REPUBLIC FIRST BANCORP INC - Annual Report: 2016 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

(Mark One)

[ X ]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 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

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code 215-735-4422

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  [  ]   NO    [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES [  ]  NO [X]

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.   YES  [X]     NO  [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

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. (Check one)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  [  ]    NO   [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $139,107,302 based on the last sale price on Nasdaq Global Market on June 30, 2016.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Definitive Proxy Statement for its 2017 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year ended December 31, 2016, are incorporated by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit Committee Report and any other information in such proxy statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein by reference or filed as a part of this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

Item 1:  Business

Throughout this Annual Report on Form 10-K, the registrant, Republic First Bancorp, Inc., is referred to as the "Company" or as "we," "our" or "us". The Company's website address is www.myrepublicbank.com. The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed by the Company with the United States Securities and Exchange Commission ("SEC") are available free of charge on the Company's website under the Investor Relations menu. Such documents are available on the Company's website as soon as reasonably practicable after they have been filed electronically with the SEC.

 

Forward Looking Statements

 

This document contains "forward-looking statements," as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995.  These statements can be identified by reference to a future period or periods or by the use of words such as "would be," "could be," "should be," "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions.  These forward-looking statements include, among others:  statements of goals, intentions and expectations, statements regarding the impact of accounting pronouncements, statements regarding prospects and business strategy, statements regarding allowance for loan losses, asset quality and market risk and estimates of future costs, benefits and results.

 

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  For example, and in addition to the "Risk Factors" discussed elsewhere in this Form 10-K, risks and uncertainties can arise with changes in or related to:

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general economic conditions, including turmoil in the financial markets and related efforts of government agencies to stabilize the financial system;

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the adequacy of our allowance for loan losses and our methodology for determining such allowance;

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adverse changes in our loan portfolio and credit risk-related losses and expenses;

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concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area;

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changes in interest rates;

·

business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items;

·

deposit flows;

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loan demand;

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the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;

 

 

 

 

·

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

·

our securities portfolio and the valuation of our securities;

·

accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

·

rapidly changing technology;

·

litigation liabilities, including costs, expenses, settlements and judgments; and

·

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's beliefs only as of the date hereof.  Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.  Significant factors which could have an adverse effect on the operations and future prospects of the Company are detailed in the "Risk Factors" section included under Item 1A of Part I of this Annual Report on Form 10-K.  Readers should carefully review the risk factors included in this Annual Report on Form 10-K and in other documents the Company files from time to time with the SEC.

General

Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank, and we may refer to as Republic or the Bank throughout this document.  Republic offers a variety of credit and depository banking services. Such services are offered to individuals and businesses primarily in the Greater Philadelphia and Southern New Jersey area through their offices and branches in Philadelphia, Montgomery, and Delaware Counties in Pennsylvania and Camden, Burlington, and Gloucester Counties in New Jersey.

  

Historically, our primary objective had been to position ourselves as an alternative to the large financial institutions for commercial banking services in the Greater Philadelphia and Southern New Jersey region.  However, in 2008, we made an important and strategic shift in our business approach, redirecting our efforts toward the creation of a major retail bank that would meet an important need in our existing marketplace. Focused on delivering high levels of customer service and satisfaction, driving innovation, developing a bold brand and creating shareholder value, Republic Bank sought to offer a banking experience that would turn customers into Fans.  As other banks began to turn toward automation for growth, Republic Bank took a different approach and chose not only to embrace advances in technology, but to also define itself by the personal touch.

To achieve such a transformation, we recruited several key banking executives who had previously served in leadership roles at Commerce Bank, upon which this business model draws inspiration.  With a strong management team in place, along with adequate capital resources to support this revitalized vision, we began to build a unique brand with the goal of establishing ourselves as a premier financial institution in the Philadelphia metropolitan area.

 

 

 

An important part of that strategic shift toward creating a retail and customer focused bank was the decision in 2010 to rebrand our stores from Republic First Bank to Republic Bank, which had been the name under which we had initially incorporated and operated from 1988-1996.  In support of that rebrand, we also renovated and remodeled the majority of our existing branches which refer to and operate as stores.  Further, we embraced critical service changes that reframed the Republic Bank brand and experience in the eyes of the consumer to include expanded hours, absolutely free checking, free coin counting, no ATM surcharges, mobile banking and much more.

