rfb10q9-30.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[ X ]   
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2012.
 
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 06, 2012
 
 
 
 
 

 

 

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, 2012 and December 31, 2011(unaudited)
 
Consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 (unaudited)
  Consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2012 and 2011 (unaudited) 3
 
Consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 2012 and 2011 (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.
Mine Safety Disclosures
     
Item 5.
Other Information
     
Item 6.
Exhibits
     
Signatures
 
 
 
 

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2012 and December 31, 2011
(Dollars in thousands, except per share data)
(unaudited)

   
September 30, 2012
   
December 31, 2011
 
ASSETS
           
Cash and due from banks
  $ 7,750     $ 13,221  
Interest bearing deposits with banks
    90,108       217,734  
Cash and cash equivalents
    97,858       230,955  
                 
Investment securities available for sale, at fair value
    192,529       174,323  
Investment securities held to maturity, at amortized cost (fair value of $69 and $144, respectively)
    66       140  
Restricted stock, at cost
    4,369       5,321  
Loans held for sale
    1,089       925  
Loans receivable (net of allowance for loan losses of $9,798  and $12,050, respectively)
    613,380       577,442  
Premises and equipment, net
    22,415       23,507  
Other real estate owned, net
    7,312       6,479  
Accrued interest receivable
    3,149       3,003  
Bank owned life insurance
    10,472       10,417  
Other assets
    14,351       14,841  
Total Assets
  $ 966,990     $ 1,047,353  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits:
               
Demand – non-interest bearing
  $ 145,493     $ 226,287  
Demand – interest bearing
    173,010       109,242  
Money market and savings
    417,506       400,141  
Time Deposits
    132,184       216,941  
    Total Deposits
    868,193       952,611  
Accrued interest payable
    646       1,049  
Other liabilities
    6,731       6,366  
Subordinated debt
    22,476       22,476  
Total Liabilities
    898,046       982,502  
                 
Shareholders’ Equity
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued as of September 30, 2012 and December 31, 2011
    -       -  
Common stock, par value $0.01 per share: 50,000,000 shares authorized; shares issued 26,501,742 as of September 30, 2012 and December 31, 2011
    265       265  
Additional paid in capital
    106,673       106,383  
Accumulated deficit
    (35,132 )     (37,842 )
Treasury stock at cost (416,303 shares)
    (3,099 )     (3,099 )
Stock held by deferred compensation plan
    (809 )     (809 )
Accumulated other comprehensive income (loss)
    1,046       (47 )
Total Shareholders’ Equity
    68,944       64,851  
Total Liabilities and Shareholders’ Equity
  $ 966,990     $ 1,047,353  

(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, 2012 and 2011
(Dollars in thousands, except per share data)
(unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest income:
                       
Interest and fees on taxable loans
  $ 8,131     $ 8,408     $ 24,265     $ 24,857  
Interest and fees on tax-exempt loans
    63       78       198       227  
Interest and dividends on taxable investment securities
    1,246       1,092       3,784       3,210  
Interest and dividends on tax-exempt investment securities
    118       114       351       341  
Interest on federal funds sold and other interest-earning assets
    54       34       239       82  
Total interest income
    9,612       9,726       28,837       28,717  
Interest expense:
                               
   Demand- interest bearing
    211       159       567       425  
   Money market and savings
    572       868       2,157       2,527  
   Time deposits
    370       781       1,384       2,327  
   Other borrowings
    283       279       852       853  
Total interest expense
    1,436       2,087       4,960       6,132  
Net interest income
    8,176       7,639       23,877       22,585  
Provision for loan losses
    850       616       600       5,666  
Net interest income after provision for loan losses
    7,326       7,023       23,277       16,919  
Non-interest income:
                               
