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 March 31, 2014.
 
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
37,815,003
Title of Class
Number of Shares Outstanding as of May 08, 2014
 
 
 
 
 
 

 
 

 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of March 31, 2014 and December 31, 2013 (unaudited)
  Consolidated statements of income for the three months ended March 31, 2014 and 2013 (unaudited) 2
 
Consolidated statements of comprehensive income for the three months ended March 31, 2014 and 2013 (unaudited)
 
Consolidated statements of cash flows for the three months ended March 31, 2014 and 2013 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2014 and 2013 (unaudited)
 
Notes to consolidated financial statements (unaudited)
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
     
Item 4.
Controls and Procedures
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
     
Item 1A.
Risk Factors
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
     
Item 3.
Defaults Upon Senior Securities
     
Item 4.
Mine Safety Disclosures
     
Item 5.
Other Information
     
Item 6.
Exhibits
     
Signatures
 
 
 
 
 
 

 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2014 and December 31, 2013
(Dollars in thousands, except per share data)
(unaudited)
 
     
March 31, 2014
     
December 31, 2013
 
ASSETS
               
Cash and due from banks
  $
17,835
    $
12,525
 
Interest bearing deposits with banks
   
16,475
     
23,355
 
    Cash and cash equivalents
   
34,310
     
35,880
 
                 
Investment securities available for sale, at fair value
   
201,262
     
204,891
 
Investment securities held to maturity, at amortized cost (fair value of $21 and $21, respectively)
   
21
     
21
 
Restricted stock, at cost
   
1,567
     
1,570
 
Loans held for sale
   
3,796
     
4,931
 
Loans receivable (net of allowance for loan losses of $11,950 and $12,263, respectively)
   
684,898
     
667,048
 
Premises and equipment, net
   
24,140
     
22,748
 
Other real estate owned, net
   
3,696
     
4,059
 
Accrued interest receivable
   
3,163
     
3,049
 
Other assets
   
17,009
     
17,468
 
    Total Assets
  $
973,862
    $
961,665
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $
182,082
    $
157,806
 
   Demand – interest bearing
   
198,080
     
230,221
 
   Money market and savings
   
423,096
     
402,671
 
   Time deposits
   
76,624
     
78,836
 
       Total Deposits
   
879,882
     
869,534
 
Accrued interest payable
   
226
     
237
 
Other liabilities
   
6,218
     
6,519
 
Subordinated debt
   
22,476
     
22,476
 
    Total Liabilities
   
908,802
     
898,766
 
                 
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
   
107,166
     
107,078
 
Accumulated deficit
   
(36,953)
     
(37,708)
 
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 loss
   
(1,510)
     
(2,828)
 
    Total Shareholders’ Equity
   
65,060
     
62,899
 
    Total Liabilities and Shareholders’ Equity
  $
973,862
    $
961,665
 
 
(See notes to consolidated financial statements)
 
 
 
 
1

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 2014 and 2013
(Dollars in thousands, except per share data)
(unaudited)
   
Three Months Ended
March 31,
 
   
2014
   
2013
 
Interest income
           
Interest and fees on taxable loans
  $ 8,241     $ 7,837  
Interest and fees on tax-exempt loans
    82       91  
Interest and dividends on taxable investment securities
    1,241       1,047  
Interest and dividends on tax-exempt investment securities
    79       73  
Interest on federal funds sold and other interest-earning assets
    12       59  
Total interest income
    9,655       9,107  
Interest expense
               
Demand-interest bearing
    191       195  
Money market and savings
    416       502  
Time deposits
    173       279  
Other borrowings
    276       278  
Total interest expense
    1,056       1,254  
Net interest income
    8,599       7,853  
Provision for loan losses
    -       -  
Net interest income after provision for loan losses
    8,599       7,853  
Non-interest income
               
Loan advisory and servicing fees
    437       338  
Gain on sales of SBA loans
    1,154       650  
Service fees on deposit accounts
    293       234  
Legal settlements
    -       238  
Gain on sale of investment securities
    -       703  
Bank owned life insurance income
    -       13  
Other non-interest income
    46       67  
Total non-interest income
    1,930       2,243  
Non-interest expenses
               
Salaries and employee benefits
    5,040       4,287  
Occupancy
    1,038       844  
Depreciation and amortization
    498       483  
Legal
    255       364  
Other real estate owned
    346       917  
Advertising
    148       101  
Data processing
    300       108  
Insurance
    157       158  
Professional fees
    402       323  
Regulatory assessments and costs
    337       344  
Taxes, other
    215       250  
Other operating expenses
    1,079       951  
Total non-interest expense
    9,815       9,130  
Income before benefit for income taxes
    714       966  
Benefit for income taxes
    (41 )     (26 )
Net income
  $ 755     $ 992  
Net income per share
               
