republicfirst10q.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 Act of 1934 for the quarterly period ended March 31, 2011.
 
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:  000-17007
 
Republic First Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania
23-2486815
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
50 South 16th Street, Philadelphia, Pennsylvania
19102
(Address of principal executive offices)
(Zip code)
 
215-735-4422
Registrant’s telephone number, including area code
Not Applicable
(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 Securities Exchange Act of 1934 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.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    [   ]
Accelerated filer     [   ]
Non-Accelerated filer   [   ]
(Do not check if a smaller reporting company)
Smaller reporting company    [X]
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  [  ]    NO   [X]
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 per share
25,972,897
Title of Class
Number of Shares Outstanding as of May 09, 2011

 
 
 
 

 
 
 
 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of March 31, 2011 (unaudited) and December 31, 2010
 
Consolidated statements of operations for the three months ended March 31, 2011 and 2010 (unaudited)
 
Consolidated statements of cash flows for the three months ended March 31, 2011 and 2010 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2011 and 2010 (unaudited)
 
Notes to consolidated financial statements (unaudited)
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
     
Item 4.
Controls and Procedures
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
     
Item 1A.
Risk Factors
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
     
Item 3.
Defaults Upon Senior Securities
     
Item 4.
(Removed and Reserved)
     
Item 5.
Other Information
     
Item 6.
Exhibits
     
Signatures
 
 
 
 

 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2011 and December 31, 2010
(Dollars in thousands, except share data)
(unaudited)

   
March 31, 2011
   
December 31, 2010
 
ASSETS 
           
Cash and due from banks
  $ 7,095     $ 6,146  
Interest bearing deposits with banks
    19,784       29,620  
Federal funds sold
    2,162       99  
Cash and cash equivalents
    29,041       35,865  
                 
Investment securities available for sale, at fair value
    139,638       143,439  
Investment securities held to maturity, at amortized cost (fair value of
    $157 and $157, respectively)
    148       147  
Restricted stock, at cost
    6,183       6,501  
Loans held for sale
    6,156       -  
Loans receivable (net of allowance for loan losses of $14,450 and $11,444,
    respectively)
    616,360       608,911  
Premises and equipment, net
    24,623       25,496  
Other real estate owned, net
    14,077       15,237  
Accrued interest receivable
    3,216       3,119  
Bank owned life insurance
    12,586       12,555  
Other assets
    25,053       24,827  
Total Assets
  $ 877,081     $ 876,097  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits:
               
Demand – non-interest bearing
  $ 78,221     $ 128,578  
Demand – interest bearing
    76,349       66,283  
Money market and savings
    333,458       329,742  
Time Deposits
    273,049       233,127  
    Total Deposits
    761,077       757,730  
Accrued interest payable
    1,097       953  
Other liabilities
    6,047       6,792  
Subordinated debt
    22,476       22,476  
Total Liabilities
    790,697       787,951  
                 
Shareholders’ Equity
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no
     shares issued as of March 31, 2011 and December 31, 2010
    -       -  
Common stock, par value $0.01 per share: 50,000,000 shares authorized; shares
     issued 26,501,742 as of March 31, 2011 and December 31, 2010
    265       265  
Additional paid in capital
    106,110       106,024  
Accumulated deficit
    (15,648 )     (13,140 )
Treasury stock at cost (416,303 shares)
    (3,099 )     (3,099 )
Stock held by deferred compensation plan
    (809 )     (809 )
Accumulated other comprehensive loss
    (435 )     (1,095 )
Total Shareholders’ Equity
    86,384       88,146  
Total Liabilities and Shareholders’ Equity
  $ 877,081     $ 876,097  
                 


(See notes to consolidated financial statements)
 
 
 
1

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands, except per share data)
(unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Interest income:
           
Interest and fees on loans
  $ 8,211     $ 8,759  
Interest and dividends on taxable investment securities
    996       1,542  
Interest and dividends on tax-exempt investment securities
    113       114  
Interest on federal funds sold and other interest-earning assets
    14       20  
Total interest income
    9,334       10,435  
Interest expense:
               
