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

Common Stock, par value $0.01 per share
37,815,003
Title of Class
Number of Shares Outstanding as of November 6, 2014
 
 
 

 
 
 

 
 

 
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, 2014 and December 31, 2013 (unaudited)
 
Consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)
Consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
 
 
Consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 (unaudited)
 
 
Consolidated statements of changes in shareholders’ equity for the nine months ended September 30, 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
September 30, 2014 and December 31, 2013
(Dollars in thousands, except per share data)
(unaudited)
   
September 30,
2014
   
December 31,
 2013
 
ASSETS
           
Cash and due from banks
  $ 13,546     $ 12,525  
Interest bearing deposits with banks
    88,917       23,355  
Federal funds sold
    3,381       -  
    Cash and cash equivalents
    105,844       35,880  
                 
Investment securities available for sale, at fair value
    158,830       204,891  
Investment securities held to maturity, at amortized cost (fair value of $68,646 and $21, respectively)
    68,991       21  
Restricted stock, at cost
    1,725       1,570  
Loans held for sale
    789       4,931  
Loans receivable (net of allowance for loan losses of $12,216 and $12,263, respectively)
    739,817       667,048  
Premises and equipment, net
    29,767       22,748  
Other real estate owned, net
    3,775       4,059  
Accrued interest receivable
    3,282       3,049  
Other assets
    17,896       17,468  
    Total Assets
  $ 1,130,716     $ 961,665  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $ 216,642     $ 157,806  
   Demand – interest bearing
    224,102       230,221  
   Money market and savings
    471,199       402,671  
   Time deposits
    78,132       78,836  
       Total Deposits
    990,075       869,534  
Accrued interest payable
    300       237  
Other liabilities
    6,272       6,519  
Subordinated debt
    22,476       22,476  
    Total Liabilities
    1,019,123       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 38,343,848 as of September 30, 2014 and 26,501,742 as of December 31, 2013
    383       265  
Additional paid in capital
    152,122       107,078  
Accumulated deficit
    (36,119 )     (37,708 )
Treasury stock at cost (503,408 shares as of September 30, 2014 and 416,303 shares as of December 31, 2013)
    (3,725 )     (3,099 )
Stock held by deferred compensation plan (25,437 shares as of September 30, 2014 and 112,542 shares as of December 31, 2013)
    (183 )     (809 )
Accumulated other comprehensive loss
    (885 )     (2,828 )
    Total Shareholders’ Equity
    111,593       62,899  
    Total Liabilities and Shareholders’ Equity
  $ 1,130,716     $ 961,665  
 
(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, 2014 and 2013
(Dollars in thousands, except per share data)
 (unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income:
                       
Interest and fees on taxable loans
  $ 8,914     $ 8,060     $ 25,381     $ 23,888  
Interest and fees on tax-exempt loans
    86       86       252       266  
Interest and dividends on taxable investment securities
    1,260       1,097       3,689       3,187  
Interest and dividends on tax-exempt investment securities
    96       56       258       177  
Interest on federal funds sold and other interest-earning assets
    45       40       107       143  
Total interest income
    10,401       9,339       29,687       27,661  
Interest expense:
                               
Demand- interest bearing
    220       213       636       615  
Money market and savings
    509       425       1,392       1,355  
Time deposits
    189       197       540       680  
Other borrowings
    277       278       830       834  
Total interest expense
    1,195       1,113       3,398       3,484  
Net interest income
    9,206       8,226       26,289       24,177  
Provision for loan losses
    300       250       600       1,175  
Net interest income after provision for loan losses
    8,906       7,976       25,689       23,002  
Non-interest income:
                               
