republicfirst10q.htm
 
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[ X ]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 August 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 June 30, 2013 and December 31, 2012 (unaudited)
 
 
Consolidated statements of income for the three and six months ended June 30, 2013 and 2012 (unaudited)
 
 
 
 
  Consolidated statements of comprehensive income (loss) for the three and six months ended June, 2013 and 2012 (unaudited)  3
 
Consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 (unaudited)
 
 
Consolidated statements of changes in shareholders’ equity for the six months ended June 30, 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
June 30, 2013 and December 31, 2012
(Dollars in thousands, except per share data)
(unaudited)
 
   
June 30, 2013
   
December 31, 2012
 
ASSETS
           
Cash and due from banks
  $ 8,934     $ 9,097  
Interest bearing deposits with banks
    47,850       118,907  
    Cash and cash equivalents
    56,784       128,004  
                 
Investment securities available for sale, at fair value
    184,371       189,259  
Investment securities held to maturity, at amortized cost (fair value of $69 and $69, respectively)
    68       67  
Restricted stock, at cost
    2,326       3,816  
Loans held for sale
    282       82  
Loans receivable (net of allowance for loan losses of $9,332 and $9,542, respectively)
    628,401       608,359  
Premises and equipment, net
    21,232       21,976  
Other real estate owned, net
    6,584       8,912  
Accrued interest receivable
    2,969       3,128  
Bank owned life insurance
    -       10,490  
Other assets
    16,649       14,565  
    Total Assets
  $ 919,666     $ 988,658  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $ 143,485     $ 145,407  
   Demand – interest bearing
    180,802       180,440  
   Money market and savings
    408,355       440,120  
   Time deposits
    88,210       123,234  
       Total Deposits
    820,852       889,201  
Accrued interest payable
    522       301  
Other liabilities
    6,448       6,778  
Subordinated debt
    22,476       22,476  
    Total Liabilities
    850,298       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
    106,908       106,753  
Accumulated deficit
    (32,225 )     (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 (loss)
    (1,672 )     1,020  
    Total Shareholders’ Equity
    69,368       69,902  
    Total Liabilities and Shareholders’ Equity
  $ 919,666     $ 988,658  
 
(See notes to consolidated financial statements)




 
1

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2013 and 2012
(Dollars in thousands, except per share data)
 (unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Interest income:
                       
Interest and fees on taxable loans
  $ 7,991     $ 8,114     $ 15,828     $ 16,134  
Interest and fees on tax-exempt loans
    89       65       180       135  
Interest and dividends on taxable investment securities
    1,043       1,269       2,090       2,538  
Interest and dividends on tax-exempt investment securities
    48       117       121       233  
Interest on federal funds sold and other interest-earning assets
    44       84       103       185  
Total interest income
    9,215       9,649       18,322       19,225  
Interest expense:
                               
Demand- interest bearing
    207       185       402       356  
Money market and savings
    428       722       930       1,585  
Time deposits
    204       433       483       1,014  
Other borrowings
    278       284       556       569  
Total interest expense
    1,117       1,624       2,371       3,524  
Net interest income
    8,098       8,025       15,951       15,701  
Provision (credit) for loan losses
    925       500       925       (250)  
Net interest income after provision (credit) for loan losses
    7,173       7,525       15,026       15,951  
Non-interest income:
                               
Loan advisory and servicing fees
    436       329       774       540  
Gain on sales of SBA loans
    2,107       1,110       2,757       2,196  
Service fees on deposit accounts
    265       226       499       436  
Legal settlements
    -       -       238       105  
Gain on sale of investment securities
    -       774       703       774  
Other-than-temporary impairment losses
    -       (16)       -       (33)  
Portion recognized in other comprehensive income (before taxes)
    -       2       -       2  
     Net impairment loss on investment securities
    -       (14)       -       (31)  
Bank owned life insurance income
    -       16       13       35  
Other non-interest income
    62       58       129       90  
Total non-interest income
    2,870       2,499       5,113       4,145  
Non-interest expenses:
                               
