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 Exchange Act of 1934  For the quarterly period ended March 31, 2013.
 
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 issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share
25,972,897
Title of Class
Number of Shares Outstanding as of May 9, 2013
 
 

 
 
 

 

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of March 31, 2013 and December 31, 2012 (unaudited)
 
Consolidated statements of income for the three months ended March 31, 2013 and 2012 (unaudited)
  Consolidated statements of comprehensive income for the three months ended March 31, 2013 and 2012 (unaudited) 3
 
Consolidated statements of cash flows for the three months ended March 31, 2013 and 2012 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2013 and 2012 (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
March 31, 2013 and December 31, 2012
(Dollars in thousands, except per share data)
(unaudited)

   
March 31, 2013
   
December 31, 2012
 
ASSETS
           
Cash and due from banks
  $ 9,592     $ 9,097  
Interest bearing deposits with banks
    62,337       118,907  
Cash and cash equivalents
    71,929       128,004  
                 
Investment securities available for sale, at fair value
    173,550       189,259  
Investment securities held to maturity, at amortized cost (fair value of $69 and $69, respectively)
    68       67  
Restricted stock, at cost
    3,276       3,816  
Loans held for sale
    165       82  
Loans receivable (net of allowance for loan losses of $9,353 and $9,542, respectively)
    617,769       608,359  
Premises and equipment, net
    21,630       21,976  
Other real estate owned, net
    8,268       8,912  
Accrued interest receivable
    3,273       3,128  
Bank owned life insurance
    10,503       10,490  
Other assets
    15,653       14,565  
Total Assets
  $ 926,084     $ 988,658  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
Demand – non-interest bearing
  $ 149,857     $ 145,407  
Demand – interest bearing
    159,601       180,440  
Money market and savings
    425,753       440,120  
Time deposits
    90,927       123,234  
Total Deposits
    826,138       889,201  
Accrued interest payable
    494       301  
Other liabilities
    6,456       6,778  
Subordinated debt
    22,476       22,476  
Total Liabilities
    855,564       918,756  
                 
Shareholders’ Equity
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued
    -       -  
Common stock, par value $0.01 per share: 50,000,000 shares authorized; shares issued 26,501,742
    265       265  
Additional paid in capital
    106,825       106,753  
Accumulated deficit
    (33,236 )     (34,228 )
Treasury stock at cost (416,303 shares)
    (3,099 )     (3,099 )
Stock held by deferred compensation plan
    (809 )     (809 )
Accumulated other comprehensive income
    574       1,020  
Total Shareholders’ Equity
    70,520       69,902  
Total Liabilities and Shareholders’ Equity
  $ 926,084     $ 988,658  


(See notes to consolidated financial statements)


 
1

 


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 2013 and 2012
(Dollars in thousands, except per share data)
 (unaudited)

   
Three Months Ended
 March 31,
 
   
2013
   
2012
 
Interest income
           
Interest and fees on taxable loans
  $ 7,837     $ 8,020  
Interest and fees on tax-exempt loans
    91       70  
Interest and dividends on taxable investment securities
    1,047       1,269  
Interest and dividends on tax-exempt investment securities
    73       116  
Interest on federal funds sold and other interest-earning assets
    59       101  
Total interest income
    9,107       9,576  
Interest expense
               
Demand- interest bearing
    195       171  
Money market and savings
    502       863  
Time deposits
    279       581  
Other borrowings
    278       285  
Total interest expense
    1,254       1,900  
Net interest income
    7,853       7,676  
Provision (credit) for loan losses
    -       (750 )
Net interest income after provision (credit) for loan losses
    7,853       8,426  
Non-interest income
               
Loan advisory and servicing fees
    338       211  
Gain on sales of SBA loans
    650       1,086  
Service fees on deposit accounts
    234       210  
Legal settlements
    238       105  
Gain on sale of investment securities
    703       -  
Other-than-temporary impairment losses
    -       (17 )
Portion recognized in other comprehensive income (before taxes)
    -       -  
Net impairment loss on investment securities
    -       (17 )
Bank owned life insurance income
    13       19  
Other non-interest income
    67       32  
Total non-interest income
    2,243       1,646  
Non-interest expense
               
