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 June 30, 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 issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share
37,816,003
Title of Class
Number of Shares Outstanding as of August 5, 2015


 
 

 


REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of June 30, 2015 and December 31, 2014 (unaudited)
  Consolidated statements of income for the three and six months ended June 30, 2015 and 2014 (unaudited) 2
 
Consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 (unaudited)
 
Consolidated statements of cash flows for the six months ended June 30, 2015 and 2014 (unaudited)
 
Consolidated statements of changes in shareholders’ equity for the six months ended June 30, 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
June 30, 2015 and December 31, 2014
(Dollars in thousands, except per share data)
(unaudited)
 
   
June 30,
2015
   
December 31,
 2014
 
ASSETS
           
Cash and due from banks
  $ 16,377     $ 14,822  
Interest bearing deposits with banks
    64,793       114,004  
    Cash and cash equivalents
    81,170       128,826  
                 
Investment securities available for sale, at fair value
    176,142       185,379  
Investment securities held to maturity, at amortized cost (fair value of $119,269 and $68,253, respectively)
    119,338       67,866  
Restricted stock, at cost
    1,179       1,157  
Loans held for sale
    3,464       1,676  
Loans receivable (net of allowance for loan losses of $8,398 and $11,536, respectively)
    814,477       770,404  
Premises and equipment, net
    40,961       35,030  
Other real estate owned, net
    13,162       3,715  
Accrued interest receivable
    3,559       3,226  
Other assets
    18,966       17,319  
    Total Assets
  $ 1,272,418     $ 1,214,598  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $ 241,550     $ 224,245  
   Demand – interest bearing
    327,342       283,768  
   Money market and savings
    488,873       488,848  
   Time deposits
    72,032       75,369  
       Total Deposits
    1,129,797       1,072,230  
Accrued interest payable
    235       265  
Other liabilities
    6,471       6,816  
Subordinated debt
    22,476       22,476  
    Total Liabilities
    1,158,979       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
    152,513       152,234  
Accumulated deficit
    (34,205 )     (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
    (1,344 )     (632 )
    Total Shareholders’ Equity
    113,439       112,811  
    Total Liabilities and Shareholders’ Equity
  $ 1,272,418     $ 1,214,598  
 
(See notes to consolidated financial statements)

 
1

 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2015 and 2014
(Dollars in thousands, except per share data)
 (unaudited)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Interest income:
                       
Interest and fees on taxable loans
  $ 9,142     $ 8,226     $ 18,093     $ 16,467  
Interest and fees on tax-exempt loans
    128       84       254       166  
Interest and dividends on taxable investment securities
    1,405       1,188       2,887       2,429  
Interest and dividends on tax-exempt investment securities
    138       83       263       162  
Interest on federal funds sold and other interest-earning assets
    86       50       163       62  
Total interest income
    10,899       9,631       21,660       19,286  
Interest expense:
                               
   Demand- interest bearing
    341       225       631       416  
   Money market and savings
    501       467       1,054       883  
   Time deposits
    170       178       345       351  
   Other borrowings
    278       277       554       553  
Total interest expense
    1,290       1,147       2,584       2,203  
Net interest income
    9,609       8,484       19,076       17,083  
Provision for loan losses
    -       300       -       300  
Net interest income after provision for loan losses
    9,609       8,184       19,076       16,783  
Non-interest income:
                               
Loan advisory and servicing fees
    325       466       924       903  
Gain on sales of SBA loans
    1,222       1,046       1,800       2,200  
Service fees on deposit accounts
    398       287       761       580  
Gain on sale of investment securities
    9       458       9       458  
Other-than-temporary impairment
    -       21       (13 )     21  
Portion recognized in other comprehensive income (before taxes)
    -       (28 )     10       (28 )
     Net impairment loss on investment securities
    -       (7 )     (3 )     (7 )
Other non-interest income
    68       39       108       85  
Total non-interest income
    2,022       2,289       3,599       4,219  
Non-interest expenses:
                               
 Salaries and employee benefits
    5,715       4,828       10,937       9,868  
 Occupancy
    1,219       1,027       2,384       2,065  
 Depreciation and amortization
    732       571       1,455       1,069  
 Legal
    340       444       579       699  
 Other real estate owned
    371       340       748       686  
 Advertising
    91       214       242       362  
 Data processing
    373       354       725       654  
 Insurance
    190       122       370       279  
 Professional fees
    350       428       675       830  
 Regulatory assessments and costs
    301       196       593       533  
 Taxes, other
    204       234       425       449  
 Other operating expenses
    1,217       1,199       2,488       2,278  
Total non-interest expense
    11,103       9,957       21,621       19,772  
Income before benefit for income taxes
    528       516       1,054       1,230  
Benefit for income taxes
    (5 )     (21 )     (7 )     (62 )
Net income
  $ 533     $ 537     $ 1,061     $ 1,292  
Net income per share:
                               
Basic
  $ 0.01     $ 0.02     $ 0.03     $ 0.04  
Diluted
  $ 0.01     $ 0.02     $ 0.03     $ 0.04  
 
(See notes to consolidated financial statements)
 
 
2

 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Six Months Ended June 30, 2015 and 2014
(Dollars in thousands)
(unaudited)
 

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Net income
  $ 533     $ 537     $ 1,061     $ 1,292  
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized gain (loss) on securities (pre-tax $(1,838),  $1,610, $(1,208), and $3,666, respectively)
    (1,178 )     1,032       (774 )     2,350  
Reclassification adjustment for securities gains (pre-tax $(9), $(458),$(9), and $(458), respectively)
    (6 )     (293 )     (6 )     (293 )
Reclassification adjustment for impairment charge (pre-tax $-, $7, $3, and $7, respectively)
                               
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity:
    -       4       2       4  
Amortization of net unrealized holding losses to income during the period (pre-tax $45, $-, $103, and $- respectively)
    29       -       66       -  
              743                  
Total other comprehensive income  (loss)
    (1,155 )     (712 )     2,061  
                                 
Total comprehensive income (loss)
  $ (622 )   $ 1,280     $ 349     $ 3,353  
 
 (See notes to consolidated financial statements)



 
3

 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2015 and 2014
(Dollars in thousands)
(unaudited)
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
Cash flows from operating activities
           
Net income
  $ 1,061     $ 1,292  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Provision for loan losses
    -       300  
Write down of other real estate owned
    298       552  
Depreciation and amortization
    1,455       1,069  
Stock based compensation
    279       198  
Gain on sale and call of investment securities
    (9 )     (458 )
Impairment charges on investment securities
    3       7  
Amortization of premiums on investment securities
    313       293  
Proceeds from sales of SBA loans originated for sale
    18,383       23,370  
SBA loans originated for sale
    (18,371 )     (16,730 )
Gains on sales of SBA loans originated for sale
    (1,800 )     (2,200 )
Increase in accrued interest receivable and other assets
    (1,581 )     (1,295 )
Decrease in accrued interest payable and other liabilities
    (375 )     (205 )
Net cash (used in) provided by operating activities
    (344 )     6,193  
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
    (9,678 )     (31,364 )
Purchase of investment securities held to maturity
    (56,741 )     -  
Proceeds from the sale of securities available for sale
    4,081       5,700  
Proceeds from the maturity or call of securities available for sale
    13,459       14,293  
Proceeds from the maturity or call of securities held to maturity
    5,226       -  
Net purchase of restricted stock
    (22 )     (155 )
Net increase in loans
    (54,286 )     (40,251 )
Net proceeds from sale of other real estate owned
    468       63  
Premises and equipment expenditures
    (7,386 )     (7,362 )
Net cash used in investing activities
    (104,879 )     (59,076 )
                 
Cash flows from financing activities
               
Net proceeds from stock offering
    -       44,973  
Net increase in demand, money market and savings deposits
    60,904       53,177  
Net (decrease) increase in time deposits
    (3,337 )     1,973  
Net cash provided by financing activities
    57,567       100,123  
                 
Net (decrease) increase in cash and cash equivalents
    (47,656 )     47,240  
Cash and cash equivalents, beginning of year
    128,826       35,880  
Cash and cash equivalents, end of period
  $ 81,170     $ 83,120  
                 
Supplemental disclosures:
               
Interest paid
  $ 2,614     $ 2,148  
Income taxes paid
  $ -     $ 70  
Non-cash transfers from loans to other real estate owned
  $ 10,213     $ 193  

(See notes to consolidated financial statements)
 
 
4

 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Six Months Ended June 30, 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
                    1,061                               1,061  
Other comprehensive loss, net of tax
                                            (712 )     (712 )
Stock based compensation
            279                                       279  
                                                         
Balance June 30,  2015
  $ 383     $ 152,513     $ (34,205 )   $ (3,725 )   $ (183 )   $ (1,344 )   $ 113,439  
                                                         
                                                         
Balance January 1, 2014
  $ 265     $ 107,078     $ (37,708 )   $ (3,099 )   $ (809 )   $ (2,828 )   $ 62,899  
                                                         
Net income
                    1,292                               1,292  
Other comprehensive income, net of tax
                                            2,061       2,061  
Proceeds from shares issued under common stock offering (11,842,106 shares) net of offering costs (pre-tax $27)
    118       44,855                                       44,973  
Stock based compensation
            198                                       198  
                                                         
Balance June 30,  2014
  $ 383     $ 152,131     $ (36,416 )   $ (3,099 )   $ (809 )   $ (767 )   $ 111,423  
                                                         

(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 and six month periods ended June 30, 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 (“the 2005 Plan”), under which the Company may grant options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants.  The 2005 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 2005 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 2005 Plan to 1.5 million shares, are available for such grants.  As of June 30, 2015, the only grants under the 2005 Plan have been option grants.  The 2005 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 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminates pursuant to its term 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 six months ended June 30, 2015, 15,000 options were granted under the 2005 Plan with a weighted average grant date fair value of $20,826. During the six months ended June 30, 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 2.00%
 
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 six months ended June 30, 2015 and 2014, 323,062 options and 198,825 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At June 30, 2015, the intrinsic value of the 1,991,105 options outstanding was $770,895, while the intrinsic value of the 772,454 exercisable (vested) options was $252,796. During the six months ended June 30, 2015, 8,494 options were forfeited with a weighted average grant date fair value of $6,870.

Information regarding stock based compensation for the six months ended June 30, 2015 and 2014 is set forth below:

   
2015
   
2014
 
Stock based compensation expense recognized
  $ 279,000     $ 198,000  
Number of unvested stock options
    1,218,651       1,055,013  
Fair value of unvested stock options
  $ 1,927,048     $ 1,545,988  
Amount remaining to be recognized as expense
  $ 1,194,289     $ 910,590  

The remaining amount of $1,194,289 will be recognized as expense through May 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 shares of common stock underlying dilutive stock options granted pursuant to the Company’s 2005 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 the net income. For the three and six months ended June 30, 2015 and 2014, the effect of CSEs (shares of common stock underlying 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 six months ended June 30, 2015 and 2014 is as follows (in thousands, except per share amounts):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net income (basic and diluted)
  $ 533     $ 537     $ 1,061     $ 1,292  
                                 
Weighted average shares outstanding
    37,816       35,157       37,816       30,590  
Net income per share – basic
  $ 0.01     $ 0.02     $ 0.03     $ 0.04  
Weighted average shares outstanding (including dilutive CSEs)
    38,049       35,609       38,048       30,932  
Net income per share – diluted
  $ 0.01     $ 0.02     $ 0.03     $ 0.04  

Recent Accounting Pronouncements

ASU 2014-04

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


 
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 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 June 30, 2015 and December 31, 2014 is as follows:

   
At June 30, 2015
 
 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 92,324     $ 768     $ (918 )   $ 92,174  
Mortgage-backed securities
    11,476       457       (74 )     11,859  
Municipal securities
    20,345       249       (237 )     20,357  
Corporate bonds
    31,336       359       (333 )     31,362  
Asset-backed securities
    18,005       259       -       18,264  
Trust preferred securities
    3,626       -       (1,620 )     2,006  
Other securities
    115       5       -       120  
Total securities available for sale
  $ 177,227     $ 2,097     $ (3,182 )   $ 176,142  
                                 
U.S. Government agencies
  $ 7,299     $ -     $ (46 )   $ 7,253  
Collateralized mortgage obligations
    103,851       445       (444 )     103,852  
Mortgage-backed securities
    8,168       1       (25 )     8,144  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 119,338     $ 446     $ (515 )   $ 119,269  

   
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 June 30, 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
  $ 21,008     $ 21,325     $ -     $ -  
After 1 year to 5 years
    60,626       60,142       67,529       67,460  
After 5 years to 10 years
    81,196       80,585       51,809       51,809  
After 10 years
    14,397       14,090       -       -  
Total
  $ 177,227     $ 176,142     $ 119,338     $ 119,269  

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
 
The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities.  There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of June 30, 2015 and December 31, 2014.  There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax.  Securities classified as held to maturity are carried at amortized cost.  An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.  The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary.  Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security.
 