   Demand- interest bearing
    98       82  
   Money market and savings
    799       1,050  
   Time deposits
    721       1,405  
   Other borrowings
    296       489  
Total interest expense
    1,914       3,026  
Net interest income
    7,420       7,409  
Provision for loan losses
    3,550       5,500  
Net interest income after provision for loan losses
    3,870       1,909  
Non-interest income:
               
Loan advisory and servicing fees
    37       57  
Gain on sale of loans
    697       -  
Service fees on deposit accounts
    169       282  
Other-than-temporary impairment losses
    -       (1,448 )
Portion recognized in other comprehensive income (before taxes)
    -       1,299  
Net impairment loss on investment securities
    -       (149 )
Gain on sale of other real estate owned
    -       200  
Bank owned life insurance income
    31       51  
Other non-interest income
    193       34  
Total non-interest income
    1,127       475  
Non-interest expenses:
               
 Salaries and employee benefits
    3,338       2,930  
 Occupancy
    855       1,521  
 Depreciation and amortization
    528       482  
 Legal
    295       535  
 Other real estate owned
    1,359       540  
 Advertising
    105       65  
 Data processing
    247       218  
 Insurance
    217       162  
 Professional fees
    434       511  
 Regulatory assessments and costs
    483       511  
 Taxes, other
    213       226  
 Other operating expenses
    918       704  
Total non-interest expense
    8,992       8,405  
Loss before benefit for income taxes
    (3,995 )     (6,021 )
Benefit for income taxes
    (1,487 )     (2,159 )
Net loss
  $ (2,508 )   $ (3,862 )
Net loss per share:
               
Basic
  $ (0.10 )   $ (0.37 )
Diluted
  $ (0.10 )   $ (0.37 )
                 
 
(See notes to consolidated financial statements)
 
 
 
2

 


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
(unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (2,508 )   $ (3,862 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Provision for loan losses
    3,550       5,500  
Writedown of other real estate owned
    1,099       488  
Net gain on sale of other real estate owned
    -       (200 )
Depreciation and amortization
    528       482  
Share based compensation
    86       42  
Impairment charges on investment securities
    -       149  
Amortization of premiums/(discounts) on investment securities
    45       13  
Proceeds from sales of SBA loans
    8,225       -  
SBA loans originated for sale
    (13,684 )     -  
Gains on sales of SBA loans originated for sale
    (697 )     -  
Increase in value of bank owned life insurance
    (31 )     (51 )
Increase in accrued interest receivable and other assets
    (693 )     (1,931 )
(Decrease) increase in accrued interest payable and other liabilities
    (135 )     609  
Net cash (used in) provided by operating activities
    (4,215 )     1,239  
                 
Cash flows from investing activities:
               
Proceeds from the maturity or call of securities available for sale
    4,785       6,857  
Proceeds from the maturity or call of securities held to maturity
    -       7  
Proceeds from redemption of FHLB stock
    318       -  
Net (increase) decrease in loans
    (10,999 )     9,103  
Net proceeds from sale of other real estate owned
    61       2,942  
Premises and equipment expenditures
    (121 )     (172 )
Net cash (used in) provided by investing activities
    (5,956 )     18,737  
                 
Cash flows from financing activities:
               
Net decrease in demand, money market and savings deposits
    (36,575 )     (9,419 )
Net increase (decrease) in time deposits
    39,922       (27,243 )
Net cash provided by (used in) financing activities
    3,347       (36,662 )
                 
Net decrease in cash and cash equivalents
    (6,824 )     (16,686 )
Cash and cash equivalents, beginning of year
    35,865       55,618  
Cash and cash equivalents, end of year
  $ 29,041     $ 38,932  
                 
Supplemental disclosures:
               
Interest paid
  $ 1,770     $ 2,633  
Non-cash transfers from loans to other real estate owned
    -       663  