Loan advisory and servicing fees
    333       137       873       293  
Gain on sales of SBA loans
    1,141       1,983       3,337       4,337  
Service fees on deposit accounts
    234       216       670       586  
Legal settlements
    50       750       155       750  
Gain on sale of investment securities
    -       640       774       640  
Other-than-temporary impairment losses
    -       (45 )     (33 )     (49 )
Portion recognized in other comprehensive income (before taxes)
    -       5       2       7  
Net impairment loss on investment securities
    -       (40 )     (31 )     (42 )
Bank owned life insurance income
    20       40       55       106  
Other non-interest income
    53       229       143       488  
Total non-interest income
    1,831       3,955       5,976       7,158  
Non-interest expense:
                               
Salaries and employee benefits
    4,008       4,135       12,105       11,280  
Occupancy
    875       850       2,591       2,494  
Depreciation and amortization
    492       527       1,516       1,588  
Legal
    547       400       2,334       1,274  
Other real estate owned
    287       315       489       1,739  
Advertising
    57       70       207       260  
Data processing
    288       347       863       865  
Insurance
    183       200       493       637  
Professional fees
    326       383       917       1,271  
Regulatory assessments and costs
    343       507       1,032       1,550  
Taxes, other
    181       261       718       706  
Other operating expenses
    1,200       1,110       3,368       3,444  
Total non-interest expense
    8,787       9,105       26,633       27,108  
Income (loss) before provision (benefit) for income taxes
    370       1,873       2,620       (3,031 )
Provision (benefit) for income taxes
    (28 )     509       (90 )     (1,407 )
Net income (loss)
  $ 398     $ 1,364     $ 2,710     $ (1,624 )
Net income (loss) per share:
                               
Basic
  $ 0.02     $ 0.05     $ 0.10     $ (0.06 )
Diluted
  $ 0.02     $ 0.05     $ 0.10     $ (0.06 )
 
(See notes to consolidated financial statements)
 
 
 
 
2

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(unaudited)
 

   
Three Months Ended
September 30,
   
Nine Months Ended
 September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income (loss)
  $ 398     $ 1,364     $ 2,710     $ (1,624 )
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized gain on securities (pre-tax $1,854, $125, $2,459, and $2,993, respectively)
    1,188       80       1,576        1,918  
Reclassification adjustment for securities gains (pre-tax $-, $640, $774, and $640, respectively)
    -       (416 )     (503 )     (416 )
Reclassification adjustment for impairment charge (pre-tax $-, $40, $31, and $42, respectively)
    -       26       20       27  
                                 
Total other comprehensive income (loss)
    1,188       (310 )     1,093       1,529  
                                 
Total comprehensive income (loss)
  $ 1,586     $ 1,054     $ 3,803     $ (95 )
                                 
 
(See notes to consolidated financial statements)













 
3

 


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(unaudited)
 
   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income (loss)
  $ 2,710     $ (1,624 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Provision for loan losses
    600       5,666  
Loss on sale of other real estate owned
    10       -  
Writedown of other real estate owned
    130       1,252  
Depreciation and amortization
    1,516       1,588  
Stock based compensation
    290       253  
Gain on sale of investment securities
    (774 )     (640 )
Impairment charges on investment securities
    31       42  
Amortization of premiums/(discounts) on investment securities
    269       45  
Proceeds from sales of SBA loans
    35,358       47,046  
SBA loans originated for sale
    (32,185 )     (44,099 )
Gains on sales of SBA loans originated for sale
    (3,337 )     (4,337 )
Increase in value of bank owned life insurance
    (55 )     (106 )
Increase in accrued interest receivable and other assets
    (249 )     (831 )
(Decrease) increase in accrued interest payable and other liabilities
    (38 )     987  
Net cash provided by operating activities
    4,276       5,242  
                 
Cash flows from investing activities:
               
Purchase of investment securities available for sale
    (60,910 )     (55,466 )
Proceeds from the sale of securities available for sale
    22,590       34,277  
Proceeds from the maturity or call of securities available for sale
    22,274       13,292  
Proceeds from the maturity or call of securities held to maturity
    74       8  
Proceeds from redemption of FHLB stock
    952       907  
Net increase in loans
    (37,845 )     (19,024 )
Net proceeds from sale of other real estate owned
    334       1,010  
Premises and equipment expenditures
    (424 )     (464 )
Net cash used in investing activities
    (52,955 )     (25,460 )
                 