On the lending side, we also shifted away from our historic approach, which was primarily focused on business banking and isolated commercial lending transactions, in particular commercial real estate loans.  While restructuring our loan portfolio and deemphasizing the origination of commercial real estate loans, we also undertook a detailed review of our more significant credit relationships.  This review allowed us to reduce exposure, enhance our allowance for loan loss methodology and commit to originate fewer commercial real estate loans in an effort to reduce our credit concentrations in that particular category.

In December 2011, we completed the sale of several distressed commercial real estate loans and foreclosed properties to a single investor.  This transaction dramatically reduced our non-performing asset balances and significantly improved our credit quality metrics. This loan sale was a cornerstone transaction in the transformation of Republic Bank.

With these significant changes implemented, Republic Bank was then well-positioned to execute an aggressive expansion plan which was given the title, "The Power of Red is Back."  To support this growth strategy, we completed the sale of $45 million of common stock through a private placement offering in April 2014 which provided the necessary capital to implement our aggressive expansion plan.

Since its inception, the expansion plan has produced strong results and continues to build momentum. Over the last three years we have opened eight new stores using our signature glass building. During 2016, we expanded our store network in Southern New Jersey by opening new locations in Washington Township and Moorestown. We also relocated an existing store to an improved site in Wynnewood, PA in 2016.  There are several other locations in various stages of approval and development for future openings.

During 2016 we also expanded our product offerings through the addition of a residential mortgage lending team. We entered into an agreement to acquire Oak Mortgage Company. The transaction closed in July 2016 and Oak Mortgage became a wholly owned subsidiary of the Bank. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida providing our customers with new opportunities in the residential lending market. The Oak Mortgage team is a tremendous fit for Republic's commitment to extraordinary customer service and has proven to be a perfect complement to the Bank's network of store locations.

To strengthen our capital position and prepare for the next stage of growth and expansion, we completed a capital raise in the amount of $100 million through a registered direct offering of our common stock in December 2016. At the same time, Vernon W. Hill, II became a member of the Board of Directors and was appointed Chairman of Republic First Bancorp, Inc. He has been a major investor and consultant to Republic since 2008. Mr. Hill is often credited with reinventing the concept of Retail Banking. He was the Founder and Chairman of Commerce Bancorp, a $50 billion Retail Bank headquartered in metro Philadelphia, which grew to 450 locations along the east coast before its sale in 2007. He is also the Founder and Chairman of Metro Bank (UK), which is the first new Retail high street bank opened in Britain since 1840 and in just six years has grown to more than $12 billion in assets and 48 locations.

 

 

 

 

As of December 31, 2016, the Company had total assets of approximately $1.9 billion, total shareholders' equity of approximately $215.1 million, total deposits of approximately $1.7 billion, net loans receivable of approximately $955.8 million, and net income of $4.9 million. We have 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. We provide banking services through the Bank, and do not presently engage in any activities other than traditional banking activities.

Republic Bank

 

  Republic is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania, and is subject to examination and comprehensive regulation by the Federal Deposit Insurance Corporation (FDIC) and the Pennsylvania Department of Banking and Securities.  The deposits held by the Bank are insured, up to applicable limits, by the Deposit Insurance Fund of the FDIC.

Service Area / Market Overview

 

Our primary service area consists of Greater Philadelphia and Southern New Jersey.  We presently conduct our principal banking activities through nineteen branch locations which are commonly referred to as "stores" throughout this document to reflect our retail oriented approach to customer service and convenience.  Eleven of these stores are located in Philadelphia and the surrounding suburbs of Plymouth Meeting, Bala Cynwyd, Wynnewood, Abington, and Media in Pennsylvania.  There are also eight stores located in the Southern New Jersey market in Haddonfield, Cherry Hill, Voorhees, Glassboro, Marlton, Berlin, Washington Township, and Moorestown. Our commercial lending activities extend beyond our primary service area, to include other counties in Pennsylvania and New Jersey, as well as parts of Delaware, Maryland, New York and other out-of-market opportunities. Our residential lending activities also extend outside of our primary service area, to include other counties in Pennsylvania and New Jersey, as well as Delaware and Florida through our subsidiary Oak Mortgage.

Competition

We face substantial competition from other financial institutions in our service area.  Competitors include Wells Fargo, BB&T, Citizens, PNC, Santander, TD Bank and Bank of America, as well as many local community banks.  In addition, we compete directly with savings banks, savings and loan associations, finance companies, credit unions, mortgage brokers, insurance companies, securities brokerage firms, mutual funds, money market funds, private lenders and other institutions for deposits, commercial loans, mortgages and consumer loans, as well as other services.  Competition among financial institutions is based upon a number of factors, including the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of banking facilities, locations and hours of operation and, in the case of loans to larger commercial borrowers, applicable lending limits.  Many of the financial institutions with which we compete have greater financial resources than we do, and offer a wider range of deposit and lending products.