Basic
  $ 0.03     $ 0.04  
Diluted
  $ 0.03     $ 0.04  
 
(See notes to consolidated financial statements)
 
 
 
 
 
2

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three Months Ended March, 2014 and 2013
(Dollars in thousands)
(unaudited)

 
   
Three Months Ended
March 31,
 
     
2014
     
2013
 
                 
Net income
  $ 755     $ 992  
                 
      Other comprehensive income (loss), net of tax
               
          Unrealized gain on securities (pre-tax $2,056 and $6, respectively)
    1,318       4  
          Reclassification adjustment for securities gains (pre-tax $-, and $703, respectively)
    -       (450 )
                 
Total other comprehensive income (loss)
    1,318       (446 )
                 
Total comprehensive income
  $ 2,073     $ 546  
 

 
(See notes to consolidated financial statements)
 
 
 
 
 
3

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2014 and 2013
(Dollars in thousands)
(unaudited)
 
Three Months Ended March 31,
 
 
2014
   
2013
 
Cash flows from operating activities
         
Net income
  $ 755       $ 992  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Write down of other real estate owned
    300         809  
Depreciation and amortization
    498         483  
Stock based compensation
    88         72  
Gain on sale and call of investment securities
    -         (703 )
Amortization of premiums on investment securities
    126         177  
Proceeds from sales of SBA loans originated for sale
    12,465         6,563  
SBA loans originated for sale
    (10,176 )       (5,996 )
Gains on sales of SBA loans originated for sale
    (1,154 )       (650 )
Increase in value of bank owned life insurance
    -         (13 )
Increase in accrued interest receivable and other assets
    (394 )       (982 )
Decrease in accrued interest payable and other liabilities
    (312 )       (129 )
Net cash provided by operating activities
    2,196         623  
                   
Cash flows from investing activities
                 
Purchase of investment securities available for sale
    (517 )       (1,425 )
Proceeds from the sale of securities available for sale
    -         7,946  
Proceeds from the maturity or call of securities available for sale
    6,077         9,016  
Proceeds from redemption of FHLB stock
    3         540  
Net increase in loans
    (17,850 )       (9,575 )
Net proceeds from sale of other real estate owned
    63         -  
Premises and equipment expenditures
    (1,890 )       (137 )
Net cash (used in) provided by investing activities
    (14,114 )       6,365  
                   
Cash flows from financing activities
                 
Net increase (decrease) in demand, money market and savings deposits
    12,560         (30,756 )
Net decrease in time deposits
    (2,212 )       (32,307 )
Net cash provided by (used in) financing activities
    10,348         (63,063 )
                   
Net decrease in cash and cash equivalents
    (1,570 )       (56,075 )
Cash and cash equivalents, beginning of year
    35,880         128,004  
Cash and cash equivalents, end of period
  $ 34,310       $ 71,929  
                   
Supplemental disclosures
                 
Interest paid
  $ 1,067       $ 1,061  
Income taxes paid
  $ 50       $ 100  
Non-cash transfers from loans to other real estate owned
  $ -       $ 165  

(See notes to consolidated financial statements)
 
 
 
 
 
4

 
 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2014 and 2013
(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, 2014
  $ 265     $ 107,078     $ (37,708 )   $ (3,099 )   $ (809 )   $ (2,828 )   $ 62,899  
                                                         
Net income
                    755                               755  
Other comprehensive income, net of tax
                                            1,318       1,318  
Stock based compensation
            88                                       88  
                                                         
Balance March 31,  2014
  $ 265     $ 107,166     $ (36,953 )   $ (3,099 )   $ (809 )   $ (1,510 )   $ 65,060  
                                                         
                                                         
Balance January 1, 2013
  $ 265     $ 106,753     $ (34,228 )   $ (3,099 )   $ (809 )   $ 1,020     $ 69,902  
                                                         
Net income
                    992                               992  
Other comprehensive loss, net of tax
                                            (446 )     (446 )
Stock based compensation
            72                                       72  
                                                         
Balance March 31, 2013
  $ 265     $ 106,825     $ (33,236 )   $ (3,099 )   $ (809 )   $ 574     $ 70,520  

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

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
 
The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and Republic for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The Company has evaluated subsequent events through the date of issuance of the financial data included herein.
 
