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METR > SEC Filings for METR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for METRO BANCORP, INC.

Form 10-Q for METRO BANCORP, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following is Management's Discussion and Analysis of Financial Condition and Results of Operations which analyzes the major elements of Metro Bancorp Inc.'s (Metro or the Company) balance sheet as of September 30, 2012 compared to December 31, 2011 and statements of operations for the three months and the nine months ended September 30, 2012 compared to the same periods in 2011. This section should be read in conjunction with the Company's consolidated 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 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 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:

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, including the duration of such policies;

general economic or business conditions, either nationally, regionally or in the communities in which we do 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;

the effects of the pending "fiscal cliff," an unprecedented slate of tax hikes and federal government spending cuts set to take effect January 1, 2013, on economic and business conditions in general and our customers in particular;

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and other changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance);

continued effects of the aftermath of recessionary conditions and the impacts on the economy in general and our customers in particular, including adverse impacts on loan utilization rates as well as delinquencies, defaults and customers' ability to meet credit obligations;

our ability to manage current levels of impaired assets;

the impact of changes in Regulation Z and other consumer credit protection laws and regulations;

changes resulting from legislative and regulatory actions with respect to the current economic and financial industry environment;

changes in the Federal Deposit Insurance Corporation (FDIC) deposit fund and the associated premiums that banks pay to the fund;

impacts of customer deposit and withdrawal behavior on individual noninterest-bearing demand accounts with balances in excess of $250,000 if Congress fails to extend beyond December 31, 2012 the FDIC's ability to provide unlimited insurance coverage on such accounts;

interest rate, market and monetary fluctuations;

the results of the regulatory examination and supervision process;

unanticipated regulatory or legal proceedings and liabilities and other costs;

compliance with laws and regulatory requirements of federal, state and local agencies;

our ability to continue to grow our business internally or through acquisitions and successful integration of new or acquired


entities while controlling costs;
continued levels of loan volume origination;

the adequacy of the allowance for loan losses;

deposit flows;

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;

changes in consumer spending and saving habits relative to the financial services we provide;

the ability to hedge certain risks economically;

the loss of certain key officers;

changes in accounting principles, policies and guidelines;

the timely development of competitive new products and services by us and the acceptance of such products and services by customers;

rapidly changing technology;

continued relationships with major customers;

effect of terrorist attacks and threats of actual war;

other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services;

interruption or breach in security of our information systems resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit systems; 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

The Company recorded net income of $2.0 million, or $0.14 per common share, for the third quarter of 2012 compared to a net loss of $5.7 million, or $0.41 per common share, for the same period one year ago. Third quarter net income of $2.0 million was net of a nonrecurring expense of $1.5 million for a civil money penalty assessed against Metro Bank, the Company's subsidiary bank, by the FDIC. The penalty arose out of certain findings related to the Bank Secrecy Act (BSA) as set forth in regulatory examinations conducted in 2009 and 2010.

Third quarter and first nine months of 2012 highlights were as follows:

Net income for the first nine months of 2012 totaled $7.4 million, or $0.52 per common share, up $9.6 million, or $0.68 per common share, over the net loss of $2.2 million, or $0.16 per common share, recorded in the first nine months of 2011.

Total revenues for the third quarter of 2012 were $28.9 million, up $873,000, or 3%, over total revenues of $28.1 million for the same quarter one year ago. Total revenues for the first nine months of 2012 increased by $2.4 million, or 3%, over the same period in 2011.

The Company's net interest margin on a fully-taxable basis for the third quarter of 2012 was 3.85% compared to 3.77% for the third quarter of 2011. The Company's deposit cost of funds for the third quarter was 0.35% compared to 0.58% for the same period one year ago.

Noninterest expenses for the third quarter 2012 were $23.1 million, down $302,000, or 1%, compared to the third quarter


one year ago. Noninterest expenses for the first nine months of 2012 were down $3.6 million, or 5%, from the first nine months of 2011, as the Company was able to reduce expenses in almost every category.

