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 September 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 November 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 September 30, 2015 and December 31, 2014    (unaudited)
 
Consolidated statements of income for the three and nine months ended September 30, 2015 and 2014 (unaudited)
 
Consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014 (unaudited)
 
 
 
Consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 (unaudited)
 
 
Consolidated statements of changes in shareholders’ equity for the nine months ended September 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
September 30, 2015 and December 31, 2014
(Dollars in thousands, except per share data)
(unaudited)
 
   
September 30,
2015
   
December 31,
 2014
 
ASSETS
           
Cash and due from banks
  $ 14,212     $ 14,822  
Interest bearing deposits with banks
    96,307       114,004  
    Cash and cash equivalents
    110,519       128,826  
                 
Investment securities available for sale, at fair value
    209,119       185,379  
Investment securities held to maturity, at amortized cost (fair value of $141,519 and $68,253, respectively)
    140,116       67,866  
Restricted stock, at cost
    1,179       1,157  
Loans held for sale
    489       1,676  
Loans receivable (net of allowance for loan losses of $8,323 and $11,536, respectively)
    837,037       770,404  
Premises and equipment, net
    45,094       35,030  
Other real estate owned, net
    13,773       3,715  
Accrued interest receivable
    3,548       3,226  
Other assets
    19,940       17,319  
    Total Assets
  $ 1,380,814     $ 1,214,598  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
  $ 243,836       224,245  
   Demand – interest bearing
    391,230       283,768  
   Money market and savings
    527,360       488,848  
   Time deposits
    75,070       75,369  
       Total Deposits
    1,237,496       1,072,230  
Accrued interest payable
    283       265  
Other liabilities
    6,086       6,816  
Subordinated debt
    22,476       22,476  
    Total Liabilities
    1,266,341       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 38,344,848 as of September 30, 2015 and 38,344,348 as of December 31, 2014
    383       383  
Additional paid in capital
    152,676       152,234  
Accumulated deficit
    (33,623 )     (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
    (1,055 )     (632 )
    Total Shareholders’ Equity
    114,473       112,811  
    Total Liabilities and Shareholders’ Equity
  $ 1,380,814     $ 1,214,598  


(See notes to consolidated financial statements)
 
 
 
 
 
1

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2015 and 2014
(Dollars in thousands, except per share data)
 (unaudited)
   
Three Months Ended 
September 30,
   
Nine Months Ended
 September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Interest income:
                       
Interest and fees on taxable loans
  $ 9,518     $ 8,914     $ 27,611     $ 25,381  
Interest and fees on tax-exempt loans
    130       86       384       252  
Interest and dividends on taxable investment securities
    1,509       1,260       4,396       3,689  
Interest and dividends on tax-exempt investment securities
    153       96       416       258  
Interest on federal funds sold and other interest-earning assets
    60       45       223       107  
Total interest income
    11,370       10,401       33,030       29,687  
Interest expense:
                               
Demand- interest bearing
    378       220       1,009       636  
Money market and savings
    538       509       1,592       1,392  
Time deposits
    183       189       528       540  
Other borrowings
    279       277       833       830  
Total interest expense
    1,378       1,195       3,962       3,398  
Net interest income
    9,992       9,206       29,068       26,289  
Provision for loan losses
    -       300       -       600  
Net interest income after provision for loan losses
    9,992       8,906       29,068       25,689  
Non-interest income:
                               
Loan advisory and servicing fees
    163       388       1,087       1,291  
Gain on sales of SBA loans
    884       614       2,684       2,814  
Service fees on deposit accounts
    452       316       1,213       896  
Gain on sale of investment securities
    64       -       73       458  
Other-than-temporary impairment
    -       -       (13 )     21  
Portion recognized in other comprehensive income (before taxes)
    -       -       10       (28 )
     Net impairment loss on investment securities
    -       -       (3 )     (7 )
Other non-interest income
    41       53       149       138  
Total non-interest income
    1,604       1,371       5,203       5,590  
Non-interest expenses:
                               