For those securities in an unrealized loss position an assessment is made to determine whether other-than-temporary impairment (OTTI) exists.  An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis.  The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security.  Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred.  In the event of a credit loss, that amount must be recognized against income in the current period.  The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss).
 
Impairment charges (credit losses) on trust preferred securities for the six month period ended June 30, 2015 amounted to $3,000. There were no impairment charges on trust preferred securities during the three month period ended June 30, 2015. The impairment charges on trust preferred securities for the three and six months ended June 30, 2014 amounted to $7,000.



 
12

 


The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at June 30, 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       7  
Reductions for securities paid off during the period
    -       -  
Reductions for securities sold during the period
    (2,569 )        
Reductions for securities for which the amount previously recognized in other
               
comprehensive income was recognized in earnings because the Company
               
intends to sell the security
    -       -  
Ending Balance, June 30th
  $ 1,400     $ 3,966  

 
 
13

 
 
 
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 June 30, 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
  $ 39,623     $ 918     $ -     $ -     $ 39,623     $ 918  
Mortgage-backed securities
    6,113       43       1,022       31       7,135       74  
Municipal securities
    8,175       193       1,381       44       9,556       237  
Corporate Bonds
    9,545       333       -       -       9,545       333  
Trust preferred securities
    -       -       2,006       1,620       2,006       1,620  
Total Available for Sale
  $ 63,456     $ 1,487     $ 4,409     $ 1,695     $ 67,865     $ 3,182  

   
At June 30, 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
 
U.S. Government agencies
  $ 4,236     $ 46     $ -     $ -     $ 4,236     $ 46  
Collateralized mortgage obligations
    28,989       444       -       -       28,989       444  
Mortgage-backed securities
    2,897       25       -       -       2,897       25  
Total Held to Maturity
  $ 36,122     $ 515     $ -     $ -     $ 36,122     $ 515  
 
   
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
Lossess
 
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  
 
 
 
14

 

 
       Unrealized losses on securities in the investment portfolio amounted to $3.7 million with a total fair value of $104.0 million as of June 30, 2015 compared to unrealized losses of $2.4 million with a total fair value of $62.2 million as of December 31, 2014.  The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.
 
       The Company held fifteen collateralized mortgage obligations and five mortgage-backed securities that were in an unrealized loss position at June 30, 2015. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of June 30, 2015.
 
       All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At June 30, 2015, the investment portfolio included fourteen municipal securities that were in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of any credit deterioration.
 
       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 on the trust preferred securities held in the portfolio as of June 30, 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 2015 and beyond
   
Cumulative OTTI Life to Date
 
TPREF Funding II
 
Class B Notes
  $ 732     $ 401     $ (331 )     C       20       36       0.39 %   $ 267  
TPREF Funding III
 
Class B2 Notes
    1,518       799       (719 )     C       15       36       0.33       483  
Trapeza CDO I, LLC
 
Class C1 Notes
    556       342       (214 )     C       7       50       0.35       470  
ALESCO Preferred
    Funding V
 
Class C1 Notes
    820       464       (356 )     C       40       15       0.35       180  
Total
      $ 3,626     $ 2,006     $ (1,620 )             82       32 %           $ 1,400  

The Company sold one trust preferred security and one corporate bond and realized gross gains on the sale of securities of $155,000 during the three and six months ended June 30, 2015.  The Company sold two other trust preferred securities and realized gross losses on the sale of securities of $146,000 during the three and six months ended June 30, 2015.  The related sale proceeds amounted to $4.1 million.  The tax provision applicable to these net gains in 2015 amounted to approximately $3,000. The Company realized gross gains on the sale of securities of $458,000 during the three and six months ended June 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.
 
 
 

 
15

 


       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 June 30, 2015, there is a remaining $1.0 million unrealized loss to be amortized.

