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EX-32.2 - REPUBLIC FIRST BANCORP INCex32-2.htm
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EX-31.1 - REPUBLIC FIRST BANCORP INCex31-1.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, 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 November 4, 2016



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, 2016 and December 31, 2015        (unaudited)
1
 
Consolidated statements of income for the three and nine months ended September 30, 2016 and 2015 (unaudited)
Consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015 (unaudited)
 
2
 
3
 
Consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 (unaudited)
 
4
 
Consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2016 and 2015 (unaudited)
 
5
 
Notes to consolidated financial statements (unaudited)
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
41
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
61
     
Item 4.
Controls and Procedures
61
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
62
     
Item 1A.
Risk Factors
62
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
62
     
Item 3.
Defaults Upon Senior Securities
62
     
Item 4.
Mine Safety Disclosures
62
     
Item 5.
Other Information
62
     
Item 6.
Exhibits
63
     
Signatures
64

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2016 and December 31, 2015
(Dollars in thousands, except per share data)
(unaudited)
   
September 30,
2016
   
December 31,
2015
 
ASSETS
       
Cash and due from banks
 
$
23,061
   
$
13,777
 
Interest bearing deposits with banks
   
126,980
     
13,362
 
    Cash and cash equivalents
   
150,041
     
27,139
 
 
               
Investment securities available for sale, at fair value
   
299,385
     
284,795
 
Investment securities held to maturity, at amortized cost (fair value of $223,247 and  $171,845, respectively)
   
220,470
     
172,277
 
Restricted stock, at cost
   
1,366
     
3,059
 
Loans held for sale
   
29,715
     
3,653
 
Loans receivable (net of allowance for loan losses of $9,453 and $8,703, respectively)
   
936,088
     
866,066
 
Premises and equipment, net
   
55,573
     
46,164
 
Other real estate owned, net
   
10,271
     
11,313
 
Accrued interest receivable
   
4,588
     
4,216
 
Goodwill
   
4,892
     
-
 
Intangible asset
   
87
     
-
 
Other assets
   
21,986
     
20,761
 
    Total Assets
 
$
1,734,462
   
$
1,439,443
 
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
 
$
302,372
   
$
243,695
 
   Demand – interest bearing
   
587,197
     
381,499
 
   Money market and savings
   
583,536
     
556,526
 
   Time deposits
   
109,127
     
67,578
 
       Total Deposits
   
1,582,232
     
1,249,298
 
Short-term borrowings
   
-
     
47,000
 
Accrued interest payable
   
339
     
245
 
Other liabilities
   
9,763
     
7,049
 
Subordinated debt
   
22,476
     
22,476
 
    Total Liabilities
   
1,614,810
     
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 38,446,223 as of September 30, 2016 and 38,365,848 as of December 31, 2015; shares outstanding 37,917,378 as of September 30, 2016 and 37,837,003 as of December 31, 2015
   
384
     
384
 
Additional paid in capital
   
153,887
     
152,897
 
Accumulated deficit
   
(29,385
)
   
(32,833
)
Treasury stock at cost (503,408 shares as of September 30, 2016 and December 31, 2015)
   
(3,725
)
   
(3,725
)
Stock held by deferred compensation plan (25,437 shares as of September 30, 2016 and
December 31, 2015)
   
(183
)
   
(183
)
Accumulated other comprehensive loss
   
(1,326
)
   
(3,165
)
    Total Shareholders' Equity
   
119,652
     
113,375
 
    Total Liabilities and Shareholders' Equity
 
$
1,734,462
   
$
1,439,443
 
 
(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, 2016 and 2015
(Dollars in thousands, except per share data)
 (unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Interest income:
 
   
   
   
 
   Interest and fees on taxable loans
 
$
10,446
   
$
9,518
   
$
30,259
   
$
27,611
 
   Interest and fees on tax-exempt loans
   
261
     
130
     
702
     
384
 
   Interest and dividends on taxable investment securities
   
2,591
     
1,509
     
7,805
     
4,396
 
   Interest and dividends on tax-exempt investment securities
   
173
     
153
     
526
     
416
 
   Interest on federal funds sold and other interest-earning assets
   
149
     
60
     
299
     
223
 
       Total interest income
   
13,620
     
11,370
     
39,591
     
33,030
 
Interest expense:
                               