(See notes to consolidated financial statements)

 
 
3

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands, except per share data)
(unaudited)

   
 
Common Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
(Accumulated
Deficit)
   
 
Treasury
Stock
   
Stock Held by
Deferred
Compensation
Plan
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Shareholders'
Equity
 
Balance January 1, 2011
  $ 265     $ 106,024     $ (13,140 )   $ (3,099 )   $ (809 )   $ (1,095 )   $ 88,146  
                                                         
Net loss
                    (2,508 )                             (2,508 )
Other comprehensive gain, net of tax:
                                                       
Unrealized gain on securities
(pre-tax $1,030)
                                            660       660  
Total comprehensive loss
                                                    (1,848 )
Stock based compensation
            86                                       86  
Balance March 31, 2011
  $ 265     $ 106,110     $ (15,648 )   $ (3,099 )   $ (809 )   $ (435 )   $ 86,384  
                                                         
                                                         
Balance January 1, 2010
  $ 111     $ 77,086     $ (2,450 )   $ (3,099 )   $ (709 )   $ (675 )   $ 70,264  
                                                         
Net loss
                    (3,862 )                             (3,862 )
Other comprehensive loss, net of tax:
                                                       
Unrealized loss on securities
(pre-tax $2,120)
                                            (1,359 )     (1,359 )
Reclassification adjustment for impairment charge (pre-tax $149)
                                            97       97  
                                                      (1,262 )
Total comprehensive loss
                                                    (5,124 )
Stock based compensation
    -       42                                       42  
Balance March 31, 2010
  $ 111     $ 77,128     $ (6,312 )   $ (3,099 )   $ (709 )   $ (1,937 )   $ 65,182  
                                                         


(See notes to consolidated financial statements)

 
4

 

Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)

Note 1:  Basis of Presentation

Republic First Bancorp, Inc. (the “Company”) is a corporation incorporated under the laws of the Commonwealth of Pennsylvania and a registered bank holding company.  The Company offers a variety of retail and commercial banking services to individuals and businesses throughout the Greater Philadelphia and Southern New Jersey area through its wholly-owned subsidiary, Republic First Bank (“Republic” or “the Bank”) which does business under the name Republic Bank.  The Company also has three unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of three separate issuances of trust preferred securities.
 
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
 
The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and Republic for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The Company has evaluated subsequent events through the date of issuance of the financial data included herein.
 
Note 2:  Summary of Significant Accounting Policies
 
Risks and Uncertainties
 
The earnings of the Company depend primarily on the earnings of Republic.  The earnings of Republic are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding the Republic’s exposure to changes in the interest rate environment.
 
 
 
5

 
 
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly, and may cause significant fluctuations in interest margins.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, impairment of restricted stock and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
 
In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors.  Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.
 
In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other than temporary.  To determine whether a loss in value is other than temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value.  The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment.  Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
 
In estimating impairment of restricted stock, management’s determination of whether these investments are impaired is based on the assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of the cost is influenced by criteria such as (1) the significance of the decline in net assets of the Federal Home Loan Bank of Pittsburgh (“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.
 
 
6

 

 
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the Company’s past operating results and the Company’s forecast of future taxable income.  In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require management to make judgments about the Company’s future taxable income and are consistent with the plans and estimates management uses to manage the Company’s business.  Any reduction in estimated future taxable income may require the Company to record a valuation allowance against its deferred tax assets.  An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on the Company’s future earnings.

Stock-Based Compensation
 
The Company maintains the Amendment and Restatement No. 3 of the Stock Option Plan and Restricted Stock Plan of Republic First Bancorp, Inc. (“Plan”), under which the Company may grant options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants.  Under the terms of the Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that may be available for grant under the Plan to 1.5 million shares, are available for such grants.  As of March 31, 2011, the only grants under the Plan have been option grants.  The Plan provides that the exercise price of each option granted equals the market price of the Company’s stock on the date of the grant.  Any option granted vests within one to five years and has a maximum term of ten years.
 