Loan advisory and servicing fees
    388       446       1,291       1,220  
Gain on sales of SBA loans
    614       1,106       2,814       3,863  
Service fees on deposit accounts
    316       270       896       769  
Legal settlements
    -       -       -       238  
Gain on sale of investment securities
    -       -       458       703  
Other-than-temporary impairment
    -       -       21       -  
Portion recognized in other comprehensive income (before taxes)
    -       -       (28 )     -  
Net impairment loss on investment securities
    -       -       (7 )     -  
Bank owned life insurance income
    -       -       -       13  
Other non-interest income
    53       70       138       199  
Total non-interest income
    1,371       1,892       5,590       7,005  
Non-interest expenses:
                               
 Salaries and employee benefits
    5,074       4,486       14,942       13,276  
 Occupancy
    1,039       941       3,104       2,661  
 Depreciation and amortization
    710       671       1,779       1,626  
 Legal
    283       544       982       1,411  
 Other real estate owned
    376       745       1,062       1,771  
 Advertising
    91       103       453       321  
 Data processing
    336       299       990       715  
 Insurance
    148       155       427       466  
 Professional fees
    330       358       1,160       1,040  
 Regulatory assessments and costs
    258       327       791       912  
 Taxes, other
    171       63       620       566  
 Legal settlement
    -       1,875       -       1,875  
 Other operating expenses
    1,170       1,541       3,448       3,654  
Total non-interest expense
    9,986       12,108       29,758       30,294  
Income (loss) before benefit for income taxes
    291       (2,240 )     1,521       (287 )
Benefit for income taxes
    (6 )     (18 )     (68 )     (68 )
Net income (loss)
  $ 297     $ (2,222 )   $ 1,589     $ (219 )
Net income (loss) per share:
                               
Basic
  $ 0.01     $ (0.09 )   $ 0.05     $ (0.01 )
Diluted
  $ 0.01     $ (0.09 )   $ 0.05     $ (0.01 )
 
(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, 2014 and 2013
(Dollars in thousands)
(unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Net income (loss)
  $ 297     $ (2,222 )   $ 1,589     $ (219 )
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized gain (loss) on securities (pre-tax $(244), $(220), $3,422, and $(3,717), respectively)
    (156 )     (141 )     2,194       (2,383 )
 
Reclassification adjustment for securities gains (pre-tax $-, $-, $458, and $703, respectively)
    -       -       (293 )     (450 )
 
Reclassification adjustment for impairment charge (pre-tax $-, $-, $7, and $-, respectively)
    -       -       4       -  
 
       Net unrealized holding gains (losses) on
       securities transferred between available-for-sale
       and held-to-maturity:
                               
          Amortization of net unrealized holding losses
           to income during the period
           (pre-tax $60, $-, $60, $-, respectively)
    38       -       38       -  
                                 
Total other comprehensive income  (loss)
    (118 )     (141 )     1,943       (2,833 )
                                 
Total comprehensive income (loss)
  $ 179     $ (2,363 )   $ 3,532     $ (3,052 )
 
 
 (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, 2014 and 2013
(Dollars in thousands)
(unaudited)
   
Nine Months Ended
September 30,
 
   
       2014
   
2013
 
Cash flows from operating activities
           
Net income (loss)
  $ 1,589     $ (219 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Provision for loan losses
    600       1,175  
Loss (gain) on sale of other real estate owned
    9       (229 )
Write down of other real estate owned
    667       1,442  
Depreciation and amortization
    1,779       1,626  
Stock based compensation
    309       237  
Gain on sale and call of investment securities
    (458 )     (703 )
Impairment charges on investment securities
    7       -  
Amortization of premiums on investment securities
    414       613  
Proceeds from sales of SBA loans originated for sale
    29,485       39,519  
SBA loans originated for sale
    (22,529 )     (42,704 )
Gains on sales of SBA loans originated for sale
    (2,814 )     (3,863 )
Increase in value of bank owned life insurance
    -       (13 )
Increase in accrued interest receivable and other assets
    (1,747 )     (2,129 )
Net (decrease) increase in accrued interest payable and other liabilities
    (184 )     723  
Net cash provided by (used in) operating activities
    7,127       (4,525 )
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
    (46,823 )     (50,054 )
Proceeds from the sale of securities available for sale
    5,700       7,946  
Proceeds from the maturity or call of securities available for sale
    20,114       27,315  
Proceeds from the maturity or call of securities held to maturity
    1,166       -  
Net (purchase) redemption of restricted stock
    (155 )     2,246  
Net increase in loans
    (73,852 )     (34,595 )
Net proceeds from sale of other real estate owned
    91       1,994  
Surrender proceeds on bank owned life insurance
    -       10,503  
Premises and equipment expenditures
    (8,798 )     (831 )
Net cash used in investing activities
    (102,557 )     (35,476 )
                 
