.63 | ||||||||||||
Total
deposits
|
$ | 1,673,355 | $ | 1,547,850 |
39
Short-Term
Borrowings
Short-term
borrowings used to meet temporary funding needs consist of short-term and
overnight advances from the Federal Home Loan Bank, securities sold under
agreements to repurchase and overnight federal funds lines of credit. At
September 30, 2009, short-term borrowings totaled $83.7 million as compared to
$300.1 million at December 31, 2008. The average rate paid on the short-term
borrowings was 0.59% during the first nine months of 2009, compared to an
average rate paid of 2.54% during the first nine months of 2008. The decrease in
borrowings is a result of applying the proceeds from the previously mentioned
capital offering combined with an increase in deposits partially offset by an
increase in loans outstanding. The decreased rate paid on the borrowings is a
direct result of the decreases in short-term interest rates implemented by the
Federal Reserve Board throughout 2008 as previously discussed in this Form
10-Q.
Long-Term
Debt
Long-term
debt totaled $54.4 million at September 30, 2009 compared to $79.4 million at
December 31, 2008. The decrease is a result of the maturity of a $25 million
Federal Home Loan Bank convertible select borrowing in the third quarter of
2009. As of September 30, 2009, our long-term debt consisted of Trust Capital
Securities through Commerce Harrisburg Capital Trust I, Commerce Harrisburg
Capital Trust II and Commerce Harrisburg Capital Trust III, our Delaware
business trust subsidiaries as well as a longer-term borrowing through the FHLB
of Pittsburgh. At September 30, 2009, all of the Capital Trust Securities
qualified as Tier I capital for regulatory capital purposes for both the Bank
and the Company. Proceeds of the trust capital securities were used for general
corporate purposes, including additional capitalization of our wholly-owned
banking subsidiary. As part of the Company’s Asset/Liability management
strategy, management utilized the Federal Home Loan Bank convertible select
borrowing product during 2007 with a $25.0 million borrowing with a 5 year
maturity and a six month conversion term at an initial interest rate of
4.29%.
Stockholders’
Equity and Capital Adequacy
At
September 30, 2009, stockholders’ equity totaled $195.7 million, up $81.3
million, or 71%, from $114.5 million at December 31, 2008. Stockholders’ equity
at September 30, 2009 included $8.3 million of unrealized losses, net of income
tax benefits, on securities available for sale. Excluding these unrealized
losses, gross stockholders’ equity increased by $72.3 million, or 55%, from
$131.8 million at December 31, 2008, to $204.0 million at September 30, 2009 as
a result of the proceeds from shares issued through our common stock offering in
September as well as through our stock option and stock purchase
plans.
On August
6, 2009, Metro Bancorp filed a shelf registration statement on Form S-3 with the
SEC which will allow the Company, from time to time, to offer and sell up to a
total aggregate of $250 million of common stock, preferred stock, debt
securities, trust preferred securities or warrants, either separately or
together in any combination. While Metro has always been well
capitalized under federal regulatory guidelines, the shelf registration better
positions the Company to take advantage of potential opportunities for growth
and to address current economic conditions.
On
September 30, 2009, the Company completed the common stock offering of 6.25
million shares, at $12.00 per share, for new capital proceeds (net of expenses)
of $70.7 million. Subsequent to the end of the quarter, the
underwriters exercised their 10% over-allotment option and Metro issued an
additional 625,000 common shares for additional net proceeds of $7.1
million. The total net proceeds of $77.9 million have significantly
strengthened Metro’s capital ratios far beyond regulatory guidelines for
“well-capitalized” status and position the Company for strong future growth
including our proposed acquisition of Republic First Bancorp, Inc.
40
Banks are
evaluated for capital adequacy based on the ratio of capital to risk-weighted
assets and total assets. The risk-based capital standards require all banks to
have Tier 1 capital of at least 4% and total capital (including Tier 1 capital)
of at least 8% of risk-weighted assets. Tier 1 capital includes common
stockholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings. Total capital includes total Tier 1
capital, limited life preferred stock, qualifying debt instruments and the
allowance for loan losses. The capital standard based on average assets, also
known as the “leverage ratio,” requires all, but the most highly-rated, banks to
have Tier 1 capital of at least 4% of total average assets. At September 30,
2009, the Bank met the definition of a “well-capitalized”
institution.
The
following tables provide a comparison of the Consolidated and the Bank-only
risk-based capital ratios and leverage ratios to the minimum regulatory
requirements for the periods indicated.