Salaries and employee benefits
    4,287       4,134  
Occupancy
    844       844  
Depreciation and amortization
    483       518  
Legal
    364       889  
Other real estate owned
    917       98  
Advertising
    101       50  
Data processing
    108       264  
Insurance
    158       134  
Professional fees
    323       293  
Regulatory assessments and costs
    344       338  
Taxes, other
    250       260  
Other operating expenses
    951       1,014  
Total non-interest expense
    9,130       8,836  
Income before benefit for income taxes
    966       1,236  
Benefit for income taxes
    (26 )     (69 )
Net income
  $ 992     $ 1,305  
Net income per share
               
Basic
  $ 0.04     $ 0.05  
Diluted
  $ 0.04     $ 0.05  
 
(See notes to consolidated financial statements)
 

 
 
2

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2013 and 2012
(Dollars in thousands)
(unaudited)
 

   
Three Months Ended
March 31,
 
   
2013
   
2012
 
             
Net income
  $ 992     $ 1,305  
                 
Other comprehensive income (loss), net of tax
               
Unrealized gain on securities (pre-tax $6 and $230, respectively)
    4        147  
Reclassification adjustment for securities gains (pre-tax $703 and $-, respectively)
    (450 )     -  
Reclassification adjustment for impairment charge (pre-tax $- and $17, respectively)
    -       11  
                 
Total other comprehensive income (loss)
    (446 )     158  
                 
Total comprehensive income
  $ 546     $ 1,463  
                 
 
(See notes to consolidated financial statements)




 
3

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2013 and 2012
(Dollars in thousands)
(unaudited)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
Cash flows from operating activities
           
Net income
  $ 992     $ 1,305  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision (credit) for loan losses
    -       (750 )
Loss on sale of other real estate owned
    -       10  
Write down of other real estate owned
    809       -  
Depreciation and amortization
    483       518  
Stock based compensation
    72       89  
Gain on sale and call of investment securities
    (703 )     -  
Impairment charges on investment securities
    -       17  
Amortization of premiums on investment securities
    177       67  
Proceeds from sales of SBA loans originated for sale
    6,563       11,408  
SBA loans originated for sale
    (5,996 )     (11,272 )
Gains on sales of SBA loans originated for sale
    (650 )     (1,086 )
Increase in value of bank owned life insurance
    (13 )     (19 )
Increase in accrued interest receivable and other assets
    (982 )     (206 )
(Decrease) increase in accrued interest payable and other liabilities
    (129 )     104  
Net cash provided by operating activities
    623       185  
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
    (1,425 )     (14,775 )
Proceeds from the sale of securities available for sale
    7,946       -  
Proceeds from the maturity or call of securities available for sale
    9,016       6,450  
Proceeds from redemption of FHLB stock
    540       259  
Net increase in loans
    (9,575 )     (14,314 )
Net proceeds from sale of other real estate owned
    -       334  
Premises and equipment expenditures
    (137 )     (142 )
Net cash provided by (used in) investing activities
    6,365       (22,188 )
                 
Cash flows from financing activities
               
Net decrease in demand, money market and savings deposits
    (30,756 )     (55,376 )
Net decrease in time deposits
    (32,307 )     (39,861 )
Net increase in short-term borrowings
    -       4,516  
Net cash used in financing activities
    (63,063 )     (90,721 )
                 
Net decrease in cash and cash equivalents
    (56,075 )     (112,724 )
Cash and cash equivalents, beginning of year
    128,004       230,955  
Cash and cash equivalents, end of period
  $ 71,929     $ 118,231  
                 
Supplemental disclosures:
               
Interest paid
  $ 1,061     $ 1,989  
Non-cash transfers from loans to other real estate owned
  $ 165     $ -  

(See notes to consolidated financial statements)


 
4

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2013 and 2012
(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, 2013
  $ 265     $ 106,753     $ (34,228 )   $ (3,099 )   $ (809 )   $ 1,020     $ 69,902  
                                                         