Salaries and employee benefits
    5,730       5,074       16,667       14,942  
Occupancy
    1,240       1,039       3,624       3,104  
Depreciation and amortization
    671       710       2,126       1,779  
Legal
    52       283       631       982  
Other real estate owned
    425       376       1,173       1,062  
Advertising
    233       91       475       453  
Data processing
    408       336       1,133       990  
Insurance
    162       148       532       427  
Professional fees
    293       330       968       1,160  
Regulatory assessments and costs
    318       258       911       791  
Taxes, other
    169       171       594       620  
Other operating expenses
    1,323       1,170       3,811       3,448  
Total non-interest expense
    11,024       9,986       32,645       29,758  
Income before benefit for income taxes
    572       291       1,626       1,521  
Benefit for income taxes
    (10 )     (6 )     (17 )     (68 )
Net income
  $ 582     $ 297     $ 1,643     $ 1,589  
Net income per share:
                               
Basic
  $ 0.02     $ 0.01     $ 0.04     $ 0.05  
Diluted
  $ 0.02     $ 0.01     $ 0.04     $ 0.05  
 

 
(See notes to consolidated financial statements)
 
 
 
 
 
2

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

 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Net income
  $ 582     $ 297     $ 1,643     $ 1,589  
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized gain (loss) on securities (pre-tax $490, $(244), $(718), and $3,422, respectively)
    314       (156 )     (460 )     2,194  
                                 
Reclassification adjustment for securities gains (pre-tax $(64), $-, $(73), and $(458), respectively)
    (41 )     -       (47 )     (293 )
                                 
Reclassification adjustment for impairment charge (pre-tax $-, $-, $3, and $7, respectively)
    -       -       2       4  
                                 
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 $25, $60, $128, $60, respectively)
    16       38       82       38  
                                 
Total other comprehensive income  (loss)
    289       (118 )     (423 )     1,943  
                                 
Total comprehensive income
  $ 871     $ 179     $ 1,220     $ 3,532  
 
 (See notes to consolidated financial statements)
 
 
 

 
 
3

 
 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2015 and 2014
(Dollars in thousands)
(unaudited)
   
Nine Months Ended September 30,
 
   
2015
   
2014
 
Cash flows from operating activities
           
Net income
  $ 1,643     $ 1,589  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    -       600  
Loss on sale of other real estate owned
    -       9  
Write down of other real estate owned
    298       667  
Depreciation and amortization
    2,126       1,779  
Stock based compensation
    441       309  
Gain on sale and call of investment securities
    (73 )     (458 )
Impairment charges on investment securities
    3       7  
Amortization of premiums on investment securities
    635       414  
Accretion of discounts on retained SBA loans
    (754 )     (568 )
Fair value adjustments on SBA servicing assets
    597       170  
Proceeds from sales of SBA loans originated for sale
    27,999       29,485  
SBA loans originated for sale
    (24,128 )     (22,529 )
Gains on sales of SBA loans originated for sale
    (2,684 )     (2,814 )
Increase in accrued interest receivable and other assets
    (3,302 )     (1,917 )
Decrease in accrued interest payable and other liabilities
    (712 )     (184 )
Net cash provided by operating activities
    2,089       6,559  
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
    (57,807 )     (46,823 )
Purchase of investment securities held to maturity
    (85,246 )     -  
Proceeds from the sale of securities available for sale
    6,672       5,700  
Proceeds from the maturity or call of securities available for sale
    26,397       20,114  
Proceeds from the maturity or call of securities held to maturity
    12,768       1,166  
Net purchase of restricted stock
    (22 )     (155 )
Net increase in loans
    (77,027 )     (73,284 )
Net proceeds from sale of other real estate owned
    792       91  
Premises and equipment expenditures
    (12,190 )     (8,798 )
Net cash used in investing activities
    (185,663 )     (101,989 )
                 
Cash flows from financing activities
               
Net proceeds from stock offering
    -       44,853  
Net proceeds from exercise of stock options
    1       -  
Net increase in demand, money market and savings deposits
    165,565       121,245  
Net decrease in time deposits
    (299 )     (704 )
Net cash provided by financing activities
    165,267       165,394  
                 
Net (decrease) increase in cash and cash equivalents
    (18,307 )     69,964  
Cash and cash equivalents, beginning of year
    128,826       35,880  
Cash and cash equivalents, end of period
  $ 110,519     $ 105,844  
                 
Supplemental disclosures:
               
Interest paid
  $ 3,944     $ 3,335  
Income taxes paid
  $ -     $ 70  
Non-cash transfers from loans to other real estate owned
  $ 11,148     $ 483  
Transfer of available-for-sale securities to held-to-maturity securities
  $ -     $ 70,118  

(See notes to consolidated financial statements)
 
 
 
 
 