Cash flows from financing activities
               
Net proceeds from stock offering
    44,853       -  
Net increase (decrease) in demand, money market and savings deposits
    121,245       (4,041 )
Net decrease in time deposits
    (704 )     (39,657 )
Net cash provided by (used in) financing activities
    165,394       (43,698 )
                 
Net increase (decrease) in cash and cash equivalents
    69,964       (83,699 )
Cash and cash equivalents, beginning of year
    35,880       128,004  
Cash and cash equivalents, end of period
  $ 105,844     $ 44,305  
                 
Supplemental disclosures:
               
Interest paid
  $ 3,335     $ 3,476  
Income taxes paid
  $ 70     $ 185  
Non-cash transfers from loans to other real estate owned
  $ 483     $ 246  
Transfer of available-for-sale securities to held-to-maturity securities
  $ 70,118     $ -  

(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, 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
                    1,589                               1,589  
Other comprehensive income, net of
   tax
                                            1,943       1,943  
Proceeds from shares issued under
   common stock offering (11,842,106
   shares) net of offering costs (pre-tax
   $147)
    118       44,735                                       44,853  
Stock based compensation
            309                                       309  
Transfer from deferred compensation
                                                       
  plan to treasury stock (87,105 shares)
                            (626 )     626               -  
                                                         
Balance September 30,  2014
  $ 383     $ 152,122     $ (36,119 )   $ (3,725 )   $ (183 )   $ (885 )   $ 111,593  
                                                         
                                                         
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  
 
 
(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, 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 including 2011, 2012, 2013, and the nine month period ended September 30, 2014 and the uncertain nature 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 September 30, 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.  The Plan terminates pursuant to its terms on November 14, 2015.
 
 
 
 
 
7

 

 
On April 29, 2014, the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 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 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.

During the nine months ended September 30, 2014, 360,900 options were granted under the Plan with a weighted average grant date fair value of $576,185. There were no options granted under the 2014 Plan.

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 55.08%
Risk-free interest rate(3)
 
1.51% to 2.26
%  
1.28% to 2.02%
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 nine months ended September 30, 2014 and 2013, 206,825 options and 127,287 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At September 30, 2014, the intrinsic value of the 1,502,774 options outstanding was $1,207,234, while the intrinsic value of the 452,261 exercisable (vested) options was $206,121. During the nine months ended September 30, 2014, 73,656 options were forfeited with a weighted average grant date fair value of $27,365.

Information regarding stock based compensation for the nine months ended September 30, 2014 and 2013 is set forth below:
 
   
2014
   
2013
 
Stock based compensation expense recognized
  $ 309,000     $ 237,000  
Number of unvested stock options
    1,050,513       893,563  
Fair value of unvested stock options
  $ 1,552,934     $ 1,210,840  
Amount remaining to be recognized as expense
  $ 812,979     $ 597,709  

The remaining amount of $812,979 will be recognized as expense through September 2018.
 
 
 
 
 
8

 

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 2014 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 net income. For the three and nine months ended September 30, 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 calculation.