Net income
                    992                               992  
Other comprehensive loss, net of tax
                                            (446 )     (446 )
Stock based compensation
            72                                       72  
                                                         
Balance March 31, 2013
  $ 265     $ 106,825     $ (33,236 )   $ (3,099 )   $ (809 )   $ 574     $ 70,520  
                                                         
                                                         
Balance January 1, 2012
  $ 265     $ 106,383     $ (37,842 )   $ (3,099 )   $ (809 )   $ (47 )   $ 64,851  
                                                         
Net income
                    1,305                               1,305  
Other comprehensive income, net of tax
                                            158       158  
Stock based compensation
            89                                       89  
                                                         
Balance March 31, 2012
  $ 265     $ 106,472     $ (36,537 )   $ (3,099 )   $ (809 )   $ 111     $ 66,403  
                                                         

(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 month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, fair value of financial instruments 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.  An estimate for the carrying value of other real estate owned is normally determined through appraisals which are updated on a regular basis or through agreements of sale that have been negotiated. 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 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.


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 March 31, 2013, 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.
 
 
 
 
7

 
 
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 2013 and 2012 are as follows:

   
2013
 
2012
Dividend yield(1)
    0.0 %     0.0 %
Expected volatility(2)
 
54.88% to 54.89
    53.12 %
Risk-free interest rate(3)
 
1.28% to 1.41
    1.36 %
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 vesting period, the maximum ten year term and review of historical behavior.

During the three months ended March 31, 2013 and 2012, 109,787 options and 21,000 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At March 31, 2013, the intrinsic value of the 1,192,280 options outstanding was $294,080, while the intrinsic value of the 288,717 exercisable (vested) options was $34,681. During the three months ended March 31, 2013, 80,500 options were forfeited with a weighted average grant date fair value of $284,695.

Information regarding stock based compensation for the three months ended March 31, 2013 and 2012 is set forth below:
 
   
2013
   
2012
 
Stock based compensation expense recognized
  $ 72,000     $ 89,000  
Number of unvested stock options
    903,563       855,600  
Fair value of unvested stock options
  $ 1,231,859     $ 1,555,074  
Amount remaining to be recognized as expense
  $ 751,865     $ 734,256  

The remaining amount of $751,865 will be recognized as expense through March 2017.

Earnings per Share

Earnings per share (“EPS”) consist of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income 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 months ended March 31, 2013 and 2012, the effect of CSEs (convertible securities related to the trust preferred securities only) 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 months ended March 31, 2013 and 2012 is as follows (in thousands, except per share amounts):
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
Net income (basic and diluted)
  $ 992     $ 1,305  
                 
Weighted average shares outstanding
    25,973       25,973  
                 
Net income per share – basic
  $ 0.04     $ 0.05  
                 
Weighted average shares outstanding (including dilutive CSEs)
    26,015       25,976  
                 
Net income per share – diluted
  $ 0.04     $ 0.05  


Recent Accounting Pronouncements

ASU 2013-02

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Comprehensive Income.” The amendments in this ASU are intended to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income.  For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts.  This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period.  The ASU was effective for public entities for reporting periods beginning after December 15, 2012 and did not have a material impact on the Company’s financial statements.

Note 3:  Legal Proceedings

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business.  While any litigation involves an element of uncertainty, management 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.



 
9

 

 
Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at March 31, 2013 and December 31, 2012 is as follows:

   
At March 31, 2013
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 90,190     $ 1,395     $ (103 )   $ 91,482  
Mortgage-backed securities
    19,379       880       (27 )     20,232  
Municipal securities
    5,360       196       (5 )     5,551  
Corporate bonds
    32,217       854       (47 )     33,024  
Asset-backed securities
    19,601       288       -       19,889  
Trust preferred securities
    5,777       -       (2,539 )     3,238  
Other securities
    131       3       -       134  
Total securities available for sale
  $ 172,655     $ 3,616     $ (2,721 )   $ 173,550  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Other securities
    67       1       -       68  
Total securities held to maturity
  $ 68     $ 1     $ -     $ 69  
 