Cash flows from financing activities:
               
Net increase in demand, money market and savings deposits
    339       71,293  
Net (decrease) increase in time deposits
    (84,757 )     4,266  
Net cash (used in) provided by financing activities
    (84,418 )     75,559  
                 
Net (decrease) increase in cash and cash equivalents
    (133,097 )     55,341  
Cash and cash equivalents, beginning of year
    230,955       35,865  
Cash and cash equivalents, end of period
  $ 97,858     $ 91,206  
                 
Supplemental disclosures:
               
Interest paid
  $ 5,363     $ 5,847  
Non-cash transfers from loans to other real estate owned
  $ 1,307     $ 1,013  

(See notes to consolidated financial statements)



 
4

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(unaudited)

   
Common Stock
   
Additional Paid in Capital
   
 
Accumulated Deficit
   
Treasury Stock
   
Stock Held by Deferred Compensation Plan
   
Accumulated Other Comprehensive Income (Loss)
   
Total Shareholders’ Equity
 
                                           
Balance January 1, 2012
  $ 265     $ 106,383     $ (37,842 )   $ (3,099 )   $ (809 )   $ (47 )   $ 64,851  
                                                         
Total comprehensive income
                    2,710                       1,093       3,803  
Stock based compensation
            290                                       290  
                                                         
Balance September 30, 2012
  $ 265     $ 106,673     $ (35,132 )   $ (3,099 )   $ (809 )   $ 1,046     $ 68,944  
                                                         
                                                         
Balance January 1, 2011
  $ 265     $ 106,024     $ (13,140 )   $ (3,099 )   $ (809 )   $ (1,095 )   $ 88,146  
                                                         
Total comprehensive income (loss)
                    (1,624 )                     1,529       (95 )
Stock based compensation
            253                                       253  
                                                         
Balance September 30, 2011
  $ 265     $ 106,277     $ (14,764 )   $ (3,099 )   $ (809 )   $ 434     $ 88,304  
                                                         

(See notes to consolidated financial statements)






 



 
5

 

 
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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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.
 
 
 
6

 

 

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.   Management also makes assumptions on the amount of future taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require management to make judgments that are consistent with the plans and estimates used to manage the Company’s business.  As a result of cumulative losses in recent years and the uncertain nature of the current economic environment, the Company has decided to currently exclude future taxable income from its analysis on the ability to recover deferred tax assets and has recorded a valuation allowance against its deferred tax assets.  An increase or decrease in the valuation allowance would result in an adjustment to income tax expense in the period and could have a significant impact on the Company’s future earnings.
 
 
 
 
7

 


Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan (“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, 2012, 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 the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant.  A summary of the assumptions used in the Black-Scholes option pricing model for 2012 and 2011 are as follows:

   
2012
 
2011
 
Dividend yield(1)
 
0.0%
 
0.0%
 
Expected volatility(2)
 
   53.12% to 54.49%
 
49.11%
 
Risk-free interest rate(3)
 
1.01% to 1.61%
 
2.84%
 
Expected life(4)
 
7.0 years
 
7.0 years
 
           
(1) A dividend yield of 0.0% is utilized because cash dividends have never been paid.
(2) Expected volatility is based on Bloomberg’s seven year volatility calculation for “FRBK” stock.
(3) The risk-free interest rate is based on the seven year Treasury bond.
(4) The expected life reflects a 3 to 4 year “all or nothing” vesting period, the maximum ten year term and review of historical behavior.

During the nine months ended September 30, 2012 and 2011, 61,000 shares and 53,500 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At September 30, 2012, the intrinsic value of the 964,530 options outstanding was $59,888, while the intrinsic value of the 168,930 exercisable (vested) options was $0.

