rfb10q.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 September 30, 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  [X ]     NO  [  ]
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  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 November 10, 2011
 
 
 
 
 

 
 
 

 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of September 30, 2011 (unaudited) and December 31, 2010
 
Consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010 (unaudited)
 
Consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 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
September 30, 2011 and December 31, 2010
(Dollars in thousands, except share data)
(unaudited)
             
   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and due from banks
  $ 12,832     $ 6,146  
Interest bearing deposits with banks
    76,286       29,620  
Federal funds sold
    2,088       99  
    Cash and cash equivalents
    91,206       35,865  
                 
Investment securities available for sale, at fair value
    154,259       143,439  
Investment securities held to maturity, at amortized cost (fair value of $145 and $157, respectively)
    139       147  
Restricted stock, at cost
    5,594       6,501  
Loans held for sale
    1,390        
Loans receivable (net of allowance for loan losses of $12,380 and $11,444, respectively)
    621,256       608,911  
Premises and equipment, net
    23,906       25,496  
Other real estate owned, net
    13,988       15,237  
Accrued interest receivable
    3,101       3,119  
Bank owned life insurance
    12,661       12,555  
Other assets
    25,301       24,827  
Total Assets
  $ 952,801     $ 876,097  
                 
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits:
               
Demand – non-interest bearing
  $ 126,310     $ 128,578  
Demand – interest bearing
    98,293       66,283  
Money market and savings
    371,293       329,742  
Time Deposits
    237,393       233,127  
    Total Deposits
    833,289       757,730  
Accrued interest payable
    1,238       953  
Other liabilities
    7,494       6,792  
Subordinated debt
    22,476       22,476  
Total Liabilities
    864,497       787,951  
                 
Shareholders’ Equity
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued as of September 30, 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 September 30, 2011 and December 31, 2010
    265       265  
Additional paid in capital
    106,277       106,024  
Accumulated deficit
    (14,764 )     (13,140 )
Treasury stock at cost (416,303 shares)
    (3,099 )     (3,099 )
Stock held by deferred compensation plan
    (809 )     (809 )
Accumulated other comprehensive income (loss)
    434       (1,095 )
Total Shareholders’ Equity
    88,304       88,146  
Total Liabilities and Shareholders’ Equity
  $ 952,801     $ 876,097  
                 
(See notes to consolidated financial statements)
 
 
 
1

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2011 and 2010
(Dollars in thousands, except per share data)
(unaudited)

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income:
                       
Interest and fees on taxable loans
 
$
8,408
   
$
8,766
   
$
24,857
   
$
26,200
 
Interest and fees on tax-exempt loans
   
78
     
-
     
227
     
-
 
Interest and dividends on taxable investment securities
   
1,092
     
1,390
     
3,210
     
4,367
 
Interest and dividends on tax-exempt investment securities
   
114
     
111
     
341
     
333
 
Interest on federal funds sold and other interest-earning assets
   
34
     
4
     
82
     
40
 
Total interest income
   
9,726
     
10,271
     
28,717
     
30,940
 
Interest expense:
                               
   Demand- interest bearing
   
159
     
119
     
425
     
326
 
   Money market and savings
   
868
     
839
     
2,527
     
2,801
 
   Time deposits
   
781
     
1,099
     
2,327
     
3,743
 
   Other borrowings
   
279
     
293
     
853
     
1,229
 
Total interest expense
   
2,087
     
2,350
     
6,132
     
8,099
 
Net interest income
   
7,639
     
7,921
     
22,585
     
22,841
 
Provision for loan losses
   
616
     
700
     
5,666
     
16,950
 
Net interest income after provision for loan losses
   
 7,023
     
7,221
     
16,919
     
5,891
 
Non-interest income:
                               
Loan advisory and servicing fees
   
137
     
146
     
293
     
299
 
Gain on sales of SBA loans
   
1,983
     
-
     
4,337
     
-
 
Service fees on deposit accounts
   
216
     
296
     
586
     
829
 
Gain on sale of investment securities
   
640
     
-
     
640
     
-
 
Other-than-temporary impairment losses
   
(45
)
   
155
     
(49
)
   
(673
)
Portion recognized in other comprehensive income (before taxes)
   
5
     
(155
)
   
7
     
301
 
Net impairment loss on investment securities
   
(40
)
   
-
     
(42
)
   
(372
)
Gain on sale of other real estate owned
   
-
     
-
     
-
     
246
 
Bank owned life insurance income
   
40
     
44
     
106
     
146
 
Other non-interest income
   
979
     
35
     
1,238
     
102
 
Total non-interest income
   
3,955
     
521
     
7,158
     
1,250
 
Non-interest expenses:
                               
 Salaries and employee benefits
   
4,135
     
3,192
     
11,280
     
9,110
 
 Occupancy
   
850
     
751
     
2,494
     
3,247
 
 Depreciation and amortization
   
527
     
529
     
1,588
     
1,497
 
 Legal
   
400
     
476
     
1,274
     
1,429
 
 Other real estate owned
   
315
     
165
     
1,739
     
1,117
 
 Advertising
   
70
     
104
     
260
     
199
 
 Data processing
   
347
     
196
     
865
     
649
 
 Insurance
   
200
     
209
     
637
     
744
 
 Professional fees
   
383
     
477
     
1,271
     
1,367
 
 Regulatory assessments and costs
   
507
     
530
     
1,550
     
1,603
 
 Taxes, other
   
261
     
238
     
706
     
681
 
 Other operating expenses
   
 1,110
     
851
     
3,444
     
2,433
 
Total non-interest expense
   
9,105
     
7,718
     
27,108
     
24,076
 
Income (loss) before provision (benefit) for income taxes
   
1,873
     
24
     
(3,031
)
   
(16,935
)
Provision (benefit) for income taxes
   
509
     
(44
)
   
(1,407
)
   
(6,086
)
Net income (loss)
 
$
1,364
   
$
68
   
$
(1,624
)
 
$
(10,849
)
Net income (loss) per share:
                               
Basic
 
$
0.05
   
$
-
   
$
(0.06
)
 
$
(0.67
)
Diluted
 
$
0.05
   
$
-
   
$
(0.06
)
 
$
(0.67
)
 
(See notes to consolidated financial statements)
 
 
 
 
2

 
 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2011 and 2010
(Dollars in thousands)
(unaudited)

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
 
$
(1,624
)
 
$
(10,849
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Provision for loan losses
   
5,666
     
16,950
 
Writedown of other real estate owned
   
1,252
     
885
 
Gain on sale of other real estate owned
   
-
     
(246
)
Depreciation and amortization
   
1,588
     
1,497
 
Share based compensation
   
253
     
198
 
Gain on sale of investment securities
   
(640
)
   
-
 
Impairment charges on investment securities
   
42
     
372
 
Amortization of premiums/(discounts) on investment securities
   
45
     
43
 
Proceeds from sales of SBA loans
   
47,046
     
-
 
SBA loans originated for sale
   
(44,099
)
   
-
 
Gains on sales of SBA loans originated for sale
   
(4,337
)
   
-
 
Increase in value of bank owned life insurance
   
(106
)
   
(146
)
Increase in accrued interest receivable and other assets
   
(831
)
   
(2,248
)
Increase in accrued interest payable and other liabilities
   
987
     
878
 
Net cash provided by operating activities
   
5,242
     
7,334
 
                 
Cash flows from investing activities:
               
Purchase of investment securities available for sale
   
(55,466
)
   
-
 
Proceeds from the maturity or call of securities available for sale
   
47,569
     
38,159
 
Proceeds from the maturity or call of securities held to maturity
   
8
     
8
 
Proceeds from redemption of FHLB stock
   
907
     
-
 
Net (increase) decrease in loans
   
(19,024
)
   
38,293
 
Net proceeds from sale of other real estate owned
   
1,010
     
2,988
 
Premises and equipment expenditures
   
(464
)
   
(2,543
)
Net cash (used in) provided by investing activities
   
(25,460
)
   
76,905
 
                 
Cash flows from financing activities:
               
Net proceeds from stock offering
   
-
     
28,812
 
Net stock purchases for deferred compensation plans
   
-
     
(100
)
Net increase in demand, money market and savings deposits
   
71,293
     
3,850
 
Net increase (decrease) in time deposits
   
4,266
     
(61,610
)
Net decrease in other borrowings
   
-
     
(25,000
)
Net cash provided by (used in) financing activities
   
75,559
     
(54,048
)
                 
Net increase in cash and cash equivalents
   
55,341
     
30,191
 
Cash and cash equivalents, beginning of year
   
35,865
     
55,618
 
Cash and cash equivalents, end of year
 
$
91,206
   
$
85,809
 
                 
Supplemental disclosures:
               