Consolidated
|
September
30,
2009
|
December
31,
2008
|
Minimum
For
Adequately
Capitalized
Requirements
|
Minimum
For
Well-Capitalized
Requirements
|
||||||||||||
Capital
Ratios:
|
||||||||||||||||
Risk-based
Tier 1
|
13.07 | % | 9.67 | % | 4.00 | % | 6.00 | % | ||||||||
Risk-based
Total
|
13.89 | 10.68 | 8.00 | 10.00 | ||||||||||||
Leverage
ratio
(to
average assets)
|
11.10 | 7.52 | 3.00 - 4.00 | 5.00 |
Bank
|
September
30,
2009
|
December
31,
2008
|
Minimum
For
Adequately
Capitalized
Requirements
|
Minimum
For
Well-Capitalized
Requirements
|
||||||||||||
Capital
Ratios:
|
||||||||||||||||
Risk-based
Tier 1
|
11.63 | % | 9.67 | % | 4.00 | % | 6.00 | % | ||||||||
Risk-based
Total
|
12.45 | 10.68 | 8.00 | 10.00 | ||||||||||||
Leverage
ratio
(to
average assets)
|
9.88 | 7.52 | 3.00 - 4.00 | 5.00 |
Interest
Rate Sensitivity
Our risk
of loss arising from adverse changes in the fair value of financial instruments,
or market risk, is composed primarily of interest rate risk. The primary
objective of our asset/liability management activities is to maximize net
interest income while maintaining acceptable levels of interest rate risk. Our
Asset/Liability Committee (“ALCO”) is responsible for establishing policies to
limit exposure to interest rate risk and to ensure procedures are established to
monitor compliance with those policies. Our Board of Directors reviews the
guidelines established by ALCO.
Our
management believes the simulation of net interest income in different interest
rate environments provides a meaningful measure of interest rate risk. Income
simulation analysis captures not only the potential of all assets and
liabilities to mature or reprice, but also the probability that they will do so.
Income simulation also attends to the relative interest rate sensitivities of
these items and projects their behavior over an extended period of time.
Finally, income simulation permits management to assess the probable effects on
the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
Our
income simulation model analyzes interest rate sensitivity by projecting net
interest income over the next twenty-four months in a flat rate scenario versus
net interest income in alternative interest rate scenarios. Our management
continually reviews and refines its interest rate risk management process in
response to the changing economic climate. Currently, our model projects a 200
basis point (“bp”) increase and a 100 bp decrease during the next year, with
rates remaining constant in the second year.
41
Our ALCO
policy has established that income sensitivity will be considered acceptable if
overall net interest income volatility in a plus 200 or minus 100 bp scenario is
within 4% of net interest income in a flat rate scenario in the first year and
5% using a two-year planning window.
The
following table compares the impact on forecasted net interest income at
September 30, 2009 of a plus 200 and minus 100 basis point (bp) change in
interest rates to the impact at September 30, 2008 in the same
scenarios.
September
30, 2009
|
September
30, 2008
|
|||||||||||||||
12
Months
|
24
Months
|
12
Months
|
24
Months
|
|||||||||||||
Plus
200
|
2.9 | % | 8.2 | % | (1.4 | )% | (0.4 | )% | ||||||||
Minus
100
|
(1.7 | ) | (4.1 | ) | 0.4 | 0.2 |
The
forecasted net interest income variability in all interest rate scenarios
indicate levels of future interest rate risk within the acceptable parameters
per the policies established by ALCO. Management continues to evaluate
strategies in conjunction with the Company’s ALCO to effectively manage the
interest rate risk position. Such strategies could include purchasing floating
rate investment securities to collateralize growth in government deposits,
altering the mix of deposits by product, utilizing risk management instruments
such as interest rate swaps and caps, or extending the maturity structure of the
Bank’s short-term borrowing position.
We used
many assumptions to calculate the impact of changes in interest rates, including
the proportionate shift in rates. Our actual results may not be similar to the
projections due to several factors including the timing and frequency of rate
changes, market conditions and the shape of the interest rate yield curve.
Actual results may also differ due to our actions, if any, in response to the
changing interest rates.
Management
also monitors interest rate risk by utilizing a market value of equity model.