 Salaries and employee benefits
    4,503       3,963       8,790       8,097  
 Occupancy
    876       872       1,720       1,716  
 Depreciation and amortization
    472       506       955       1,024  
 Legal
    503       898       867       1,787  
 Other real estate owned
    109       104       1,026       202  
 Advertising
    117       100       218       150  
 Data processing
    307       311       415       575  
 Insurance
    153       176       311       310  
 Professional fees
    359       298       682       591  
 Regulatory assessments and costs
    241       351       585       689  
 Taxes, other
    253       277       503       537  
 Other operating expenses
    1,163       1,154       2,114       2,168  
Total non-interest expense
    9,056       9,010       18,186       17,846  
Income before provision (benefit) for income taxes
    987       1,014       1,953       2,250  
Provision (benefit) for income taxes
    (24)       7       (50)       (62)  
Net income
  $ 1,011     $ 1,007     $ 2,003     $ 2,312  
Net income per share:
                               
Basic
  $ 0.04     $ 0.04     $ 0.08     $ 0.09  
Diluted
  $ 0.04     $ 0.04     $ 0.08     $ 0.09  
 
(See notes to consolidated financial statements)
 
 
 
2

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2013 and 2012
(Dollars in thousands)
(unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
    2013    
2012
   
2013
   
2012
 
                         
Net income
  $ 1,011     $ 1,007     $ 2,003     $ 2,312  
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized gain (loss) on securities (pre-tax $(3,504), $376, $(3,498), and $605, respectively)
    (2,246 )     241       (2,242 )     388  
Reclassification adjustment for securities gains (pre-tax $-, $774, $703, and $774, respectively)
    -       (503 )     (450 )     (503 )
Reclassification adjustment for impairment charge (pre-tax $-, $14, $-, and $31, respectively)
    -       9       -       20  
              (253 )                
Total other comprehensive loss
    (2,246 )     (2,692 )     (95 )
                                 
Total comprehensive income (loss)
  $ (1,235 )   $ 754     $ (689 )   $ 2,217  
 
 (See notes to consolidated financial statements)






 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
3

 
 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2013 and 2012
(Dollars in thousands)
(unaudited)
 
   
Six Months Ended June 30,
 
   
2013
   
2012
 
Cash flows from operating activities
           
Net income
  $ 2,003     $ 2,312  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision (credit) for loan losses
    925       (250 )
(Gain) loss on sale of other real estate owned
    (229 )     10  
Write down of other real estate owned
    809       -  
Depreciation and amortization
    955       1,024  
Stock based compensation
    155       192  
Gain on sale and call of investment securities
    (703 )     (774 )
Impairment charges on investment securities
    -       31  
Amortization of premiums on investment securities
    380       160  
Proceeds from sales of SBA loans originated for sale
    27,410       23,066  
SBA loans originated for sale
    (24,853 )     (20,920 )
Gains on sales of SBA loans originated for sale
    (2,757 )     (2,196 )
Increase in value of bank owned life insurance
    (13 )     (35 )
Increase in accrued interest receivable and other assets
    (416 )     (823 )
Decrease in accrued interest payable and other liabilities
    (109 )     (74 )
Net cash provided by operating activities
    3,557       1,723  
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
    (25,289 )     (40,902 )
Proceeds from the sale of securities available for sale
    7,946       22,590  
Proceeds from the maturity or call of securities available for sale
    18,352       13,265  
Proceeds from the maturity or call of securities held to maturity
    -       74  
Proceeds from redemption of FHLB stock
    1,490       505  
Net increase in loans
    (21,213 )     (17,836 )
Net proceeds from sale of other real estate owned
    1,994       334  
Surrender proceeds on bank owned life insurance
    10,503       -  
Premises and equipment expenditures
    (211 )     (289 )
Net cash used in investing activities
    (6,428 )     (22,259 )
                 
Cash flows from financing activities
               
Net decrease in demand, money market and savings deposits
    (33,325 )     (40,072 )
Net decrease in time deposits
    (35,024 )     (71,225 )
Net cash used in financing activities
    (68,349 )     (111,297 )
                 
Net decrease in cash and cash equivalents
    (71,220 )     (131,833 )
Cash and cash equivalents, beginning of year
    128,004       230,955  
Cash and cash equivalents, end of period
  $ 56,784     $ 99,122  
                 