Note 2:  Summary of Significant Accounting Policies

Risks and Uncertainties

The earnings of the Company depend primarily on the earnings of Republic.  The earnings of Republic are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment.

Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
 
 
 
 
 
6

 

 
Use of Estimates

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

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors.  An estimate for the carrying value of other real estate owned is normally determined through appraisals which are updated on a regular basis or through agreements of sale that have been negotiated. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.
 
In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other than temporary.  To determine whether a loss in value is other than temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value.  The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment.  Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
 
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence.   Management also makes assumptions on the amount of future taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.  These assumptions require management to make judgments that are consistent with the plans and estimates used to manage the Company’s business.  As a result of cumulative losses in recent years and the 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.

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.  The Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders.  Under the terms of the Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that may be available for grant under the Plan to 1.5 million shares, are available for such grants.  As of March 31, 2014, 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.  Options granted pursuant to the Plan vest within one to four years and have a maximum term of 10 years.
 
 
 
 
 
7

 
 
 
On April 29, 2014 the Company’s shareholders approved the 2014 Equity Incentive Plan, under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants.  Under the terms of the 2014 Equity and Incentive Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants.

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 2014 and 2013 are as follows:

   
2014
       
2013
 
Dividend yield(1)
    0.0 %         0.0 %
Expected volatility(2)
 
55.79% to 57.99%
     
54.88% to 54.89%
Risk-free interest rate(3)
 
1.51% to 2.13%
     
1.28% to 1.41%
Expected life(4)
 
5.5 to 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 five and one-half to seven year volatility calculation for “FRBK” stock.
(3) The risk-free interest rate is based on the five to seven year Treasury bond.
(4) The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.

During the three months ended March 31, 2014 and 2013, 147,575 shares and 109,787 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At March 31, 2014, the intrinsic value of the 1,511,024 options outstanding was $1,171,483, while the intrinsic value of the 394,886 exercisable (vested) options was $183,030.  During the three months ended March 31, 2014, 58,906 options were forfeited with a weighted average grant date fair value of $6,698.

Information regarding stock based compensation for the three months ended March 31, 2014 and 2013 is set forth below:
   
2014
   
2013
 
Stock based compensation expense recognized
  $ 88,000     $ 72,000  
Number of unvested stock options
    1,116,138       903,563  
Fair value of unvested stock options
  $ 1,620,736     $ 1,231,859  
Amount remaining to be recognized as expense
  $ 1,021,120     $ 751,865  

The remaining amount of $1,021,120 will be recognized ratably as expense through February 2018.

Earnings per Share

Earnings per share (“EPS”) consist of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s Plan and convertible securities related to the trust preferred securities issued in 2008.  In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance is added back to the net income. For the three months ended March 31, 2014 and 2013, 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 calculations.
 
 
 
 
 
8

 

 
The calculation of EPS for the three months ended March 31, 2014 and 2013 is as follows:

(in thousands, except per share amounts)
 
Three Months Ended
March 31,
 
   
2014
   
2013
 
             
Net income - basic and diluted
  $ 755     $ 992  
                 
Weighted average shares outstanding
    25,973       25,973  
                 
Net income per share – basic
  $ 0.03     $ 0.04  
                 
Weighted average shares outstanding (including dilutive CSEs)
    26,212       26,042  
                 
Net income per share – diluted
  $ 0.03     $ 0.04  


Recent Accounting Pronouncements

ASU 2014-04

In January 2014, the FASB issued ASU 2014-04, “Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure – a consensus of the FASB Emerging Issues Task Force.  The guidance clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized.  For public business entities, the ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The Company does not believe the adoption of the amendment to this guidance will have a material impact on the financial statements.

Note 3:  Legal Proceedings

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.

Note 4:  Segment Reporting

       The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its stores.
 
 
 
 
 
9

 


Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at March 31, 2014 and December 31, 2013 is as follows:

 
   
At March 31, 2014
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
  $ 122,031     $ 710     $ (2,551 )   $ 120,190  
Mortgage-backed securities
    14,869       601       (83 )     15,387  
Municipal securities
    10,251       147       (84 )     10,314  
Corporate bonds
    32,159       1,170       -       33,329  
Asset-backed securities
    18,916       206       (12 )     19,110  
Trust preferred securities
    5,277       -       (2,470 )     2,807  
Other securities
    115       10       -       125  
Total securities available for sale
  $ 203,618     $ 2,844     $ (5,200 )   $ 201,262  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 21     $ -     $ -     $ 21  

