rfb10q.htm
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[ X ]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015.
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     [X]
Non-Accelerated filer   [   ]
(Do not check if a smaller reporting company)
Smaller reporting company    [ ]
 
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
37,815,503
Title of Class
Number of Shares Outstanding as of May 7, 2015
 
 
 
 
 
 

 

 
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, 2015 and December 31, 2014 (unaudited)
 
Consolidated statements of income for the three months ended March 31, 2015 and 2014 (unaudited)
Consolidated statements of comprehensive income for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
 
Consolidated statements of cash flows for the three months ended March 31, 2015 and 2014 (unaudited)
 
 
Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2015 and 2014 (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, 2015 and December 31, 2014
(Dollars in thousands, except per share data)
(unaudited)
   
March 31, 2015
   
December 31, 2014
 
ASSETS
           
Cash and due from banks
  $ 25,316     $ 14,822  
Interest bearing deposits with banks
    133,321       114,004  
Federal funds sold
    3,891       -  
    Cash and cash equivalents
    162,528       128,826  
                 
Investment securities available for sale, at fair value
    187,024       185,379  
Investment securities held to maturity, at amortized cost (fair value of $67,878 and $68,253, respectively)
    66,742       67,866  
Restricted stock, at cost
    1,157       1,157  
Loans held for sale
    4,955       1,676  
Loans receivable (net of allowance for loan losses of $10,944 and $11,536, respectively)
    777,857       770,404  
Premises and equipment, net
    36,573       35,030  
Other real estate owned, net
    3,827       3,715  
Accrued interest receivable
    3,401       3,226  
Other assets
    19,919       17,319  
    Total Assets
  $ 1,263,983     $ 1,214,598  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $ 237,307     $ 224,245  
   Demand – interest bearing
    310,595       283,768  
   Money market and savings
    498,862       488,848  
   Time deposits
    74,633       75,369  
       Total Deposits
    1,121,397       1,072,230  
Accrued interest payable
    260       265  
Other liabilities
    5,950       6,816  
Subordinated debt
    22,476       22,476  
    Total Liabilities
    1,150,083       1,101,787  
                 
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 38,344,348
    383       383  
Additional paid in capital
    152,352       152,234  
Accumulated deficit
    (34,738 )     (35,266 )
Treasury stock at cost (503,408 shares)
    (3,725 )     (3,725 )
Stock held by deferred compensation plan (25,437 shares)
    (183 )     (183 )
Accumulated other comprehensive loss
    (189 )     (632 )
    Total Shareholders’ Equity
    113,900       112,811  
    Total Liabilities and Shareholders’ Equity
  $ 1,263,983     $ 1,214,598  


(See notes to consolidated financial statements)
 
 
 

 
 
1

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 2015 and 2014
(Dollars in thousands, except per share data)
(unaudited)
 
   
Three Months Ended
March 31,
 
   
2015
   
2014
 
Interest income
           
Interest and fees on taxable loans
  $ 8,951     $ 8,241  
Interest and fees on tax-exempt loans
    126       82  
Interest and dividends on taxable investment securities
    1,482       1,241  
Interest and dividends on tax-exempt investment securities
    125       79  
Interest on federal funds sold and other interest-earning assets
    77       12  
Total interest income
    10,761       9,655  
Interest expense
               
Demand-interest bearing
    290       191  
Money market and savings
    553       416  
Time deposits
    175       173  
Other borrowings
    276       276  
Total interest expense
    1,294       1,056  
Net interest income
    9,467       8,599  
Provision for loan losses
    -       -  
Net interest income after provision for loan losses
    9,467       8,599  
Non-interest income
               
Loan advisory and servicing fees
    599       437  
Gain on sales of SBA loans
    578       1,154  
Service fees on deposit accounts
    363       293  
Other than temporary impairment
    (13 )     -  
Portion recognized in other comprehensive income (before taxes)
    10       -  
    Net impairment loss on investment securities
    (3 )     -  
Other non-interest income
    40       46  
Total non-interest income
    1,577       1,930  
Non-interest expenses
               
