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 September 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 Registrant’s classes of common stock, as of the latest practicable date.

Common Stock, $0.01 per share
25,972,897
Title of Class
Number of Shares Outstanding as of November 11, 2013
 
 
 
 
 

 


REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of September 30, 2013 and December 31, 2012 (unaudited)
 
Consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)
 
Consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2013 and 2012 (unaudited)
 
Consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the nine months ended September 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
September 30, 2013 and December 31, 2012
(Dollars in thousands, except per share data)
(unaudited)
 
   
September 30, 2013
   
December 31, 2012
 
ASSETS
           
Cash and due from banks
  $ 11,468     $ 9,097  
Interest bearing deposits with banks
    31,498       118,907  
Federal funds sold      1,339       -  
    Cash and cash equivalents
    44,305       128,004  
                 
Investment securities available for sale, at fair value
    199,722       189,259  
Investment securities held to maturity, at amortized cost (fair value of $69 and $69, respectively)
    69       67  
Restricted stock, at cost
    1,570       3,816  
Loans held for sale
    7,130       82  
Loans receivable (net of allowance for loan losses of $8,704 and $9,542, respectively)
    641,533       608,359  
Premises and equipment, net
    21,181       21,976  
Other real estate owned, net
    5,951       8,912  
Accrued interest receivable
    2,920       3,128  
Bank owned life insurance
    -       10,490  
Other assets
    18,487       14,565  
    Total Assets
  $ 942,868     $ 988,658  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $ 159,384     $ 145,407  
   Demand – interest bearing
    188,572       180,440  
   Money market and savings
    413,970       440,120  
   Time deposits
    83,577       123,234  
       Total Deposits
    845,503       889,201  
Accrued interest payable
    309       301  
Other liabilities
    7,493       6,778  
Subordinated debt
    22,476       22,476  
    Total Liabilities
    875,781       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
    106,990       106,753  
Accumulated deficit
    (34,447 )     (34,228 )
Treasury stock at cost (416,303 shares)
    (3,099 )     (3,099 )
Stock held by deferred compensation plan (112,542 shares)
    (809 )     (809 )
Accumulated other comprehensive income (loss)
    (1,813 )     1,020  
    Total Shareholders’ Equity
    67,087       69,902  
    Total Liabilities and Shareholders’ Equity
  $ 942,868     $ 988,658  

 
(See notes to consolidated financial statements)
 
 
 
 
1

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2013 and 2012
(Dollars in thousands, except per share data)
 (unaudited)
 
     
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
 
     
2013
     
2012
     
2013
     
2012
 
Interest income:
                               
Interest and fees on taxable loans
  $ 8,060     $ 8,131     $ 23,888     $ 24,265  
Interest and fees on tax-exempt loans
    86       63       266       198  
Interest and dividends on taxable investment securities
    1,097       1,246       3,187       3,784  
Interest and dividends on tax-exempt investment securities
    56       118       177       351  
Interest on federal funds sold and other interest-earning assets
    40       54       143       239  
Total interest income
    9,339       9,612       27,661       28,837  
Interest expense:
                               
   Demand- interest bearing
    213       211       615       567  
   Money market and savings
    425       572       1,355       2,157  
   Time deposits
    197       370       680       1,384  
   Other borrowings
    278       283       834       852  
Total interest expense
    1,113       1,436       3,484       4,960  
Net interest income
    8,226       8,176       24,177       23,877  
Provision for loan losses
    250       850       1,175       600  
Net interest income after provision for loan losses
    7,976       7,326       23,002       23,277  
Non-interest income:
                               
Loan advisory and servicing fees
    446       333       1,220       873  
Gain on sales of SBA loans
    1,106       1,141       3,863       3,337  
Service fees on deposit accounts
    270       234       769       670  
Legal settlements
    -       50       238       155  
Gain on sale of investment securities
    -       -       703       774  
Other-than-temporary impairment losses
    -       -       -       (33 )
Portion recognized in other comprehensive income (before taxes)
    -       -       -       2  
     Net impairment loss on investment securities
    -       -       -       (31 )
Bank owned life insurance income
    -       20       13       55  
Other non-interest income
    70       53       199       143  
Total non-interest income
    1,892       1,831       7,005       5,976  
Non-interest expenses:
                               