 
   
At December 31, 2013
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
  $ 127,242     $ 665     $ (4,467 )   $ 123,440  
Mortgage-backed securities
    15,669       623       (111 )     16,181  
Municipal securities
    9,737       68       (162 )     9,643  
Corporate bonds
    32,174       1,079       -       33,253  
Asset-backed securities
    19,089       318       -       19,407  
Trust preferred securities
    5,277       -       (2,427 )     2,850  
Other securities
    115       2       -       117  
Total securities available for sale
  $ 209,303     $ 2,755     $ (7,167 )   $ 204,891  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 21     $ -     $ -     $ 21  

       The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at March 31, 2014 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
  $ 843     $ 863     $ -     $ -  
After 1 year to 5 years
    77,014       78,062       21       21  
After 5 years to 10 years
    115,669       111,955       -       -  
After 10 years
    10,092       10,382       -       -  
Total
  $ 203,618     $ 201,262     $ 21     $ 21  
 
 
 
 
 
10

 

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

As of March 31, 2014 and December 31, 2013, the collateralized mortgage obligations and mortgage backed securities included in the investment securities portfolio consist solely of securities issued by U.S. government sponsored agencies.  There were no private label mortgage securities held in the investment securities portfolio as of those dates. The Company did not hold any mortgage-backed securities that were rated “Alt-A” or “Subprime” as of March 31, 2014 and December 31, 2013.  In addition, the Company did not hold any private issued CMO’s as of March 31, 2014 and December 31, 2013.  As of March 31, 2014 and December 31, 2013, 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 months ended March 31, 2014 and 2013.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at March 31, 2014 and 2013 for which a portion of OTTI was recognized in other comprehensive income:
 
(dollars in thousands)
 
2014
   
2013
 
             
Beginning Balance, January 1st
  $ 3,959     $ 3,959  
Additional credit-related impairment loss on securities for which an
               
other-than-temporary impairment was previously recognized
    -       -  
Reductions for securities paid off during the period
    -       -  
Reductions for securities for which the amount previously recognized in other
               
comprehensive income was recognized in earnings because the Company
               
intends to sell the security
    -       -  
Ending Balance, March 31st
  $ 3,959     $ 3,959  

No securities were sold during the three months ended March 31, 2014.  The Company realized gross gains on the sale of securities of $703,000 during the three months ended March 31, 2013.  The related sale proceeds amounted to $7.9 million.  The tax provision applicable to these gross gains for the three months ended March 31, 2013 amounted to approximately $253,000.
 
 
 
 
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The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 
At March 31, 2014
 
 
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
$ 50,836     $ 1,895     $ 20,787     $ 656     $ 71,623     $ 2,551  
Mortgage-backed securities
  1,459       25       1,108       58       2,567       83  
Municipal securities
  2,109       84       -       -       2,109       84  
Trust preferred securities
  -       -       2,807       2,470       2,807       2,470  
Asset-backed securities
  8,587       12       -       -       8,587       12  
Total
$ 62,991     $ 2,016     $ 24,702     $ 3,184     $ 87,693     $ 5,200  

 
At December 31, 2013
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized 
Losses
 
Fair
Value
 
Unrealized 
Losses
 
                         
Collateralized  mortgage obligations
$ 73,137     $ 3,923     $ 8,697     $ 544     $ 81,834     $ 4,467  
Mortgage-backed securities
  1,450       41       1,123       70       2,573       111  
Municipal securities
  5,108       162       -       -       5,108       162  
Trust preferred securities
  -       -       2,850       2,427       2,850       2,427  
Total
$ 79,695     $ 4,126     $ 12,670     $ 3,041     $ 92,365     $ 7,167  


The impairment of the investment portfolio amounted to $5.2 million on securities with a total fair value of $87.7 million at March 31, 2014.  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 CMO’s are primarily related to the recent movement in market interest rates rather than the underlying credit quality of the issuers.  The Company does not currently intend to sell these securities prior to their maturity or the recovery of their cost bases and does not believe it will be forced to sell these securities prior to maturity or recovering the cost bases.

At March 31, 2014, the investment portfolio included twenty-five collateralized mortgage obligations with a total market value of $120.2 million.  Fifteen of these securities carried an unrealized loss at March 31, 2014.  At March 31, 2014, the investment portfolio included forty-two mortgage-backed securities with a total market value of $15.4 million.  Two of these securities carried an unrealized loss at March 31, 2014.  At March 31, 2014, the investment portfolio included two asset-backed securities with a total market value of $19.1 million.  One of these securities carried an unrealized loss at March 31, 2014.  Management found no evidence of OTTI on any of these securities and the unrealized losses are due to changes in market value resulting from changes in market interest rates and are considered temporary as of March 31, 2014.

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.
 
 
 

 
 
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The following table provides additional detail about the trust preferred securities held in the portfolio as of March 31, 2014.
(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
2014 and
beyond
Cumulative
OTTI Life to
Date
Preferred Term Securities IV
Mezzanine Notes
$
49
$
39
$
(10)
B
6
18%
0.36%
$
-
Preferred Term Securities VII
Mezzanine Notes
 
989
 
721
 
(268)
C
11
54
0.38
 
2,173
TPREF Funding II
Class B Notes
 
739
 
329
 
(410)
C
17
41
0.40
 
260
TPREF Funding III
Class B2 Notes
 
1,520
 
665
 
(855)
C
15
35
0.31
 
480
Trapeza CDO I, LLC
Class C1 Notes
 
556
 
294
 
(262)
C
9
49
0.35
 
470
ALESCO Preferred Funding IV
Class B1 Notes
 
604
 
362
 
(242)
C
41
8
0.34
 
396
ALESCO Preferred    Funding V
Class C1 Notes
 
820
 
397
 
(423)
C
39
24
0.35
 
180
Total
 
 $
5,277
 $
2,807
 $
(2,470)
 
138
32%
 
 $
3,959

At March 31, 2014, the investment portfolio included eighteen municipal securities with a total market value of $10.3 million.  Three of these securities carried an unrealized loss at March 31, 2014.  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 March 31, 2014, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.

Note 6:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of March 31, 2014 and December 31, 2013:

(dollars in thousands)
 
March 31, 2014
   
December 31, 2013
 
             
Commercial real estate
  $ 344,125     $ 342,794  
Construction and land development
    26,931       23,977  
Commercial and industrial
    125,792       118,209  
Owner occupied real estate
    164,325       160,229  
Consumer and other
    33,554       31,981  
Residential mortgage
    2,344       2,359  
Total loans receivable
    697,071       679,549  
Deferred costs (fees)
    (223 )     (238 )
Allowance for loan losses
    (11,950 )     (12,263 )
Net loans receivable
  $ 684,898     $ 667,048  
 

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 March 31, 2014 and December 31, 2013:

 
March 31, 2014
   
December 31, 2013
 
 
 
(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
  $ 6,693     $ 6,698     $ -       $ 6,850     $ 6,971     $ -  
Construction and land development
    696       3,867       -         902       4,076       -  
Commercial and industrial
    3,035       6,259       -         2,043       2,882       -  
Owner occupied real estate
    815       1,134       -         542       862       -  
Consumer and other
    643       924       -         453       711       -  
Total
  $ 11,882     $ 18,882     $ -       $ 10,790     $ 15,502     $ -  

With an allowance recorded:
                     
Commercial real estate
  $ 13,301     $ 13,416     $ 3,673       $ 13,044     $ 13,044     $ 3,679  
Construction and land development
    566       3,741       235         716       3,867       237  
Commercial and industrial
    3,726       4,357       1,449         4,889       7,634       1,254  
Owner occupied real estate
    2,931       2,933       434         2,891       2,891       430  
Consumer and other
    -       -       -         203       210       10  
Total
  $ 20,524     $ 24,447     $ 5,791       $ 21,743     $ 27,646     $ 5,610  

Total:
                               
Commercial real estate
  $ 19,994     $ 20,114     $ 3,673       $ 19,894     $ 20,015     $ 3,679  
Construction and land development
    1,262       7,608       235         1,618       7,943       237  
Commercial and industrial
    6,761       10,616       1,449         6,932       10,516       1,254  
Owner occupied real estate
    3,746       4,067       434         3,433       3,753       430  
Consumer and other
    643       924       -         656       921       10  
Total
  $ 32,406     $ 43,329     $ 5,791       $ 32,533     $ 43,148     $ 5,610  
 



 
14

 

 
         The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
 
 
 
(dollars in thousands)
Average
Recorded Investment
 
Interest Income Recognized
 
Average
Recorded Investment
 
Interest Income Recognized
 
With no related allowance recorded:
               
Commercial real estate
  $ 6,772     $ 106     $ 20,189     $ 219  
Construction and land development
    799       -       3,408       21  
Commercial and industrial
    2,539       1       2,917       6  
Owner occupied real estate
    678       5       252       -  
Consumer and other
    548       1       837       1  
Total
  $ 11,336     $ 113     $ 27,603     $ 247  