Salaries and employee benefits
    5,222       5,040  
Occupancy
    1,165       1,038  
Depreciation and amortization
    723       498  
Legal
    239       255  
Other real estate owned
    377       346  
Advertising
    151       148  
 Data processing
    352       300  
Insurance
    180       157  
Professional fees
    325       402  
Regulatory assessments and costs
    292       337  
Taxes, other
    221       215  
Other operating expenses
    1,271       1,079  
Total non-interest expense
    10,518       9,815  
Income before benefit for income taxes
    526       714  
Benefit for income taxes
    (2 )     (41 )
Net income
  $ 528     $ 755  
Net income per share
               
Basic
  $ 0.01     $ 0.03  
Diluted
  $ 0.01     $ 0.03  
 
 
(See notes to consolidated financial statements)
 
 
 
 
 
2

 
 
 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2015 and 2014
(Dollars in thousands)
(unaudited)
 
   
Three Months Ended
March 31,
 
   
2015
   
2014
 
             
Net income
  $ 528     $ 755  
                 
      Other comprehensive income, net of tax
               
          Unrealized gain on available for sale securities (pre-tax $630, and $2,056 respectively)
    404       1,318  
                 
          Reclassification adjustment for impairment charge (pre-tax $3, and $- respectively)
    2       -  
                 
          Net unrealized holding losses on securities transferred from
          available-for-sale to held-to-maturity:
               
              Amortization of net unrealized holding losses to income during the period
             (pre-tax $58, and $- respectively)
    37       -  
                 
Total other comprehensive income
    443       1,318  
                 
Total comprehensive income
  $ 971     $ 2,073  

 
 
(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, 2015 and 2014
(Dollars in thousands)
(unaudited)
 
Three Months Ended March 31,
 
 
2015
   
2014
 
Cash flows from operating activities
         
Net income
  $ 528     $ 755  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Write down of other real estate owned
    148       300  
Depreciation and amortization
    723       498  
Stock based compensation
    118       88  
Amortization of premiums on investment securities
    112       126  
Proceeds from sales of SBA loans originated for sale
    5,825       12,465  
SBA loans originated for sale
    (8,526 )     (10,176 )
Gains on sales of SBA loans originated for sale
    (578 )     (1,154 )
Increase in accrued interest receivable and other assets
    (3,023 )     (394 )
Decrease in accrued interest payable and other liabilities
    (871 )     (312 )
Net cash (used in) provided by operating activities
    (5,544 )     2,196  
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
    (6,356 )     (517 )
Proceeds from the maturity or call of securities available for sale
    5,273       6,077  
Proceeds from the maturity or call of securities held to maturity
    1,141       -  
Proceeds from redemption of FHLB stock
    -       3  
Net increase in loans
    (8,032 )     (17,850 )
Net proceeds from sale of other real estate owned
    319       63  
Premises and equipment expenditures
    (2,266 )     (1,890 )
Net cash used in investing activities
    (9,921 )     (14,114 )
                 
Cash flows from financing activities
               
Net increase  in demand, money market and savings deposits
    49,903       12,560  
Net decrease in time deposits
    (736 )     (2,212 )
Net cash provided by financing activities
    49,167       10,348  
                 
Net increase (decrease) in cash and cash equivalents
    33,702       (1,570 )
Cash and cash equivalents, beginning of year
    128,826       35,880  
Cash and cash equivalents, end of period
  $ 162,528     $ 34,310  
                 
Supplemental disclosures
               
Interest paid
  $ 1,299     $ 1,067  
Income taxes paid
  $ -     $ 50  
Non-cash transfers from loans to other real estate owned
  $ 579     $ -  
                 
                 
                 

(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, 2015 and 2014
(Dollars in thousands)
(unaudited)

 
   
