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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, 2016.
 
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
37,917,378
Title of Class
Number of Shares Outstanding as of August 5, 2016



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, 2016 and December 31, 2015 (unaudited)
  Consolidated statements of income for the three and six months ended June 30, 2016 and 2015 (unaudited) 2
 
Consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015 (unaudited)
 
Consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 (unaudited)
 
Consolidated statements of changes in shareholders' equity for the six months ended June 30, 2016 and 2015 (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, 2016 and December 31, 2015
(Dollars in thousands, except per share data)
(unaudited)

   
June 30, 2016
   
December 31, 2015
 
ASSETS
       
Cash and due from banks
 
$
18,561
   
$
13,777
 
Interest bearing deposits with banks
   
93,211
     
13,362
 
    Cash and cash equivalents
   
111,772
     
27,139
 
 
               
Investment securities available for sale, at fair value
   
253,289
     
284,795
 
Investment securities held to maturity, at amortized cost (fair value of $203,186 and $171,845, respectively)
   
199,074
     
172,277
 
Restricted stock, at cost
   
1,367
     
3,059
 
Loans held for sale
   
5,487
     
3,653
 
Loans receivable (net of allowance for loan losses of $8,761 and $8,703, respectively)
   
920,993
     
866,066
 
Premises and equipment, net
   
53,617
     
46,164
 
Other real estate owned, net
   
11,974
     
11,313
 
Accrued interest receivable
   
4,367
     
4,216
 
Other assets
   
20,307
     
20,761
 
    Total Assets
 
$
1,582,247
   
$
1,439,443
 
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
 
$
281,496
   
$
243,695
 
   Demand – interest bearing
   
472,575
     
381,499
 
   Money market and savings
   
574,051
     
556,526
 
   Time deposits
   
106,129
     
67,578
 
       Total Deposits
   
1,434,251
     
1,249,298
 
Short-term borrowings
   
-
     
47,000
 
Accrued interest payable
   
313
     
245
 
Other liabilities
   
6,637
     
7,049
 
Subordinated debt
   
22,476
     
22,476
 
    Total Liabilities
   
1,463,677
     
1,326,068
 
                 
Shareholders' Equity
               
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding
   
-
     
-
 
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 38,442,473 as of June 30, 2016 and 38,365,848 as of December 31, 2015; shares outstanding 37,913,628 as of June 30, 2016 and 37,837,003 as of December 31, 2015
   
384
     
384
 
Additional paid in capital
   
153,476
     
152,897
 
Accumulated deficit
   
(30,725
)
   
(32,833
)
Treasury stock at cost (503,408 shares as of June 30, 2016 and December 31, 2015)
   
(3,725
)
   
(3,725
)
Stock held by deferred compensation plan (25,437 shares as of June 30, 2016 and December 31, 2015)
   
(183
)
   
(183
)
Accumulated other comprehensive loss
   
(657
)
   
(3,165
)
    Total Shareholders' Equity
   
118,570
     
113,375
 
    Total Liabilities and Shareholders' Equity
 
$
1,582,247
   
$
1,439,443
 



(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, 2016 and 2015
(Dollars in thousands, except per share data)
 (unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
Interest income:
 
   
   
   
 
   Interest and fees on taxable loans
 
$
10,096
   
$
9,142
   
$
19,813
   
$
18,093
 
   Interest and fees on tax-exempt loans
   
227
     
128
     
441
     
254
 
   Interest and dividends on taxable investment securities
   
2,620
     
1,405
     
5,214
     
2,887
 
   Interest and dividends on tax-exempt investment securities
   
179
     
138
     
353
     
263
 
   Interest on federal funds sold and other interest-earning assets
   
87
     
86
     
150
     
163
 
       Total interest income
   
13,209
     
10,899
     
25,971
     
21,660
 
Interest expense:
                               
   Demand- interest bearing
   
503
     
341
     
918
     
631
 
   Money market and savings
   
637
     
501
     
1,246
     
1,054
 
   Time deposits
   
183
     
170
     
324
     
345
 
   Other borrowings
   
289
     
278
     
595
     
554
 
       Total interest expense
   
1,612
     
1,290
     
3,083
     
2,584
 
Net interest income
   
11,597
     
9,609
     
22,888
     
19,076
 
Provision for loan losses
   
650
     
-
     
950
     
-
 
       Net interest income after provision for loan losses
   
10,947
     
9,609
     
21,938
     
19,076
 
Non-interest income:
                               
   Loan advisory and servicing fees
   
197
     
325
     
800
     
924
 
   Gain on sales of SBA loans
   
1,749
     
1,222
     
2,582
     
1,800
 
   Service fees on deposit accounts
   
654
     
398
     
1,224
     
761
 
   Gain on sale of investment securities
   
358
     
9
     
654
     
9
 
   Other-than-temporary impairment
   
(25
)
   
-
     
(27
)
   
(13
)
   Portion recognized in other comprehensive income (before taxes)
   
21
     
-
     
22
     
10
 
        Net impairment loss on investment securities
   
(4
)
   
-
     
(5
)
   
(3
)
   Other non-interest income
   
77
     
68
     
188
     
108
 
Total non-interest income
   
3,031
     
2,022
     
5,443
     
3,599
 
Non-interest expenses:
                               
   Salaries and employee benefits
   
6,551
     
5,715
     
12,603
     
10,937
 
   Occupancy
   
1,447
     
1,219
     
2,852
     
2,384
 
   Depreciation and amortization
   
796
     
732
     
1,765
     
1,455
 
   Legal
   
66
     
340
     
154
     
579
 
   Other real estate owned
   
323
     
371
     
908
     
748
 
   Advertising
   
190
     
91
     
319
     
242
 
   Data processing
   
575
     
373
     
1,042
     
725
 
   Insurance
   
188
     
190
     
394
     
370
 
   Professional fees
   
455
     
350
     
815
     
675
 
   Regulatory assessments and costs
   
373
     
301
     
715
     
593
 
   Taxes, other
   
228
     
204
     
252
     
425
 
   Other operating expenses
   
1,775
     
1,217
     
3,491
     
2,488
 
       Total non-interest expense
   
12,967
     
11,103
     
25,310
     
21,621
 
Income before benefit for income taxes
   
1,011
     
528
     
2,071
     
1,054
 
Benefit for income taxes
   
(12
)
   
(5
)
   
(37
)
   
(7
)
Net income
 
$
1,023
   
$
533
   
$
2,108
   
$
1,061
 
Net income per share:
                               
Basic
 
$
0.03
   
$
0.01
   
$
0.06
   
$
0.03
 
Diluted
 
$
0.03
   
$
0.01
   
$
0.05
   
$
0.03
 
 

 
(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, 2016 and 2015
(Dollars in thousands)
(unaudited)


   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2016
   
2015
   
2016
   
2015
 
       
   
   
 
Net income
 
$
1,023
   
$
533
   
$
2,108
   
$
1,061
 
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized gain (loss) on securities (pre-tax $1,156, $(1,838), $4,468, and $(1,208), respectively)
   
741
     
(1,178
)
   
2,863
     
(774
)
Reclassification adjustment for securities gains (pre-tax $(358), $(9), $(654), and $(9), respectively)
   
(229
)
   
(6
)
   
(419
)
   
(6
)
Reclassification adjustment for impairment charge (pre-tax $4, $-, $5, and $3, respectively)
   
2
     
-
     
3
     
2
 
Net unrealized gains (losses) on securities
   
514
     
(1,184
)
   
2,447
     
(778
)
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 $37, $45, $95, and $103 respectively)
   
24
     
29
     
61
     
66
 
                                 
Total other comprehensive income  (loss)
   
538
     
(1,155
)
   
2,508
     
(712
)
                                 
Total comprehensive income (loss)
 
$
1,561
   
$
(622
)
 
$
4,616
   
$
349
 
 

 
 (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, 2016 and 2015
(Dollars in thousands)
(unaudited)

   
Six Months Ended June 30,
 
   
2016
   
2015
 
Cash flows from operating activities
 
   
 
Net income
 
$
2,108
   
$
1,061
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
   
950
     
-
 
Write down of other real estate owned
   
129
     
298
 
Depreciation and amortization
   
1,765
     
1,455
 
Stock based compensation
   
367
     
279
 
Gain on sale and call of investment securities
   
(654
)
   
(9
)
Impairment charges on investment securities
   
5
     
3
 
Amortization of premiums on investment securities
   
637
     
312
 
Accretion of discounts on retained SBA loans
   
(677
)
   
(496
)
Fair value adjustments on SBA servicing assets
   
570
     
225
 
Proceeds from sales of SBA loans originated for sale
   
28,918
     
18,383
 
SBA loans originated for sale
   
(28,170
)
   
(18,371
)
Gains on sales of SBA loans originated for sale
   
(2,582
)
   
(1,800
)
Increase in accrued interest receivable and other assets
   
(1,671
)
   
(1,805
)
Decrease in accrued interest payable and other liabilities
   
(593
)
   
(375
)
Net cash provided by (used in) operating activities
   
1,102
     
(840
)
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
   
(55,937
)
   
(9,678
)
Purchase of investment securities held to maturity
   
(38,073
)
   
(56,741
)
Proceeds from the sale of securities available for sale
   
78,582
     
4,081
 
Proceeds from the paydowns, maturity, or call of securities available for sale
   
13,031
     
13,459
 
Proceeds from the paydowns, maturity, or call of securities held to maturity
   
11,029
     
5,226
 
Redemption (purchase) of restricted stock
   
1,692
     
(22
)
Net increase in loans
   
(55,816
)
   
(53,790
)
Net proceeds from sale of other real estate owned
   
76
     
468
 
Premises and equipment expenditures
   
(9,218
)
   
(7,386
)
Net cash used in investing activities
   
(54,634
)
   
(104,383
)
                 
Cash flows from financing activities
               
Net proceeds from exercise of stock options
   
212
     
-
 
Net increase in demand, money market and savings deposits
   
146,402
     
60,904
 
Net increase (decrease) in time deposits
   
38,551
     
(3,337
)
Decrease in short-term borrowings
   
(47,000
)
   
-
 
Net cash provided by financing activities
   
138,165
     
57,567
 
                 
Net increase (decrease) in cash and cash equivalents
   
84,633
     
(47,656
)
Cash and cash equivalents, beginning of year
   
27,139
     
128,826
 
Cash and cash equivalents, end of period
 
$
111,772
   
$
81,170
 
                 
Supplemental disclosures
               
Interest paid
 
$
3,015
   
$
2,614
 
Income taxes paid
 
$
60
   
$
-
 
Non-cash transfers from loans to other real estate owned
 
$
616
   
$
10,213
 


(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, 2016 and 2015
(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, 2016
 
$
384
   
$
152,897
   
$
(32,833
)
 
$
(3,725
)
 
$
(183
)
 
$
(3,165
)
 
$
113,375
 
                                                         
Net income
                   
2,108
                             
2,108
 
Other comprehensive income, net of tax
                                           
2,508
     
2,508
 
Stock based compensation
           
367
                                     
367
 
Options exercised (76,625 shares)
           
212
                                     
212
 
                                                         
Balance June 30,  2016
 
$
384
   
$
153,476
   
$
(30,725
)
 
$
(3,725
)
 
$
(183
)
 
$
(657
)
 
$
118,570
 
                                                         
                                                         
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
 

(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 one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania.  It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank ("Republic").  Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Camden, Burlington, and Gloucester Counties.  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 federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others.  Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.

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 ("US GAAP") that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
 
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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
 
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 also 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, (see "Note 7" below) 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, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. 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 portion of the decline related to credit impairment is charged to earnings.
 
In evaluating the Company's ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan ("the 2005 Plan"), under which the Company granted 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 could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants.  As of June 30, 2016, the only grants under the 2005 Plan were option grants.  The 2005 Plan provided that the exercise price of each option granted equaled 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 terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
 
 
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. At June 30, 2016, the maximum number of shares of common shares issuable under the 2014 Plan was 4.0 million. During the six months ended June 30, 2016, 551,250 options were granted under the 2014 Plan with a weighted average grant date fair value of $971,891.

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 2016 and 2015 are as follows:

   
2016
 
2015
 
Dividend yield(1)
 
0.0%
 
0.0%
 
Expected volatility(2)
 
   47.59% to 52.54%
 
   53.78% to 56.00%
 
Risk-free interest rate(3)
 
1.23% to 1.82%
 
1.49% to 2.00%
 
Expected life(4)
 
5.5 to 7.0 years
 
5.5 to 7.0 years
 
Assumed forfeiture rate
 
10.0%
 
19.0%
 

(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, 2016 and 2015, 486,550 shares and 323,062 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At June 30, 2016, the intrinsic value of the 2,395,300 options outstanding was $2,081,904, while the intrinsic value of the 1,176,824 exercisable (vested) options was $1,256,526.  During the six months ended June 30, 2016, 76,625 options were exercised with cash received of $212,634 and 25,550 options were forfeited with a weighted average grant date fair value of $39,900.

Information regarding stock based compensation for the six months ended June 30, 2016 and 2015 is set forth below:
 
   
2016
   
2015
 
Stock based compensation expense recognized
 
$
367,000
   
$
279,000
 
Number of unvested stock options
   
1,218,476
     
1,218,651
 
Fair value of unvested stock options
 
$
2,408,636
   
$
1,927,048
 
Amount remaining to be recognized as expense
 
$
1,479,287
   
$
1,194,289
 

The remaining amount of $1,479,287 will be recognized as expense through February 2020.

8

Earnings per Share

Earnings per share ("EPS") consist of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSEs"). CSEs consist of dilutive stock options granted through the Company's stock option plans 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 six months ended June 30, 2016 and 2015, the effect of CSEs (convertible securities related to the trust preferred securities only) and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculations.

The calculation of EPS for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands, except per share amounts):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2016
   
2015
   
2016
   
2015
 
                 
Net income (basic and diluted)
 
$
1,023
   
$
533
   
$
2,108
   
$
1,061
 
                                 
Weighted average shares outstanding
   
37,882
     
37,816
     
37,860
     
37,816
 
Net income per share – basic
 
$
0.03
   
$
0.01
   
$
0.06
   
$
0.03
 
Weighted average shares outstanding (including dilutive CSEs)
   
38,422
     
38,049
     
38,344
     
38,048
 
Net income per share – diluted
 
$
0.03
   
$
0.01
   
$
0.05
   
$
0.03
 

The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.

(in thousands)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
                       
Anti-dilutive securities
                     
                       
Share based compensation awards
 
1,855
   
1,757
   
1,910
   
1,758
                       
Convertible securities
 
1,662
   
1,662
   
1,662
   
1,662
                       
Total anti-dilutive securities
 
3,517
   
3,419
   
3,572
   
3,420


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 was 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.

9

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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with The Company (Topic 606): Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.

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 was 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.

ASU 2015-14

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.

ASU 2015-16

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the guidance in this ASU eliminates the requirement to retrospectively account for those adjustments and requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance in this ASU was effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and should be applied prospectively to adjustment to provisional amounts that occur after the effective date of this ASU. The adoption of this ASU did not have an impact on the Company's financial condition or results of operations.

10


ASU 2016-01

In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

ASU 2016-02

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases. From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn't convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
 
ASU 2016-09

 In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU 2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU 2016-09 will be effective January 1, 2017 and is not expected to have a significant impact on our financial statements.

11

ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the 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.









12

 

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, 2016 and December 31, 2015 is as follows:

   
At June 30, 2016
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
                 
Collateralized mortgage obligations
 
$
150,708
   
$
2,292
   
$
(134
)
 
$
152,866
 
Agency mortgage-backed securities
   
9,357
     
67
     
(5
)
   
9,419
 
Municipal securities
   
24,141
     
1,131
     
-
     
25,272
 
Corporate bonds
   
49,256
     
52
     
(1,509
)
   
47,799
 
Asset-backed securities
   
16,825
     
-
     
(762
)
   
16,063
 
Trust preferred securities
   
3,065
     
-
     
(1,310
)
   
1,755
 
Other securities
   
115
     
-
     
-
     
115
 
Total securities available for sale
 
$
253,467
   
$
3,542
   
$
(3,720
)
 
$
253,289
 
                                 
U.S. Government agencies
 
$
16,651
   
$
244
   
$
(10
)
 
$
16,885
 
Collateralized mortgage obligations
   
164,150
     
3,602
     
(114
)
   
167,638
 
Agency mortgage-backed securities
   
17,253
     
390
     
-
     
17,643
 
Other securities
   
1,020
     
-
     
-
     
1,020
 
Total securities held to maturity
 
$
199,074
   
$
4,236
   
$
(124
)
 
$
203,186
 


   
At December 31, 2015
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
                 
Collateralized mortgage obligations
 
$
180,795
   
$
523
   
$
(3,173
)
 
$
178,145
 
Agency mortgage-backed securities
   
10,073
     
176
     
(78
)
   
10,171
 
Municipal securities
   
22,814
     
562
     
(32
)
   
23,344
 
Corporate bonds
   
54,294
     
135
     
(300
)
   
54,129
 
Asset-backed securities
   
17,631
     
-
     
(626
)
   
17,005
 
Trust preferred securities
   
3,070
     
-
     
(1,187
)
   
1,883
 
Other securities
   
115
     
3
     
-
     
118
 
Total securities available for sale
 
$
288,792
   
$
1,399
   
$
(5,396
)
 
$
284,795
 
                                 
U.S. Government agencies
 
$
17,067
   
$
39
   
$
(72
)
 
$
17,034
 
Collateralized mortgage obligations
   
146,458
     
402
     
(780
)
   
146,080
 
Agency mortgage-backed securities
   
7,732
     
-
     
(21
)
   
7,711
 
Other securities
   
1,020
     
-
     
-
     
1,020
 
Total securities held to maturity
 
$
172,277
   
$
441
   
$
(873
)
 
$
171,845
 


13

The following table presents investment securities by stated maturity at June 30, 2016. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date.
 
   
Available for Sale
   
Held to Maturity
 
 
(dollars in thousands)
 
Amortized Cost
   
Fair
Value
   
Amortized Cost
   
Fair
Value
 
Due in 1 year or less
 
$
6,844
   
$
6,861
   
$
-
   
$
-
 
After 1 year to 5 years
   
16,065
     
15,694
     
4,828
     
4,817
 
After 5 years to 10 years
   
45,375
     
44,290
     
12,843
     
13,088
 
After 10 years
   
25,118
     
24,159
     
-
     
-
 
Collateralized mortgage obligations
   
150,708
     
152,866
     
164,150
     
167,638
 
Agency mortgage-backed securities
   
9,357
     
9,419
     
17,253
     
17,643
 
Total
 
$
253,467
   
$
253,289
   
$
199,074
   
$
203,186
 

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, 2016 and December 31, 2015.  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) for investment securities classified available for sale.

Impairment charges (credit losses) on trust preferred securities for the three month period ended June 30, 2016 amounted to $4,000. No impairment charges were incurred on trust preferred securities during the three month period ended June 30, 2015. Impairment charges on trust preferred securities for the six month period ended June 30, 2016 and 2015 amounted to $5,000 and $3,000, respectively.


14

 
The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at June 30, 2016 and 2015 for which a portion of OTTI was recognized in other comprehensive income:
     
(dollars in thousands)
 
2016
   
2015
 
         
Beginning Balance, January 1st
 
$
930
   
$
3,966
 
Additional credit-related impairment loss on securities for which an
               
other-than-temporary impairment was previously recognized
   
5
     
3
 
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
 
$
935
   
$
1,400
 
 

 
15



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, 2016
 
 
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
 
$
11,320
   
$
93
   
$
9,728
   
$
41
   
$
21,048
   
$
134
 
Agency mortgage-backed securities
   
-
     
-
     
3,604
     
5
     
3,604
     
5
 
Corporate bonds
   
33,682
     
1,318
     
5,804
     
191
     
39,486
     
1,509
 
Asset backed securities
   
6,463
     
491
     
9,600
     
271
     
16,063
     
762
 
Trust preferred securities
   
-
     
-
     
1,755
     
1,310
     
1,755
     
1,310
 
Total Available for Sale
 
$
51,465
   
$
1,902
   
$
30,491
   
$
1,818
   
$
81,956
   
$
3,720
 

 
At June 30, 2016
 
 
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
 
$
-
   
$
-
   
$
3,798
   
$
10
   
$
3,798
   
$
10
 
Collateralized mortgage obligations
   
20,383
     
114
     
-
     
-
     
20,383
     
114
 
Total Held to Maturity
 
$
20,383
   
$
114
   
$
3,798
   
$
10
   
$
24,181
   
$
124
 

 
At December 31, 2015
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
             
Collateralized  mortgage obligations
 
$
116,161
   
$
3,173
   
$
-
   
$
-
   
$
116,161
   
$
3,173
 
Agency mortgage-backed securities
   
2,389
     
14
     
5,502
     
64
     
7,891
     
78
 
Municipal securities
   
886
     
15
     
1,814
     
17
     
2,700
     
32
 
Corporate bonds
   
9,583
     
258
     
2,952
     
42
     
12,535
     
300
 
Asset backed securities
   
17,005
     
626
     
-
     
-
     
17,005
     
626
 
Trust preferred securities
   
-
     
-
     
1,883
     
1,187
     
1,883
     
1,187
 
Total Available for Sale
 
$
146,024
   
$
4,086
   
$
12,151
   
$
1,310
   
$
158,175
   
$
5,396
 

 
At December 31, 2015
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
(dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
             
U.S. Government agencies
 
$
11,954
   
$
72
   
$
-
   
$
-
   
$
11,954
   
$
72
 
Collateralized mortgage obligations
   
68,888
     
732
     
15,956
     
48
     
84,844
     
780
 
Agency mortgage-backed securities
   
7,711
     
21
     
-
     
-
     
7,711
     
21
 
Total Held to Maturity
 
$
88,553
   
$
825
   
$
15,956
   
$
48
   
$
104,509
   
$
873
 

Unrealized losses on securities in the investment portfolio amounted to $3.8 million with a total fair value of $106.1 million as of June 30, 2016 compared to unrealized losses of $6.3 million with a total fair value of $262.7 million as of December 31, 2015.  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 two U.S. Government agency securities, seven collateralized mortgage obligations and two agency mortgage-backed securities that were in an unrealized loss position at June 30, 2016. 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, 2016.

16

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, 2016, there were no municipal securities that were in an unrealized loss position.

At June 30, 2016, 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 credit deterioration.  At June 30, 2016, the investment portfolio included six corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of 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 about the trust preferred securities held in the portfolio as of June 30, 2016.

(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
 
$
727
   
$
389
   
$
(338
)
     
C
   
19
     
37
%
   
0.40
%
 
$
272
 
TPREF Funding III
 
Class B2 Notes
   
1,518
     
838
     
(680
)
     
C
   
15
     
32
     
0.40
     
483
 
ALESCO Preferred Funding V
 
Class C1 Notes
   
820
     
528
     
(292
)
     
C
   
42
     
18
     
0.40
     
180
 
Total
     
$
3,065
   
$
1,755
   
$
(1,310
)
           
76
     
29
%
         
$
935
 

During the three months ended June 30, 2016, the proceeds from the sale of investment securities was $23.9 million. Gross gains of $358,000 were realized on these sales and there were no losses on the sale of investment securities. The tax provision applicable to the net gains for the three months ended June 30, 2016 was $129,000. During the six months ended June 30, 2016, the proceeds from the sale of investment securities was $78.6 million. Gross gains of $678,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to the net gains for the six months ended June 30, 2016 was $235,000.

During the three and six months ended June 30, 2015, the proceeds from the sale of investment securities was $4.1 million. Gross gains of $155,000 and gross losses of $146,000 were realized on these sales. The tax provision applicable to these net gains for the three and six months ended June 30, 2015 was $3,000.

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 accumulated other comprehensive loss and be amortized as an adjustment to yield over the remaining life of those securities.  At June 30, 2016, there is an approximate unrealized loss of $847,000 remaining to be amortized.


17


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, 2016 and December 31, 2015:

(dollars in thousands)
 
June 30,
2016
   
December 31,
2015
 
         
Commercial real estate
 
$
369,784
   
$
349,726
 
Construction and land development
   
40,462
     
46,547
 
Commercial and industrial
   
199,149
     
181,850
 
Owner occupied real estate
   
265,245
     
246,398
 
Consumer and other
   
53,213
     
48,126
 
Residential mortgage
   
2,338
     
2,380
 
Total loans receivable
   
930,191
     
875,027
 
Deferred costs (fees)
   
(437
)
   
(258
)
Allowance for loan losses
   
(8,761
)
   
(8,703
)
Net loans receivable
 
$
920,993
   
$
866,066
 

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses.  The Company's loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, and residential mortgages.  The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

18


A loan is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming loans, but also include internally classified accruing loans.  The following table summarizes information with regard to impaired loans by loan portfolio class as of June 30, 2016 and December 31, 2015:

   
June 30, 2016
   
December 31, 2015
 
 
 
(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
 
$
12,333
   
$
12,334
   
$
-
   
$
11,692
   
$
11,730
   
$
-
 
Construction and land development
   
56
     
2,050
     
-
     
117
     
2,208
     
-
 
Commercial and industrial
   
1,675
     
2,804
     
-
     
2,381
     
3,683
     
-
 
Owner occupied real estate
   
950
     
963
     
-
     
507
     
507
     
-
 
Consumer and other
   
856
     
1,156
     
-
     
800
     
1,084
     
-
 
Total
 
$
15,870
   
$
19,307
   
$
-
   
$
15,497
   
$
19,212
   
$
-
 

With an allowance recorded:
 
Commercial real estate
 
$
7,193
   
$
7,194
   
$
1,317
   
$
511
   
$
511
   
$
47
 
Construction and land development
   
4
     
101
     
4
     
-
     
-
     
-
 
Commercial and industrial
   
3,618
     
6,285
     
1,677
     
3,112
     
5,779
     
1,111
 
Owner occupied real estate
   
1,298
     
1,298
     
304
     
2,862
     
2,876
     
1,059
 
Consumer and other
   
292
     
292
     
79
     
147
     
147
     
21
 
Total
 
$
12,405
   
$
15,170
   
$
3,381
   
$
6,632
   
$
9,313
   
$
2,238
 

Total:
 
Commercial real estate
 
$
19,526
   
$
19,528
   
$
1,317
   
$
12,203
   
$
12,241
   
$
47
 
Construction and land development
   
60
     
2,151
     
4
     
117
     
2,208
     
-
 
Commercial and industrial
   
5,293
     
9,089
     
1,677
     
5,493
     
9,462
     
1,111
 
Owner occupied real estate
   
2,248
     
2,261
     
304
     
3,369
     
3,383
     
1,059
 
Consumer and other
   
1,148
     
1,448
     
79
     
947
     
1,231
     
21
 
Total
 
$
28,275
   
$
34,477
   
$
3,381
   
$
22,129
   
$
28,525
   
$
2,238
 

19



The following table presents additional information regarding the Company's impaired loans for the three months ended June 30, 2016 and June 30, 2015:

 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
 
(dollars in thousands)
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
With no related allowance recorded:
       
Commercial real estate
 
$
12,085
   
$
67
   
$
13,432
   
$
(21
)
Construction and land development
   
77
     
-
     
248
     
1
 
Commercial and industrial
   
1,782
     
11
     
3,992
     
27
 
Owner occupied real estate
   
793
     
2
     
957
     
3
 
Consumer and other
   
847
     
3
     
713
     
3
 
Total
 
$
15,584
   
$
83
   
$
19,342
   
$
13
 

With an allowance recorded:
               
Commercial real estate
 
$
4,966
   
$
16
   
$
4,864
   
$
3
 
Construction and land development
   
2
     
-
     
116
     
-
 
Commercial and industrial
   
3,450
     
19
     
2,084
     
-
 
Owner occupied real estate
   
1,808
     
8
     
4,009
     
30
 
Consumer and other
   
265
     
3
     
-
     
-
 
Total
 
$
10,491
   
$
46
   
$
11,073
   
$
33
 

Total:
               
Commercial real estate
 
$
17,051
   
$
83
   
$
18,296
   
$
(18
)
Construction and land development
   
79
     
-
     
364
     
1
 
Commercial and industrial
   
5,232
     
30
     
6,076
     
27
 
Owner occupied real estate
   
2,601
     
10
     
4,966
     
33
 
Consumer and other
   
1,112
     
6
     
713
     
3
 
Total
 
$
26,075
   
$
129
   
$
30,415
   
$
46
 

20



The following table presents additional information regarding the Company's impaired loans for the six months ended June 30, 2016 and June 30, 2015:

 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
 
(dollars in thousands)
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
With no related allowance recorded:
       
Commercial real estate
 
$
11,837
   
$
132
   
$
12,648
   
$
141
 
Construction and land development
   
97
     
-
     
178
     
1
 
Commercial and industrial
   
1,890
     
21
     
3,923
     
48
 
Owner occupied real estate
   
638
     
3
     
829
     
4
 
Consumer and other
   
838
     
6
     
607
     
4
 
Total
 
$
15,300
   
$
162
   
$
18,185
   
$
198
 

With an allowance recorded:
               
Commercial real estate
 
$
2,737
   
$
24
   
$
8,965
   
$
3
 
Construction and land development
   
1
     
-
     
137
     
-
 
Commercial and industrial
   
3,280
     
38
     
1,796
     
-
 
Owner occupied real estate
   
2,319
     
14
     
4,109
     
63
 
Consumer and other
   
239
     
5
     
-
     
-
 
Total
 
$
8,576
   
$
81
   
$
15,007
   
$
66
 

Total:
               
Commercial real estate
 
$
14,574
   
$
156
   
$
21,613
   
$
144
 
Construction and land development
   
98
     
-
     
315
     
1
 
Commercial and industrial
   
5,170
     
59
     
5,719
     
48
 
Owner occupied real estate
   
2,957
     
17
     
4,938
     
67
 
Consumer and other
   
1,077
     
11
     
607
     
4
 
Total
 
$
23,876
   
$
243
   
$
33,192
   
$
264
 
 

 
21


 
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three and six months ended June 30, 2016 and 2015:

 
 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and Industrial
   
Owner Occupied Real Estate
   
Consumer and Other
   
Residential Mortgage
   
Unallocated
   
Total
 
 
Three months ended June 30, 2016
 
Allowance for loan losses:
 
Beginning balance:
 
$
2,045
   
$
414