Information regarding stock based compensation at and for the periods ended September 30, 2012 and 2011 is set forth below:
 
   
2012
 
2011
 
Stock based compensation expense recognized
 
$    290,000
 
 $   253,000
 
Number of unvested stock options
 
     795,600
 
550,350
 
Fair value of unvested stock options
 
$ 1,426,878
 
$1,231,597
 
Amount remaining to be recognized as expense
 
$    548,287
 
$   554,517
 

The remaining amount of $548,287 will be recognized as expense through August 2016.

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, 2012 and 2011, 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.
 
 
 
8

 

The calculation of EPS for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands, except per share amounts):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ 398     $ 1,364     $ 2,710     $ (1,624 )
                                 
Weighted average shares outstanding
    25,973       25,973       25,973       25,973  
                                 
Net income (loss) per share – basic and diluted
  $ 0.02     $ 0.05     $ 0.10     $ (0.06 )


Recent Accounting Pronouncements

ASU 2011-12
      In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-12, Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05.  In response to stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and previous years, the FASB deferred the implementation date of this provision to allow time for further consideration.  The requirement in ASU 2011-05, Presentation of Comprehensive Income, for the presentation of a combined statement of comprehensive income or separate, but consecutive, statements of net income and other comprehensive income is still effective for fiscal years and interim periods beginning after December 15, 2011 for public companies, and fiscal years ending after December 15, 2011 for nonpublic companies.  The adoption of this guidance did not have a material effect on its consolidated financial statements.

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 Update is effective for fiscal years and interim periods beginning after December 31, 2011.  The adoption of this guidance did not have a material effect on its consolidated financial statements but expanded related disclosures.

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.
 
 
 
9

 
 

 
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 Update is effective for interim and annual periods beginning after December 15, 2011.  The adoption of this guidance did not have a material effect on its consolidated financial statements but expanded disclosures surrounding fair value.

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 stores.




 
10

 



Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2012 and December 31, 2011 is as follows:

   
At September 30, 2012
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 101,279     $ 2,196     $ -     $ 103,475  
Mortgage-backed securities
    20,237       1,301       -       21,538  
Municipal securities
    11,077       919       (36 )     11,960  
Corporate bonds
    32,245       555       (423 )     32,377  
Asset-backed securities
    19,986       135       (191 )     19,930  
Trust Preferred Securities
    5,950       -       (2,834 )     3,116  
Other securities
    131       2       -       133  
Total securities available for sale
  $ 190,905     $ 5,108     $ (3,484 )   $ 192,529  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Other securities
    65       3       -       68  
Total securities held to maturity
  $ 66     $ 3     $ -     $ 69  


   
At December 31, 2011
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 117,382     $ 2,629     $ -     $ 120,011  
Mortgage-backed securities
    12,764       1,352       -       14,116  
Municipal securities
    10,863       494       (323 )     11,034  
Corporate bonds
    26,881       17       (1,281 )     25,617  
Trust Preferred Securities
    6,375       -       (2,965 )     3,410  
Other securities
    131       4       -       135  
Total securities available for sale
  $ 174,396     $ 4,496     $ (4,569 )   $ 174,323  
                                 
U.S. Government agencies
  $ 2     $ -     $ -     $ 2  
Other securities
    138       4       -       142  
Total securities held to maturity
  $ 140     $ 4     $ -     $ 144  



 
11

 


       The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 2012 is as follows:

   
Available for Sale
   
Held to Maturity
 
 
(dollars in thousands)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
 
Fair Value
 
Due in 1 year or less
  $ 15,389     $ 15,714     $ -     $ -  
After 1 year to 5 years
    79,126       81,254       66       69  
After 5 years to 10 years
    72,070       70,075       -       -  
After 10 years
    24,320       25,486       -       -  
Total
  $ 190,905     $ 192,529     $ 66     $ 69  

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

As of September 30, 2012 and December 31, 2011, the collateralized mortgage obligations and mortgage backed securities 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 did not hold any mortgage-backed securities that were rated “Alt-A” or “Subprime” as of September 30, 2012 and December 31, 2011.  In addition, the Company did not hold any private issued CMO’s as September 30, 2012 and December 31, 2011.  As of September 30, 3012, the asset-backed securities consist solely of two Sallie Mae bonds collateralized by student loans which are guaranteed by the U.S. Department of Education.  There were no asset-backed securities in the portfolio as of December 31, 2011.