Note 6:  Loans Receivable and Allowance for Loan Losses

The following table sets forth the Company’s gross loans by major categories as of June 30, 2015, and December 31, 2014:

(dollars in thousands)
 
June 30,
 2015
   
December 31,
 2014
 
             
Commercial real estate
  $ 371,051     $ 379,259  
Construction and land development
    34,947       29,861  
Commercial and industrial
    166,912       145,113  
Owner occupied real estate
    202,467       188,025  
Consumer and other
    47,475       39,713  
Residential mortgage
    401       408  
Total loans receivable
    823,253       782,379  
Deferred costs (fees)
    (378 )     (439 )
Allowance for loan losses
    (8,398 )     (11,536 )
Net loans receivable
  $ 814,477     $ 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. 

 
 

 
16

 


       The following table summarizes information with regard to impaired loans by loan portfolio class as of June 30, 2015 and December 31, 2014:

   
June 30, 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
  $ 14,214     $ 14,262     $ -       $ 11,964     $ 11,969     $ -  
Construction and land development
    320       417       -         61       158       -  
Commercial and industrial
    4,062       5,322       -         3,764       7,275       -  
Owner occupied real estate
    1,084       1,288       -         524       528       -  
Consumer and other
    818       1,091       -         429       708       -  
Total
  $ 20,498     $ 22,380     $ -       $ 16,742     $ 20,638     $ -  

With an allowance recorded:
                               
Commercial real estate
  $ 766     $ 837     $ 194       $ 13,118     $ 13,245     $ 3,858  
Construction and land development
    94       3,740       60         316       3,741       217  
Commercial and industrial
    2,372       5,039       1,149         1,457       2,057       211  
Owner occupied real estate
    3,907       3,909       994         4,011       4,162       844  
Consumer and other
    -       -       -         -       -       -  
Total
  $ 7,139     $ 13,525     $ 2,397       $ 18,902     $ 23,205     $ 5,130  

Total:
                                     
Commercial real estate
  $ 14,980     $ 15,099     $ 194       $ 25,082     $ 25,214     $ 3,858  
Construction and land development
    414       4,157       60         377       3,899       217  
Commercial and industrial
    6,434       10,361       1,149         5,221       9,332       211  
Owner occupied real estate
    4,991       5,197       994         4,535       4,690       844  
Consumer and other
    818       1,091       -         429       708       -  
Total
  $ 27,637     $ 35,905     $ 2,397       $ 35,644     $ 43,843     $ 5,130  
 
 

 
17

 


      The following table presents additional information regarding the Company’s impaired loans for the three months ended June 30, 2015 and June 30, 2014:

 
Three Months Ended June 30,
 
 
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
  $ 13,432     $ (21 )     $ 6,696     $ 106  
Construction and land development
    248       1         661       -  
Commercial and industrial
    3,992       27         2,859       -  
Owner occupied real estate
    957       3         802       (3 )
Consumer and other
    713       3         480       -  
Total
  $ 19,342     $ 13       $ 11,498     $ 103  
 
With an allowance recorded:
                         
Commercial real estate
  $ 4,864     $ 3       $ 13,325     $ (130 )
Construction and land development
    116       -         659       -  
Commercial and industrial
    2,084       -         3,914       (1 )
Owner occupied real estate
    4,009       30         3,315       35  
Consumer and other
    -       -         35       -  
Total
  $ 11,073     $ 33       $ 21,248     $ (96 )

Total:
                         
Commercial real estate
  $ 18,296     $ (18 )     $ 20,021     $ (24 )
Construction and land development
    364       1         1,320       -  
Commercial and industrial
    6,076       27         6,773       (1 )
Owner occupied real estate
    4,966       33         4,117       32  
Consumer and other
    713       3         515       -  
Total
  $ 30,415     $ 46       $ 32,746     $ 7  

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $218,000 and $399,000 for the three months ended June 30, 2015 and 2014, respectively.

 
18

 


The following table presents additional information regarding the Company’s impaired loans for the six months ended June 30, 2015 and June 30, 2014:

 
Six Months Ended June 30,
 
 
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
  $ 12,648     $ 141       $ 6,734     $ 212  
Construction and land development
    178       1         730       -  
Commercial and industrial
    3,923       48         2,699       1  
Owner occupied real estate
    829       4         740       2  
Consumer and other
    607       4         514       1  
Total
  $ 18,185     $ 198       $ 11,417     $ 216  

With an allowance recorded:
                         
Commercial real estate
  $ 8,965     $ 3       $ 13,249     $ 8  
Construction and land development
    137       -      <