 Salaries and employee benefits
    4,486       4,008       13,276       12,105  
 Occupancy
    941       875       2,661       2,591  
 Depreciation and amortization
    671       492       1,626       1,516  
 Legal
    544       547       1,411       2,334  
 Other real estate owned
    745       287       1,771       489  
 Advertising
    103       57       321       207  
 Data processing
    299       288       715       863  
 Insurance
    155       183       466       493  
 Professional fees
    358       326       1,040       917  
 Regulatory assessments and costs
    327       343       912       1,032  
 Taxes, other
    63       181       566       718  
 Legal settlement
    1,875       -       1,875       -  
 Other operating expenses
    1,541       1,200       3,654       3,368  
Total non-interest expense
    12,108       8,787       30,294       26,633  
Income (loss) before benefit for income taxes
    (2,240 )     370       (287 )     2,620  
Benefit for income taxes
    (18 )     (28 )     (68 )     (90 )
Net income (loss)
  $ (2,222 )   $ 398     $ (219 )   $ 2,710  
Net income (loss) per share:
                               
Basic
  $ (0.09 )   $ 0.02     $ (0.01 )   $ 0.10  
Diluted
  $ (0.09 )   $ 0.02     $ (0.01 )   $ 0.10  
 
(See notes to consolidated financial statements)
 
 
 
 
2

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2013 and 2012
(Dollars in thousands)
(unaudited)
 
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net income (loss)
  $ (2,222 )   $ 398     $ (219 )   $ 2,710  
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized gain (loss) on securities (pre-tax $(220), $1,854, $(3,717), and $2,459, respectively)
    (141 )     1,188       (2,383 )     1,576  
Reclassification adjustment for securities gains (pre-tax $-, $-, $703, and $774, respectively)
    -       -       (450 )     (503 )
Reclassification adjustment for impairment charge (pre-tax $-, $-, $-, and $31, respectively)
    -       -       -       20  
                                 
Total other comprehensive income (loss)
    (141 )     1,188       (2,833 )     1,093  
                                 
Total comprehensive income (loss)
  $ (2,363 )   $ 1,586     $ (3,052 )   $ 3,803  

 
(See notes to consolidated financial statements)
 
 
 
 

 
 
3

 
 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2013 and 2012
(Dollars in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
 
2013
   
2012
 
Cash flows from operating activities
         
Net income (loss)
  $ (219 )     $ 2,710  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                 
Provision for loan losses
    1,175         600  
(Gain) loss on sale of other real estate owned
    (229 )       10  
Write down of other real estate owned
    1,442         130  
Depreciation and amortization
    1,626         1,516  
Stock based compensation
    237         290  
Gain on sale of investment securities
    (703 )       (774 )
Impairment charges on investment securities
    -         31  
Amortization of premiums on investment securities
    613         269  
Proceeds from sales of SBA loans originated for sale
    39,519         35,358  
SBA loans originated for sale
    (42,704 )       (32,185 )
Gains on sales of SBA loans originated for sale
    (3,863 )       (3,337 )
Increase in value of bank owned life insurance
    (13 )       (55 )
Increase in accrued interest receivable and other assets
    (2,129 )       (249 )
Increase (decrease) in accrued interest payable and other liabilities
    723         (38 )
Net cash provided by (used in) operating activities
    (4,525 )       4,276  
                   
Cash flows from investing activities
                 
Purchase of investment securities available for sale
    (50,054 )       (60,910 )
Proceeds from the sale of securities available for sale
    7,946         22,590  
Proceeds from the maturity or call of securities available for sale
    27,315         22,274  
Proceeds from the maturity or call of securities held to maturity
    -         74  
Proceeds from redemption of FHLB stock
    2,246         952  
Net increase in loans
    (34,595 )       (37,845 )
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
    (831 )       (424 )
Net cash used in investing activities
    (35,476 )       (52,955 )
                   
Cash flows from financing activities
                 
Net (decrease) increase in demand, money market and savings deposits
    (4,041 )       339  
Net decrease in time deposits
    (39,657 )       (84,757 )
Net cash used in financing activities
    (43,698 )       (84,418 )
                   
Net decrease in cash and cash equivalents
    (83,699 )       (133,097 )
Cash and cash equivalents, beginning of year
    128,004         230,955  
Cash and cash equivalents, end of period
  $ 44,305       $ 97,858  
                   
Supplemental disclosures:
                 
Interest paid
  $ 3,476       $ 5,363  
Income taxes paid
  $ 185       $ -  
Non-cash transfers from loans to other real estate owned
  $ 246       $ 1,307  

(See notes to consolidated financial statements)
 
 
 

 
 
4

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 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 loss
                    (219 )                             (219 )
Other comprehensive loss, net of tax
                                            (2,833 )     (2,833 )
Stock based compensation
            237                                       237  
                                                         