 

Our legal lending limit to one borrower was approximately $27.0 million at December 31, 2016.  Loans above this amount may be made if the excess over the lending limit is participated to other institutions.  We are subject to potential intensified competition from new branches of established banks in the area as well as new banks that could open in our market area.  There are banks and other financial institutions, which serve surrounding areas, and additional out-of-state financial institutions, which currently, or in the future, may compete in our market. We compete to attract deposits and loan applications both from customers of existing institutions and from customers new to our market and we anticipate a continued increase in competition in our service area.

 

 

 

 

 

We believe that an attractive niche exists serving small to medium sized business customers not adequately served by our larger competitors, and we will seek opportunities to build commercial relationships to complement our retail strategy.  We believe small to medium-sized businesses will continue to respond in a positive manner to the attentive and highly personalized service we provide.

Products and Services

 

We offer a range of competitively priced banking products and services, including consumer and commercial deposit accounts, checking accounts, interest-bearing demand accounts, money market accounts, certificates of deposit, savings accounts, sweep accounts, lockbox services and individual retirement accounts (and other traditional banking services), secured and unsecured commercial loans, real estate loans, construction and land development loans, automobile loans, home improvement loans, mortgages, home equity and overdraft lines of credit, and other products.  We attempt to offer a high level of personalized service to both our retail and commercial customers.

 

We also maintain a Small Business Lending team that specializes in the origination of loans guaranteed by the U.S. Small Business Administration ("SBA") to provide much needed credit to small businesses throughout our service area.  This team has developed into one of the top lenders under the SBA program in our region.  For the last several years they have been ranked as one of the top SBA lenders in the tri-state market of Pennsylvania, New Jersey and Delaware based on the dollar volume of loan originations.

We are members of the STAR™ and PLUS™ automated teller (ATM) networks, and Allpoint - America's Largest Surcharge Free ATM Network which enable us to provide our customers with free access to more than 55,000 ATMs worldwide. We currently have nineteen proprietary ATMs located in our store network.

Our lending activities generally are focused on small and medium sized businesses within the communities that we serve. Commercial real estate loans represent the largest category within our loan portfolio, amounting to approximately 39% of total loans outstanding at December 31, 2016.  Repayment of these loans is, in part, dependent on general economic conditions affecting our customers and various businesses within the community.  As a commercial lender, we are subject to credit risk. Economic and financial conditions could have an adverse effect on the ability of our borrowers to repay their loans. To manage the challenges that the economic environment may present we have adopted a conservative loan classification system, continually review and enhance our allowance for loan loss methodology, and perform a comprehensive review of our loan portfolio on a regular basis.  

With the addition of Oak Mortgage Company in 2016, we are now able to offer residential mortgage loan products to customers in Pennsylvania, New Jersey, Delaware, and Florida. A majority of the residential loans originated are currently sold on the secondary market shortly after closing. Oak Mortgage follows the established underwriting policies and guidelines of third party vendors with whom loans are being sold to maintain compliance, but credit risk still exists in the portfolio. Repayment of residential loans held in the portfolio is, in part, dependent on general economic conditions affecting our customers.  

Although management follows established underwriting policies and closely monitors loans through Republic's loan review officer, credit risk is still inherent in the portfolio.  The majority of Republic's loan portfolio is collateralized with real estate or other collateral; however, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing.  Republic makes both fixed and variable rate commercial loans with terms typically ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest.

 

 

 

Store Expansion Plans and Growth Strategy

 

We will carefully evaluate growth opportunities throughout 2017 and beyond.  Renovation and refurbishment of all existing store locations took place during 2009.  The Bank relocated an existing store to a new improved site in Wynnewood, PA during 2016. We also opened two new stores located in Washington Township and Moorestown, NJ utilizing our new and distinctive prototype building in 2016. The Bank anticipates the continuation of its expansion strategy through the opening of additional new stores in 2017. Relocation of other existing store locations may also occur in the future as we continue to enhance our brand and focus on constantly improving the customer experience. The opening and relocation of these stores is subject to regulatory approval.