The calculation of EPS for the three and nine months ended September 30, 2014 and 2013 is as follows (in thousands, except per share amounts):
 
 
     
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
 
     
2014
     
2013
     
2014
     
2013
 
                                 
Net income (loss) (basic and diluted)
  $ 297     $ (2,222 )   $ 1,589     $ (219 )
                                 
Weighted average shares outstanding
    37,815       25,973       33,025       25,973  
Net income (loss) per share – basic
  $ 0.01     $ (0.09 )   $ 0.05     $ (0.01 )
Weighted average shares outstanding (including dilutive CSEs)
    38,253       25,973       33,399       25,973  
Net income (loss) per share – diluted
  $ 0.01     $ (0.09 )   $ 0.05     $ (0.01 )

 
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 those annual periods.  The Company does not believe the adoption of the amendment to this guidance will have a material impact on the consolidated financial statements.

ASU 2014-09

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40).”  The purpose of this guidance is to clarify the principles for recognizing revenue.  The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification.  For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016.  The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated financial statements.
 
 
 
 
 
9

 
 

ASU 2014-14

      In August 2014, the FASB issued ASU 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure - a consensus of the FASB Emerging Issues Task Force.”  The amendments in this update address a practice issue related to the classification of certain foreclosed residential and nonresidential mortgage loans that are either fully or partially guaranteed under government programs. Specifically, creditors should reclassify loans that meet certain conditions to "other receivables" upon foreclosure, rather than reclassifying them to other real estate owned (OREO). The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For all other entities, the amendments are effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated 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.
 
 
 
 
 
10

 
 
 
Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2014 and December 31, 2013 is as follows:
 
   
At September 30, 2014
 
 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 83,145     $ 326     $ (346 )   $ 83,125  
Mortgage-backed securities
    12,832       611       (56 )     13,387  
Municipal securities
    12,246       348       (41 )     12,553  
Corporate bonds
    26,908       818       -       27,726  
Asset-backed securities
    18,532       204       -       18,736  
Trust preferred securities
    5,261       -       (2,082 )     3,179  
Other securities
    115       9       -       124  
Total securities available for sale
  $ 159,039     $ 2,316     $ (2,525 )   $ 158,830  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Collateralized mortgage obligations
    68,970       123       (468 )     68,625  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 68,991     $ 123     $ (468 )   $ 68,646  

 
   
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  


 

 
11

 
 

      The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 30, 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
  $ 14,979     $ 15,211     $ -     $ -  
After 1 year to 5 years
    63,314       63,848       41,733       41,676  
After 5 years to 10 years
    69,020       67,598       27,258       26,970  
After 10 years
    11,726       12,173       -       -  
Total
  $ 159,039     $ 158,830     $ 68,991     $ 68,646  
 
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, 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 September 30, 2014 and December 31, 2013.  In addition, the Company did not hold any private issued collateralized mortgage obligations (“CMOs”) as of September 30, 2014 and December 31, 2013.  As of September 30, 2014 and December 31, 2013, the asset-backed securities consisted solely of Sallie Mae bonds collateralized by student loans which are guaranteed by the U.S. Department of Education.

In instances when a determination is made that an other-than-temporary impairment exists with respect to a debt security but the investor does not intend to sell the debt security and it is more likely than not that the investor will not be required to sell the debt security prior to its anticipated recovery, accounting standards require the other-than-temporary impairment to be separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income. Impairment charges (credit losses) on trust preferred securities for the nine months ended September 30, 2014 amounted to $7,000. There were no impairment charges (credit losses) on trust preferred securities during the three month period ended September 30, 2014 or the three and nine month periods ended September 30, 2013.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at September 30, 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
    7       -  
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
  $ 3,966     $ 3,959  




 
12

 
 

The Company realized gross gains on the sale of securities of $458,000 during the nine months ended September 30, 2014.  The related sale proceeds amounted to $5.7 million.  The tax provision applicable to these gross gains in 2014 amounted to approximately $165,000. 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 tax provisions applicable to the gains in both nine month periods were offset by an adjustment to the deferred tax asset valuation allowance.