With an allowance recorded:
                 
Commercial real estate
  $ 13,173     $ 138     $ 4,714     $ 36  
Construction and land development
    641       -       296       -  
Commercial and industrial
    4,308       1       3,988       14  
Owner occupied real estate
    2,911       35       3,441       36  
Consumer and other
    101       -       73       -  
Total
  $ 21,134     $ 174     $ 12,512     $ 86  

Total:
                       
Commercial real estate
  $ 19,945     $ 244     $ 24,903     $ 255  
Construction and land development
    1,440       -       3,704       21  
Commercial and industrial
    6,847       2       6,905       20  
Owner occupied real estate
    3,589       40       3,693       36  
Consumer and other
    649       1       910       1  
Total
  $ 32,470     $ 287     $ 40,115     $ 333  

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $143,000 and $209,000 for the three months ended March 31, 2014 and 2013, respectively.




 
15

 
 
 
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2014 and 2013:

 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and Industrial
   
Owner Occupied Real Estate
   
Consumer and Other
   
Residential Mortgage
   
Unallocated
   
Total
 
                                             
Three months ended March 31, 2014
                                           
Allowance for loan losses:
                                               
                                                 
Beginning balance:
  $ 6,454     $ 1,948     $ 2,309     $ 985     $ 225     $ 14     $ 328     $ 12,263  
Charge-offs
    -       (20 )     (283 )     -       (10 )     -       -       (313 )
Recoveries
    -       -       -       -       -       -       -       -  
Provisions (credits)
    (180 )     (1,067 )     614       143       (18 )     (1 )     509       -  
Ending balance
  $ 6,274     $ 861     $ 2,640     $ 1,128     $ 197     $ 13     $ 837     $ 11,950  
                                                                 
 
Three months ended March 31, 2013
                                           
Allowance for loan losses:
                                               
                                                 
Beginning balance:
  $ 3,979     $ 1,273     $ 1,880     $ 1,967     $ 234     $ 17     $ 192     $ 9,542  
Charge-offs
    (60 )     (55 )     -       -       (75 )     -       -       (190 )
Recoveries
    -       -       1       -       -       -       -       1  
Provisions (credits)
    (662 )     617       455       (670 )     11       (3 )     252       -  
Ending balance
  $ 3,257     $ 1,835     $ 2,336     $ 1,297     $ 170     $ 14     $ 444     $ 9,353  

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of March 31, 2014 and December 31, 2013:

 
 
(dollars in thousands)
Commercial Real Estate
 
Construction and Land Development
 
Commercial
and
Industrial
 
Owner Occupied Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
 
Unallocated
 
 
Total
 
                                 
March 31, 2014
                               
                                 
Allowance for loan losses:
                               
Individually evaluated for impairment
  $ 3,673     $ 235     $ 1,449     $ 434     $ -     $ -     $ -     $ 5,791  
Collectively evaluated for impairment
    2,601       626       1,191       694       197       13       837       6,159  
Total allowance for loan losses
  $ 6,274     $ 861     $ 2,640     $ 1,128     $ 197     $ 13     $ 837     $ 11,950  
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
  $ 19,994     $ 1,262     $ 6,761     $ 3,746     $ 643     $ -     $ -     $ 32,406  
Loans evaluated collectively
    324,131       25,669       119,031       160,579       32,911       2,344       -       664,665  
Total loans receivable
  $ 344,125     $ 26,931     $ 125,792     $ 164,325     $ 33,554     $ 2,344     $ -     $ 697,071  
 
 
 

 
 
16

 


 
 
(dollars in thousands)
Commercial Real Estate
 
Construction and Land Development
 
Commercial
and
Industrial
 
Owner Occupied Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
 
Unallocated
 
 
Total
 
                                 
December 31, 2013
                               
                                 
Allowance for loan losses:
                               
Individually evaluated for impairment
  $ 3,679     $ 237     $ 1,254     $ 430     $ 10     $ -     $ -     $ 5,610  
Collectively evaluated for impairment
    2,775       1,711       1,055       555       215       14       328       6,653  
Total allowance for loan losses
  $ 6,454     $ 1,948     $ 2,309     $ 985     $ 225     $ 14     $ 328     $ 12,263  
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
  $ 19,894     $ 1,618     $ 6,932     $ 3,433     $ 656     $ -     $ -     $ 32,533  
Loans evaluated collectively
    322,900       22,359       111,277       156,796       31,325       2,359