Supplemental disclosures:
               
Interest paid
  $ 2,150     $ 3,820  
Income taxes paid
  $ 175     $ -  
Non-cash transfers from loans to other real estate owned
  $ 246     $ -  

(See notes to consolidated financial statements)
 
 
 
 
 
4

 


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Six Months Ended June 30, 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
                    2,003                               2,003  
Other comprehensive loss, net of tax
                                            (2,692 )     (2,692 )
Stock based compensation
            155                                       155  
                                                         
Balance June 30,  2013
  $ 265     $ 106,908     $ (32,225 )   $ (3,099 )   $ (809 )   $ (1,672 )   $ 69,368  
                                                         
                                                         
Balance January 1, 2012
  $ 265     $ 106,383     $ (37,842 )   $ (3,099 )   $ (809 )   $ (47 )   $ 64,851  
                                                         
Net income
                    2,312                               2,312  
Other comprehensive loss, net of tax
                                            (95 )     (95 )
Stock based compensation
            192                                       192  
                                                         
Balance June 30, 2012
  $ 265     $ 106,575     $ (35,530 )   $ (3,099 )   $ (809 )   $ (142 )   $ 67,260  

(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 six month periods ended June 30, 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 the years 2008 through 2011 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 June 30, 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 55.08
%    
53.12% to 54.21
%
Risk-free interest rate(3)
 
1.28% to 2.02
%    
1.01% to 1.61
%
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 six months ended June 30, 2013 and 2012, 109,787 options and 21,000 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At June 30, 2013, the intrinsic value of the 1,200,280 options outstanding was $344,580, while the intrinsic value of the 288,717 exercisable (vested) options was $38,036. During the six months ended June 30, 2013, 83,500 options were forfeited with a weighted average grant date fair value of $289,015.

Information regarding stock based compensation for the six months ended June 30, 2013 and 2012 is set forth below:
   
2013
     
2012
 
Stock based compensation expense recognized
  $ 155,000       $ 192,000  
Number of unvested stock options
    911,563         845,600  
Fair value of unvested stock options
  $ 1,245,470       $ 1,562,250  
Amount remaining to be recognized as expense
  $ 687,636       $ 638,125  

The remaining amount of $687,636 will be recognized as expense through June 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 and six months ended June 30, 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 and six months ended June, 2013 and 2012 is as follows (in thousands, except per share amounts):
 
     
Three Months Ended June 30,
     
Six Months Ended June 30,
 
     
2013
     
2012
     
2013
     
2012
 
Net income (basic and diluted)
  $ 1,011     $ 1,007     $ 2,003     $ 2,312  
                                 
Weighted average shares outstanding
    25,973       25,973       25,973       25,973  
                                 
Net income per share – basic
  $ 0.04     $ 0.04     $ 0.08     $ 0.09  
                                 
Weighted average shares outstanding (including dilutive CSEs)
    26,103       25,996       26,062       25,988  
                                 
Net income per share – diluted
  $ 0.04     $ 0.04     $ 0.08     $ 0.09  


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 June 30, 2013 and December 31, 2012 is as follows:

 
   
At June 30, 2013
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
    Fair
Value
 
Collateralized mortgage obligations
  $ 106,473     $ 588     $ (2,293 )   $ 104,768  
Mortgage-backed securities
    17,647       718       (60 )     18,305  
Municipal securities
    5,360       97       (97 )     5,360  
Corporate bonds
    32,203       773       -       32,976  
Asset-backed securities
    19,416       268       -       19,684  
Trust preferred securities
    5,766       -       (2,604 )     3,162  
Other securities
    115       1       -       116  
Total securities available for sale
  $ 186,980     $ 2,445     $ (5,054 )   $ 184,371  
                                 
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 June 30, 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
  $ 16,175     $ 16,516     $ 47     $ 48  
After 1 year to 5 years
    72,281       72,383       21       21  
After 5 years to 10 years
    91,165       87,946       -       -  
After 10 years
    7,359       7,526       -       -  
Total
  $ 186,980     $ 184,371     $ 68     $ 69  

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
 
 
 