Interest paid
 
$
5,847
   
$
7,895
 
Non-cash transfers from loans to other real estate owned
   
1,013
     
663
 
                 

(See notes to consolidated financial statements)

 
3

 


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2011 and 2010
(Dollars in thousands, except per share data)
(unaudited)
                                           
   
Common
Stock
   
Additional
Paid in
Capital
   
Accumulated Deficit
   
Treasury
Stock
   
Stock Held by Deferred Compensation Plan
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
BALANCE, JANUARY 1, 2011
 
$
265
   
$
106,024
   
$
(13,140
)
 
$
(3,099
)
 
$
(809
)
 
$
(1,095
)
 
$
88,146
 
Net loss
                   
(1,624
)
                           
(1,624
)
Other comprehensive gain, net of tax:
                                                       
Unrealized gain on securities (pre-tax $2,343)
                                           
1,502
     
1,502
 
Reclassification adjustment for impairment charge (pre-tax $42)
                                           
27
     
27
 
                                                     
1,529
 
Total comprehensive loss
                                                   
(95
Stock based compensation
           
253
                                     
253
 
BALANCE, SEPTEMBER 30, 2011
 
$
265
   
$
106,277
   
$
(14,764
)
 
$
(3,099
)
 
$
(809
)
 
$
434
   
$
88,304
 
                                                       


   
Common
Stock
   
Additional
Paid in
Capital
   
 
Accumulated Deficit
   
Treasury
Stock
   
 
 
Stock Held by Deferred Compensation Plan
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
                                           
BALANCE, JANUARY 1, 2010
  $ 111     $ 77,086     $ (2,450 )   $ (3,099 )   $ (709 )   $ (675 )   $ 70,264  
Net loss
                    (10,849 )                             (10,849 )
Other comprehensive gain, net of tax:
                                                       
Unrealized gain on securities (pre-tax $2,493)
                                            1,598       1,598  
Reclassification adjustment for impairment charge  (pre-tax $372)
                                            238       238  
                                                      1,836  
Total comprehensive loss
                                                    (9,013 )
Shares issued under common stock offering (15,412,350 shares)
    154       28,658                                       28,812  
Stock based compensation
    -       198                                       198  
Stock purchases for deferred compensation plan (24,489 shares)
                                    (100 )             (100 )
BALANCE, SEPTEMBER 30, 2010
  $ 265     $ 105,942     $ (13,299 )   $ (3,099 )   $ (809 )   $ 1,161     $ 90,161  
                                                         
                                                       
(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 and nine month periods ended September 30, 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 Republic’s exposure to changes in the interest rate environment.  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.
 
 
 
5

 
 
 
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.
 
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.
 
 
 
6

 
 

 
The Division of Corporate Finance at the U.S. Securities and Exchange Commission (“SEC”) selectively reviews filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934 to monitor and enhance compliance with applicable accounting and disclosure requirements.  As a result of this process the Company has received a comment letter from the SEC questioning the realizability of its deferred tax asset and the lack of a related valuation reserve. The Company has asked the SEC to reconsider its view related to the deferred tax asset and at this time the matter remains unresolved.

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 September 30, 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 combination of 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 nine months ended September 30, 2011, 53,500 options vested.  No options vested during the nine months ended September 30, 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 September 30, 2011, there were 550,350 unvested options with a fair value of $1,231,597 with $554,517 of that amount remaining to be recognized as expense. At that date, the intrinsic value of the 785,893 options outstanding was $0, while the intrinsic value of the 235,543 exercisable (vested) options was $0.
 
Compensation expense of $85,000 and $253,000 was recognized during the three and nine months ended September 30, 2011, respectively. Compensation expense of $78,000 and $198,000 was recognized during the three and nine months ended September 30, 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 to the 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 and nine months ended September 30, 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 and nine months ended September 30, 2011 and 2010 is as follows (in thousands, except per share amounts):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic and diluted earnings per share:
                   
 
Net income/(loss)
 
$
1,364
   
$
68
   
$
(1,624
 
$
(10,849
)
                                 
Weighted average shares outstanding
   
25,871
     
25,871
     
25,871
     
16,109
 
                                 
Net income (loss) per share – basic and diluted
 
$
0.05
   
$
-
   
$
(0.06
 
$
(0.67
)

Recent Accounting Pronouncements

ASU 2011-05
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which amends FASB ASC Topic 220, Comprehensive Income.  The FASB has issued this ASU to facilitate the continued alignment of U.S. GAAP with International Accounting Standards.