   Demand- interest bearing
   
553
     
378
     
1,471
     
1,009
 
   Money market and savings
   
677
     
538
     
1,923
     
1,592
 
   Time deposits
   
301
     
183
     
625
     
528
 
   Other borrowings
   
303
     
279
     
898
     
833
 
       Total interest expense
   
1,834
     
1,378
     
4,917
     
3,962
 
Net interest income
   
11,786
     
9,992
     
34,674
     
29,068
 
Provision for loan losses
   
607
     
-
     
1,557
     
-
 
       Net interest income after provision for loan losses
   
11,179
     
9,992
     
33,117
     
29,068
 
Non-interest income:
                               
   Loan advisory and servicing fees
   
218
     
163
     
1,018
     
1,087
 
   Gain on sales of loans
   
4,413
     
884
     
6,995
     
2,684
 
   Service fees on deposit accounts
   
686
     
452
     
1,910
     
1,213
 
   Gain on sale of investment securities
   
2
     
64
     
656
     
73
 
   Other-than-temporary impairment
   
(12
)
   
-
     
(39
)
   
(13
)
   Portion recognized in other comprehensive income (before taxes)
   
10
     
-
     
32
     
10
 
        Net impairment loss on investment securities
   
(2
)
   
-
     
(7
)
   
(3
)
   Other non-interest income
   
94
     
41
     
282
     
149
 
Total non-interest income
   
5,411
     
1,604
     
10,854
     
5,203
 
Non-interest expenses:
                               
   Salaries and employee benefits
   
7,731
     
5,730
     
20,334
     
16,667
 
   Occupancy
   
1,535
     
1,240
     
4,387
     
3,624
 
   Depreciation and amortization
   
1,051
     
671
     
2,816
     
2,126
 
   Legal
   
158
     
52
     
312
     
631
 
   Other real estate owned
   
702
     
425
     
1,610
     
1,173
 
   Advertising
   
218
     
233
     
537
     
475
 
   Data processing
   
669
     
408
     
1,711
     
1,133
 
   Insurance
   
262
     
162
     
656
     
532
 
   Professional fees
   
352
     
293
     
1,167
     
968
 
   Regulatory assessments and costs
   
296
     
318
     
1,011
     
911
 
   Taxes, other
   
243
     
169
     
495
     
594
 
   Other operating expenses
   
2,065
     
1,323
     
5,556
     
3,811
 
       Total non-interest expense
   
15,282
     
11,024
     
40,592
     
32,645
 
Income before benefit for income taxes
   
1,308
     
572
     
3,379
     
1,626
 
Benefit for income taxes
   
(32
)
   
(10
)
   
(69
)
   
(17
)
Net income
 
$
1,340
   
$
582
   
$
3,448
   
$
1,643
 
Net income per share:
                               
Basic
 
$
0.04
   
$
0.02
   
$
0.09
   
$
0.04
 
Diluted
 
$
0.03
   
$
0.02
   
$
0.09
   
$
0.04
 

(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, 2016 and 2015
(Dollars in thousands)
(unaudited)
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
       
   
   
 
Net income
 
$
1,340
   
$
582
   
$
3,448
   
$
1,643
 
                                 
   Other comprehensive income (loss), net of tax
                               
       Unrealized gain (loss) on securities (pre-tax $(1,082),
        $490, $3,386, and $(718), respectively)
   
(693
)
   
314
     
2,170
     
(460
)
       Reclassification adjustment for securities gains (pre-tax
       $(2), $(64), $(656), and $(73), respectively)
   
(1
)
   
(41
)
   
(420
)
   
(47
)
       Reclassification adjustment for impairment charge (pre-
       tax $2, $-, $7, and $3, respectively)
   
1
     
-
     
4
     
2
 
            Net unrealized gains (losses) on securities
   
(693
)
   
273
     
1,754
     
(505
)
       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 $38, $25, $133,
            and $128, respectively)
   
24
     
16
     
85
     
82
 
                                 
Total other comprehensive income (loss)
   
(669
)
   
289
     
1,839
     
(423
)
                                 
Total comprehensive income
 
$
671
   
$
871
   
$
5,287
   
$
1,220
 

 (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, 2016 and 2015
(Dollars in thousands)
(unaudited)
   
Nine Months Ended September 30,
 
   
2016
   
2015
 
Cash flows from operating activities
 
   
 
Net income
 
$
3,448
   
$
1,643
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
   
1,557
     
-
 
Write down of other real estate owned
   
521
     
298
 
Depreciation and amortization
   
2,816
     
2,126
 
Stock based compensation
   
562
     
441
 
Gain on sale of investment securities
   
(656
)
   