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, requires the other-than-temporary impairment to be 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.  Impairment charges (credit losses) on trust preferred securities for the three and nine months ended September 30, 2012 amounted to $0 and $31,000 respectively.  Impairment charges (credit losses) on trust preferred securities for the three and nine months ended September 30, 2011 amounted to $40,000 and $42,000, respectively.  

The company realized gross gains on the sale of securities of $0 and $774,000, respectively, during the three and nine months ended September 30, 2012.  The related sale proceeds amounted to $22.6 million.  The tax provision applicable to these gross gains in 2012 amounted to approximately $271,000.  The company realized gross gains on the sale of securities of $640,000 during the three and nine months ended September 30, 2011.  The related sale proceeds amounted to $34.3 million.  The tax provision applicable to these gross gains in 2011 amounted to approximately $224,000.



 
12

 


The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at September 30, 2012 and 2011 for which a portion of OTTI was recognized in other comprehensive income:

 
(dollars in thousands)
 
2012
   
2011
 
             
Beginning Balance, January 1st
  $ 3,925     $ 3,883  
Additional credit-related impairment loss on securities for which another-than-temporary impairment was previously recognized
    31       42  
Reductions for securities paid off during the period
    -       -  
Reductions for securities for which the amount previously recognized in other
    -       -  
comprehensive income was recognized in earnings because the Company
    -       -  
intends to sell the security
    -       -  
Ending Balance, September 30,
  $ 3,956     $ 3,925  

The following tables show 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, 2012
 
   
Less than 12 months
   
12 months or more
   
Total
 
 
(dollars in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
Collateralized  mortgage obligations
  $ -     $ -     $ -     $ -     $ -     $ -  
Municipal securities
    -       -       1,717       36       1,717       36  
Corporate bonds
    4,821       178       14,751       245       19,572       423  
Asset-backed securities
    9,405       191       -       -       9,405       191  
Trust Preferred Securities
    -       -       3,116       2,834       3,116       2,834  
Total
  $ 14,226     $ 369     $ 19,584     $ 3,115     $ 33,810     $ 3,484  


   
At December 31, 2011
 
   
Less than 12 months
   
12 months or more
   
Total
 
 
(dollars in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
Mortgage-backed securities
  $ -     $ -     $ 9     $ -     $ 9     $ -  
Municipal securities
    -       -       4,490       323       4,490       323  
Corporate bonds
    18,714       1,281       -       -       18,714       1,281  
Trust Preferred Securities
    -       -       3,410       2,965       3,410       2,965  
Total
  $ 18,714     $ 1,281     $ 7,909     $ 3,288     $ 26,623     $ 4,569  
 
The impairment of the investment portfolio totaled $3.5 million with a total fair value of $33.8 million at September 30, 2012.  The most significant component of this impairment is related to the trust preferred securities held in the portfolio.  Unrealized losses on the trust preferred securities amount to $2.8 million at September 30, 2012.  The unrealized losses associated with the trust preferred securities are a result of the secondary market for such securities becoming inactive and are considered temporary at this time.
 

 
 
13

 

The following table provides additional detail about trust preferred securities as of September 30, 2012.