The Update prohibits the presentation of the components of comprehensive income in the statement of stockholders’ equity.  Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate statements of net income and other comprehensive income.  Under previous GAAP, all three presentations were acceptable.  Regardless of the presentation selected, the Company is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements.

The effective date of ASU 2011-05 differs for public and nonpublic companies.  For public companies, the Update is effective for fiscal years and interim periods beginning after December 31, 2011.  For nonpublic entities, the provisions are effective for fiscal years ending after December 31, 2012, and for interim and annual periods thereafter.  Early adoption is permitted.  The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.
 
 
 
 
8

 
 

 
ASU 2011-04
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  The FASB has issued this ASU to amend ASC Topic 820, Fair Value Measurements, in order to bring U.S. GAAP for fair value measurements in line with International Accounting Standards.

The Update clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholders’ equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets.

The Update also creates an exception to Topic 820 for entities, which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction.  The Update also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy.

Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as:  disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes.

The effective date of ASU 2011-04 differs for public and nonpublic companies.  For public companies, the Update is effective for interim and annual periods beginning after December 15, 2011.  For nonpublic entities, the Update is effective for annual periods beginning after December 15, 2011.  Early adoption is not permitted.  The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial statements.

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.
 
 
 
 
9

 

 

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 Income / (Loss)

Total comprehensive income (loss), which for the Company included net income (loss) and changes in unrealized gains and losses on the Company’s available for sale securities, was $1.1 million and $610,000 for the three months ended September 30, 2011 and 2010, respectively.  For the nine months ended September 30, 2011 and 2010, total comprehensive loss was $95,000 and $9.0 million, respectively.
 
Note 6:  Investment Securities
 
A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2011 and December 31, 2010 is as follows:

   
September 30, 2011
 
   
Investment Securities Available for Sale
 
 
 
(Dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Mortgage-backed securities/CMOs
  $ 113,287     $ 3,848     $ -     $ 117,135  
Municipal securities
    10,794       362       (473 )     10,683  
Corporate bonds
    22,995       -       (110 )     22,885  
Pooled Trust Preferred Securities
    6,375       -       (2,954 )     3,421  
Other securities
    131       4               135  
Total
  $ 153,582     $ 4,214     $ (3,537 )   $ 154,259  
                                 
 
 
 
10

 

 

   
September 30, 2011
 
   
Investment Securities Held to Maturity
 
 
 
(Dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    137       6       -       143  
Total
  $ 139     $ 6     $ -     $ 145  
                                 

   
December 31, 2010
 
   
Investment Securities Available for Sale
 
 
 
(Dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
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
  $ 145,148     $ 2,822     $ (4,531 )   $ 143,439  
                                 

   
December 31, 2010
 
   
Investment Securities Held to Maturity
 
 
 
(Dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    145       10       -       155  
Total
  $ 147     $ 10     $ -     $ 157  
                                 

The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 2011 is as follows:

   
September 30, 2011
 
   
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
  $ 8     $ 8     $ 75     $ 77  
After 1 year to 5 years
    86,377       88,669       44       48  
After 5 years to 10 years
    54,502       52,708       -       -  
After 10 years
    12,695       12,874       -       -  
No stated maturity
    -       -       20       20  
Total
  $ 153,582     $ 154,259     $ 139     $ 145  

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
 
 
 
 
11

 
 
 
As of September 30, 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-backed 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 September 30, 2011 and December 31, 2010.  In addition, the Company does not hold any privately issued CMO’s as of September 30, 2011 and December 31, 2010.
 
In instances when a determination is made that an OTTI 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 OTTI recognized in the income statement.  The OTTI 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 OTTI related to all other factors.  The amount of the total OTTI related to other factors is recognized in other comprehensive income.  In accordance with the updated guidance under ASC 320-10, the Company recorded impairment charges (credit losses) on bank pooled trust preferred securities for the three and nine months ended September 30, 2011 of $40,000 and $42,000, respectively, which was due to the default of a bank in one of the securities.  The Company realized gross losses due to impairment charges on pooled trust preferred securities of $0 and $372,000 for the three and nine months ended September 30, 2010, respectively.

The Company realized gross gains on the sale of securities of $640,000 during the three and nine months ended September 30, 2011.  The tax provision applicable to these gross gains in 2011 amounted to approximately $225,000.  No securities were sold during the three and nine months ended September 30, 2010.