10

 

 
As of June 30, 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 June 30, 2013 and December 31, 2012.  In addition, the Company did not hold any private issued CMO’s as of June 30, 2013 and December 31, 2012.  As of June 30, 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, accounting standards require 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.  There were no impairment charges (credit losses) on trust preferred securities for the three and six months ended June 30, 2013. Impairment charges (credit losses) on trust preferred securities for the three and six months ended June 30, 2012 amounted to $14,000 and $31,000, respectively.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at June 30, 2013 and 2012 for which a portion of OTTI was recognized in other comprehensive income:

   
June 30,
 
(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
    -       31  
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, June 30th
  $ 3,959     $ 3,956  
 
The Company realized gross gains on the sale of securities of $703,000 during the six months ended June 30, 2013.  The related sale proceeds amounted to $7.9 million.  The tax provision applicable to these gross gains in 2013 amounted to approximately $253,000. The Company realized gross gains on the sale of securities of $774,000 during the three and six months ended June 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.










 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 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
  $ 70,117     $ 2,293     $ -     $ -     $ 70,117     $ 2,293  
Mortgage-backed securities
    1,178       60       -       -       1,178       60  
Municipal securities
    1,328       97       -       -       1,328       97  
Corporate bonds
    -       -       -       -       -       -  
Trust preferred securities
    -       -       3,162       2,604       3,162       2,604  
Total
  $ 72,623     $ 2,450     $ 3,162     $ 2,604     $ 75,785     $ 5,054  
 
 
   
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 $5.1 million with a total fair value of $75.8 million at June 30, 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 $2.6 million at June 30, 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 June 30, 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 %     0.32 %   $ -  
Preferred Term Securities VII
Mezzanine
   Notes
    1,478       1,071       (407 )    C       13       46       0.33       2,173  
TPREF Funding II
Class B Notes
    739       336       (403 )    C       16       44       0.38       260  
TPREF Funding III
Class B2 Notes
    1,520       724       (796 )    C       17       35       0.32       480  
Trapeza CDO I, LLC
Class C1 Notes
    556       245       (311 )    C       9       49       0.39       470  
ALESCO Preferred
    Funding IV
Class B1 Notes
    604       326       (278 )    C       38       14       0.36       396  
ALESCO Preferred
    Funding V
Class C1 Notes
    820       420       (400 )    C       37       24       0.35       180  
Total
    $ 5,766       3,162     $ (2,604 )             135       33 %           $ 3,959  

At June 30, 2013, the investment portfolio included eight municipal securities with a total market value of $5.4 million.  One of these securities carried an unrealized loss at June 30, 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 $1.3 million.  As of June 30, 2013, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.
 
 
 
12

 

 
At June 30, 2013, the investment portfolio included eighteen collateralized mortgage obligations with a total market value of $104.8 million.  Thirteen of these securities carried an unrealized loss at June 30, 2013.  At June 30, 2013, the investment portfolio included forty-two mortgage-backed securities with a total market value of $18.3 million.  One of these securities carried an unrealized loss at June 30, 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 June 30, 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 June 30, 2013, and December 31, 2012:
             
(dollars in thousands)
 
June 30, 2013
   
December 31, 2012
 
             
Commercial real estate
  $ 329,599     $ 335,561  
Construction and land development
    31,455       26,659  
Commercial and industrial
    108,951       103,768  
Owner occupied real estate
    137,219       126,242  
Consumer and other
    28,413       23,449  
Residential mortgage
    2,400       2,442  
Total loans receivable
    638,037       618,121  
Deferred costs (fees)
    (304 )     (220 )
Allowance for loan losses
    (9,332 )     (9,542 )
Net loans receivable
  $ 628,401     $ 608,359  


A loan is considered impaired, 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 June 30, 2013 and December 31, 2012:

 
   
June 30, 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
  $ 12,919     $ 13,040     $ -     $ 19,231     $ 20,000     $ -  
Construction and land development
    1,029       4,244       -       3,153       6,312       -  
Commercial and industrial
    2,973       4,256       -       3,793       7,106       -  
Owner occupied real estate
    144       463       -       505       505       -  
Consumer and other
    668       917       -       912       1,146       -  
Total
  $ 17,733     $ 22,920     $ -     $ 27,594     $ 35,069     $ -  