(73
)
Impairment charges on investment securities
   
7
     
3
 
Amortization of premiums on investment securities
   
1,172
     
635
 
Accretion of discounts on retained SBA loans
   
(1,057
)
   
(754
)
Fair value adjustments on SBA servicing assets
   
894
     
597
 
Proceeds from sales of SBA loans originated for sale
   
48,031
     
27,999
 
SBA loans originated for sale
   
(43,016
)
   
(24,128
)
Gains on sales of SBA loans originated for sale
   
(4,212
)
   
(2,684
)
Proceeds from sales of mortgage loans originated for sale
   
79,029
     
-
 
Mortgage loans originated for sale
   
(82,240
)
   
-
 
Gains on sales of mortgage loans originated for sale
   
(2,783
)
   
-
 
Amortization of intangible assets
   
17
     
-
 
        Increase in accrued interest receivable and other assets
   
(704
)
   
(3,302
)
Decrease in accrued interest payable and other liabilities
   
(396
)
   
(712
)
              Net cash provided by operating activities
   
2,990
     
2,089
 
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
   
(117,812
)
   
(57,807
)
Purchase of investment securities held to maturity
   
(69,792
)
   
(85,246
)
Proceeds from the sale of securities available for sale
   
78,582
     
6,672
 
Proceeds from the paydowns, maturity, or call of securities available for sale
   
26,295
     
26,397
 
Proceeds from the paydowns, maturity, or call of securities held to maturity
   
21,106
     
12,768
 
Redemption (purchase) of restricted stock
   
1,693
     
(22
)
Net increase in loans
   
(70,006
)
   
(77,027
)
Net proceeds from sale of other real estate owned
   
1,387
     
792
 
Net cash paid in acquisition
   
(5,913
)
   
-
 
Premises and equipment expenditures
   
(12,122
)
   
(12,190
)
             Net cash used in investing activities
   
(146,582
)
   
(185,663
)
                 
Cash flows from financing activities
               
Net proceeds from exercise of stock options
   
226
     
1
 
Net increase in demand, money market and savings deposits
   
291,385
     
165,565
 
Net increase (decrease) in time deposits
   
41,549
     
(299
)
Decrease in short-term borrowings
   
(66,666
)
   
-
 
             Net cash provided by financing activities
   
266,494
     
165,267
 
                 
Net increase (decrease) in cash and cash equivalents
   
122,902
     
(18,307
)
Cash and cash equivalents, beginning of year
   
27,139
     
128,826
 
Cash and cash equivalents, end of period
 
$
150,041
   
$
110,519
 
                 
Supplemental disclosures
               
Interest paid
 
$
5,011
   
$
3,944
 
Income taxes paid
 
$
90
   
$
-
 
Non-cash transfers from loans to other real estate owned
 
$
616
   
$
11,148
 

(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, 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
                   
3,448
                             
3,448
 
Other comprehensive income, net of tax
                                           
1,839
     
1,839
 
Stock based compensation
           
764
                                     
764
 
Options exercised (80,375 shares)
           
226
                                     
226
 
                                                         
Balance September 30,  2016
 
$
384
   
$
153,887
   
$
(29,385
)
 
$
(3,725
)
 
$
(183
)
 
$
(1,326
)
 
$
119,652
 
                                                         
                                                         
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
 
                                                         


(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. On July 26, 2016, Republic entered into a purchase agreement with the owners of Oak Mortgage Company LLC ("Oak Mortgage"), pursuant to which the owners agreed to sell to Republic all of the issued and outstanding limited liability company interests of Oak Mortgage. The transaction closed on July 28, 2016, and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. 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 nine month periods ended September 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 cause significant fluctuations in interest margins.
 
 
- 6 -

 

 
Mortgage Banking Activities and Mortgage Loans Held for Sale

Loans held for sale are originated and held until sold to permanent investors. On July 28, 2016, management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.

Loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Gains and losses on loan sales are recorded in non-interest income and direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

 Interest Rate Lock Commitments

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are derivatives are recognized at fair value on the balance sheet as other assets and as other liabilities with changes in their fair values recorded as a gain or loss in hedging instruments in non-interest income and non-interest expense in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. See Note 11 Derivatives and Risk Management Activities.

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), the value of assets acquired and liabilities assumed in business combinations, 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.
 
- 7 -

 
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 September 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.

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 September 30, 2016, the maximum number of shares of common shares issuable under the 2014 Plan was 4.0 million. During the nine months ended September 30, 2016, 653,250 options were granted under the 2014 Plan with a weighted average grant date fair value of $1,174,320.