4

 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 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
                    1,643                               1,643  
Other comprehensive loss, net of
   tax
                                            (423 )     (423 )
Stock based compensation
            441                                       441  
Options exercised (500 shares)
            1                                       1  
                                                         
Balance September 30,  2015
  $ 383     $ 152,676     $ (33,623 )   $ (3,725 )   $ (183 )   $ (1,055 )   $ 114,473  
                                                         
                                                         
Balance January 1, 2014
  $ 265     $ 107,078     $ (37,708 )   $ (3,099 )   $ (809 )   $ (2,828 )   $ 62,899  
                                                         
Net income
                    1,589                               1,589  
Other comprehensive income, net of
 tax
                                            1,943       1,943  
Proceeds from shares issued under
   common stock offering (11,842,106
   shares) net of offering costs (pre-tax
   $147)
    118       44,735                                       44,853  
Stock based compensation
            309                                       309  
Transfer from deferred compensation
                                                       
  plan to treasury stock (87,105 shares)
                            (626 )     626               -  
                                                         
Balance September 30,  2014
  $ 383     $ 152,122     $ (36,119 )   $ (3,725 )   $ (183 )   $ (885 )   $ 111,593  

(See notes to consolidated financial statements)
 
 
 

 
 
5

 
 

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

Note 1:  Basis of Presentation

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

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
 
The Company and Republic are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Company and Republic for adherence to laws and regulations. As a consequence, the cost of doing business may be affected.
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 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.  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 September 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 nine months ended September 30, 2015, 15,000 options were granted under the 2005 Plan with a weighted average grant date fair value of $20,826 and 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 2.26%
 
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 nine months ended September 30, 2015 and 2014, 349,062 options and 206,825 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At September 30, 2015, the intrinsic value of the 1,982,730 options outstanding was $1,073,953, while the intrinsic value of the 797,579 exercisable (vested) options was $400,024. During the nine months ended September 30, 2015, 500 options were exercised with cash received of $1,345 and 16,369 options were forfeited with a weighted average grant date fair value of $21,331.

Information regarding stock based compensation for the nine months ended September 30, 2015 and 2014 is set forth below:
 
   
2015
   
2014
 
Stock based compensation expense recognized
  $ 441,000     $ 309,000  
Number of unvested stock options
    1,185,151       1,050,513  
Fair value of unvested stock options
  $ 1,908,205     $ 1,552,934  
Amount remaining to be recognized as expense
  $ 1,034,337     $ 812,979  

The remaining amount of $1,034,337 will be recognized as expense through May 2019.

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 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 net income. For the three and nine months ended September 30, 2015 and 2014, the effect of CSEs in the amount of 1,661,538 shares (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. For the three months ended September 30, 2015 and 2014, total anti-dilutive stock options were 660,780 and 247,624, respectively. For the nine months ended September 30, 2015 and 2014, total anti-dilutive stock options were 660,780 and 271,624, respectively.
 
 
 
 
 
8

 

 
The calculation of EPS for the three and nine months ended September 30, 2015 and 2014 is as follows (in thousands, except per share amounts):
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Net income (basic and diluted)
  $ 582     $ 297     $ 1,643     $ 1,589  
                                 
Weighted average shares outstanding
    37,816       37,815       37,816       33,025  
                                 
Net income per share – basic
  $ 0.02     $ 0.01     $ 0.04     $ 0.05  
                                 
Weighted average shares outstanding (including dilutive CSEs)
    38,064       38,253       38,052       33,399  
                                 
Net income per share – diluted
  $ 0.02     $ 0.01     $ 0.04     $ 0.05  


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.
 
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.
 
 
 
 
 
9

 

 
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.

During the fourth quarter of 2015, the Company reached a settlement agreement with an insurance company relating to a bond claim initially submitted in 2010. Under the terms of the agreement, the Company will receive a one-time cash payment in the amount of $2.6 million which will be recognized as “non-interest income” in the quarter ending December 31, 2015.

Note 4:  Segment Reporting

       The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its stores.
 