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:

   
At September 30, 2011
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
(Dollars in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Mortgage-backed securities/CMOs
  $ -     $ -     $ 30     $ -     $ 30     $ -  
Municipal securities
    -       -       4,147       473       4,147       473  
Corporate bonds
    14,885       110       -       -       14,885       110  
Trust Preferred Securities
    -       -       3,431       2,954       3,431       2,954  
Total
  $ 14,885     $ 110     $ 7,608     $ 3,427     $ 22,493     $ 3,537  

 
 
 
12

 
 
 

 
   
At December 31, 2010
 
   
Less than 12 months
   
12 months or longer
   
Total
 
 
(Dollars in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
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 totaled $3.5 million with a total fair value of $22.5 million at September 30, 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 September 30, 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 September 30, 2011, the investment portfolio included twenty-five municipal securities with a total market value of $10.7 million.  These 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 the state of California where thirteen municipal securities had a market value of $5.3 million.  As of September 30, 2011, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.

Note 7:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of September 30, 2011 and December 31, 2010:
 
(Dollars in thousands)
 
September 30,
 2011
   
December 31,
2010
 
             
Commercial real estate
  $ 393,652     $ 374,935  
Construction and land development
    52,681       73,795  
Commercial and industrial
    79,162       78,428  
Owner occupied real estate
    88,677       70,833  
Consumer and other
    16,636       17,808  
Residential mortgage
    3,175       5,026  
Total loans receivable
    633,983       620,825  
                 
Deferred costs (fees)
    (347 )     (470 )
Allowance for loan losses
    (12,380 )     (11,444 )
Net loans receivable
  $ 621,256     $ 608,911  
                 
 
 
 
 
13

 

 

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 September 30, 2011, management identified one troubled debt restructuring in the loan portfolio in the amount of $2.5 million.  No troubled debt restructurings were identified as of December 31, 2010.

The following table presents the Company’s impaired loans at September 30, 2011 and December 31, 2010:

 
(Dollars in thousands)
 
September 30,
2011
   
December 31,
2010
 
   
Impaired loans without a valuation allowance
  $ 50,267     $ 72,908  
Impaired loans with a valuation allowance
    20,965       14,206  
Total impaired loans
  $ 71,232     $ 87,114  
   
Valuation allowance related to impaired loans
  $ 3,359     $ 2,786  
Total nonaccrual loans
    32,006       39,992  
Total loans past-due ninety days or more and still accruing
    -       -  

Impaired loans with a valuation allowance increased from $14.2 million at December 31, 2010 to $21.0 million at September 30, 2011.  The increase was primarily due to valuation allowances, which were recorded during the nine month period ending September 30, 2011 for impaired loans which previously did not have a valuation allowance as of December 31, 2010.  The valuation allowances recorded for these impaired loans were primarily driven by updated appraisals of collateral received during the nine month period ending September 30, 2011.  Management determined that these valuation allowances did not have to be immediately charged off during this time period.  Total impaired loans decreased by $15.9 million to $71.2 million at September 30, 2011 compared to $87.1 million at December 31, 2010.  This decrease was mainly driven by upgrades to loans previously categorized as impaired as a result of improved financial performance and strength of the borrowers.  The valuation allowance related to impaired loans increased from $2.8 million at December 31, 2010 to $3.4 million at September 30, 2011.

As of September 30, 2011 and December 31, 2010, the average recorded investment in impaired loans was approximately $78.8 million and $100.3 million, respectively.  The Company earned $1.6 million and $2.7 million of interest income on impaired loans (internally classified as accruing loans) for the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.  The Company recognized interest income on a cash basis on impaired loans of  $1.7 million and $2.9 million during the nine months ended September 30, 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.
 
 
 
14

 

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of September 30, 2011 and December 31, 2010:

   
At September 30, 2011
 
 
 
(Dollars in thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
                               
With no related allowance recorded:
                         
                               
Commercial real estate
  $ 27,518     $ 32,738     $ -     $ 31,140     $ 822  
Construction and land development
    18,767       33,022       -       17,328       144  
Commercial and industrial
    1,926       1,926       -       3,083       80  
Owner occupied real estate
    1,301       1,301       -       1,710       28  
Consumer and other
    755       985       -       709       -  
Total
  $ 50,267     $ 69,972     $ -     $ 53,970     $ 1,074  
                                         
With an allowance recorded:
                                       