The addition of Oak Mortgage as a wholly owned subsidiary in July 2016 provides us with new growth opportunities in the residential lending market. Oak Mortgage is licensed to do business in Pennsylvania, New Jersey, Delaware, and Florida and gives us the ability to serve both new and existing customers throughout our store network.

Securities Portfolio 

We maintain an investment securities portfolio.  We purchase investment securities that are in compliance with our investment policies, which are approved annually by our Board of Directors.  The investment policies address such issues as permissible investment categories, credit quality, maturities and concentrations.  At December 31, 2016 and 2015, approximately 86% and 78%, respectively, of the aggregate dollar amount of the investment securities consisted of either U.S. government debt securities or U.S. government agency issued mortgage-backed securities.  Credit risk associated with these U.S. government debt securities and the U.S. government agency securities is minimal, with risk-based capital weighting factors of 0% and 20%, respectively.  The remainder of the securities portfolio consists of municipal securities, pooled trust preferred securities, corporate bonds, asset-backed securities, and Federal Home Loan Bank (FHLB) capital stock.

Supervision and Regulation

 

General

Republic, as a Pennsylvania state chartered bank, is not a member of the Federal Reserve System ("Federal Reserve") and is subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking and Securities. Our bank holding company is subject to supervision and regulation by the Board of Governors of the Federal Reserve under the Federal Bank Holding Company Act of 1956, as amended ("BHC Act").  As a bank holding company, our activities and those of Republic are limited to the business of banking and activities closely related or incidental to banking, and we may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve.

 

We are subject to extensive requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various federal and state consumer laws and regulations also affect the operations of Republic. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve attempting to control the money supply and credit availability in order to influence market interest rates and the national economy.   

 

 

 

The following discussion summarizes certain banking laws and regulations that affect us and Republic.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act").  The Dodd-Frank Act has had a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector.  Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC.  A summary of certain provisions of the Dodd-Frank Act is set forth below.

 

 

 

 

 

 

Many of the requirements of the Dodd-Frank Act will be implemented over time, and most are subject to implementing regulations that have or will become effective over the course of several years.  Given the complexity associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies through regulations, the full extent of the impact such requirements will have on financial institutions' operations is unclear.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

On February 3, 2017, President Trump signed an executive order calling for the Secretary of Treasury, in consultation with the heads of the member agencies of the Financial Stability Oversight Council,  to review existing U.S. financial laws and regulations, including the Dodd-Frank Act, in order to determine whether they promote a set of "core principles" of financial policy. The core financial principles identified in the executive order include the following: empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; preventing taxpayer-funded bailouts; fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; enabling American companies to be competitive with foreign firms in domestic and foreign markets; advancing American interests in international financial regulatory negotiations and meetings; making regulation efficient, effective and appropriately tailored; and restoring public accountability within Federal financial regulatory agencies and rationalizing the Federal financial regulatory framework.  The executive order does not specifically identify any existing laws or regulations considered to be inconsistent with the core principles.  There can be no assurance that any changes to existing law or regulation will be implemented as a result of the executive order or, if implemented, the extent to which such changes may impact our business, financial condition or results of operations.

Gramm-Leach-Bliley Act

 

The federal Gramm-Leach-Bliley Act (the "GLB Act"), enacted in 1999 repealed the key provisions of the Glass Steagall Act so as to permit commercial banks to affiliate with investment banks (securities firms); amended the BHC Act to permit qualifying bank holding companies to engage in many types of financial activities that were not permitted for banks themselves; and permitted subsidiaries of banks to engage in a broad range of financial activities that were not permitted for banks themselves.

 

The result was to permit banking companies to offer a wider range of financial products and services to combine with other types of financial companies, such as securities and insurance companies. The impact of the GLB Act has, however, now been substantially limited by the Dodd-Frank Act and regulations issued by the Federal Reserve thereunder, specifically the so-called "Volcker Rule," which will limit the ability of banks and their affiliates to invest in, or to engage in, non-banking activities for their own account.

 The GLB Act created a new type of bank holding company called a "financial holding company" ("FHC").  An FHC is authorized to engage in any activity that is "financial in nature or incidental to financial activities" and any activity that the Federal Reserve determines is "complementary to financial activities" and does not pose undue risks to the financial system.  Among other things, "financial in nature" activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities.  A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is "well capitalized," "well managed," and has a rating under the Community Reinvestment Act ("CRA") of "satisfactory" or better.  A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC.  We have not elected to become an FHC.  Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those previously permitted by law and regulation.