Note 5:  Investment Securities

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2015 and December 31, 2014 is as follows:

   
At September 30, 2015
 
 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Collateralized mortgage obligations
  $ 127,369     $ 1,371     $ (353 )   $ 128,387  
Mortgage-backed securities
    10,287       188       (51 )     10,424  
Municipal securities
    21,820       374       (110 )     22,084  
Corporate bonds
    29,313       275       (367 )     29,221  
Asset-backed securities
    17,804       -       (590 )     17,214  
Trust preferred securities
    3,070       -       (1,400 )     1,670  
Other securities
    115       4       -       119  
Total securities available for sale
  $ 209,778     $ 2,212     $ (2,871 )   $ 209,119  
                                 
U.S. Government agencies
  $ 12,091     $ 1     $ (39 )   $ 12,053  
Collateralized mortgage obligations
    120,051       1,574       (206 )     121,419  
Mortgage-backed securities
    7,954       73       -       8,027  
Other securities
    20       -       -       20  
Total securities held to maturity
  $ 140,116     $ 1,648     $ (245 )   $ 141,519  

   
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  

 
 
10

 

 
      The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at September 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
  $ 23,526     $ 24,035     $ 1     $ 1  
After 1 year to 5 years
    68,022       67,445       62,243       62,778  
After 5 years to 10 years
    106,071       105,624       77,872       78,740  
After 10 years
    12,159       12,015       -       -  
Total
  $ 209,778     $ 209,119     $ 140,116     $ 141,519  

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 September 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.  An other-than-temporary impairment (“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 that is attributed to credit deterioration.  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 nine month period ended September 30, 2015 amounted to $3,000. There were no impairment charges on trust preferred securities during the three month period ended September 30, 2015 and September 30, 2014. The impairment charges on trust preferred securities for the nine months ended September 30, 2014 amounted to $7,000.

       The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at September 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
    (3,039 )     -  
Reductions for securities for which the amount previously recognized in other
               
comprehensive income was recognized in earnings because the Company
               
intends to sell the security
    -       -  
Ending Balance, September 30th
  $ 930     $ 3,966  
 
 
 

 
 
11

 
 

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

   
At September 30, 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
  $ 23,084     $ 353     $ -     $ -     $ 23,084     $ 353  
Mortgage-backed securities
    5,815       29       1,010       22       6,825       51  
Municipal securities
    1,412       13       5,408       97       6,820       110  
Corporate bonds
    12,488       367       -       -       12,488       367  
Asset backed securities
    17,214       590       -       -       17,214       590  
Trust preferred securities
    -       -       1,670       1,400       1,670       1,400  
Total Available for Sale
  $ 60,013     $ 1,352     $ 8,088     $ 1,519     $ 68,101     $ 2,871  

 
   
At September 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
  $ 4,018     $ 39     $ -     $ -     $ 4,018     $ 39  
Collateralized mortgage obligations
    9,460       206       -       -       9,460       206  
Total Held to Maturity
  $ 13,478     $ 245     $ -     $ -     $ 13,478     $ 245  
 
   
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  
 
 
 

 
 
12

 
 
 
       Unrealized losses on securities in the investment portfolio amounted to $3.1 million with a total fair value of $81.6 million as of September 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 one U.S. Government agency security, nine collateralized mortgage obligations and four mortgage-backed securities that were in an unrealized loss position at September 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 September 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 September 30, 2015, the investment portfolio included nine 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.

       At September 30, 2015, the investment portfolio included two asset-backed securities that were in an unrealized loss position.  The asset-backed securities held in the investment securities portfolio consist solely of Sallie Mae bonds, collateralized by student loans which are guaranteed by the U.S. Department of Education.  Management believes the unrealized losses on these securities were driven by changes in market interest rates and not a result of any credit deterioration.  At September 30, 2015, the investment portfolio included four corporate bonds that were in an unrealized loss position.  Management believes the unrealized losses on these securities were driven by changes in market interest rates and not a result 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 September 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     $ 395     $ (337 )     C       20       36 %     0.38 %   $ 267  
TPREF Funding III
Class B2 Notes
    1,518       815       (703 )     C       16       29       0.40       483  
ALESCO Preferred
    Funding V
Class C1 Notes
    820       460       (360 )     C       40       15       0.34       180  
Total
    $ 3,070     $ 1,670     $ (1,400 )             76       27 %           $ 930  

       Proceeds of sales of securities available for sale during the three months ended September 30, 2015 were $2.6 million.  Gross gains of $206,000 and gross losses of $142,000 were realized on these sales.  The tax provision applicable to the net gains for the three months ended September 30, 2015 amounted to $23,000.  Proceeds of sales of securities available for sale during the nine months ended September 30, 2015 were $6.7 million.  Gross gains of $361,000 and gross losses of $288,000 were realized on these sales.  The tax provision applicable to the net gains for the three months ended September 30, 2015 amounted to $26,000.
 