The model assesses the impact of a change in interest rates on the market value
of all our assets and liabilities, as well as any off-balance sheet
items. Market value of equity is defined as the market value of
assets less the market value of liabilities plus the market value of off-balance
sheet items. Market value of equity is calculated in the current rate
scenario, as well as in rate scenarios that assume an immediate 200 bp increase
and a 100 bp decrease from the current level of interest rates. Our
ALCO policy indicates that the level of interest rate risk is unacceptable if
the immediate change in rates would result in a loss of more than 30% of the
market value calculated in the current rate scenario. This
measurement of interest rate risk represents a change from the previously
reported metric which focused on the change in the excess of market value over
book value in each of the interest rate scenarios. At September 30,
2009 the market value of equity calculation indicated acceptable levels of
interest rate risk in all scenarios per the policies established by
ALCO.
The
market value of equity model reflects certain estimates and assumptions
regarding the impact on the market value of our assets and liabilities given an
immediate plus 200 or minus 100 bp change in interest rates. One of the key
assumptions is the market value assigned to our core deposits, or the core
deposit premiums. Using an independent consultant, we have completed and updated
comprehensive core deposit studies in order to assign core deposit premiums to
our deposit products as permitted by regulation. The studies have consistently
confirmed management’s assertion that our core deposits have stable balances
over long periods of time, are generally insensitive to changes in interest
rates and have significantly longer average lives and durations than our loans
and investment securities. Thus, these core deposit balances provide an internal
hedge to market fluctuations in our fixed rate assets. Management believes the
core deposit premiums produced by its market value of equity model at September
30, 2009 provide an accurate assessment of our interest rate risk. At September
30, 2009, the average life of our core deposit transaction accounts was 8.0
years.
42
Liquidity
The
objective of liquidity management is to ensure our ability to meet our financial
obligations. These obligations include the payment of deposits on demand at
their contractual maturity, the repayment of borrowings as they mature, the
payment of lease obligations as they become due, the ability to fund new and
existing loans and other funding commitments and the ability to take advantage
of new business opportunities. Our ALCO is responsible for implementing the
policies and guidelines of our board-governing liquidity.
Liquidity
sources are found on both sides of the balance sheet. Liquidity is provided on a
continuous basis through scheduled and unscheduled principal reductions and
interest payments on outstanding loans and investments. Liquidity is also
provided through the following sources: the availability and maintenance of a
strong base of core customer deposits, maturing short-term assets, the ability
to sell investment securities, short-term borrowings and access to capital
markets.
Liquidity
is measured and monitored daily, allowing management to better understand and
react to balance sheet trends. On a quarterly basis, our board of directors
reviews a comprehensive liquidity analysis. The analysis provides a summary of
the current liquidity measurements, projections and future liquidity positions
given various levels of liquidity stress. Management also maintains a detailed
liquidity contingency plan designed to respond to an overall decline in the
condition of the banking industry or a problem specific to the
Company.
The
Company’s investment portfolio consists mainly of mortgage-backed securities and
collateralized mortgage obligations that do not have stated maturities. Cash
flows from such investments are dependent upon the performance of the underlying
mortgage loans and are generally influenced by the level of interest rates. As
rates increase, cash flows generally decrease as prepayments on the underlying
mortgage loans slow. As rates decrease, cash flows generally increase as
prepayments increase. In the current distressed market environment which has
adversely impacted the pricing on certain securities in the Company’s investment
portfolio, the Company would not be inclined to act on a sale of such available
for sale securities for liquidity purposes. If the Company attempted to sell
certain securities of its investment portfolio, current economic conditions and
the lack of a liquid market could affect the Company’s ability to sell those
securities, as well as the value the Company would be able to
realize.
The
Company and the Bank’s liquidity are managed separately. On an unconsolidated
basis, the principal source of our revenue is dividends paid to the Company by
the Bank. The Bank is subject to regulatory restrictions on its ability to pay
dividends to the Company. The Company’s net cash outflows consist principally of
interest on the trust-preferred securities, dividends on the preferred stock and
unallocated corporate expenses.
We also
maintain secondary sources of liquidity which can be drawn upon if needed. These
secondary sources of liquidity include federal funds lines of credit, repurchase
agreements and borrowing capacity at the Federal Home Loan Bank. At September
30, 2009, our total potential liquidity through these secondary sources was
$413.9 million, of which $305.3 million was currently available, as compared to
$277.8 million available out of our total potential liquidity of $627.7 million
at December 31, 2008. The $213.8 million decrease in potential liquidity was
entirely due to a decrease in the calculated borrowing capacity at the Federal
Home Loan Bank (FHLB). FHLB borrowing capacity is determined based on
asset levels on a quarterly lag, with the decrease reflecting the Bank’s lower
level of qualifying unpledged investment securities. The $241.5
million reduction in utilization of this capacity resulted from the fact that
deposit growth, proceeds received from the Company’s stock offering and runoff
in our investment portfolio outpaced our loan growth in the third quarter of
2009.