(dollars in thousands)
Class / Tranche
 
Amortized Cost
   
Fair
Value
   
Unrealized Losses
   
Lowest Credit Rating Assigned
   
Number of Banks Currently Performing
   
Deferrals / Defaults as % of Current Balance
   
Conditional Default Rates for 2013 and beyond
   
Cumulative OTTI Life to Date
 
Preferred Term Securities IV
Mezzanine Notes
  $ 49     $ 40     $ (9 )  
CCC
      5       27 %     0.40 %   $ -  
Preferred Term Securities VII
Mezzanine Notes
    1,658       1,114       (544 )   C       8       64       0.59       2,173  
TPREF Funding II
Class B Notes
    742       336       (406 )   C       18       39       0.37       257  
TPREF Funding III
Class B2 Notes
    1,521       731       (790 )   C       17       39       0.44       480  
Trapeza CDO I, LLC
Class C1 Notes
    556       215       (341 )   C       11       53       0.52       470  
ALESCO Preferred Funding IV
Class B1 Notes
    604       272       (332 )   C       36       29       0.37       396  
ALESCO Preferred Funding V
Class C1 Notes
    820       408       (412 )   C       39       33       0.36       180  
Total
    $ 5,950     $ 3,116     $ (2,834 )           134       40 %           $ 3,956  

At September 30, 2012, the investment portfolio included twenty-five municipal securities with a total market value of $12.0 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 California where thirteen municipal securities had a market value of $6.1 million.  As of September 30, 2012, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.

The unrealized losses on the remaining securities are due to changes in market value resulting from changes in market interest rates and are considered temporary as of September 30, 2012.

Note 6:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of September 30, 2012 and December 31, 2011:

(dollars in thousands)
 
September 30, 2012
   
December 31, 2011
 
             
Commercial real estate
  $ 344,149     $ 344,377  
Construction and land development
    29,744       35,061  
Commercial and industrial
    108,665       87,668  
Owner occupied real estate
    117,959       102,777  
Consumer and other
    20,370       16,683  
Residential mortgage
    2,467       3,150  
Total loans receivable
    623,354       589,716  
Deferred costs (fees)
    (176 )     (224 )
Allowance for loan losses
    (9,798 )     (12,050 )
Net loans receivable
  $ 613,380     $ 577,442  

 
 
 
14

 

 
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 loans, but also include internally classified accruing loans. 

The following table summarizes information with regard to impaired loans by loan portfolio class as of September 30, 2012 and December 31, 2011:

   
September 30, 2012
   
December 31, 2011
 
 
 
(dollars in thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
 
 
With no related allowance recorded:
                                   
Commercial real estate
  $ 16,200     $ 16,282     $ -     $ 11,053     $ 11,123     $ -  
Construction and land development
    4,842       9,825       -       6,165       12,011       -  
Commercial and industrial
    5,178       8,282       -       4,781       4,895       -  
Owner occupied real estate
    505       505       -       506       506       -  
Consumer and other
    914       1,141       -       958       1,196       -  
Total
  $ 27,639     $ 36,035     $ -     $ 23,463     $ 29,731     $ -  

With an allowance recorded:
                                   
Commercial real estate
  $ 10,138     $ 10,138     $ 1,681     $ 9,023     $ 9,023     $ 2,066  
Construction and land development
    733       1,933       83       818       1,933       98  
Commercial and industrial
    1,992       2,114       609       3,539       6,009       629  
Owner occupied real estate
    3,527       3,527       872       1,356       1,356       311  
Consumer and other
    146       153       47       -       -       -  
Total
  $ 16,536     $ 17,865     $ 3,292     $ 14,736     $ 18,321     $ 3,104  

Total Impaired Loans:
                                   
Commercial real estate
  $ 26,338     $ 26,420     $ 1,681     $ 20,076     $ 20,146     $ 2,066  
Construction and land development
    5,575       11,758       83       6,983       13,944       98  
Commercial and industrial
    7,170       10,396       609       8,320       10,904       629  
Owner occupied real estate
    4,032       4,032       872       1,862       1,862       311  
Consumer and other
    1,060       1,294       47       958       1,196       -  
Total
  $ 44,175     $ 53,900     $ 3,292     $ 38,199     $ 48,052     $ 3,104  




 
15

 