- 8 -



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)
 
   46.38% 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 nine months ended September 30, 2016 and 2015, 487,550 options and 349,062 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At September 30, 2016, the intrinsic value of the 2,480,550 options outstanding was $1,652,149, while the intrinsic value of the 1,164,074 exercisable (vested) options was $1,081,116. During the nine months ended September 30, 2016, 80,375 options were exercised with cash received of $226,271 and 38,550 options were forfeited with a weighted average grant date fair value of $55,920.  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, 2016 and 2015 is set forth below:

   
September 30, 2016
   
September 30, 2015
 
Stock based compensation expense recognized
 
$
764,000
   
$
441,000
 
Number of unvested stock options
   
1,316,476
     
1,185,151
 
Fair value of unvested stock options
 
$
2,608,986
   
$
1,908,205
 
Amount remaining to be recognized as expense
 
$
1,284,071
   
$
1,034,337
 

The remaining amount of $1,284,071 will be recognized as expense through February 2020.

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 nine months ended September 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.



- 9 -



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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                 
Net income (basic and diluted)
 
$
1,340
   
$
582
   
$
3,448
   
$
1,643
 
                                 
Weighted average shares outstanding
   
37,916
     
37,816
     
37,879
     
37,816
 
Net income per share – basic
 
$
0.04
   
$
0.02
   
$
0.09
   
$
0.04
 
Weighted average shares outstanding (including dilutive CSEs)
   
38,375
     
38,064
     
38,355
     
38,052
 
Net income per share – diluted
 
$
0.03
   
$
0.02
   
$
0.09
   
$
0.04
 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                 
Anti-dilutive securities
               
                 
    Share based compensation awards
   
2,022
     
1,735
     
2,005
     
1,747
 
                                 
    Convertible securities
   
1,662
     
1,662
     
1,662
     
1,662
 
                                 
    Total anti-dilutive securities
   
3,684
     
3,397
     
3,667
     
3,409
 

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.

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.
 
 
- 10 -


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.

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.
 
 
- 11 -


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.

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.
 
 
- 12 -


ASU 2016-15

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The ASU addresses classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effective on January 1, 2018, on a retrospective basis, with early adoption permitted. This new accounting guidance will result in some changes in classification in the Consolidated Statement of Cash Flows, which the Company does not expect will be significant, and will not have any impact 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 residential mortgage and other consumer loan products in the area surrounding its stores.

 
- 13 -




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, 2016 and December 31, 2015 is as follows:

   
At September 30, 2016
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
                 
Collateralized mortgage obligations
 
$
199,622
   
$
1,414
   
$
(640
)
 
$
200,396
 
Agency mortgage-backed securities
   
11,632
     
73
     
(19
)
   
11,686
 
Municipal securities
   
23,383
     
1,067
     
(8
)
   
24,442
 
Corporate bonds
   
46,737
     
32
     
(1,341
)
   
45,428
 
Asset-backed securities
   
16,183
     
-
     
(466
)
   
15,717
 
Trust preferred securities
   
3,063
     
-
     
(1,372
)
   
1,691
 
Other securities
   
25
     
-
     
-
     
25
 
Total securities available for sale
 
$
300,645
   
$
2,586
   
$
(3,846
)
 
$
299,385
 
                                 
U.S. Government agencies
 
$
28,468
   
$
310
   
$
(58
)
 
$
28,720
 
Collateralized mortgage obligations
   
155,098
     
2,396
     
(219
)
   
157,275
 
Agency mortgage-backed securities
   
35,884
     
348
     
-
     
36,232
 
Other securities
   
1,020
     
-
     
-
     
1,020
 
Total securities held to maturity
 
$
220,470
   
$
3,054
   
$
(277
)
 
$
223,247
 


   
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
 






- 14 -





The following table presents investment securities by stated maturity at September 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
 
$
675
   
$
677
   
$
-
   
$
-
 
After 1 year to 5 years
   
12,096
     
12,260
     
4,651
     
4,640
 
After 5 years to 10 years
   
53,126
     
51,671
     
24,837
     
25,100
 
After 10 years
   
23,494
     
22,695
     
-
     
-
 
Collateralized mortgage obligations
   
199,622
     
200,396
     
155,098
     
157,275
 
Agency mortgage-backed securities
   
11,632
     
11,686
     
35,884
     
36,232
 
Total
 
$
300,645
   
$
299,385
   
$
220,470
   
$
223,247
 

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, 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 September 30, 2016 amounted to $2,000. No impairment charges were incurred on trust preferred securities during the three month period September 30, 2015. Impairment charges on trust preferred securities for the nine month period ended September 30, 2016 and 2015 amounted to $7,000 and $3,000, respectively.
 