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, 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
  $ 50,551     $ 480       $ 30,221     $ 334     $ 80,772     $ 814  
Mortgage-backed securities
    1,461       9         1,075       47       2,536       56  
Municipal securities
    -       -         1,384       41       1,384       41  
Trust preferred securities
    -       -         3,179       2,082       3,179       2,082  
Total
  $ 52,012     $ 489       $ 35,859     $ 2,504     $ 87,871     $ 2,993  

 
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 $3.0 million on securities with a total fair value of $87.9 million at September 30, 2014.  The most significant components of this impairment are related to the CMOs and the trust preferred securities held in the portfolio.  The unrealized losses on the CMOs 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 maturity or the recovering the cost bases and does not believe it will be forced to sell these securities prior to maturity or recovering the cost bases.

At September 30, 2014, the investment portfolio included thirty-two CMOs with a total market value of $151.8 million.  Sixteen of these securities carried an unrealized loss at September 30, 2014.  At September 30, 2014, the investment portfolio included forty-two mortgage-backed securities with a total market value of $13.4 million.  Two of these securities carried an unrealized loss at September 30, 2014.  Management found no evidence of OTTI on any of these securities and the unrealized losses are due to changes in fair value resulting from changes in market interest rates and are considered temporary as of September 30, 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.




 
13

 


 The following table provides additional detail about trust preferred securities held in the portfolio as of September 30, 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     $ 40     $ (9 )     B1       6       18 %     0.31 %   $ -  
Preferred Term Securities VII
Mezzanine
   Notes
    979       809       (170 )     D       11       54       0.35       2,173  
TPREF Funding II
Class B Notes
    732       379       (353 )     C       17       41       0.35       267  
TPREF Funding III
Class B2 Notes
    1,521       775       (746 )     C       15       36       0.27       480  
Trapeza CDO I, LLC
Class C1 Notes
    556       324       (232 )     C       8       49       0.30       470  
ALESCO Preferred  Funding IV
Class B1 Notes
    604       414       (190 )     C       40       8       0.32       396  
ALESCO Preferred Funding V
Class C1 Notes
    820       438       (382 )     C       41       15       0.33       180  
Total
    $ 5,261       3,179     $ (2,082 )             138       30 %           $ 3,966  

At September 30, 2014, the investment portfolio included twenty-two municipal securities with a total market value of $12.6 million.  One of these securities carried an unrealized loss at September 30, 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 eleven municipal securities had a market value of $6.4 million.  As of September 30, 2014, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.

In July 2014, thirteen CMOs with a fair value of $70.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category.  These securities were transferred at fair value.  Unrealized losses of $1.2 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of those securities.  At September 30, 2014, the fair market value of the securities transferred to held-for-maturity is $68.6 million and the unrealized losses are $1.5 million.
 
 
 

 
 
14

 


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, 2014, and December 31, 2013:
 
(dollars in thousands)
 
September 30,
2014
   
December 31,
 2013
 
             
Commercial real estate
  $ 366,611     $ 342,794  
Construction and land development
    38,236       23,977  
Commercial and industrial
    134,340       118,209  
Owner occupied real estate
    172,642       160,229  
Consumer and other
    38,365       31,981  
Residential mortgage
    2,314       2,359  
Total loans receivable
    752,508       679,549  
Deferred costs (fees)
    (475 )     (238 )
Allowance for loan losses
    (12,216 )     (12,263 )
Net loans receivable
  $ 739,817     $ 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. 
 