43
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
Our
exposure to market risk principally includes interest rate risk, which was
previously discussed. The information presented in the Interest Rate Sensitivity
subsection of Part I, Item 2 of this Report, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, is incorporated by
reference into this Item 3.
Item
4. Controls
and Procedures
Quarterly evaluation of the Company’s
Disclosure Controls and Internal Controls. As of the end of the period
covered by this quarterly report, the Company has evaluated the effectiveness of
the design and operation of its “disclosure controls and procedures”
(“Disclosure Controls”). This evaluation (“Controls Evaluation”) was done under
the supervision and with the participation of management, including the Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).
Limitations on the Effectiveness of
Controls. The Company’s management, including the CEO and CFO, does not
expect that their Disclosure Controls or their “internal controls and procedures
for financial reporting” (“Internal Controls”) will prevent all errors and all
fraud. The Company’s Disclosure Controls are designed to provide reasonable
assurance that the information provided in the reports we file under the
Exchange Act, including this quarterly Form 10-Q report, is appropriately
recorded, processed and summarized. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls is also based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate. The
Company conducts periodic evaluations to enhance, where necessary, its
procedures and controls.
Based
upon the Controls Evaluation, the CEO and CFO have concluded that, subject to
the limitations noted above, there have not been any changes in the Company’s
controls and procedures for the quarter ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. Additionally, the CEO and
CFO have concluded that the Disclosure Controls are effective in reaching a
reasonable level of assurance that management is timely alerted to material
information relating to the Company during the period when its periodic reports
are being prepared.
Item
4T. Controls
and Procedures
Not
applicable.
44
Part
II -- OTHER INFORMATION
Item
1. Legal
Proceedings.
On or
about June 19, 2009, Members 1st Federal Credit Union (“Members 1st”) filed a
complaint in the United States District Court for the Middle District of
Pennsylvania against Metro Bancorp, Inc., Metro Bank, Republic First Bancorp,
Inc. and Republic First Bank. Members 1st’s claims are for federal
trademark infringement, federal unfair competition, and common law trademark
infringement and unfair competition. It is Members 1st’s assertion that
Metro’s use of a red letter “M” alone, or in conjunction with its trade name
METRO, purportedly infringes Members 1st’s federally registered and common law
trademark for the mark M1st
(stylized). Metro intends to defend the case vigorously and has
strong defenses to the claims. The complaint seeks damages in an
unspecified amount and injunctive relief. In light of the preliminary
state of the proceeding, it is not possible to assess potential costs and
damages if Members 1st were successful in the proceeding notwithstanding Metro’s
defenses. Management does not believe, however, that such an outcome would
have a material adverse effect on Metro.
Item
1A. Risk
Factors.
We
incorporate by reference into this Quarterly Report on form 10-Q for the Quarter
Ended September 30, 2009 the following portion of a document previously filed
with the SEC:
The
section of our Prospectus Supplement dated September 24, 2009 and filed with the
SEC on September 24, 2009 pursuant to Rule 424(b) related to our Registration
Statement on Form S-3 (File No. 333-161114), under the heading “Risk
Factors”. See Exhibit 99.1 Risk Factors.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
No items
to report for the quarter ended September 30, 2009.
Item
3. Defaults
Upon Senior Securities.
No items
to report for the quarter ended September 30, 2009.
Item
4. Submission
of Matters to a Vote of Security Holders.
No items
to report for the quarter ended September 30, 2009.
Item
5. Other
Information.
No items
to report for the quarter ended September 30, 2009.
