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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.
 
 
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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%.
 
 
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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.
 
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·
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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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