Balance September 30,  2013
  $ 265     $ 106,990     $ (34,447 )   $ (3,099 )   $ (809 )   $ (1,813 )   $ 67,087  
                                                         
                                                         
Balance January 1, 2012
  $ 265     $ 106,383     $ (37,842 )   $ (3,099 )   $ (809 )   $ (47 )   $ 64,851  
                                                         
Net income
                    2,710                               2,710  
Other comprehensive income, net of tax
                                            1,093       1,093  
Stock based compensation
            290                                       290  
                                                         
Balance September 30, 2012
  $ 265     $ 106,673     $ (35,132 )   $ (3,099 )   $ (809 )   $ 1,046     $ 68,944  

(See notes to consolidated financial statements)
 
 
 

 
 
5

 

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

Note 1:  Basis of Presentation

Republic First Bancorp, Inc. (the “Company”) is a corporation incorporated under the laws of the Commonwealth of Pennsylvania and a registered bank holding company.  The Company offers a variety of retail and commercial banking services to individuals and businesses throughout the Greater Philadelphia and Southern New Jersey area through its wholly-owned subsidiary, Republic First Bank (“Republic” or the “Bank”) which does business under the name Republic Bank.  The Company also has three unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of three separate issuances of trust preferred securities.

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
 
The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and Republic for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 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.
 
 
 
 
 
6

 

 
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, 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 slow pace of recovery in the current economic environment, the Company has decided to currently exclude future taxable income from its analysis of the ability to recover deferred tax assets and has recorded a valuation allowance against its deferred tax assets.  An increase or decrease in the valuation allowance would result in an adjustment to income tax expense in the period and could have a significant impact on the Company’s future earnings.
 
 
 
 
 
7

 
 
 
Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan (“Plan”), under which the Company may grant options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants.  Under the terms of the Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that may be available for grant under the Plan to 1.5 million shares, are available for such grants.  As of September 30, 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.

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 54.49%
 
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 nine months ended September 30, 2013 and 2012, 127,287 shares and 61,000 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At September 30, 2013, the intrinsic value of the 1,199,780 options outstanding was $562,985, while the intrinsic value of the 306,217 exercisable (vested) options was $52,294.  During the nine months ended September 30, 2013, 84,000 options were forfeited with a weighted average grant date fair value of $289,760.

Information regarding stock based compensation for the nine months ended September 30, 2013 and 2012 is set forth below:
   
2013
   
2012
 
Stock based compensation expense recognized
  $ 237,000     $ 290,000  
Number of unvested stock options
    893,563       795,600  
Fair value of unvested stock options
  $ 1,210,840     $ 1,426,878  
Amount remaining to be recognized as expense
  $ 597,709     $ 548,287  

The remaining amount of $597,709 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 nine months ended September 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 nine months ended September 30, 2013 and 2012 is as follows (in thousands, except per share amounts):

 
   
Three Months Ended
September  30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net income (loss) - basic and diluted
  $ (2,222 )   $ 398     $ (219 )   $ 2,710  
                                 
Weighted average shares outstanding
    25,973       25,973       25,973       25,973  
Net income (loss) per share – basic
  $ (0.09 )   $ 0.02     $ (0.01 )   $ 0.10  
                                 
Weighted average shares outstanding (including dilutive CSEs)
    25,973       25,996       25,973       25,991  
Net income (loss) per share – diluted
  $ (0.09 )   $ 0.02     $ (0.01 )   $ 0.10  
 
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.  The Company entered into a settlement agreement during the three month period ending September 30, 2013 in connection with litigation in which it was a defendant. The settlement agreement releases the Company from all claims and actions related to the matter.

Any litigation involves an element of uncertainty.  After reviewing pending actions with its legal counsel, 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.
 
 
 

 
 
9

 
 

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.

Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2013 and December 31, 2012 is as follows:

 
   
At September 30, 2013
 
(dollars in thousands)
 
Amortized
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 122,657     $ 521     $ (2,760 )   $ 120,418  
Mortgage-backed securities
    15,007       634       (55 )     15,586  
Municipal securities
    8,004       97       (99 )     8,002  
Corporate bonds
    32,188       805       -       32,993  
Asset-backed securities
    19,234       324       -       19,558  
Trust preferred securities
    5,345       -       (2,297 )     3,048  
Other securities
    115       2       -       117  
Total securities available for sale
  $ 202,550     $ 2,383     $ (5,211 )   $ 199,722  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Other securities
    68       -       -       68  
Total securities held to maturity
  $ 69     $ -     $ -     $ 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  
 
 
 

 
 
10

 
 