         The following table presents additional information regarding the Company’s impaired loans for the three and nine months ended September 30, 2012 and September 30, 2011:
 
   
Three Months Ended September 30,
 
   
2012
   
2011
 
 
 
(dollars in thousands)
 
Average Recorded Investment
   
Interest Income Recognized
   
Average Recorded Investment
   
Interest Income Recognized
 
 
With no related allowance recorded:
                       
Commercial real estate
  $ 15,728     $ 186     $ 28,726     $ 231  
Construction and land development
    4,878       27       18,286       45  
Commercial and industrial
    4,955       28       2,313       27  
Owner occupied real estate
    673       3       1,436       9  
Consumer and other
    898       4       739       -  
Total
  $ 27,132     $ 248     $ 51,500     $ 312  
 
With an allowance recorded:
                       
Commercial real estate
  $ 9,256     $ 124     $ 13,951     $ 159  
Construction and land development
    923       -       2,285       4  
Commercial and industrial
    2,480       16       3,956       5  
Owner occupied real estate
    3,123       48       2,066       32  
Consumer and other
    121       -       -       -  
Total
  $ 15,903     $ 188     $ 22,258     $ 200  

Total Impaired Loans:                                 
Commercial real estate
  $ 24,984     $ 310     $ 42,677     $ 390  
Construction and land development
    5,801       27       20,571       49  
Commercial and industrial
    7,435       44       6,269       32  
Owner occupied real estate
    3,796       51       3,502       41  
Consumer and other
    1,019       4       739       -  
Total
  $ 43,035     $ 436     $ 73,758     $ 512  
 
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $225,000 and $503,000 for the three months ended September 30, 2012 and 2011, respectively.



 
16

 

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
 
 
(dollars in thousands)
 
Average Recorded Investment
   
Interest Income Recognized
   
Average Recorded Investment
   
Interest Income Recognized
 
 
With no related allowance recorded:
                       
Commercial real estate
  $ 14,786     $ 556     $ 31,140     $ 822  
Construction and land development
    4,946       86       17,328       144  
Commercial and industrial
    4,509       106       3,083       80  
Owner occupied real estate
    1,013       30       1,710       28  
Consumer and other
    866       8       709       -  
Total
  $ 26,120     $ 786     $ 53,970     $ 1,074  
 
With an allowance recorded:
                       
Commercial real estate
  $ 7,488     $ 259     $ 12,901     $ 411  
Construction and land development
    1,305       -       5,545       25  
Commercial and industrial
    3,454       35       3,784       16  
Owner occupied real estate
    2,315       96       2,610       96  
Consumer and other
    73       -       -       -  
Total
  $ 14,635     $ 390     $ 24,840     $ 548  
 
Total Impaired Loans:                         
Commercial real estate
  $ 22,274     $ 815     $ 44,041     $ 1,233  
Construction and land development
    6,251       86       22,873       169  
Commercial and industrial
    7,963       141       6,867       96  
Owner occupied real estate
    3,328       126       4,320       124  
Consumer and other
    939       8       709       -  
Total
  $ 40,755     $ 1,176     $ 78,810     $ 1,622  


If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $545,000 and $1.6 million for the nine months ended September 30, 2012 and 2011, respectively.


 
17

 


The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three and nine months ended September 30, 2012 and September 30, 2011:
 
 
 
(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, 2012
                                           
Allowance for loan losses:
                                           
                                                 
Beginning balance:
  $ 3,961     $ 1,416     $ 1,816     $ 1,626     $ 134     $ 16     $ 416     $ 9,385  
Charge-offs
    (133 )     -       (303 )     -       (1 )     -       -       (437 )
Recoveries
    -       -       -       -       -       -       -       -  
Provisions (credits)
    794       (173 )     37       335       55       2       (200 )     850  
Ending balance
  $ 4,622     $ 1,243     $ 1,550     $ 1,961     $ 188     $ 18     $ 216     $ 9,798  
                                                                 
Three months ended Septe