The Company utilizes a Black-Scholes option pricing model to determine the fair market value of stock options.  In 2011, the following assumptions were utilized:  a dividend yield of 0%; expected volatility of 49.11%; a risk-free interest rate of 2.84%; and an expected life of 7.0 years. In 2010, the following assumptions were utilized: a dividend yield of 0%; expected volatility of 33.67% to 37.37%; a risk-free interest rate of 2.06% to 3.46%; and an expected life of 7.0 years.  A dividend yield of 0% is utilized, because cash dividends have never been paid.  The expected life reflects a 3 to 4 year “all or nothing” vesting period, the maximum ten-year term and review of historical behavior.  The volatility was based on Bloomberg’s seven-year volatility calculation for “FRBK” stock.  The risk-free interest rate is based on the seven year Treasury bond.  During the three months ended March 31, 2011, 53,500 shares vested.  No options vested during the three months ended March 31, 2010.  Expense is recognized ratably over the period required to vest.  There were 445,350 unvested options at January 1, 2011 with a fair value of $1,158,861 with $531,757 of that amount remaining to be recognized as expense.  At March 31, 2011, there were 562,950 unvested options with a fair value of $1,235,096 with $724,281 of that amount remaining to be recognized as expense. At that date, the intrinsic value of the 823,604 options outstanding was $9,655, while the intrinsic value of the 260,654 exercisable (vested) options was $15.
 
Compensation expense of $86,000 and $42,000 was recognized during the three months ended March 31, 2011 and 2010, respectively.  For each of these periods, a 35% assumed tax benefit for the Plan was utilized in making the calculations.
 
 
 
7

 
 
Earnings per Share

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s Plan and convertible securities related trust preferred securities issued in 2008.  In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance is added back to the net income.  For the three months ended March 31, 2011 and 2010, the effect of CSEs and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculation.
 
The calculation of EPS for the three months ended March 31, 2011 and 2010 is as follows (in thousands, except per share amounts):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Net loss
  $ (2,508 )   $ (3,862 )
                 
Weighted average shares outstanding
    25,973       10,578  
                 
Net loss per share – basic and diluted
  $ (0.10 )   $ (0.37 )

Recent Accounting Pronouncements

ASU 2011-02
In April 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The FASB has issued this ASU to clarify the accounting principles applied to loan modifications, as defined by FASB ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors.

The ASU clarifies guidance on a creditor’s evaluation of whether or not a concession has been granted, with an emphasis on evaluating all aspects of the modification rather than focus on specific criteria, such as the effective interest rate test, to determine a concession.  The ASU goes on to provide guidance on specific types of modifications such as changes in the interest rate of the borrowing, and insignificant delays in payments, as well as guidance on the creditor’s evaluation of whether or not a debtor is experiencing financial difficulties.

The effective date of ASU 2011-02 differs for public and nonpublic companies.  For public companies, the amendments in the ASU are effective for the first interim or annual periods beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.
 
 
 
8

 

 
The entity should also disclose information required by ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which had previously been deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011.  The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

ASU 2010-20
In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The FASB believes that this guidance will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class. This disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this ASU apply to all public and nonpublic entities with financing receivables.  Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Note 3:  Legal Proceedings
 
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business.  While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
 
Note 4:  Segment Reporting
 
The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its branches.
 
Note 5:  Comprehensive Loss
 
Total comprehensive loss, which for the Company included net loss and changes in unrealized gains and losses on the Company’s available for sale securities, was $1.8 million and $5.1 million for the three months ended March 31, 2011 and 2010, respectively.
 