Item
6. Exhibits.
2.1
|
First
Amendment dated as of July 31,2009 to Agreement and Plan of Merger dated
as of November 7, 2008 between Metro Bancorp, Inc. and Republic First
Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed with the SEC on July 31,
2009)
|
4.1
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed with the SEC on September
29, 2009)
|
4.2
|
Form
of Senior Indenture (incorporated by reference to Exhibit 4.7 to the
Company’s Registration Statement on Form S-3 filed with the SEC on August
6, 2009)
|
4.3
|
Form
of Subordinated Indenture (incorporated by reference to Exhibit 4.8 to the
Company’s Registration Statement on Form S-3 filed with the SEC on August
6, 2009)
|
4.4
|
Certificate
of Trust of Metro Capital Trust IV (incorporated by reference to Exhibit
4.11 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6,
2009)
|
45
4.5
|
Trust
Agreement of Metro Capital Trust IV (incorporated by reference to Exhibit
4.12 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.6
|
Certificate
of Trust of Metro Capital Trust V (incorporated by reference to Exhibit
4.13 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.7
|
Trust
Agreement of Metro Capital Trust V (incorporated by reference to Exhibit
4.14 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.8
|
Form
of Amended and Restated Trust Agreement of Metro Capital Trust IV and
Metro Capital Trust V (incorporated by reference to Exhibit 4.15 to the
Company’s Registration Statement on Form S-3 filed with the SEC on August
6, 2009)
|
4.9
|
Form
of Preferred Security Certificate for Metro Capital Trust IV and Metro
Capital Trust V (incorporated by reference to Exhibit E to Exhibit 4.15 to
the Company’s Registration Statement on Form S-3 filed with the SEC on
August 6, 2009)
|
4.10
|
Form
of Trust Preferred Securities Guarantee Agreement (incorporated by
reference to Exhibit 4.17 to the Company’s Registration Statement on Form
S-3 filed with the SEC on August 6, 2009)
|
10
|
Underwriting
Agreement, dated September 24, 2009, between Metro Bancorp, Inc. and
Sandler O’Neill + Partners, L.P. as representative for the several
underwriters named therein (incorporated by reference to Exhibit 1.1 to
the Company’s Current Report on Form 8-K filed with the SEC on September
25, 2009)
|
46
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
METRO
BANCORP, INC.
|
||
(Registrant)
|
||
11/9/09
|
/s/
Gary L. Nalbandian
|
|
(Date)
|
Gary
L. Nalbandian
|
|
President/CEO
|
||
11/9/09
|
/s/
Mark A. Zody
|
|
(Date)
|
Mark
A. Zody
|
|
Chief
Financial Officer
|
||
47
EXHIBIT
INDEX
2.1
|
First
Amendment dated as of July 31,2009 to Agreement and Plan of Merger dated
as of November 7, 2008 between Metro Bancorp, Inc. and Republic First
Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed with the SEC on July 31,
2009)
|
4.1
|
Form
of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed with the SEC on September
29, 2009)
|
4.2
|
Form
of Senior Indenture (incorporated by reference to Exhibit 4.7 to the
Company’s Registration Statement on Form S-3 filed with the SEC on August
6, 2009)
|
4.3
|
Form
of Subordinated Indenture (incorporated by reference to Exhibit 4.8 to the
Company’s Registration Statement on Form S-3 filed with the SEC on August
6, 2009)
|
4.4
|
Certificate
of Trust of Metro Capital Trust IV (incorporated by reference to Exhibit
4.11 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.5
|
Trust
Agreement of Metro Capital Trust IV (incorporated by reference to Exhibit
4.12 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.6
|
Certificate
of Trust of Metro Capital Trust V (incorporated by reference to Exhibit
4.13 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.7
|
Trust
Agreement of Metro Capital Trust V (incorporated by reference to Exhibit
4.14 to the Company’s Registration Statement on Form S-3 filed with the
SEC on August 6, 2009)
|
4.8
|
Form
of Amended and Restated Trust Agreement of Metro Capital Trust IV and
Metro Capital Trust V (incorporated by reference to Exhibit 4.15 to the
Company’s Registration Statement on Form S-3 filed with the SEC on August
6, 2009)
|
4.9
|
Form
of Preferred Security Certificate for Metro Capital Trust IV and Metro
Capital Trust V (incorporated by reference to Exhibit E to Exhibit 4.15 to
the Company’s Registration Statement on Form S-3 filed with the SEC on
August 6, 2009)
|
4.10
|
Form
of Trust Preferred Securities Guarantee Agreement (incorporated by
reference to Exhibit 4.17 to the Company’s Registration Statement on Form
S-3 filed with the SEC on August 6, 2009)
|
10
|
Underwriting
Agreement, dated September 24, 2009, between Metro Bancorp, Inc. and
Sandler O’Neill + Partners, L.P. as representative for the several
underwriters named therein (incorporated by reference to Exhibit 1.1 to
the Company’s Current Report on Form 8-K filed with the SEC on September
25, 2009)
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48
49