 
- 15 -


 

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held for the three and nine months ended September 30, 2016 and 2015 for which a portion of OTTI was recognized in other comprehensive income:
   
Three Months Ended September 30,
 
 (dollars in thousands)
 
2016
   
2015
 
         
Beginning Balance, July 1st
 
$
935
   
$
1,400
 
Additional credit-related impairment loss on securities for which an
               
other-than-temporary impairment was previously recognized
   
2
     
-
 
Reductions for securities paid off during the period
   
-
     
-
 
Reductions for securities sold during the period
   
-
     
(470
)
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
 
$
937
   
$
930
 


 
   
Nine Months Ended September 30,
 
(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
   
7
     
3
 
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
 
$
937
   
$
930
 


 
- 16 -




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 September 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
 
$
76,185
   
$
573
   
$
8,199
   
$
67
   
$
84,384
   
$
640
 
Agency mortgage-backed securities
   
2,584
     
14
     
3,432
     
5
     
6,016
     
19
 
Municipal securities
   
486
     
8
     
-
     
-
     
486
     
8
 
Corporate bonds
   
28,859
     
1,142
     
10,796
     
199
     
39,655
     
1,341
 
Asset backed securities
   
-
     
-
     
15,717
     
466
     
15,717
     
466
 
Trust preferred securities
   
-
     
-
     
1,691
     
1,372
     
1,691
     
1,372
 
Total Available for Sale
 
$
108,114
   
$
1,737
   
$
39,835
   
$
2,109
   
$
147,949
   
$
3,846
 

 
At September 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
 
$
7,067
   
$
47
   
$
3,621
   
$
11
   
$
10,688
   
$
58
 
Collateralized mortgage obligations
   
26,469
     
219
     
-
     
-
     
26,469
     
219
 
Total Held to Maturity
 
$
33,536
   
$
266
   
$
3,621
   
$
11
   
$
37,157
   
$
277
 

   
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 $4.1 million with a total fair value of $185.1 million as of September 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 three U.S. Government agency securities, nineteen collateralized mortgage obligations and three agency mortgage-backed securities that were in an unrealized loss position at September 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 September 30, 2016.
 
 
- 17 -

 

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, 2016, one municipal security was in an unrealized loss position.

At September 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 September 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 September 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 2016 and beyond
   
Cumulative OTTI Life to Date
 
TPREF Funding II
Class B Notes
 
$
725
   
$
377
   
$
(348
)
   
 
   
19
     
37
%
   
0.42
%
 
$
274
 
TPREF Funding III
Class B2 Notes
   
1,518
     
804
     
(714
)
   
 
   
15
     
32
     
0.43
     
483
 
ALESCO Preferred 
Funding V
Class C1 Notes
   
820
     
510
     
(310
)
   
 
   
42
     
14
     
0.41
     
180
 
Total
   
$
3,063
   
$
1,691
   
$
(1,372
)
           
76
     
27
%
         
$
937
 

There were no proceeds from the sale of investment securities during the three months ended September 30, 2016. Proceeds from the sale of investment securities during the nine months ended September 30, 2016 was $78.6 million. Gross gains of $680,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to the net gains for the nine months ended September 30, 2016 was $235,000.

Proceeds from the sale of investment securities 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 from the sale of investment securities 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 nine months ended September 30, 2015 amounted to $26,000.



- 18 -





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, 2016 and December 31, 2015:

(dollars in thousands)
 
September 30, 2016
   
December 31, 2015
 
         
Commercial real estate
 
$
376,466
   
$
349,726
 
Construction and land development
   
48,983
     
46,547
 
Commercial and industrial
   
186,126
     
181,850
 
Owner occupied real estate
   
268,435
     
246,398
 
Consumer and other
   
58,580
     
48,126
 
Residential mortgage
   
6,909
     
2,380
 
Total loans receivable
   
945,499
     
875,027
 
Deferred costs (fees)
   
42
     
(258
)
Allowance for loan losses
   
(9,453
)
   
(8,703
)
Net loans receivable
 
$
936,088
   
$
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.