   
At December 31, 2012
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 97,959     $ 1,830     $ (6 )   $ 99,783  
Mortgage-backed securities
    20,626       1,014       -       21,640  
Municipal securities
    11,150       967       (16 )     12,101  
Corporate bonds
    32,231       639       (185 )     32,685  
Asset-backed securities
    19,785       135       (191 )     19,729  
Trust preferred securities
    5,785       -       (2,598 )     3,187  
Other securities
    131       3       -       134  
Total securities available for sale
  $ 187,667     $ 4,588     $ (2,996 )   $ 189,259  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Other securities
    66       2       -       68  
Total securities held to maturity
  $ 67     $ 2     $ -     $ 69  

       The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at March 31, 2013 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
  $ 20,105     $ 20,507     $ 47     $ 48  
After 1 year to 5 years
    66,642       68,398       21       21  
After 5 years to 10 years
    77,801       76,206       -       -  
After 10 years
    8,107       8,439       -       -  
Total
  $ 172,655     $ 173,550     $ 68     $ 69  
 
 
 
 
10

 

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

As of March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012.  In addition, the Company did not hold any private issued CMO’s as of March 31, 2013 and December 31, 2012.  As of March 31, 2013 and December 31, 2012, the asset-backed securities consisted solely of Sallie Mae bonds collateralized by student loans which are guaranteed by the U.S. Department of Education.

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 months ended March 31, 2013 and 2012 amounted to $0 and $17,000, respectively.

The Company realized gross gains on the sale of securities of $703,000 during the three months ended March 31, 2013.  The related sale proceeds amounted to $7.9 million.  The tax provision applicable to these gross gains for the three months ended March 31, 2013 amounted to approximately $253,000. No securities were sold during the three months ended March 31, 2012.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at March 31, 2013 and 2012 for which a portion of OTTI was recognized in other comprehensive income:
 
(dollars in thousands)
 
2013
   
2012
 
             
Beginning Balance, January 1st
  $ 3,959     $ 3,925  
Additional credit-related impairment loss on securities for which an
               
     other-than-temporary impairment was previously recognized
    -       17  
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, March 31st,
  $ 3,959     $ 3,942  


 
11

 

 
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 March 31, 2013
 
   
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
  $ 19,395     $ 103     $ -     $ -     $ 19,395     $ 103  
Mortgage-backed securities
    1,233       27       -       -       1,233       27  
Municipal securities
    1,420       5       -       -       1,420       5  
Corporate bonds
    -       -       4,953       47       4,953       47  
Trust preferred securities
    -       -       3,238       2,539       3,238       2,539  
Total
  $ 22,048     $ 135     $ 8,191     $ 2,586     $ 30,239     $ 2,721  
 
   
At December 31, 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
  $ 9,991     $ 6     $ -     $ -     $ 9,991     $ 6  
Municipal securities
    1,050       16       -       -       1,050       16  
Corporate bonds
    -       -       9,811       185       9,811       185  
Asset-backed securities
    9,218       191       -       -       9,218       191  
Trust preferred securities
    -       -       3,187       2,598       3,187       2,598  
Total
  $ 20,259     $ 213     $ 12,998     $ 2,783     $ 33,257     $ 2,996  
 
The impairment of the investment portfolio totaled $2.7 million with a total fair value of $30.2 million at March 31, 2013.  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 $2.5 million at March 31, 2013.  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.

The following table provides additional detail about trust preferred securities as of March 31, 2013.
 
(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 %     0.33 %   $ -  
Preferred Term Securities VII
Mezzanine Notes
    1,489       1,140       (349 )     C       12       49       0.34       2,173  
TPREF Funding II
Class B Notes
    739       338       (401 )     C       16       44       0.39       260  
TPREF Funding III
Class B2 Notes
    1,520       727       (793 )     C       17       35       0.33       480  
Trapeza CDO I, LLC
Class C1 Notes
    556       255       (301 )     C       10       47       0.38       470  
ALESCO Preferred Funding IV
Class B1 Notes
    604       318       (286 )     C       39       14       0.36       396  
ALESCO Preferred Funding V
Class C1 Notes
    820       420       (400 )     C       37       27       0.36       180  
Total
    $ 5,777     $ 3,238     $ (2,539 )             136       34 %           $ 3,959  
 
 
 
12

 
 

 
At March 31, 2013, the investment portfolio included eight municipal securities with a total market value of $5.6 million.  One of these securities carried an unrealized loss at March 31, 2013.  Each of the municipal securities is 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 Pennsylvania where one municipal security had a market value of $1.4 million.  As of March 31, 2013, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.