 
 

 
 
15

 

 
       The following table summarizes information with regard to impaired loans by loan portfolio class as of September 30, 2014 and December 31, 2013:
 
   
September 30, 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
  $ 6,528     $ 6,533     $ -     $ 6,850     $ 6,971     $ -  
Construction and land development
    61       158       -       902       4,076       -  
Commercial and industrial
    3,487       6,635       -       2,043       2,882       -  
Owner occupied real estate
    827       827       -       542       862       -  
Consumer and other
    437       711       -       453       711       -  
Total
  $ 11,340     $ 14,864     $ -     $ 10,790     $ 15,502     $ -  
 
With an allowance recorded
                                   
Commercial real estate
  $ 13,119     $ 13,245     $ 3,856     $ 13,044     $ 13,044     $ 3,679  
Construction and land development
    516       3,741       211       716       3,867       237  
Commercial and industrial
    2,432       2,718       1,276       4,889       7,634       1,254  
Owner occupied real estate
    3,877       3,879       838       2,891       2,891       430  
Consumer and other
    -       -       -       203       210       10  
Total
  $ 19,944     $ 23,583     $ 6,181     $ 21,743     $ 27,646     $ 5,610  
 
Total
                                   
Commercial real estate
  $ 19,647     $ 19,778     $ 3,856     $ 19,894     $ 20,015     $ 3,679  
Construction and land development
    577       3,899       211       1,618       7,943       237  
Commercial and industrial
    5,919       9,353       1,276       6,932       10,516       1,254  
Owner occupied real estate
    4,704       4,706       838       3,433       3,753       430  
Consumer and other
    437       711       -       656       921       10  
Total
  $ 31,284     $ 38,447     $ 6,181     $ 32,533     $ 43,148     $ 5,610  

 

 
 
16

 
 
 

The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2014 and September 30, 2013:

   
Three Months Ended September 30,
 
   
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
  $ 6,578     $ 88     $ 12,063     $ 178  
Construction and land development
    229       -       1,421       3  
Commercial and industrial
    3,290       10       3,034       7  
Owner occupied real estate
    806       2       465       4  
Consumer and other
    457       -       538       -  
Total
  $ 11,360     $ 100     $ 17,521     $ 192  


With an allowance recorded:
                       
Commercial real estate
  $ 13,150     $ (3 )   $ 1,925     $ 10  
Construction and land development
    551       -       545       -  
Commercial and industrial
    2,851       -       3,392       14  
Owner occupied real estate
    3,686       26       3,013       37  
Consumer and other
    17       -       163       -  
Total
  $ 20,255     $ 23     $ 9,038     $ 61  

Total:
                       
Commercial real estate
  $ 19,728     $ 85     $ 13,988     $ 188  
Construction and land development
    780       -       1,966       3  
Commercial and industrial
    6,141       10       6,426       21  
Owner occupied real estate
    4,492       28       3,478       41  
Consumer and other
    474       -       701       -  
Total
  $ 31,615     $ 123     $ 26,559     $ 253  

 
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $232,000 and $113,000 for the three months ended September 30, 2014 and 2013, respectively.




 
17

 
 
 
The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2014 and September 30, 2013:

   
Nine Months Ended September 30,
 
   
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
  $ 6,682     $ 300     $ 15,865     $ 599  
Construction and land development
    563       -       2,217       32  
Commercial and industrial
    2,896       11       2,968       18  
Owner occupied real estate
    762       4       299       4  
Consumer and other
    495       1       700       1  
Total
  $ 11,398     $ 316     $ 22,049     $ 654  


With an allowance recorded:
                       
Commercial real estate
  $ 13,216     $ 5     $ 4,565     $ 71  
Construction and land development
    617       -       445       -  
Commercial and industrial
    3,691       -       3,628       42  
Owner occupied real estate
    3,304       96       3,201       110  
Consumer and other
    51       -       87       -  
Total
  $ 20,879     $ 101     $ 11,926     $ 223  

Total:
                       
Commercial real estate
  $ 19,898     $ 305     $ 20,430     $ 670  
Construction and land development
    1,180       -       2,662       32  
Commercial and industrial
    6,587       11       6,596       60  
Owner occupied real estate
    4,066       100       3,500       114  
Consumer and other
    546       1