 
- 19 -




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 September 30, 2016 and December 31, 2015:

   
September 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
 
$
12,305
   
$
12,307
   
$
-
   
$
11,692
   
$
11,730
   
$
-
 
Construction and land development
   
-
     
-
     
-
     
117
     
2,208
     
-
 
Commercial and industrial
   
1,515
     
2,648
     
-
     
2,381
     
3,683
     
-
 
Owner occupied real estate
   
672
     
685
     
-
     
507
     
507
     
-
 
Consumer and other
   
1,092
     
1,400
     
-
     
800
     
1,084
     
-
 
Total
 
$
15,584
   
$
17,040
   
$
-
   
$
15,497
   
$
19,212
   
$
-
 

With an allowance recorded:
                       
Commercial real estate
 
$
7,165
   
$
7,179
   
$
1,290
   
$
511
   
$
511
   
$
47
 
Construction and land development
   
56
     
2,050
     
56
     
-
     
-
     
-
 
Commercial and industrial
   
3,719
     
6,385
     
1,799
     
3,112
     
5,779
     
1,111
 
Owner occupied real estate
   
1,859
     
1,860
     
544
     
2,862
     
2,876
     
1,059
 
Consumer and other
   
292
     
293
     
71
     
147
     
147
     
21
 
Total
 
$
13,091
   
$
17,767
   
$
3,760
   
$
6,632
   
$
9,313
   
$
2,238
 

Total:
                       
Commercial real estate
 
$
19.470
   
$
19,486
   
$
1,290
   
$
12,203
   
$
12,241
   
$
47
 
Construction and land development
   
56
     
2,050
     
56
     
117
     
2,208
     
-
 
Commercial and industrial
   
5,234
     
9,033
     
1,799
     
5,493
     
9,462
     
1,111
 
Owner occupied real estate
   
2,531
     
2,545
     
544
     
3,369
     
3,383
     
1,059
 
Consumer and other
   
1,384
     
1,693
     
71
     
947
     
1,231
     
21
 
Total
 
$
28,675
   
$
34,807
   
$
3,760
   
$
22,129
   
$
28,525
   
$
2,238
 





- 20 -

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

 
Three Months Ended September 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
 
$
12,188
   
$
65
   
$
13,923
   
$
73
 
Construction and land development
   
22
     
-
     
328
     
2
 
Commercial and industrial
   
1,611
     
9
     
2,459
     
16
 
Owner occupied real estate
   
665
     
3
     
589
     
1
 
Consumer and other
   
1,027
     
5
     
754
     
3
 
Total
 
$
15,513
   
$
82
   
$
18,053
   
$
95
 
 
With an allowance recorded:
               
Commercial real estate
 
$
6,058
   
$
19
   
$
2,479
   
$
3
 
Construction and land development
   
43
     
-
     
62
     
-
 
Commercial and industrial
   
3,607
     
18
     
3,776
     
12
 
Owner occupied real estate
   
1,977
     
9
     
3,293
     
27
 
Consumer and other
   
278
     
2
     
111
     
1
 
Total
 
$
11,963
   
$
48
   
$
9,721
   
$
43
 

Total:
               
Commercial real estate
 
$
18,246
   
$
84
   
$
16,402
   
$
76
 
Construction and land development
   
65
     
-
     
390
     
2
 
Commercial and industrial
   
5,218
     
27
     
6,235
     
28
 
Owner occupied real estate
   
2,642
     
12
     
3,882
     
28
 
Consumer and other
   
1,305
     
7
     
865
     
4
 
Total
 
$
27,476
   
$
130
   
$
27,774
   
$
138
 


 
- 21 -


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

 
Nine Months Ended September 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
 
$
11,954
   
$
197
   
$
13,073
   
$
214
 
Construction and land development
   
72
     
-
     
228
     
3
 
Commercial and industrial
   
1,797
     
30
     
3,435
     
64
 
Owner occupied real estate
   
647
     
6
     
749
     
5
 
Consumer and other
   
901
     
11
     
656
     
7
 
Total
 
$
15,371
   
$
244
   
$
18,141
   
$
293
 


With an allowance recorded:
               
Commercial real estate
 
$
3,844
   
$
43
   
$
6,803
   
$
6
 
Construction and land development
   
15
     
-
     
112
     
-
 
Commercial and industrial
   
3,389
     
56
     
2,456
     
12
 
Owner occupied real estate
   
2,205
     
23
     
3,837
     
90
 
Consumer and other
   
252
     
7
     
37
     
1
 
Total
 
$
9,705
   
$
129
   
$
13,245