Total deposits increased to $2.24 billion, up $172.4 million, or 8% (non-annualized), for the first nine months of 2012.

Core deposits (all deposits excluding public fund time deposits) grew $156.9 million, or 8% (non-annualized), compared to December 31, 2011.

Net loans now total $1.48 billion, up $64.3 million, or 5% (non-annualized), for the first nine months of 2012.

Our allowance for loan losses totaled $25.6 million, or 1.70%, of total loans at September 30, 2012 as compared to $23.3 million, or 1.61%, of total loans at September 30, 2011. During the past twelve months the nonperforming loan coverage ratio has increased from 61% to 68%.

Nonperforming assets were 1.67% of total assets at September 30, 2012 compared to 1.73% of total assets at December 31, 2011.

Metro's capital levels at September 30, 2012 remain strong with a total risk-based capital ratio of 15.76%, a Tier 1 Leverage ratio of 10.18% and a tangible common equity to tangible assets ratio of 9.09%.

Stockholders' equity increased by $11.8 million, or 5% (non-annualized), for the first nine months of 2012 to $231.8 million. At September 30, 2012, the Company's book value per share was $16.33.

Summarized below are financial highlights for the three and nine months ended September 30, 2012 compared to the same periods in 2011:

TABLE 1

                                  At or for the Three Months Ended                      For the Nine Months Ended
(in millions, except per    September 30,                                     September 30,
share data)                     2012         September 30, 2011   % Change        2012         September 30, 2011   % Change
Total assets              $       2,538.4   $         2,435.1        4  %
Total loans (net)                 1,479.4             1,421.3        4
Total deposits                    2,243.9             2,059.4        9
Total stockholders'
equity                              231.8               219.3        6
Total revenues            $          28.9   $            28.1        3  %   $          87.4   $           85.0         3  %
Total noninterest
expenses                             23.1                23.4       (1 )               68.7               72.3        (5 )
Net income (loss)                     2.0                (5.7 )    135                  7.4               (2.2 )     439
Diluted net income (loss)
per
 common share                        0.14               (0.41 )    134                 0.52              (0.16 )     425

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 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). 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 (allowance or ALL) represents the amount available for estimated


potential losses embedded in our loan portfolio. While the allowance is maintained at a level believed to be adequate by management for estimated potential 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 to the provision for loan losses may be necessary if economic conditions or loan credit quality differ materially from the estimates and assumptions used in making the evaluations. The use of different assumptions could materially impact the level of the allowance and, therefore, the provision for loan losses to be charged against earnings. Such changes could impact future financial results.

Monthly, systematic reviews of our loan portfolios are performed to identify potential losses and assess the overall probability of collection. These reviews include an analysis of historical loss experience, which results in the identification and quantification of loss factors. These loss factors are used in determining the appropriate level of allowance to cover estimated potential losses in specific loan types. The estimates of loss factors can be impacted by many variables, such as the number of years of actual loss history included in the evaluation.

As part of the quantitative analysis of the adequacy of the ALL, management bases its calculation of probable future loan losses on those loans collectively reviewed for impairment on a two-year period of actual historical losses. When the economy, borrower repayment ability, loan collateral values and other factors used in our analysis show sustained signs of improvement, the Bank may adjust the number of months used in the historical loss calculation.

Significant estimates are involved in the determination of any loss related to impaired loans. The evaluation of an impaired loan 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 management's judgment and the use of estimates.

In addition to calculating the loss factors, we may periodically adjust the factors for changes in levels and trends of charge-offs, delinquencies and nonaccrual loans, material changes in the mix, volume, or duration of the loan portfolio, changes in lending policies and procedures including underwriting standards, changes in the experience, ability and depth of lending management and other relevant staff, the existence and effect of any concentrations of credit and changes in the level of such concentrations and changes in national and local economic trends and conditions, among other things. Management judgment is involved at many levels of these evaluations.