Common
Stock
   
Additional
Paid in
Capital
   
Accumulated Deficit
   
Treasury
Stock
   
Stock Held by Deferred Compensation Plan
   
Accumulated Other Comprehensive Loss
   
Total Shareholders’ Equity
 
                                           
Balance January 1, 2015
  $ 383     $ 152,234     $ (35,266 )   $ (3,725 )   $ (183 )   $ (632 )   $ 112,811  
                                                         
Net income
                    528                               528  
Other comprehensive income, net of tax
                                            443       443  
Stock based compensation
            118                                       118  
                                                         
Balance March 31, 2015
  $ 383     $ 152,352     $ (34,738 )   $ (3,725 )   $ (183 )   $ (189 )   $ 113,900  
                                                         
                                                         
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  

(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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2015, 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 three months ended March 31, 2015, 3,000 options were granted under the Plan with a weighted average grant date fair value of $4,819. During the three months ended March 31, 2015, 490,200 options were granted under the 2014 Plan with a weighted average grant date fair value of $747,152.

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 2015 and 2014 are as follows:

   
2015
 
2014
 
Dividend yield(1)
 
0.0%
 
0.0%
 
Expected volatility(2)
 
   53.78% to 56.00%
 
  55.79% to 57.99%
 
Risk-free interest rate(3)
 
1.49% to 1.95%
 
1.51% to 2.13%
 
Expected life(4)
 
5.5 to 7.0 years
 
5.5 to 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, 2015 and 2014, 312,812 shares and 147,575 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At March 31, 2015, the intrinsic value of the 1,986,974 options outstanding was $942,801, while the intrinsic value of the 766,948 exercisable (vested) options was $301,700.  During the three months ended March 31, 2015, 625 options were forfeited with a weighted average grant date fair value of $931.

Information regarding stock based compensation for the three months ended March 31, 2015 and 2014 is set forth below:
 
   
2015
 
2014
 
Stock based compensation expense recognized
 
$    118,000
 
$      88,000
 
Number of unvested stock options
 
   1,220,026
 
   1,116,138
 
Fair value of unvested stock options
 
$ 1,911,407
 
$ 1,620,736
 
Amount remaining to be recognized as expense
 
$ 1,335,438
 
$ 1,021,120
 

The remaining amount of $1,335,438 will be recognized ratably as expense through February 2019.
 
 
 

 
 
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 months ended March 31, 2015 and 2014, 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.

The calculation of EPS for the three months ended March 31, 2015 and 2014 is as follows (in thousands, except per share amounts):

   
Three Months Ended
March 31,
   
   
2015
   
2014
   
               
Net income - basic and diluted
  $ 528     $ 755    
                   
Weighted average shares outstanding
    37,816       25,973    
                   
Net income per share – basic
  $ 0.01     $ 0.03    
                   
Weighted average shares outstanding (including dilutive CSEs)
    38,047       26,212    
                   
Net income per share – diluted
  $ 0.01     $ 0.03    


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.
 
 
 
 
 
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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, early adoption of the update will be effective for interim and annual periods beginning after December 15, 2016.  For public companies that elect to defer the update, adoption will be effective for interim and annual periods beginning after December 15, 2017.  The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect a material impact.

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 adopted ASU 2014-14 effective January 1, 2015.  The adoption of ASU 2014-14 did not have a material effect 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 March 31, 2015 and December 31, 2014 is as follows:

 
   
At March 31, 2015
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
  $ 99,421     $ 1,508     $ (142 )   $ 100,787  
Mortgage-backed securities
    12,474       549       (45 )     12,978  
Municipal securities
    17,031       404       (47 )     17,388  
Corporate bonds
    33,817       555       (51 )     34,321  
Asset-backed securities
    18,164       222       -       18,386  
Trust preferred securities
    5,240       -       (2,198 )     3,042  
Other securities
    115       7       -       122  
Total securities available for sale
  $ 186,262     $ 3,245     $ (2,483 )   $ 187,024  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Collateralized mortgage obligations
    66,721       1,136       -       67,857  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 66,742     $ 1,136     $ -     $ 67,878  

 
   
At December 31, 2014
(dollars in thousands)
 
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
  $ 98,626     $ 692     $ (96 )   $ 99,222  
Mortgage-backed securities
    13,271       564       (33 )     13,802  
Municipal securities
    15,784       363       (40 )     16,107  
Corporate bonds
    33,840       621       (34 )     34,427  
Asset-backed securities
    18,353       152       -       18,505  
Trust preferred securities
    5,261       -       (2,068 )     3,193  
Other securities
    115       8       -       123  
Total securities available for sale
  $ 185,250     $ 2,400     $ (2,271 )   $ 185,379  
                                 
U.S. Government agencies
  $ 1     $ -     $ -     $ 1  
Collateralized mortgage obligations
    67,845       531       (144 )     68,232  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 67,866     $ 531     $ (144 )   $ 68,253  

 
 
 

 
 
11

 
 

       The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at March 31, 2015 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
  $ 13,398     $ 13,498     $ -     $ -  
After 1 year to 5 years
    86,809       87,202       43,315       44,104  
After 5 years to 10 years
    75,048       75,062       23,427       23,774  
After 10 years
    11,007       11,262       -       -  
Total
  $ 186,262     $ 187,024     $ 66,742     $ 67,878  

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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014.  In addition, the Company did not hold any private issued CMO’s as of March 31, 2015 and December 31, 2014.  As of March 31, 2015 and December 31, 2014, 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.  Impairment charges (credit losses) on trust preferred securities for the three months ended March 31, 2015 amounted to $3,000. There were no impairment charges (credit losses) on trust preferred securities for the three months ended March 31, 2014.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at March 31, 2015 and 2014 for which a portion of OTTI was recognized in other comprehensive income:
       
(dollars in thousands)
 
2015
   
2014
 
             
Beginning Balance, January 1st
  $ 3,966     $ 3,959  
Additional credit-related impairment loss on securities for which an
               
other-than-temporary impairment was previously recognized
    3       -  
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
  $ 3,969     $ 3,959  
 
 
 
 
 
12

 

 
No securities were sold during the three months ended March 31, 2015 and March 31, 2014.

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 in the available for sale and held to maturity section:

 
At March 31, 2015
 
 
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
  $ 22,105     $ 142     $ -     $ -     $ 22,105     $ 142  
Mortgage-backed securities
    5,128       24       1,057       21       6,185       45  
Municipal securities
    2,064       26       1,405       21       3,469       47  
Corporate bonds
    4,951       51       -       -       4,951       51  
Trust preferred securities
    -       -       3,042       2,198       3,042       2,198  
Total Available for Sale
  $ 34,248     $ 243     $ 5,504     $ 2,240     $ 39,752     $ 2,483  

 
At March 31, 2015
 
 
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
  $ -       -     $ -       -     $ -       -  
Total Held to Maturity
  $ -     $ -     $ -     $ -     $ -     $ -  

 
At December 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
  $ 17,331     $ 96     $ -     $ -     $ 17,331     $ 96  
Mortgage-backed securities
    3,997       2       1,069       31       5,066       33  
Municipal securities
    1,298       10       1,395       30       2,693       40  
Corporate bonds
    4,880       34       -       -       4,880       34  
Trust preferred securities
    -       -       3,193       2,068       3,193       2,068  
Total Available for Sale
  $ 27,506     $ 142     $ 5,657     $ 2,129     $ 33,163     $ 2,271  

 
At December 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
  $ 19,766       92     $ 9,232       52     $ 28,998       144  
Total Held to Maturity
  $ 19,766     $ 92     $ 9,232     $ 52     $ 28,998     $ 144  


The impairment of the investment portfolio amounted to $2.5 million on securities with a total fair value of $39.8 million at March 31, 2015.  The most significant components of this impairment are related to the trust preferred securities held in the portfolio.  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, 2015, the investment portfolio included thirty-five collateralized mortgage obligations with a total market value of $168.6 million.  Four of these securities carried an unrealized loss at March 31, 2015.  At March 31, 2015, the investment portfolio included forty-two mortgage-backed securities with a total market value of $13.0 million.  Three of these securities carried an unrealized loss at March 31, 2015.  At March 31, 2015, the investment portfolio included two asset-backed securities with a total market value of $18.4 million.  None of these securities carried an unrealized loss at March 31, 2015.  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, 2015.
 
 
 
 
 
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The unrealized losses on the trust preferred securities are primarily the result of the secondary market for such securities becoming inactive and are also considered temporary at this time.

The following table provides additional detail about the trust preferred securities held in the portfolio as of March 31, 2015.

(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)
 
B1
6
18%
0.32%
$
-
 
Preferred Term Securities VII
 
Mezzanine Notes
 
961
 
788
 
(173)
 
D
12
50
0.45
 
2,173
 
TPREF Funding II
 
Class B Notes
 
732
 
371
 
(361)
 
C
18
39
0.38
 
267
 
TPREF Funding III
 
Class B2 Notes
 
1,518
 
739
 
(779)
 
C
15
36
0.30
 
483
 
Trapeza CDO I, LLC
 
Class C1 Notes
 
556
 
295
 
(261)
 
C
8
50
0.31
 
470
 
ALESCO Preferred Funding IV
 
Class B1 Notes
 
604
 
396
 
(208)
 
C
41
6
0.33
 
396
 
ALESCO Preferred Funding V
 
Class C1 Notes
 
820
 
414
 
(406)
 
C
39
17
0.34
 
180
 
Total
   
 $
5,240
 $
3,042
 $
(2,198)
   
139
31%
 
 $
3,969
 

At March 31, 2015, the investment portfolio included thirty municipal securities with a total market value of $17.4 million.  Four of these securities carried an unrealized loss at March 31, 2015.  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 and New Jersey where twenty-three municipal securities had a market value of $12.9 million.  As of March 31, 2015, 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 March 31, 2015, the fair market value of the securities transferred to held-for-maturity is $67.9 million and the unrealized gains are $79,000.
 
 
 

 
 
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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, 2015 and December 31, 2014:

(dollars in thousands)
 
March 31, 2015
   
December 31, 2014
 
             
Commercial real estate
  $ 364,397     $ 379,259  
Construction and land development
    35,238       29,861  
Commercial and industrial
    159,819       145,113  
Owner occupied real estate
    188,783       188,025  
Consumer and other
    40,468       39,713  
Residential mortgage
    405       408  
Total loans receivable
    789,110       782,379  
Deferred costs (fees)
    (309 )     (439 )
Allowance for loan losses
    (10,944 )     (11,536 )
Net loans receivable
  $ 777,857     $ 770,404  

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.

The following table summarizes information with regard to impaired loans by loan portfolio class as of March 31, 2015 and December 31, 2014:

 
March 31, 2015
   
December 31, 2014
 
 
 
(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
  $ 11,764     $ 11,863     $ -     $ 11,964     $ 11,969     $ -  
Construction and land development
    155       3,899       -       61       158       -  
Commercial and industrial
    3,943       5,229       -       3,764       7,275       -  
Owner occupied real estate
    878       1,083       -       524       528       -  
Consumer and other
    573       840       -       429       708       -  
Total
  $ 17,313     $ 22,914     $ -     $ 16,742     $ 20,638     $ -  

With an allowance recorded:
                   
Commercial real estate
  $ 13,013     $ 13,140     $ 3,838     $ 13,118     $ 13,245     $ 3,858  
Construction and land development
    -       -       -       316       3,741       217  
Commercial and industrial
    1,559       4,226       308       1,457       2,057       211  
Owner occupied real estate
    4,409       4,410       825       4,011       4,162       844  
Consumer and other
    -       -       -       -       -       -  
Total
  $ 18,981     $ 21,776     $ 4,971     $ 18,902     $ 23,205     $ 5,130  