With an allowance recorded:
                                   
Commercial real estate
  $ 8,227     $ 8,889     $ 958     $ 6,085     $ 6,085     $ 1,077  
Construction and land development
    593       3,700       217       593       3,700       70  
Commercial and industrial
    3,263       5,663       992       3,147       3,255       861  
Owner occupied real estate
    3,002       3,002       498       3,450       3,450       860  
Consumer and other
    -       -       -       146       155       75  
Total
  $ 15,085     $ 21,254     $ 2,665     $ 13,421     $ 16,645     $ 2,943  

Total:
                                   
Commercial real estate
  $ 21,146     $ 21,929     $ 958     $ 25,316     $ 26,085     $ 1,077  
Construction and land development
    1,622       7,944       217       3,746       10,012       70  
Commercial and industrial
    6,236       9,919       992       6,940       10,361       861  
Owner occupied real estate
    3,146       3,465       498       3,955       3,955       860  
Consumer and other
    668       917       -       1,058       1,301       75  
Total
  $ 32,818     $ 44,174     $ 2,665     $ 41,015     $ 51,714     $ 2,943  
















 
 

 
 
14

 
 

The following table presents additional information regarding the Company’s impaired loans for the three months ended June 30, 2013 and June 30, 2012:

 
Three Months Ended June 30,
 
 
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
  $ 15,343     $ 202     $ 15,879     $ 205  
Construction and land development
    1,822       8       5,227       29  
Commercial and industrial
    2,953       5       4,882       36  
Owner occupied real estate
    180       -       876       -  
Consumer and other
    725       -       784       2  
Total
  $ 21,023     $ 215     $ 27,648     $ 272  
 
With an allowance recorded:
                       
Commercial real estate
  $ 7,056     $ 25     $ 5,707     $ 52  
Construction and land development
    494       -       869       -  
Commercial and industrial
    3,504       14       3,350       12  
Owner occupied real estate
    3,149       37       2,472       36  
Consumer and other
    25       -       98       -  
Total
  $ 14,228     $ 76     $ 12,496     $ 100  

Total:
                       
Commercial real estate
  $ 22,399     $ 227     $ 21,586     $ 257  
Construction and land development
    2,316       8       6,096       29  
Commercial and industrial
    6,457       19       8,232       48  
Owner occupied real estate
    3,329       37       3,348       36  
Consumer and other
    750       -       882       2  
Total
  $ 35,251     $ 291     $ 40,144     $ 372  


If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $130,000 and $153,000 for the three months ended June 30, 2013 and 2012, respectively.








 
 
 
 
 
 
 
 

 
 
15

 


The following table presents additional information regarding the Company’s impaired loans for the six months ended June 30, 2013 and June 30, 2012:

   
Six Months Ended June 30,
 
   
2013
 
2012
 
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded Investment
   
Interest
Income
Recognized
 
(dollars in thousands)
                       
With no related allowance recorded:
                       
Commercial real estate
  $ 17,766     $ 421     $ 14,315     $ 370  
Construction and land development
    2,615       29       4,980       59  
Commercial and industrial
    2,935       11       4,286       78  
Owner occupied real estate
    216       -       1,183       27  
Consumer and other
    781       1       850       4  
Total
  $ 24,313     $ 462     $ 25,614     $ 538  
 
With an allowance recorded:
                       
Commercial real estate
  $ 5,885     $ 61     $ 6,604     $ 135  
Construction and land development
    395       -       1,496       -  
Commercial and industrial
    3,746       28       3,941       19  
Owner occupied real estate
    3,295       73       1,911       48  
Consumer and other
    49       -       49       -  
Total
  $ 13,370     $ 162     $ 14,001     $ 202  

Total:
                       
Commercial real estate
  $ 23,651     $ 482     $ 20,919     $ 505  
Construction and land development
    3,010       29       6,476       59  
Commercial and industrial
    6,681       39       8,227       97  
Owner occupied real estate
    3,511       73       3,094       75  
Consumer and other
    830       1       899