At March 31, 2013, the investment portfolio included thirteen collateralized mortgage obligations with a total market value of $91.5 million.  Three of these securities carried an unrealized loss at March 31, 2013.  At March 31, 2013, the investment portfolio included forty-two mortgage-backed securities with a total market value of $20.2 million.  One of these securities carried an unrealized loss at March 31, 2013.  At March 31, 2013, the investment portfolio included seven corporate bonds with a total market value of $33.0 million.  One of these securities carried an unrealized loss at March 31, 2013.  At March 31, 2013, the investment portfolio included two asset-backed securities with a total market value of $19.9 million, the majority of which (97%) is guaranteed by the U.S. Department of Education. None of these securities carried an unrealized loss at March 31, 2013.  Management found no evidence of OTTI on any of these securities and the unrealized losses are due to changes in market value resulting from changes in market interest rates and are considered temporary as of March 31, 2013.

Note 6:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of March 31, 2013, and December 31, 2012:
 
(dollars in thousands)
 
March 31, 2013
   
December 31, 2012
 
             
Commercial real estate
  $ 332,407     $ 335,561  
Construction and land development
    27,614       26,659  
Commercial and industrial
    110,785       103,768  
Owner occupied real estate
    129,692       126,242  
Consumer and other
    24,359       23,449  
Residential mortgage
    2,425       2,442  
Total loans receivable
    627,282       618,121  
Deferred costs (fees)
    (160 )     (220 )
Allowance for loan losses
    (9,353 )     (9,542 )
Net loans receivable
  $ 617,769     $ 608,359  
 
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. 


 
13

 

 
The following table summarizes information with regard to impaired loans by loan portfolio class as of March 31, 2013 and December 31, 2012:

   
March 31, 2013
   
December 31, 2012
 
 
 
(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
  $ 21,146     $ 21,901     $ -     $ 19,231     $ 20,000     $ -  
Construction and land development
    3,663       9,984       -       3,153       6,312       -  
Commercial and industrial
    2,041       2,958       -       3,793       7,106       -  
Owner occupied real estate
    -       -       -       505       505       -  
Consumer and other
    762       1,015       -       912       1,146       -  
Total
  $ 27,612     $ 35,858     $ -     $ 27,594     $ 35,069     $ -  

With an allowance recorded:
                                   
Commercial real estate
  $ 3,343     $ 3,344     $ 607     $ 6,085     $ 6,085     $ 1,077  
Construction and land development
    -       -       -       593       3,700       70  
Commercial and industrial
    4,829       7,337       1,327       3,147       3,255       861  
Owner occupied real estate
    3,431       3,431       840       3,450       3,450       860  
Consumer and other
    -       -       -       146       155       75  
Total
  $ 11,603     $ 14,112     $ 2,774     $ 13,421     $ 16,645     $ 2,943  

Total:
                                   
Commercial real estate
  $ 24,489     $ 25,245     $ 607     $ 25,316     $ 26,085     $ 1,077  
Construction and land development
    3,663       9,984       -       3,746       10,012       70  
Commercial and industrial
    6,870       10,295       1,327       6,940       10,361       861  
Owner occupied real estate
    3,431       3,431       840       3,955       3,955       860  
Consumer and other
    762       1,015       -       1,058       1,301       75  
Total
  $ 39,215     $ 49,970     $ 2,774     $ 41,015     $ 51,714     $ 2,943  
 
 
 
 
14

 
 
 
The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2013 and March 31, 2012:

   
Three Months Ended March 31,
 
   
2013
   
2012
 
 
 
(dollars in thousands)
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
 
With no related allowance recorded:
                       