An integral aspect of our risk management process is allocating the allowance 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.

Other-than-Temporary Impairment (OTTI) of Investment Securities. We perform no less than quarterly 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 for the portion of the impairment deemed to be related to credit. The remaining portion of the impairment that is not related to credit is written down to its current fair value through other comprehensive income.

Stock-Based Compensation. The Company recognizes compensation costs related to share-based payment transactions in the income statement based on the grant-date fair value of the stock-based compensation issued. 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 are dependent upon certain assumptions we make such as the expected term the options will remain outstanding, the dividend yield and the volatility of our Company stock price and a risk free interest rate.

Fair Value Measurements. The Company is required to disclose the fair value of its financial instruments that are measured at fair value within a fair value hierarchy. This 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). 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). 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 (AFS) investment security portfolio constitutes 98% of the total assets measured at fair value


and all securities are 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. Most securities are not quoted on an exchange, but are traded in active markets and fair values were obtained from matrix pricing on similar securities.

Deferred Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be used.

The Company assesses whether or not the deferred taxes will be realized in the future if it does not have future taxable income to use as an offset. If future taxable income is not expected to be available to use, a valuation allowance is required to be recognized. A valuation allowance would result in additional income tax expense in the period. The Company assesses if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of a valuation allowance is subjective and dependent upon judgment concerning both positive and negative evidence to support that the net deferred tax assets will be utilized. In order to evaluate whether or not a valuation allowance is necessary, the Company uses current forecasts of future income, reviews possible tax planning strategies and assesses current and future economic and business conditions. Negative evidence utilized would include any cumulative losses in previous years and general business and economic trends. At September 30, 2012, the Company conducted such an analysis to determine if a valuation allowance was required and concluded that a valuation allowance was not necessary largely based on projections of future taxable income. A valuation allowance, if required, could have a significant impact on the Company's future earnings.

RESULTS OF OPERATIONS

Average Balances and Average Interest Rates

Table 2 sets forth balance sheet items on a daily average basis for the three and nine months ended September 30, 2012 and 2011, respectively, and presents the daily average interest rates earned on assets and the daily average interest rates paid on liabilities for such periods.

Third Quarter 2012 compared to Third Quarter 2011

Interest-earning assets averaged $2.29 billion for the third quarter of 2012, compared to $2.23 billion for the third quarter in 2011. For the quarter ended September 30, 2012, total loans receivable including loans held for sale, averaged $1.51 billion compared to $1.45 billion for the same quarter in 2011. For the same two quarters, total securities, including restricted investments in bank stock, averaged $779.7 million and $757.1 million, respectively.

The average balance of total deposits increased $109.8 million, or 6%, for the third quarter of 2012 over the third quarter of 2011. These deposits were used to fund loan originations, to purchase investment securities and to reduce short-term borrowings. Total interest-bearing deposits averaged $1.66 billion for the third quarter of 2012, compared to $1.60 billion for the third quarter one year ago and average noninterest-bearing deposits increased by $43.8 million, or 12%, to $417.1 million. Short-term borrowings, which consist of overnight advances from the Federal Home Loan Bank (FHLB), averaged $69.0 million for the third quarter of 2012 versus $110.9 million for the same quarter of 2011.

The fully tax-equivalent yield on interest-earning assets for the third quarter of 2012 was 4.28%, a decrease of 13 basis points (bps) from the comparable period in 2011. This decrease resulted from a combination of lower yields on the Company's securities and loan receivable portfolios during the third quarter of 2012 as compared to the same period in 2011 as well as a shift in the mix of fixed versus floating interest rate assets. Floating rate loans represented approximately 58% of our total loans receivable portfolio at September 30, 2012 as compared to 50% of total loans receivable at September 30, 2011.

As a result of the current low level of interest rates, coupled with the Federal Reserve's currently stated intention to maintain this accommodating level of rates through at least mid-2015, we expect the yields we receive on our interest-earning assets will continue at their current low levels, or decline further, throughout the remainder of 2012 and in 2013 as well.