 
 
9

 
 
Note 6:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at March 31, 2011 and December 31, 2010 is as follows:

 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
March 31, 2011:
                       
Mortgage-backed securities/CMOs
  $ 120,112     $ 3,257     $ -     $ 123,369  
Municipal securities
    10,657       106       (1,213 )     9,550  
Corporate bonds
    3,000       -       -       3,000  
Pooled Trust Preferred Securities
    6,417       -       (2,816 )     3,601  
Other securities
    131       2       (15 )     118  
Total securities available for sale
  $ 140,317     $ 3,365     $ (4,044 )   $ 139,638  
                                 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    146       9       -       155  
Total securities held to maturity
  $ 148     $ 9     $ -     $ 157  
                                 
December 31, 2010:
                               
Mortgage-backed securities/CMOs
  $ 125,011     $ 2,784     $ (133 )   $ 127,662  
Municipal securities
    10,589       36       (1,415 )     9,210  
Corporate bonds
    3,000       -       -       3,000  
Pooled Trust Preferred Securities
    6,417       -       (2,967 )     3,450  
Other securities
    131       2       (16 )     117  
Total securities available for sale
  $ 145,148     $ 2,822     $ (4,531 )   $ 143,439  
                                 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    145       10       -       155  
Total securities held to maturity
  $ 147     $ 10     $ -     $ 157  

The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at March 31, 2011 is as follows:

   
Available for Sale
   
Held to Maturity
 
 
(dollars in thousands)
 
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Due in 1 year or less
  $ -     $ -     $ -     $ -  
After 1 year to 5 years
    25       26       116       125  
After 5 years to 10 years
    417       442       2       2  
After 10 years
    139,875       139,170       -       -  
No stated maturity
    -       -       30       30  
Total
  $ 140,317     $ 139,638     $ 148     $ 157  

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
 
As of March 31, 2011 and December 31, 2010, the mortgage backed securities and collateralized mortgage obligations included in the investment securities portfolio consist solely of securities issued by U.S. government sponsored agencies.  There were no private label mortgage securities held in the investment securities portfolio as of those dates. The Company does not hold any mortgage-backed securities that are rated “Alt-A” or “Subprime” as of March 31, 2011 and December 31, 2010.  In addition, the Company does not hold any private issued CMO’s as of March 31, 2011 and December 31, 2010.
 
 
 
10

 
 
In instances when a determination is made that an other-than-temporary impairment exists with respect to a debt security but the investor does not intend to sell the debt security and it is more likely than not that the investor will not be required to sell the debt security prior to its anticipated recovery, FASB Accounting Standards Codification (“ASC”) 320-10, Investments – Debt and Equity Securities, changes the presentation and amount of the other-than-temporary impairment recognized in the income statement.  The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income.  The adoption of updated guidance under ASC 320-10 had an impact on the amounts reported in the consolidated financial statements as impairment charges (credit losses) on bank pooled trust preferred securities for the three months ended March 31, 2011 and 2010 in the amount of $0 and $149,000, respectively.  

The following table shows the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
                   
   
Less than 12 months
   
12 months or more
   
Total
 
 
(dollars in thousands)
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
March 31, 2011:
                                   
Mortgage-backed securities/CMOs
  $ -     $ -     $ 30     $ -     $ 30     $ -  
Municipal securities
    4,401       263       3,716       950       8,117       1,213  
Trust Preferred Securities
    -       -       3,602       2,816       3,602       2,816  
Other securities
    -       -       75       15       75       15  
Total
  $ 4,401     $ 263     $ 7,423     $ 3,781     $ 11,824     $ 4,044  
                                                 
December 31, 2010:
                                               
Mortgage-backed securities/CMOs
  $ 17,599     $ 133     $ 31     $ -     $ 17,630     $ 133  
Municipal securities
    5,288       398       3,599       1,017       8,887       1,415  
Trust Preferred Securities
    -       -       3,450       2,967       3,450       2,967  
Other securities
    -       -       74       16       74       16  
Total
  $ 22,887     $ 531     $ 7,154     $ 4,000     $ 30,041     $ 4,531  

The impairment of the investment portfolio at March 31, 2011 totaled $4.0 million with a total fair value of $11.8 million at March 31, 2011.  The unrealized loss for the Bank’s pooled trust preferred securities was due to the secondary market for such securities becoming inactive and is considered temporary at March 31, 2011.