Total:
                             
Commercial real estate
  $ 24,777     $ 25,003     $ 3,838     $ 25,082     $ 25,214     $ 3,858  
Construction and land development
    155       3,899       -       377       3,899       217  
Commercial and industrial
    5,502       9,455       308       5,221       9,332       211  
Owner occupied real estate
    5,287       5,493       825       4,535       4,690       844  
Consumer and other
    573       840       -       429       708       -  
Total
  $ 36,294     $ 44,690     $ 4,971     $ 35,644     $ 43,843     $ 5,130  
 
 
 
 
 
15

 
 
 
         The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2015 and 2014:
 
 
Three Months Ended March 31,
 
 
2015
   
2014
 
 
 
(dollars in thousands)
Average
Recorded
Investment
 
Interest
Income
Recognized
   
Average
Recorded Investment
 
Interest
Income
Recognized
 
With no related allowance recorded:
                 
Commercial real estate
  $ 11,864     $ 162     $ 6,772     $ 106  
Construction and land development
    108       -       799       -  
Commercial and industrial
    3,854       21       2,539       1  
Owner occupied real estate
    701       1       678       5  
Consumer and other
    501       1       548       1  
Total
  $ 17,028     $ 185     $ 11,336     $ 113  

With an allowance recorded:
                 
Commercial real estate
  $ 13,066     $ -     $ 13,173     $ 138  
Construction and land development
    158       -       641       -  
Commercial and industrial
    1,508       -       4,308       1  
Owner occupied real estate
    4,209       33       2,911       35  
Consumer and other
    -       -       101       -  
Total
  $ 18,941     $ 33     $ 21,134     $ 174  
 
Total:
                       
Commercial real estate
  $ 24,930     $ 162     $ 19,945     $ 244  
Construction and land development
    266       -       1,440       -  
Commercial and industrial
    5,362       21       6,847       2  
Owner occupied real estate
    4,910       34       3,589       40  
Consumer and other
    501       1       649       1  
Total
  $ 35,969     $ 218     $ 32,470     $ 287  
 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $245,000 and $143,000 for the three months ended March 31, 2015 and 2014, respectively.
 
 
 
 
 
16

 
 

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, 2015 and 2014:

 
 
(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, 2015
                             
Allowance for loan losses:
                             
                                 
Beginning balance:
  $ 6,828     $ 917     $ 1,579     $ 1,638     $ 234     $ 2     $ 338     $ 11,536  
Charge-offs
    (231 )     (222 )     (169 )     (55 )     -       -       -       (677 )
Recoveries
    4       5       45       -       31       -       -       85  
Provisions (credits)
    (338 )     (445 )     469       (5 )     (35 )     -       354       -  
Ending balance
  $ 6,263     $ 255     $ 1,924     $ 1,578     $ 230     $ 2     $ 692     $ 10,944  
                                                             
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  

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, 2015 and December 31, 2014:

 
 
(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, 2015
                               
                                 
Allowance for loan losses:
                               
                                                 
Individually evaluated for impairment
  $ 3,838     $ -     $ 294     $ 839     $ -     $ -     $ -     $ 4,971  
Collectively evaluated for impairment
    2,425       255       1,630       739       230       2       692       5,973  
Total allowance for loan losses
  $ 6,263     $ 255     $ 1,924     $ 1,578     $ 230     $ 2     $ 692     $ 10,944  
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
  $ 24,777     $ 155     $ 5,502     $ 5,287     $ 573     $ -     $ -     $ 36,294  
Loans evaluated collectively
    339,620       35,083       154,317       183,496       39,895       405       -       752,816  
Total loans receivable
  $ 364,397     $ 35,238     $ 159,819     $ 188,783     $ 40,468     $ 405     $ -     $ 789,110