The average rate paid on our total interest-bearing liabilities for the third quarter of 2012 was 0.55%, compared to 0.82% for the third quarter of 2011. Our deposit cost of funds decreased 23 bps from 0.58% in the third quarter of 2011 to 0.35% for the third quarter of 2012. The average rate paid on deposits decreased across all categories during the third quarter of 2012 compared to third quarter of 2011. The decrease in the Company's deposit cost of funds is primarily related to the combination of time deposits that matured and renewed at lower rates as well as lower rates paid on certain interest checking and money market deposit accounts.


Both of these decreases were in response to the continued low level of general market interest rates. At September 30, 2012, $690.8 million, or 31%, 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 a published rate such as London Interbank Offered Rate (LIBOR) or to an internally managed index rate. Time deposits, or certificates of deposit (CDs), have a significant impact on the Company's cost of funds. As certificates that were originated in past years at much higher interest rates have matured over the past twelve months, these funds have been either renewed into new CDs with much lower interest rates or shifted by our customers to their checking and/or savings accounts. As a result, our weighted-average rate paid on all time deposits, including both retail and public, decreased by 57 bps from 1.68% for the third quarter of 2011 to 1.11% for the third quarter of 2012.

The average cost of short-term borrowings was 0.24% for the third quarter of 2012 as compared to 0.20% for the third quarter of 2011. The higher average borrowing rate in 2012 reflected a lower level of low rate overnight borrowings. The average cost of long-term debt decreased from 5.33% for the third quarter of 2011 to 4.80% during the third quarter of 2012. This change was the result of the retirement of a $5.0 million trust capital debt security with an interest rate of 11.00% during the fourth quarter of 2011. The aggregate average cost of all funding sources for the Company was 0.45% for the third quarter of 2012, compared to 0.68% for the same quarter of the prior year.

On October 26, 2012, the Company repurchased and retired $8.0 million of 10% fixed rate Trust Capital Securities. These securities were issued in September 2001 and had a maturity date of September 2031. The Company recorded a one-time pretax charge of $140,000 related to this transaction. The reduction of the Company's interest expense for the fourth quarter of 2012 associated with this transaction will offset the above-mentioned one-time pretax charge. Going forward, the Company's interest expense associated with the Trust Capital Securities will be lower by $800,000 annually, on a pretax basis.

Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30, 2011

Interest-earning assets averaged $2.28 billion for the first nine months of 2012, compared to $2.18 billion for the same period in 2011. For the same two periods, total loans receivable including loans held for sale, averaged $1.48 billion in 2012 and $1.45 billion in 2011. Total securities, including restricted investments in bank stock, averaged $798.4 million and $724.5 million for the first nine months of 2012 and 2011, respectively.
The Company was able to fund the growth in earning assets over the past twelve months solely with the growth in deposits, allowing short-term borrowings to decrease. Total average deposits, including noninterest-bearing funds, increased by $141.1 million, or 7%, for the first nine months of 2012 over the same period of 2011 from $1.90 billion to $2.04 billion. Short-term borrowings averaged $95.0 million and $146.1 million in the first nine months of 2012 and 2011, respectively.

The fully tax-equivalent yield on interest-earning assets for the first nine months of 2012 was 4.33%, a decrease of 19 bps versus the comparable period in 2011. This decrease primarily resulted from the continued overall lower level of interest rates as yields declined for both investment securities and loans. The average fully-taxable equivalent yield on the investment portfolio fell 26 bps from 3.06% during the first nine months of 2011 to 2.80% during the first nine months of 2012 as the yields on new securities purchased in 2012 are lower than the yields on securities purchased in 2010 and 2011. The average fully-taxable equivalent yield on the loan portfolio declined 12 bps from 5.29% during the first nine months of 2011 to 5.17% during the first nine months of 2012, primarily as a result of the shift in the proportion of floating rate loans to fixed rate loans as previously mentioned.

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