Commercial real estate
  $ 20,189     $ 219     $ 14,615     $ 193  
Construction and land development
    3,408       21       3,428       30  
Commercial and industrial
    2,917       6       2,627       35  
Owner occupied real estate
    252       -       1,490       27  
Consumer and other
    837       1       916       2  
Total
  $ 27,603     $ 247     $ 23,076     $ 287  


With an allowance recorded:
                       
Commercial real estate
  $ 4,714     $ 36     $ 5,637     $ 55  
Construction and land development
    296       -       3,428       -  
Commercial and industrial
    3,988       14       5,595       14  
Owner occupied real estate
    3,441       36       1,350       12  
Consumer and other
    73       -       -       -  
Total
  $ 12,512     $ 86     $ 16,010     $ 81  

Total:
                       
Commercial real estate
  $ 24,903     $ 255     $ 20,252     $ 248  
Construction and land development
    3,704       21       6,856       30  
Commercial and industrial
    6,905       20       8,222       49  
Owner occupied real estate
    3,693       36       2,840       39  
Consumer and other
    910       1       916       2  
Total
  $ 40,115     $ 333     $ 39,086     $ 368  
 
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $209,000 and $167,000 for the three months ended March 31, 2013 and 2012, respectively.


 
15

 


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 months ended March 31, 2013 and 2012:

 
(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 March 31, 2013
                                           
Allowance for loan losses:
                                           
                                                 
Beginning balance:
  $ 3,979     $ 1,273     $ 1,880     $ 1,967     $ 234     $ 17     $ 192     $ 9,542  
Charge-offs
    (60 )     (55 )     -       -       (75 )     -       -       (190 )
Recoveries
    -       -       1       -       -       -       -       1  
Provisions (credits)
    (662 )     617       455       (670 )     11       (3 )     252       -  
Ending balance
  $ 3,257     $ 1,835     $ 2,336     $ 1,297     $ 170     $ 14     $ 444     $ 9,353  
                                                                 
Three months ended March 31, 2012
                                                         
Allowance for loan losses:
                                                         
                                                                 
Beginning balance:
  $ 7,372     $ 558     $ 1,928     $ 1,963     $ 113     $ 23     $ 93     $ 12,050  
Charge-offs
    (492 )     -       (52 )     -       (1 )     -       -       (545 )
Recoveries
    -       -       -       -       1       -       -       1  
Provisions (credits)
    (2,509 )     1,611       343       (508     (7 )     (3 )     323       (750 )
Ending balance
  $ 4,371     $ 2,169     $ 2,219     $ 1,455     $ 106     $ 20     $ 416     $ 10,756  
                                                                 

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of March 31, 2013 and December 31, 2012:

 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and Industrial
   
Owner Occupied Real Estate
   
Consumer and Other
   
Residential Mortgage
   
 
Unallocated
   
 
Total
 
                                                 
March 31, 2013
                                           
Allowance for loan losses:
                                           
Individually evaluated for impairment
  $  607     $  -     $  1,327     $  840     $  -     $  -     $  -     $  2,774  
Collectively evaluated for impairment
    2,650       1,835       1,009       457       170       14       444       6,579  
Total allowance for loan losses
  $  3,257     $  1,835     $  2,336     $  1,297     $  170     $  14     $  444     $  9,353  
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
  $ 24,489     $ 3,663     $ 6,870     $ 3,431     $ 762     $ -     $ -     $ 39,215  
Loans evaluated collectively
    307,918       23,951       103,915       126,261       23,597       2,425       -       588,067  
Total loans receivable
  $ 332,407     $ 27,614     $ 110,785     $ 129,692     $ 24,359     $ 2,425     $ -     $ 627,282  
                                                                 
 
 
 
 
16

 

 
 

 
(dollars in thousands)
   
Commercial Real Estate
     
Construction and Land Development
     
Commercial and Industrial
     
Owner Occupied Real Estate
     
Consumer and Other
     
Residential Mortgage
     
Unallocated
     
Total
 
December 31, 2012
                                               
Allowance for loan losses:
                                               
Individually evaluated for impairment
  $  1,077     $  70     $  861     $  860     $  75     $  -     $  -     $  2,943  
Collectively evaluated for impairment