The unrealized loss on the remaining securities is due to changes in market value resulting from changes in market interest rates and is also considered temporary.  At March 31, 2011, the investment portfolio included twenty-five municipal securities with a total market value of $9.5 million.  The securities are reviewed quarterly for impairment. Research on each issuer is completed to ensure the financial stability of the municipal entity. The largest geographic concentration was in California where thirteen municipal securities had a market value of $4.6 million.  There were no defaults by any Moody’s rated state or local government during the three months ended March 31, 2011.  As of March 31, 2011, management found no evidence of other than temporary impairment on any of the municipal securities held in the investment securities portfolio.
 
 
 
11

 

 
Note 7:  Loans Receivable and Allowance for Loan Losses
 
The following table sets forth the Company’s gross loans by major categories as of March 31, 2011 and December 31, 2010:
 
(dollars in thousands)
 
March 31,
 2011
   
December 31,
2010
 
             
Commercial
  $ 78,735     $ 78,428  
Owner occupied
    79,412       70,833  
Total commercial
    158,147       149,261  
                 
Consumer and residential
    21,344       22,834  
Commercial real estate
    451,779       448,730  
Total loans receivable
    631,270       620,825  
Less: Deferred loan fees
    (460 )     (470 )
Less: Allowance for loan losses
    (14,450 )     (11,444 )
                 
Net loans receivable
  $ 616,360     $ 608,911  

A loan is considered impaired, in accordance with ASC 310, Receivables, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans, but also include internally classified accruing loans.  As of March 31, 2011 and December 31, 2010, management did not identify any troubled debt restructurings in the loan portfolio.

The following table presents the Company’s impaired loans at March 31, 2011 and December 31, 2010:

 
(dollars in thousands)
 
March 31,
2011
   
December 31,
2010
 
Impaired loans without a valuation allowance
  $ 52,768     $ 72,908  
Impaired loans with a valuation allowance
    28,827       14,206  
Total impaired loans
  $ 81,595     $ 87,114  
                 
Valuation allowance related to impaired loans
  $ 4,979     $ 2,786  
Total nonaccrual loans
    39,161       39,992  
Total loans past-due ninety days or more and still accruing
    -       -  


As of March 31, 2011 and December 31, 2010, the average recorded investment in impaired loans was approximately $84.4 million and $100.3 million, respectively.  The Company earned $612,000 and $2.7 million of interest income on impaired loans (internally classified accruing loans) for the three months ended March 31, 2011 and the year ended December 31, 2010, respectively.  The Company recognized interest income on a cash basis on impaired loans of  $580,000 and $2.9 million during the three months ended March 31, 2011 and the year ended December 31, 2010, respectively.    There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.

 
 
12

 

 
The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2011 and December 31, 2010:

   
March 31, 2011
 
 
 
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                             
Commercial
  $ 1,965     $ 1,965     $ -     $ 4,223     $ 27  
Owner occupied
    1,957       1,957       -       2,118       19  
Total commercial
    3,922       3,922       -       6,341       46  
Consumer and residential
    798       1,015       -       652       -  
Commercial real estate
    48,048       62,354       -       55,845       417  
Total
  $ 52,768     $ 67,291     $ -     $ 62,838     $ 463  
                                         
With an allowance recorded:
                                       
Commercial
  $ 5,298     $ 6,807     $ 1,629     $ 3,048     $ 6  
Owner occupied
    3,399       3,399       464       3,418       59  
Total commercial
    8,697       10,206       2,093       6,466       65  
Consumer and residential
    -       -       -       -       -  
Commercial real estate
    20,130       24,460       2,886       15,051       84  
Total
  $ 28,827     $ 34,666     $ 4,979     $ 21,517     $ 149  
                                         
Total:
                                       