 
 
 
13

 

 
      The Company realized gross gains on the sale of securities of $458,000 during the nine months ended September 30, 2014. The related sale proceeds amounted to $5.7 million.  The tax provision applicable to these gross gains in 2014 amounted to approximately $165,000.

        In July 2014, thirteen CMOs with a fair value of $70.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category.  These securities were transferred at fair value. Unrealized losses of $1.2 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of those securities.  At September 30, 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 September 30, 2015, and December 31, 2014:

(dollars in thousands)
 
September 30,
2015
   
December 31,
 2014
 
             
Commercial real estate
  $ 377,307     $ 379,259  
Construction and land development
    41,418       29,861  
Commercial and industrial
    174,631       145,113  
Owner occupied real estate
    203,735       188,025  
Consumer and other
    46,136       39,713  
Residential mortgage
    2,395       408  
Total loans receivable
    845,622       782,379  
Deferred costs (fees)
    (262 )     (439 )
Allowance for loan losses
    (8,323 )     (11,536 )
Net loans receivable
  $ 837,037     $ 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. 
 
 
 

 
 
14

 
 

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

   
September 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
  $ 14,349     $ 14,483     $ -     $ 11,964     $ 11,969     $ -  
Construction and land development
    376       2,467       -       61       158       -  
Commercial and industrial
    1,972       3,229       -       3,764       7,275       -  
Owner occupied real estate
    509       509       -       524       528       -  
Consumer and other
    805       1,083       -       429       708       -  
Total
  $ 18,011     $ 21,771     $ -     $ 16,742     $ 20,638     $ -  
 
With an allowance recorded:
     
Commercial real estate
  $ 313     $ 313     $ 98     $ 13,118     $ 13,245     $ 3,858  
Construction and land development
    38       1,691       38       316       3,741       217  
Commercial and industrial
    4,436       7,110       1,368       1,457       2,057       211  
Owner occupied real estate
    3,023       3,035       919       4,011       4,162       844  
Consumer and other
    149       149       19       -       -       -  
Total
  $ 7,959     $ 12,298     $ 2,442     $ 18,902     $ 23,205     $ 5,130  
 
Total:
 
Commercial real estate
  $ 14,662     $ 14,796     $ 98     $ 25,082     $ 25,214     $ 3,858  
Construction and land development
    414       4,158       38       377       3,899       217  
Commercial and industrial
    6,408       10,339       1,368       5,221       9,332       211  
Owner occupied real estate
    3,532       3,544       919       4,535       4,690       844  
Consumer and other
    954       1,232       19       429       708       -  
Total
  $ 25,970     $ 34,069     $ 2,442     $ 35,644     $ 43,843     $ 5,130  

 


 
15

 
 

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

 
   
Three Months Ended September 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
  $ 13,923     $ 73     $ 6,578     $ 88  
Construction and land development
    328       2       229       -  
Commercial and industrial
    2,459       16       3,290       10  
Owner occupied real estate
    589       1       806       2  
Consumer and other
    754       3       457       -  
Total
  $ 18,053     $ 95     $ 11,360     $ 100  

With an allowance recorded:
                       
Commercial real estate
  $ 2,479     $ 3     $ 13,150     $ (3 )
Construction and land development
    62       -       551       -  
Commercial and industrial
    3,776       12       2,851       -  
Owner occupied real estate
    3,293       27       3,686       26  
Consumer and other
    111       1       17       -  
Total
  $ 9,721     $ 43     $ 20,255     $ 23  

Total:
                       
Commercial real estate
  $ 16,402     $ 76     $ 19,728     $ 85  
Construction and land development
    390       2       780       -  
Commercial and industrial
    6,235       28       6,141       10  
Owner occupied real estate
    3,882       28       4,492       28  
Consumer and other
    865       4       474       -  
Total
  $ 27,774     $ 138     $ 31,615     $ 123  


If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $110,000 and $232,000 for the three months ended September 30, 2015 and 2014, respectively.
 
 
 

 
 
16

 
 

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

 
   
Nine Months Ended September 30,
 
   
2015
   
2014
 
(dollars in thousands)
 
Average
Recorded Investment
   
Interest
Income Recognized
   
Average
Recorded Investment
   
Interest
Income Recognized
 
With no related allowance recorded: