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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 March 31, 2017.
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,  smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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    [   ]
Emerging growth company  [   ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  [  ]    NO   [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date.

Common Stock, $0.01 per share
56,962,264
Title of Class
Number of Shares Outstanding as of May 4, 2017
 
 
 
 


 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of March 31, 2017 and December 31, 2016 (unaudited)
1
 
Consolidated statements of income for the three months ended March 31, 2017 and 2016 (unaudited)
2
 
Consolidated statements of comprehensive income for the three months ended March 31, 2017 and 2016 (unaudited)
3
 
Consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 (unaudited)
4
 
Consolidated statements of changes in shareholders' equity for the three months ended March 31, 2017 and 2016 (unaudited)
5
     
 
Notes to consolidated financial statements (unaudited)
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
39
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
56
     
Item 4.
Controls and Procedures
56
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
57
     
Item 1A.
Risk Factors
57
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
     
Item 3.
Defaults Upon Senior Securities
57
     
Item 4.
Mine Safety Disclosures
57
     
Item 5.
Other Information
57
     
Item 6.
Exhibits
58
     
Signatures
59
 
 

 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2017 and December 31, 2016
(Dollars in thousands, except per share data)
(unaudited)
   
March 31, 2017
   
December 31, 2016
 
ASSETS
           
Cash and due from banks
 
$
25,119
   
$
19,830
 
Interest bearing deposits with banks
   
11,472
     
14,724
 
    Cash and cash equivalents
   
36,591
     
34,554
 
 
               
Investment securities available for sale, at fair value
   
362,328
     
369,739
 
Investment securities held to maturity, at amortized cost (fair value of $413,699 and $425,183, respectively)
   
421,850
     
432,499
 
Restricted stock, at cost
   
1,366
     
1,366
 
Loans held for sale
   
25,098
     
28,065
 
Loans receivable (net of allowance for loan losses of $9,181 and $9,155 respectively)
   
1,016,962
     
955,817
 
Premises and equipment, net
   
58,926
     
57,040
 
Other real estate owned, net
   
9,944
     
10,174
 
Accrued interest receivable
   
5,987
     
5,497
 
Goodwill
   
5,011
     
5,011
 
Intangible asset
   
35
     
61
 
Other assets
   
24,490
     
24,108
 
    Total Assets
 
$
1,968,588
   
$
1,923,931
 
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
 
$
364,278
   
$
324,912
 
   Demand – interest bearing
   
629,583
     
605,950
 
   Money market and savings
   
620,218
     
635,644
 
   Time deposits
   
106,433
     
111,164
 
       Total Deposits
   
1,720,512
     
1,677,670
 
Accrued interest payable
   
490
     
444
 
Other liabilities
   
7,614
     
8,883
 
Subordinated debt
   
21,648
     
21,881
 
    Total Liabilities
   
1,750,264
     
1,708,878
 
                 
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 57,415,434 as of March 31, 2017 and 57,283,712 as of December 31, 2016; shares outstanding 56,886,589 as of March 31, 2017 and 56,754,867 as of December 31, 2016
   
574
     
573
 
Additional paid in capital
   
254,403
     
253,570
 
Accumulated deficit
   
(26,101
)
   
(27,888
)
Treasury stock at cost (503,408 shares as of March 31, 2017 and December 31, 2016)
   
(3,725
)
   
(3,725
)
Stock held by deferred compensation plan (25,437 shares as of March 31, 2017 and December 31, 2016)
   
(183
)
   
(183
)
Accumulated other comprehensive loss
   
(6,644
)
   
(7,294
)
    Total Shareholders' Equity
   
218,324
     
215,053
 
    Total Liabilities and Shareholders' Equity
 
$
1,968,588
   
$
1,923,931
 
 
(See notes to consolidated financial statements)
 
 
1


 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 2017 and 2016
(Dollars in thousands, except per share data)
 (unaudited)
 
   
Three Months Ended
March 31,
 
   
2017
   
2016
 
Interest income
           
Interest and fees on taxable loans
 
$
10,941
   
$
9,717
 
Interest and fees on tax-exempt loans
   
258
     
214
 
Interest and dividends on taxable investment securities
   
4,733
     
2,594
 
Interest and dividends on tax-exempt investment securities
   
194
     
174
 
Interest on federal funds sold and other interest-earning assets
   
61
     
63
 
Total interest income
   
16,187
     
12,762
 
Interest expense
               
   Demand-interest bearing
   
608
     
415
 
   Money market and savings
   
698
     
609
 
   Time deposits
   
296
     
141
 
   Other borrowings
   
366
     
306
 
Total interest expense
   
1,968
     
1,471
 
Net interest income
   
14,219
     
11,291
 
Provision for loan losses
   
-
     
300
 
Net interest income after provision for loan losses
   
14,219
     
10,991
 
Non-interest income
               
Loan advisory and servicing fees
   
337
     
603
 
Mortgage banking income
   
2,421
     
-
 
Gain on sales of SBA loans
   
688
     
833
 
Service fees on deposit accounts
   
846
     
570
 
Gain on sale of investment securities
   
-
     
296
 
Net securities impairment losses recognized in earnings
   
-
     
(1
)
Other non-interest income
   
46
     
111
 
Total non-interest income
   
4,338
     
2,412
 
Non-interest expenses
               
 Salaries and employee benefits
   
8,582
     
6,052
 
 Occupancy
   
1,715
     
1,405
 
 Depreciation and amortization
   
1,175
     
969
 
 Legal
   
252
     
88
 
 Other real estate owned
   
346
     
585
 
 Advertising
   
245
     
129
 
 Data processing
   
785
     
467
 
 Insurance
   
273
     
206
 
 Professional fees
   
428
     
360
 
 Regulatory assessments and costs
   
329
     
342
 
 Taxes, other
   
236
     
24
 
 Other operating expenses
   
2,438
     
1,716
 
Total non-interest expense
   
16,804
     
12,343
 
Income before benefit for income taxes
   
1,753
     
1,060
 
Benefit for income taxes
   
(34
)
   
(25
)
Net income
 
$
1,787
   
$
1,085
 
Net income per share
               
Basic
 
$
0.03
   
$
0.03
 
Diluted
 
$
0.03
   
$
0.03
 
 
(See notes to consolidated financial statements)
 
 
2



Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2017 and 2016
(Dollars in thousands)
(unaudited)

   
Three Months Ended
March 31,
 
   
2017
   
2016
 
             
Net income
 
$
1,787
   
$
1,085
 
                 
      Other comprehensive income, net of tax
               
          Unrealized gain on securities
          (pre-tax $971, and $3,312 respectively)
   
623
     
2,122
 
                 
Reclassification adjustment for securities gains
(pre-tax $-, and $(296) respectively)
   
-
     
(190
)
                 
          Reclassification adjustment for impairment charge
(pre-tax $-, and $1 respectively)
   
-
     
1
 
Net unrealized gains on securities
   
623
     
1,933
 
                 
          Net unrealized holding losses on securities transferred from available-for-sale to held to maturity:
               
Amortization of net unrealized holding losses during the period
(pre-tax $42, and $58 respectively)
   
27
     
37
 
                 
Total other comprehensive income
   
650
     
1,970
 
                 
Total comprehensive income
 
$
2,437
   
$
3,055
 
                 
 (See notes to consolidated financial statements)




3

 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2017 and 2016
(Dollars in thousands)
(unaudited)
   
Three Months Ended March 31,
 
   
2017
   
2016
 
Cash flows from operating activities
           
Net income
 
$
1,787
   
$
1,085
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
   
-
     
300
 
Write down of other real estate owned
   
110
     
126
 
Depreciation and amortization
   
1,175
     
969
 
Stock based compensation
   
302
     
171
 
Gain on sale and call of investment securities
   
-
     
(296
)
Impairment charges on investment securities
   
-
     
1
 
Amortization of premiums on investment securities
   
676
     
229
 
Accretion of discounts on retained SBA loans
   
(267
)
   
(214
)
Fair value adjustments on SBA servicing assets
   
265
     
70
 
Proceeds from sales of SBA loans originated for sale
   
8,378
     
9,695
 
SBA loans originated for sale
   
(8,881
)
   
(7,192
)
Gains on sales of SBA loans originated for sale
   
(688
)
   
(833
)
Proceeds from sales of mortgage loans originated for sale
   
76,740
     
-
 
Mortgage loans originated for sale
   
(70,507
)
   
-
 
Gains on mortgage loans originated for sale
   
(2,075
)
   
-
 
Amortization of intangible assets
   
26
     
-
 
Amortization of debt issuance costs
   
7
     
7
 
Increase in accrued interest receivable and other assets
   
(1,501
)
   
(552
)
Decrease in accrued interest payable and other liabilities
   
(1,223
)
   
(1,556
)
Net cash provided by operating activities
   
4,324
     
2,010
 
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
   
(909
)
   
(32,856
)
Purchase of investment securities held to maturity
   
-
     
(10,523
)
Proceeds from the sale of securities available for sale
   
-
     
54,715
 
Proceeds from the maturity or call of securities available for sale
   
8,955
     
5,878
 
Proceeds from the maturity or call of securities held to maturity
   
10,352
     
4,100
 
Proceeds from redemption of restricted stock
   
-
     
1,880
 
Net increase in loans
   
(60,878
)
   
(24,140
)
Net proceeds from sale of other real estate owned
   
120
     
76
 
Premises and equipment expenditures
   
(3,061
)
   
(4,391
)
Net cash used in investing activities
   
(45,421
)
   
(5,261
)
                 
Cash flows from financing activities
               
Net proceeds from exercise of stock options
   
292
     
1
 
Net increase in demand, money market and savings deposits
   
47,573
     
95,479
 
Net decrease in time deposits
   
(4,731
)
   
(7,170
)
Decrease in short-term borrowings
   
-
     
(47,000
)
Net cash provided by financing activities
   
43,134
     
41,310
 
                 
Net increase in cash and cash equivalents
   
2,037
     
38,059
 
Cash and cash equivalents, beginning of year
   
34,554
     
27,139
 
Cash and cash equivalents, end of period
 
$
36,591
   
$
65,198
 
                 
Supplemental disclosures
               
Interest paid
 
$
1,992
   
$
1,445
 
Non-cash transfers from loans to other real estate owned
 
$
-
   
$
32
 
Conversion of subordinated debt to common stock
 
$
240
   
$
-
 

(See notes to consolidated financial statements)
 
 
4

 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2017 and 2016
(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, 2017
 
$
573
   
$
253,570
   
$
(27,888
)
 
$
(3,725
)
 
$
(183
)
 
$
(7,294
)
 
$
215,053
 
                                                         
Net income
                   
1,787
                             
1,787
 
Other comprehensive income, net of tax
                                           
650
     
650
 
Stock based compensation
           
302
                                     
302
 
Conversion of subordinated debt to common stock (36,922 shares)
           
240
                                     
240
 
Options exercised (94,800 shares)
   
1
     
291
                                     
292
 
                                                         
Balance March 31, 2017
 
$
574
   
$
254,403
   
$
(26,101
)
 
$
(3,725
)
 
$
(183
)
 
$
(6,644
)
 
$
218,324
 
                                                         
                                                         
Balance January 1, 2016
 
$
384
   
$
152,897
   
$
(32,833
)
 
$
(3,725
)
 
$
(183
)
 
$
(3,165
)
 
$
113,375
 
                                                         
Net income
                   
1,085
                             
1,085
 
Other comprehensive income, net of tax
                                           
1,970
     
1,970
 
Stock based compensation
           
171
                                     
171
 
Options exercised (250
shares)
           
1
                                     
1
 
                                                         
Balance March 31, 2016
 
$
384
   
$
153,069
   
$
(31,748
)
 
$
(3,725
)
 
$
(183
)
 
$
(1,195
)
 
$
116,602
 
                                                         

(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 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC ("Oak Mortgage") 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 month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

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.

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 ("IRLCs")

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 mortgage banking income in non-interest income 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. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price. 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), 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 March 31, 2017, 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 March 31, 2017, the maximum number of shares of common shares issuable under the 2014 Plan was 5.9 million. During the three months ended March 31, 2017, 893,000 options were granted under the 2014 Plan with a weighted average grant date fair value of $3,122,517.
 
 

 
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 the three months ended March 31, 2017 and 2016 are as follows:

   
2017
 
2016
 
Dividend yield(1)
 
0.0%
 
0.0%
 
Expected volatility(2)
 
  45.50% to 50.09%
 
  47.59% to 52.54%
 
Risk-free interest rate(3)
 
1.89% to 2.26%
 
1.23% to 1.82%
 
Expected life(4)
 
5.5 to 7.0 years
 
5.5 to 7.0 years
 
Assumed forfeiture rate(5)
 
6.0%
 
10.0%
 

(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.
(5)  Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period.

During the three months ended March 31, 2017 and 2016, 478,374 options and 470,300 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At March 31, 2017, the intrinsic value of the 3,121,500 options outstanding was $10,534,698, while the intrinsic value of the 1,423,648 exercisable (vested) options was $6,685,120.  At March 31, 2016, the intrinsic value of the 2,491,175 options outstanding was $1,985,387, while the intrinsic value of the 1,236,949 exercisable (vested) options was $1,252,381. During the three months ended March 31, 2017, 94,800 options were exercised with cash received of $291,981 and 9,600 options were forfeited with a weighted average grant date fair value of $43,581. During the three months ended March 31, 2016, 250 options were exercised with cash received of $488 and 6,050 options were forfeited with a weighted average grant date fair value of $0.

Information regarding stock based compensation for the three months ended March 31, 2017 and 2016 is set forth below:

   
2017
   
2016
 
Stock based compensation expense recognized
 
$
302,000
   
$
171,000
 
Number of unvested stock options
   
1,697,852
     
1,254,226
 
Fair value of unvested stock options
 
$
4,583,209
   
$
2,418,303
 
Amount remaining to be recognized as expense
 
$
3,935,014
   
$
1,690,057
 

The remaining unrecognized expense amount of $3,935,014 will be recognized ratably as expense through February 2021.

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 the net income. For the three months ended March 31, 2017 and 2016, 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 months ended March 31, 2017 and 2016 is as follows (in thousands, except per share amounts):

   
Three Months Ended
March 31,
 
   
2017
   
2016
 
             
Net income - basic and diluted
 
$
1,787
   
$
1,085
 
                 
Weighted average shares outstanding
   
56,824
     
37,837
 
                 
Net income per share – basic
 
$
0.03
   
$
0.03
 
                 
Weighted average shares outstanding (including dilutive CSEs)
   
58,048
     
38,269
 
                 
Net income per share – diluted
 
$
0.03
   
$
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.

   
Three Months Ended
March 31,
 
(in thousands)
 
2017
   
2016
 
             
Anti-dilutive securities
           
             
   Share based compensation awards
   
1,897
     
2,059
 
                 
   Convertible securities
   
1,625
     
1,662
 
                 
      Total anti-dilutive securities
   
3,522
     
3,721
 

During the three months ended March 31, 2017, $240,000 of subordinated debt was converted to 36,922 shares of Company common stock.

Recent Accounting Pronouncements

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 was 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 expects that the most significant impact related to the standard's expected disclosure requirements will be the disaggregation of revenue. 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 has evaluated this ASU and it does not have a significant impact on its 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 has evaluated this ASU and it does not 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 Republic 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 landlord 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. After evaluating the impact of the pending adoption of the new standard on its consolidated financial statements, the Company expects an increase of assets and liabilities on the Company's books.

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 was effective January 1, 2017. It currently does not have a material impact on the financial statements, however depending upon the exercise timing of share based awards, the ASU could have a material impact on the financial statements going forward.
 
 
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.

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.

ASU-2017-01

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). The ASU clarifies the definition of a business in ASC 805. The FASB issued the ASU in response to stakeholder feedback that the definition of a business in ASC 805 is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. Concerns about the definition of a business were among the primary issues raised in connection with the Financial Accounting Foundation's post-implementation review report on FASB Statement No. 141(R), Business Combinations (codified in ASC 805). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. For all other entities, the ASU is effective in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The ASU must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company has not yet determined the impact the adoption of ASU 2017-01 will have on the consolidated financial statements.

ASU 2017-04

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test For Goodwill Impairment. The ASU simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if "the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit." For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2017-04 will have on the consolidated financial statements.
 
 
 
12

 

ASU 2017-08

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has not yet determined the impact the adoption of ASU 2017-08 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.


 
 
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 March 31, 2017 and December 31, 2016 is as follows:

   
At March 31, 2017
 
 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
 
$
222,278
   
$
99
   
$
(4,761
)
 
$
217,616
 
Agency mortgage-backed securities
   
37,273
     
24
     
(1,267
)
   
36,030
 
Municipal securities
   
27,727
     
255
     
(342
)
   
27,640
 
Corporate bonds
   
66,698
     
98
     
(2,515
)
   
64,281
 
Asset-backed securities
   
14,975
     
-
     
(175
)
   
14,800
 
Trust preferred securities
   
3,063
     
-
     
(1,102
)
   
1,961
 
Total securities available for sale
 
$
372,014
   
$
476
   
$
(10,162
)
 
$
362,328
 
                                 
U.S. Government agencies
 
$
97,177
   
$
31
   
$
(2,430
)
 
$
94,778
 
Collateralized mortgage obligations
   
196,461
     
644
     
(2,788
)
   
194,317
 
Agency mortgage-backed securities
   
127,192
     
-
     
(3,608
)
   
123,584
 
Other securities
   
1,020
     
-
     
-
     
1,020
 
Total securities held to maturity
 
$
421,850
   
$
675
   
$
(8,826
)
 
$
413,699
 


   
At December 31, 2016
 
 
 
(dollars in thousands)
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
 
$
230,252
   
$
145
   
$
(5,632
)
 
$
224,765
 
Agency mortgage-backed securities
   
37,973
     
32
     
(1,295
)
   
36,710
 
Municipal securities
   
26,825
     
151
     
(429
)
   
26,547
 
Corporate bonds
   
66,718
     
8
     
(1,978
)
   
64,748
 
Asset-backed securities
   
15,565
     
-
     
(416
)
   
15,149
 
Trust preferred securities
   
3,063
     
-
     
(1,243
)
   
1,820
 
Total securities available for sale
 
$
380,396
   
$
336
   
$
(10,993
)
 
$
369,739
 
                                 
U.S. Government agencies
 
$
98,538
   
$
8
   
$
(2,238
)
 
$
96,308
 
Collateralized mortgage obligations
   
202,990
     
793
     
(2,553
)
   
201,230
 
Agency mortgage-backed securities
   
129,951
     
1
     
(3,327
)
   
126,625
 
Other securities
   
1,020
     
-
     
-
     
1,020
 
Total securities held to maturity
 
$
432,499
   
$
802
   
$
(8,118
)
 
$
425,183
 





14


 
The following table presents investment securities by stated maturity at March 31, 2017. 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
 
$
650
   
$
651
   
$
-
   
$
-
 
After 1 year to 5 years
   
13,088
     
13,247
     
4,408
     
4,376
 
After 5 years to 10 years
   
73,254
     
70,702
     
93,789
     
91,422
 
After 10 years
   
25,471
     
24,082
     
-
     
-
 
Collateralized mortgage obligations
   
222,278
     
217,616
     
196,461
     
194,317
 
Agency mortgage-backed securities
   
37,273
     
36,030
     
127,192
     
123,584
 
Total
 
$
372,014
   
$
362,328
   
$
421,850
   
$
413,699
 

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 March 31, 2017 and December 31, 2016.  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.

There were no impairment charges (credit losses) on trust preferred securities for the three months ended March 31, 2017 and $1,000 was recorded for the three months ended March 31, 2016.

 
15

 

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at March 31, 2017 and 2016 for which a portion of OTTI, as applicable, was recognized in other comprehensive income:
(dollars in thousands)
 
2017
   
2016
 
             
Beginning Balance, January 1st
 
$
937
   
$
930
 
Additional credit-related impairment loss on securities for which an other-than-temporary impairment was previously recognized
    -       1  
Ending Balance, March 31st
 
$
937
   
$
931
 
 

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

   
At March 31, 2017
 
   
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
 
$
194,126
   
$
4,512
   
$
7,264
   
$
249
   
$
201,390
   
$
4,761
 
Agency mortgage-backed securities
   
32,174
     
1,231
     
2,973
     
36
     
35,147
     
1,267
 
Municipal securities
   
9,598
     
342
     
-
     
-
     
9,598
     
342
 
Corporate bonds
   
19,546
     
454
     
35,934
     
2,061
     
55,480
     
2,515
 
Asset backed securities
   
-
     
-
     
14,800
     
175
     
14,800
     
175
 
Trust preferred securities
   
-
     
-
     
1,961
     
1,102
     
1,961
     
1,102
 
Total Available for Sale
 
$
255,444
   
$
6,539
   
$
62,932
   
$
3,623
   
$
318,376
   
$
10,162
 

   
At March 31, 2017
 
   
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
   
$
86,540
   
$
2,398
   
$
3,355
   
$
32
   
$
89,895
   
$
2,430
 
Collateralized mortgage obligations
     
124,180
     
2,356
     
20,325
     
432
     
144,505
     
2,788
 
Agency mortgage-backed securities
     
123,584
     
3,608
     
-
     
-
     
123,584
     
3,608
 
Total Held to Maturity
   
$
334,304
   
$
8,362
   
$
23,680
   
$
464
   
$
357,984
   
$
8,826
 

   
At December 31, 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
 
$
192,308
   
$
5,380
   
$
7,579
   
$
252
   
$
199,887
   
$
5,632
 
Agency mortgage-backed securities
   
29,916
     
1,260
     
3,199
     
35
     
33,115
     
1,295
 
Municipal securities
   
15,414
     
429
     
-
     
-
     
15,414
     
429
 
Corporate bonds
   
32,257
     
1,708
     
10,726
     
270
     
42,983
     
1,978
 
Asset backed securities
   
-
     
-
     
15,149
     
416
     
15,149
     
416
 
Trust preferred securities
   
-
     
-
     
1,820
     
1,243
     
1,820
     
1,243
 
Total Available for Sale
 
$
269,895
   
$
8,777
   
$
38,473
   
$
2,216
   
$
308,368
   
$
10,993
 

 
At December 31, 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
 
$
67,725
   
$
2,198
   
$
3,586
   
$
40
   
$
71,311
   
$
2,238
 
Collateralized mortgage obligations
   
108,974
     
2,469
     
8,572
     
84
     
117,546
     
2,553
 
Agency mortgage-backed securities
   
97,725
     
3,327
     
-
     
-
     
97,725
     
3,327
 
Total Held to Maturity
 
$
274,424
   
$
7,994
   
$
12,158
   
$
124
   
$
286,582
   
$
8,118
 
 
 
16

 
 
Unrealized losses on securities in the investment portfolio amounted to $19.0 million with a total fair value of $676.4 million as of March 31, 2017 compared to unrealized losses of $19.1 million with a total fair value of $595.0 million as of December 31, 2016.  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 ten U.S. Government agency securities, fifty-five collateralized mortgage obligations and twenty-three agency mortgage-backed securities that were in an unrealized loss position at March 31, 2017. 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 March 31, 2017.

       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 March 31, 2017, the investment portfolio included fifteen municipal securities that were in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of credit deterioration.

       At March 31, 2017, 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 March 31, 2017, the investment portfolio included seven 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 March 31, 2017.

(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
2018 and beyond
   
Cumulative OTTI Life to Date
 
TPREF Funding II
Class B Notes
 
$
725
   
$
428
   
$
(297
)
   
C
 
   
19
     
29
%
   
0.41
%
 
$
274
 
TPREF Funding III
Class B2 Notes
   
1,518
     
956
     
(562
)
   
C
 
   
15
     
28
     
0.42
     
483
 
ALESCO Preferred
Funding V
Class C1 Notes
   
820
     
577
     
(243
)
   
C
 
   
40
     
15
     
0.43
     
180
 
Total
   
$
3,063
   
$
1,961
   
$
(1,102
)
           
74
     
24
%
         
$
937
 

No securities were sold during the three months ended March 31, 2017. During the three months ended March 31, 2016, the proceeds from the sale of investment securities were $54.7 million. Gross gains of $320,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to the net gains for the three months ended March 31, 2016 was $106,000.
 
 
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 March 31, 2017 and December 31, 2016:

(dollars in thousands)
 
March 31, 2017
   
December 31, 2016
 
             
Commercial real estate
 
$
394,840
   
$
378,519
 
Construction and land development
   
78,636
     
61,453
 
Commercial and industrial
   
188,873
     
174,744
 
Owner occupied real estate
   
273,996
     
276,986
 
Consumer and other
   
67,402
     
63,660
 
Residential mortgage
   
22,652
     
9,682
 
Total loans receivable
   
1,026,399
     
965,044
 
Deferred costs (fees)
   
(256
)
   
(72
)
Allowance for loan losses
   
(9,181
)
   
(9,155
)
Net loans receivable
 
$
1,016,962
   
$
955,817
 

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.

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2017 and 2016:

 
 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial
and Industrial
   
Owner Occupied Real Estate
   
Consumer
and Other
   
Residential Mortgage
   
Unallocated
   
Total
 
                                             
Three months ended March 31, 2017
                                           
Allowance for loan losses:
                                           
                                                 
Beginning balance:
 
$
3,254
   
$
557
   
$
2,884
   
$
1,382
   
$
588
   
$
58
   
$
432
   
$
9,155
 
Charge-offs
   
-
     
-
     
-
     
(8
)
   
(2
)
   
-
     
-
     
(10
)
Recoveries
   
7
     
-
     
29
     
-
     
-
     
-
     
-
     
36
 
Provisions (credits)
   
(299
)
   
(11
)
   
(143
)
   
253
     
(11
)
   
72
     
139
     
-
 
Ending balance
 
$
2,962
   
$
546
   
$
2,770
   
$
1,627
   
$
575
   
$
130
   
$
571
   
$
9,181
 
                                                                 
Three months ended March 31, 2016
                                                         
Allowance for loan losses:
                                                         
                                                                 
Beginning balance:
 
$
2,393
   
$
338
   
$
2,932
   
$
2,030
   
$
295
   
$
14
   
$
701
   
$
8,703
 
Charge-offs
   
-
     
-
     
(18
)
   
(28
)
   
-
     
-
     
-
     
(46
)
Recoveries
   
-
     
-
     
72
     
-
     
-
     
-
     
-
     
72
 
Provisions (credits)
   
(348
)
   
76
     
(44
)
   
89
     
17
     
(3
)
   
513
     
300
 
Ending balance
 
$
2,045
   
$
414
   
$
2,942
   
$
2,091
   
$
312
   
$
11
   
$
1,214
   
$
9,029
 
 
 
 
18

 
 
The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of March 31, 2017 and December 31, 2016:

 
 
(dollars in thousands)
Commercial
Real Estate
 
Construction
and Land Development
 
Commercial
and
Industrial
 
Owner
Occupied Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                                 
March 31, 2017
                               
                                 
Allowance for loan losses:
                               
                                                 
Individually evaluated for impairment
 
$
1,305
   
$
-
   
$
1,758
   
$
297
   
$
262
   
$
-
   
$
-
   
$
3,622
 
Collectively evaluated for impairment
   
1,657
     
546
     
1,012
     
1,330
     
313
     
130
     
571
     
5,559
 
Total allowance for loan losses
 
$
2,962
   
$
546
   
$
2,770
   
$
1,627
   
$
575
   
$
130
   
$
571
   
$
9,181
 
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
 
$
18,854
   
$
-
   
$
5,287
   
$
3,475
   
$
1,272
   
$
-
   
$
-
   
$
28,888
 
Loans evaluated collectively
   
375,986
     
78,636
     
183,586
     
270,521
     
66,130
     
22,652
     
-
     
997,511
 
Total loans receivable
 
$
394,840
   
$
78,636
   
$
188,873
   
$
273,996
   
$
67,402
   
$
22,652
   
$
-
   
$
1,026,399
 

 
 
(dollars in thousands)
Commercial
Real Estate
 
Construction
and Land Development
 
Commercial
and
Industrial
 
Owner
Occupied Real Estate
 
Consumer
and Other
 
Residential Mortgage
 
Unallocated
 
Total
 
                                 
December 31, 2016
                               
                                 
Allowance for loan losses:
                               
                                                 
Individually evaluated for impairment
 
$
1,277
   
$
-
   
$
1,624
   
$
274
   
$
293
   
$
-
   
$
-
   
$
3,468
 
Collectively evaluated for impairment
   
1,977
     
557
     
1,260
     
1,108
     
295
     
58
     
432
     
5,687
 
Total allowance for loan losses
 
$
3,254
   
$
557
   
$
2,884
   
$
1,382
   
$
588
   
$
58
   
$
432
   
$
9,155
 
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
 
$
19,245
   
$
-
   
$
5,180
   
$
2,325
   
$
1,290
   
$
130
   
$
-
   
$
28,170
 
Loans evaluated collectively
   
359,274
     
61,453
     
169,564
     
274,661
     
62,370
     
9,552
     
-
     
936,874
 
Total loans receivable
 
$
378,519
   
$
61,453
   
$
174,744
   
$
276,986
   
$
63,660
   
$
9,682
   
$
-
   
$
965,044
 




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 March 31, 2017 and December 31, 2016:

   
March 31, 2017
   
December 31, 2016
 
 
 
(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
 
$
12,234
   
$
12,235
   
$
-
   
$
12,347
   
$
12,348
   
$
-
 
Construction and land development
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
1,907
     
3,067
     
-
     
1,955
     
3,111
     
-
 
Owner occupied real estate
   
1,631
     
1,742
     
-
     
621
     
733
     
-
 
Consumer and other
   
817
     
1,115
     
-
     
687
     
976
     
-
 
Residential mortgage
   
-
     
-
     
-
     
130
     
130
     
-
 
Total
 
$
16,589
   
$
18,159
   
$
-
   
$
15,740
   
$
17,298
   
$
-
 

With an allowance recorded:
                                   
Commercial real estate
 
$
6,620
   
$
6,634
   
$
1,305
   
$
6,898
   
$
6,912
   
$
1,277
 
Construction and land development
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial and industrial
   
3,380
     
6,047
     
1,758
     
3,225
     
5,892
     
1,624
 
Owner occupied real estate
   
1,844
     
1,844
     
297
     
1,704
     
1,704
     
274
 
Consumer and other
   
455
     
481
     
262
     
603
     
627
     
293
 
Residential mortgage
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
12,299
   
$
15,006
   
$
3,622
   
$