Commercial
  $ 7,263     $ 8,772     $ 1,629     $ 7,271     $ 33  
Owner occupied
    5,356       5,356       464       5,536       78  
Total commercial
    12,619       14,128       2,093       12,807       111  
Consumer and residential
    798       1,015       -       652       -  
Commercial real estate
    68,178       86,814       2,886       70,896       501  
Total
  $ 81,595     $ 101,957     $ 4,979     $ 84,355     $ 612  
 
 
 
13

 

 

   
December 31, 2010
 
 
 
(dollars in thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
                             
Commercial
  $ 6,482     $ 7,992     $ -     $ 7,040     $ 160  
Owner occupied
    2,278       2,278       -       2,370       132  
Total commercial
    8,760       10,270       -       9,410       292  
Consumer and residential
    506       684       -       536       6  
Commercial real estate
    63,642       81,161       -       75,205       1,632  
Total
  $ 72,908     $ 92,115     $ -     $ 85,151     $ 1,930  
                                         
With an allowance recorded:
                                       
Commercial
  $ 798     $ 798     $ 287     $ 809     $ 26  
Owner occupied
    3,436       3,436       517       3,832       267  
Total commercial
    4,234       4,234       804       4,641       293  
Consumer and residential
    -       -       -       -       -  
Commercial real estate
    9,972       10,312       1,982       10,484       445  
Total
  $ 14,206     $ 14,546     $ 2,786     $ 15,125     $ 738  
                                         
Total:
                                       
Commercial
  $ 7,280     $ 8,790     $ 287     $ 7,849     $ 186  
Owner occupied
    5,714       5,714       517       6,202       399  
Total commercial
    12,994       14,504       804       14,051       585  
Consumer and residential
    506       684       -       536       6  
Commercial real estate
    73,614       91,473       1,982       85,689       2,077  
Total
  $ 87,114     $ 106,661     $ 2,786     $ 100,276     $ 2,668  

As of March 31, 2011 and December 31, 2010, there were loans of approximately $39.2 million and $40.0 million, respectively, which were classified as non-accrual. If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $637,000 and $2.4 million, for the three months ended March 31, 2011 and the year ended December 31, 2010, respectively.  There were no loans past due 90 days and accruing interest at March 31, 2011 or December 31, 2010.

The following is an analysis of the changes in the allowance for loan losses for the three months ended March 31, 2011 and year ended December 31, 2010:

 
(dollars in thousands)
 
March 31,
2011
   
December 31,
2010
 
Balance at beginning of year
  $ 11,444     $ 12,841  
                 
Provision for loan losses
    3,550       16,600  
Recoveries of loans previously charged off
    9       1,171  
Loan charge-offs
    (553 )     (19,168 )
Balance at end of year
  $ 14,450     $ 11,444  


 
14

 



The following provides the ending balances of the allowance for credit losses and loan receivables, including loans held for sale, by loan portfolio class as of March 31, 2011 and December 31, 2010:

 
 
(dollars in thousands)
 
 
Commercial
   
Owner
Occupied
   
Consumer
and
Residential
   
Commercial
Real Estate
   
 
Unallocated
   
 
Total
 
   
Allowance for credit losses at March 31, 2011:
 
                                     
Beginning balance:
  $ 1,443     $ 1,575     $ 171     $ 8,080     $ 175     $ 11,444  
Charge-offs
    -       -       (31 )     (522 )     -       (553 )
Recoveries
    -       -               9       -       9  
Provisions
    1,326       70       13       1,435       706       3,550  
Ending balance
  $ 2,769     $ 1,645     $ 153     $ 9,002     $ 881     $ 14,450  
                                                 
Ending balance:  individually evaluated for impairment
  $ 1,629     $  464     $  -     $ 2,886     $  -     $  4,979  
Ending balance:  collectively evaluated for impairment
      1,140         1,181         153         6,116         881         9,471  
Ending balance:  loans acquired with deteriorated credit quality
         -           -           -           -           -           -  
                                                 
Allowance for credit losses at December 31, 2010:
                         