       The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 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
  $ 18,899     $ 19,173     $ 48     $ 48  
After 1 year to 5 years
    64,862       64,836       21       21  
After 5 years to 10 years
    110,860       107,567       -       -  
After 10 years
    7,929       8,146       -       -  
Total
  $ 202,550     $ 199,722     $ 69     $ 69  

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

As of September 30, 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 September 30, 2013 and December 31, 2012.  In addition, the Company did not hold any private issued CMO’s as September 30, 2013 and December 31, 2012.  As of September 30, 3013 and December 31, 2012, the asset-backed securities consist 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 nine months ended September 30, 2013. Impairment charges (credit losses) on trust preferred securities for the three and nine months ended September 30, 2012 amounted to $0 and $31,000, respectively.
 
 
 
 
11

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

   
September 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, September 30th
  $ 3,959     $ 3,956  
 
The Company realized gross gains on the sale of securities of $703,000 during the nine months ended September 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 nine months ended September 30, 2012.  The related sale proceeds amounted to $22.6 million.  The tax provision applicable to these gross gains in 2012 amounted to approximately $271,000.

The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 
At September 30, 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
  $ 80,855     $ 2,760     $ -     $ -     $ 80,855     $ 2,760  
Mortgage-backed securities
    1,160       55       -       -       1,160       55  
Municipal securities
    2,344       99       -       -       2,344       99  
Corporate bonds
    -       -       -       -       -       -  
Trust preferred securities
    -       -       3,048       2,297       3,048       2,297  
U.S. Government Agencies
    1       -       -       -       1       -  
Total
  $ 84,360     $ 2,914     $ 3,048     $ 2,297     $ 87,408     $ 5,211  

 
   
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  
 
 
 

 
 
12

 
 
 
The impairment of the investment portfolio amounted to $5.2 million on securities with a total fair value of $87.4 million at September 30, 2013.  The most significant components of this impairment are related to the collateralized mortgage obligations and the trust preferred securities held in the portfolio.  The unrealized losses on the collateralized mortgage obligations are temporary in nature and are primarily related to the recent movement in market interest rates rather than the underlying credit quality of the issuers.  The Company does currently intend to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely than not that it will not have to sell these securities prior to their maturity or the recovery of their cost bases.

At September 30, 2013, the investment portfolio included twenty-three collateralized mortgage obligations with a total market value of $120.4 million.  Sixteen of these securities carried an unrealized loss at September 30, 2013.  At September 30, 2013, the investment portfolio included forty-one mortgage-backed securities with a total market value of $15.6 million.  One of these securities carried an unrealized loss at September 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 September 30, 2013.

The unrealized losses on the trust preferred securities are primarily the result of the secondary market for such securities becoming inactive and are also considered temporary at this time.

The following table provides additional detail about the trust preferred securities held in the portfolio as of September 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 )  
Caa2
      6       18 %     0.37 %   $ -  
Preferred Term
    Securities VII
Mezzanine Notes
    1,056       780       (276 )     C       12       53       0.34       2,173  
TPREF Funding II
Class B Notes
    739       362       (377 )     C       16       44       0.36       260  
TPREF Funding III
Class B2 Notes
    1,521       782       (739 )     C       17       34       0.34       480  
Trapeza CDO I, LLC
Class C1 Notes
    556       271       (285 )     C       9       49       0.38       470  
ALESCO Preferred
    Funding IV
Class B1 Notes
    604       361       (243 )     C       38       14       0.36       396  
ALESCO Preferred
    Funding V
Class C1 Notes
    820       452       (368 )     C       38       24       0.36       180  
Total
    $ 5,345     $ 3,048     $ (2,297 )             136       33 %           $ 3,959  


At September 30, 2013, the investment portfolio included thirteen municipal securities with a total market value of $8.0 million.  Three of these securities carried an unrealized loss totaling $0.1 million at September 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 September 30, 2013, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.
 
 
 

 
 
13

 


Note 6:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of September 30, 2013 and December 31, 2012:

(dollars in thousands)
September 30,
2013
   
December 31, 2012
 
           
Commercial real estate
  $ 328,486     $ 335,561  
Construction and land development
    25,238       26,659  
Commercial and industrial
    113,302       103,768  
Owner occupied real estate
    150,594       126,242  
Consumer and other
    30,595       23,449  
Residential mortgage
    2,374       2,442  
Total loans receivable
    650,589       618,121  
Deferred costs (fees)
    (352 )     (220 )
Allowance for loan losses
    (8,704 )     (9,542 )
Net loans receivable
  $ 641,533     $ 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. 
 