                                         
Commercial real estate
  $ 14,476     $ 14,476     $ 2,015     $ 12,901     $ 411  
Construction and land development
    656       656       442       5,545       25  
Commercial and industrial
    4,039       6,509       583       3,784       16  
Owner occupied real estate
    1,794       1,794       319       2,610       96  
Total
  $ 20,965     $ 23,435     $ 3,359     $ 24,840     $ 548  
                                         
Total:
                                       
                                         
Commercial real estate
  $ 41,994     $ 47,214     $ 2,015     $ 44,041     $ 1,233  
Construction and land development
    19,423       33,678       442       22,873       169  
Commercial and industrial
    5,965       8,435       583       6,867       96  
Owner occupied real estate
    3,095       3,095       319       4,320       124  
Consumer and other
    755       985       -       709       -  
Total
  $ 71,232     $ 93,407     $ 3,359     $ 78,810     $ 1,622  
                                         

 
 
 
15

 
 

 
   
At 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 real estate
  $ 40,840     $ 46,119     $ -     $ 43,144     $ 1,341  
Construction and land development
    22,802       35,042       -       32,061       291  
Commercial and industrial
    6,482       7,992       -       7,040       160  
Owner occupied real estate
    2,278       2,278       -       2,370       132  
Consumer and other
    506       684       -       536       6  
Total
  $ 72,908     $ 92,115     $ -     $ 85,151     $ 1,930  
                                         
With an allowance recorded:
                                       
                                         
Commercial real estate
  $ 7,683     $ 7,872     $ 1,937     $ 7,882     $ 422  
Construction and land development
    2,289       2,440       45       2,602       23  
Commercial and industrial
    798       798       287       809       26  
Owner occupied real estate
    3,436       3,436       517       3,832       267  
Total
  $ 14,206     $ 14,546     $ 2,786     $ 15,125     $ 738  
                                         
Total:
                                       
                                         
Commercial real estate
  $ 48,523     $ 53,991     $ 1,937     $ 51,026     $ 1,763  
Construction and land development
    25,091       37,482       45       34,663       314  
Commercial and industrial
    7,280       8,790       287       7,849       186  
Owner occupied real estate
    5,714       5,714       517       6,202       399  
Consumer and other
    506       684       -       536       6  
Total
  $ 87,114     $ 106,661     $ 2,786     $ 100,276     $ 2,668  

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $1.6 million and $2.4 million, for the nine months ended September 30, 2011 and the year ended December 31, 2010, respectively.

The following is an analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2011 and year ended December 31, 2010:

 
(Dollars in thousands)
 
September 30,
2011
   
December 31,
2010
 
             
Balance at beginning of year
  $ 11,444     $ 12,841  
                 
Provision for loan losses
    5,666       16,600  
Recoveries of loans previously charged off
    50       1,171  
Loan charge-offs
    (4,780 )     (19,168 )
Balance at end of period
  $ 12,380     $ 11,444  
 
 
 
16

 
 

 
The following provides the ending balances of the allowance for credit losses and loan receivables by loan portfolio class as of September 30, 2011 and December 31, 2010:

   
At September 30, 2011
 
   
Allowance for Credit Losses
 
                                             
(Dollars in thousands)
 
Commercial Real Estate
   
Construction and
Land Development
   
Commercial and Industrial
   
Owner Occupied Real Estate
   
Consumer and Other
   
Residential Mortgage
    Unallocated    
Total
 
Three Months Ended September 30, 2011:
                   
 
Beginning balance:
  8,646     1,819     2,729     1,596     124     33     $   161     15,108  
Charge-offs
    (1,062     (1,305     (975 )     -       (3 )     -       -       (3,345 )
Recoveries
    -       -       -       -       1       -       -       1  
Provisions
    99       460       -       93       (8 )     (10 )     (18 )     616  
Ending balance
  7,683     974     1,754     1,689     114     23     $ 143     12,380  
   
 
Nine Months Ended September 30, 2011:
                                           
 
Beginning balance:
  7,243     $ 837     $ 1,443     $ 1,575     $ 130     $ 41     $ 175     $ 11,444  
Charge-offs
    (2,096 )     (1,675 )     (975 )     -       (34 )     -       -       (4,780 )
Recoveries
    9       2       -       -       39       -       -       50  
Provisions
    2,527       1,810       1,286       114       (21 )     (18 )     (32 )     5,666  
Ending balance
  7,683     $ 974     $ 1,754     $ 1,689     $ 114