                                                 
Ending balance
  $ 1,443     $ 1,575     $ 171     $ 8,080     $ 175     $ 11,444  
                                                 
Ending balance:  individually evaluated for impairment
  $  287     $  517     $  -     $ 1,982     $  -     $  2,786  
Ending balance:  collectively evaluated for impairment
      1,156         1,058         171         6,098         175         8,658  
Ending balance:  loans acquired with deteriorated credit quality
        -           -           -            -           -           -  


 
15

 

 
 
(dollars in thousands)
 
 
Commercial
   
Owner
Occupied
   
Consumer
and
Residential
   
Commercial
Real Estate
   
 
Unallocated
   
 
Total
 
                                     
Loans receivable at March 31, 2011:
 
                                     
Ending balance
  $ 78,735     $ 79,412     $ 20,884     $ 451,779     $ -     $ 630,810  
                                                 
Ending balance:  
    individually evaluated
    for impairment
      7,263         5,356         798         68,178         -         81,595  
Ending balance:  
    collectively evaluated
    for impairment
      71,472         74,056         20,086         383,601          -         549,215  
Ending balance:  loans
    acquired with
    deteriorated credit
    quality
        -           -           -            -           -           -  
                                                 
Loans receivable at December 31, 2010:
 
                                                 
Ending balance
  $ 78,428     $ 70,833     $ 22,364     $ 448,730     $ -     $ 620,355  
                                                 
Ending balance:  
    individually evaluated
    for impairment
      7,280         5,714         506         73,614          -         87,114  
Ending balance:  
    collectively evaluated
    for impairment
      71,148         65,119         21,858         375,116          -         533,241  
Ending balance:  loans
    acquired with
    deteriorated credit
    quality
        -           -            -            -            -           -  

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2011 and December 31, 2010:

 
 
 
(dollars in thousands)
 
30-59
Days Past
Due
   
60-89
Days Past
Due
   
Greater
than 90
Days
   
 
Total
Past Due
   
 
 
Current
   
Total
Loans
Receivable
   
Loans
Receivable >
90 Days and
Accruing
 
March 31, 2011:
                                         
Commercial
  $ 500     $ -     $ 4,500     $ 5,000     $ 73,735     $ 78,735     $ -  
Owner occupied
    1,913       -       788       2,701       76,711       79,412       -  
Total commercial
    2,413       -       5,288       7,701       150,446       158,147       -  
Consumer and residential
    1       -       798       799       20,085       20,884       -  
Commercial real estate
    17,142       4,351       33,075       54,568       397,211       451,779       -  
Total
  $ 19,556     $ 4,351     $ 39,161     $ 63,068     $ 567,742     $ 630,810     $ -  
 
 
 
16

 

 

 
 
 
(dollars in thousands)
 
30-59
Days Past
Due
   
60-89
Days Past
Due
   
Greater
than 90
Days
   
 
Total
Past Due
   
 
 
Current
   
Total
Loans
Receivable
   
Loans
Receivable >
90 Days and
A
ccruing
 
December 31, 2010:
                                         
Commercial
  $ 251     $ -     $ 4,500     $ 4,751     $ 73,677     $ 78,428     $ -  
Owner occupied
    -       2,179       1,061       3,240       67,593       70,833       -  
Total commercial
    251       2,179       5,561       7,991       141,270       149,261       -  
Consumer and residential
    164       198       461       823       21,541       22,364       -  
Commercial real estate
    1,249       15,161       33,925       50,335       398,395       448,730       -  
Total
  $ 1,664     $ 17,538     $ 39,947     $ 59,149     $ 561,206     $ 620,355     $ -  

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2011 and December 31, 2010:

 
(dollars in thousands)
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
March 31, 2011:
                             
Commercial
  $ 65,307     $ 2,767     $ 10,661     $ -     $ 78,735  
Owner occupied
    69,848       3,867       5,697       -       79,412  
Total commercial
    135,155       6,634       16,358       -