 
 
 
14

 

 
The following table summarizes information with regard to impaired loans by loan portfolio class as of September 30, 2013 and December 31, 2012:
 
    September 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
  $ 10,161     $ 10,281     $ -     $ 19,231     $ 20,000     $ -  
Construction and land development
    1,025       4,244       -       3,153       6,312       -  
Commercial and industrial
    3,064       4,352       -       3,793       7,106       -  
Owner occupied real estate
    547       867       -       505       505       -  
Consumer and other
    459       711       -       912       1,146       -  
Total
  $ 15,256     $ 20,455     $ -     $ 27,594     $ 35,069     $ -  
 
With an allowance recorded:
                   
Commercial real estate
  $ 606     $ 606     $ 134     $ 6,085     $ 6,085     $ 1,077  
Construction and land development
    593       3,700       217       593       3,700       70  
Commercial and industrial
    3,274       5,674       815       3,147       3,255       861  
Owner occupied real estate
    2,920       2,920       444       3,450       3,450       860  
Consumer and other
    203       209       9       146       155       75  
Total
  $ 7,596     $ 13,109     $ 1,619     $ 13,421     $ 16,645     $ 2,943  

Total:
                             
Commercial real estate
  $ 10,767     $ 10,887     $ 134     $ 25,316     $ 26,085     $ 1,077  
Construction and land development
    1,618       7,944       217       3,746       10,012       70  
Commercial and industrial
    6,338       10,026       815       6,940       10,361       861  
Owner occupied real estate
    3,467       3,787       444       3,955       3,955       860  
Consumer and other
    662       920       9       1,058       1,301       75  
Total
  $ 22,852     $ 33,564     $ 1,619     $ 41,015     $ 51,714     $ 2,943  

 
 
 

 
 
15

 
 

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

 
   
Three Months Ended September 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
  $ 12,063     $ 178     $ 15,728     $ 186  
Construction and land development
    1,421       3       4,878       27  
Commercial and industrial
    3,034       7       4,955       28  
Owner occupied real estate
    465       4       673       3  
Consumer and other
    538       -       898       4  
Total
  $ 17,521     $ 192     $ 27,132     $ 248  
 
With an allowance recorded:
                 
Commercial real estate
  $ 1,925     $ 10     $ 9,256     $ 124  
Construction and land development
    545       -       923       -  
Commercial and industrial
    3,392       14       2,480       16  
Owner occupied real estate
    3,013       37       3,123       48  
Consumer and other
    163       -       121       -  
Total
  $ 9,038     $ 61     $ 15,903     $ 188  

Total:
                       
Commercial real estate
  $ 13,988     $ 188     $ 24,984     $ 310  
Construction and land development
    1,966       3       5,801       27  
Commercial and industrial
    6,426       21       7,435       44  
Owner occupied real estate
    3,478       41       3,796       51  
Consumer and other
    701       -       1,019       4  
Total
  $ 26,559     $ 253     $ 43,035     $ 436  

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $113,000 and $225,000 for the three months ended September 30, 2013 and 2012, respectively.
 
 
 
 
16

 
 

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

 
Nine Months Ended September 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
  $ 15,865     $ 599     $ 14,786     $ 556  
Construction and land development
    2,217       32       4,946       86  
Commercial and industrial
    2,968       18       4,509       106  
Owner occupied real estate
    299       4       1,013       30  
Consumer and other
    700       1       866       8  
Total
  $ 22,049     $ 654     $ 26,120     $ 786  


With an allowance recorded:
                 
Commercial real estate
  $ 4,565     $ 71     $ 7,488     $ 259  
Construction and land development
    445       -       1,305       -  
Commercial and industrial
    3,628       42       3,454       35  
Owner occupied real estate
    3,201       110       2,315       96  
Consumer and other
    87       -       73       -  
Total
  $ 11,926     $ 223     $ 14,635     $ 390  

Total:
                       
Commercial real estate
  $ 20,430     $ 670     $ 22,274     $ 815  
Construction and land development
    2,662       32       6,251       86  
Commercial and industrial
    6,596       60       7,963       141  
Owner occupied real estate
    3,500       114       3,328       126  
Consumer and other
    787       1       939       8  
Total
  $ 33,975     $ 877     $ 40,755     $ 1,176  
 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $480,000 and $545,000 for the nine months ended September 30, 2013 and 2012, respectively.
 
 
 
 
17

 

 
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three and nine months ended September 30, 2013 and September 30, 2012:


 
 
(dollars in thousands)
Commercial Real Estate
 
Construction and Land Development