 

 

 

 

In addition, the GLB Act provided significant new protections for the privacy of customer information.  These provisions apply to any company the business of which is engaging in activities permitted for an FHC, even if it is not itself an FHC.  The GLB Act subjected a financial institution to four new requirements regarding non-public information about a customer.  The financial institution must: adopt and disclose a privacy policy; give customers the right to "opt out" of disclosures to non-affiliated parties; not disclose any information to third party marketers; and follow regulatory standards to protect the security and confidentiality of customer information.

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as us, with equity or debt securities registered under the Exchange Act. Among other things, Sarbanes-Oxley and its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, and expanded the disclosure requirements for our corporate insiders. The requirements are intended to allow shareholders to more easily and efficiently monitor the performance of companies and directors.

Regulatory Restrictions on Dividends

  

Dividend payments by Republic to the holding company are subject to the Pennsylvania Banking Code of 1965 ("Banking Code") and the Federal Deposit Insurance Act ("FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under the Banking Code, Republic would be limited to $23.9 million of dividends payable plus an additional amount equal to its net profit for 2017, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios as discussed in "Capital Adequacy".

 

Federal regulatory authorities have adopted standards for the maintenance of adequate levels of regulatory capital by banks. Adherence to such standards further limits the ability of Republic to pay dividends to us.

Dividend Policy

 

We have not paid any cash dividends on our common stock, and have no plans to pay any cash dividends in 2017 or in the foreseeable future.  See Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information.

 

 

 

Deposit Insurance and Assessments

The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The deposits of Republic are insured up to applicable limits per insured depositor by the FDIC. As noted above, pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increased to $250,000.

As an FDIC-insured bank, Republic is subject to FDIC insurance assessments.  The FDIC regulations assess insurance premiums for small insured depository institutions based on a risk-based assessment system.  Under this assessment system, the FDIC evaluates the risk of each financial institution based on regulatory capital ratios and other supervisory factors. The rules base assessments on an institution's average consolidated total assets less its average tangible equity, as opposed to total deposits.  The base assessment rates for small insured depository institutions range from 2.5 to 9 basis points for the least risky institutions to 30 to 45 basis points for the riskiest.  The rate schedules will automatically adjust in the future as the Deposit Insurance Fund ("DIF") reserve ratio reaches certain milestones.

The FDIC has authority to increase insurance assessments.  Any future increase in insurance premiums may adversely affect our results of operations.

The Dodd-Frank Act also requires the FDIC to take such steps as are necessary to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020. The FDIC has issued rules regarding the method to be used to achieve a 1.35% reserve ratio by 2020 and offset the effect on institutions with assets less than $10 billion in assets.

All FDIC-insured depository institutions pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board.  The bonds, commonly referred to as Financing Corporation ("FICO") bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. These assessments will continue until the FICO bonds mature in 2017 through 2019.

Capital Adequacy

The Federal Reserve has issued risk-based and leverage capital rules applicable to U.S. banking organizations such as the Company and Republic.  These guidelines are intended to reflect the relationship between the banking organization's capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items.  The Federal Reserve may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization's financial condition or actual or anticipated growth.

The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain.  Common equity Tier 1 capital generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions.  Tier 1 capital for banks and bank holding companies generally consists of the sum of common equity Tier 1 elements, non-cumulative perpetual preferred stock, and related surplus in certain cases and subject to limitations, minority interests in consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions.  Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses.  The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital.  Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations.  However, the Federal Reserve's capital rule applicable to bank holding companies permanently grandfathers non-qualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limit of 25% of Tier 1 capital.  In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, we were permitted to make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. We have made this election.

 

 

 

Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets.  Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk.  Under the Federal Reserve's rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%.  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.  The capital conservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2016 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019).  Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and will be phased-in over a three-year period (beginning at 40% on January 1, 2015, 60% on January 1, 2016 and an additional 20% per year thereafter).

The new capital to risk-adjusted assets requirements (which includes the impact of the capital conservation buffer effective January 1, 2017) are as follows:

Republic is considered "well capitalized" under the FDIC's prompt corrective action rules and the Company is considered "well capitalized" under the Federal Reserve's rules applicable to bank holding companies.

The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. 

Legislative and Regulatory Changes

 

We are heavily regulated by regulatory agencies at the federal and state levels. We, like most of our competitors, have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us as well as the financial services industry in general.

 

 

 

Future Legislative and Regulatory Developments

 

It is conceivable that compliance with current or future legislative and regulatory initiatives could require us to change certain business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations, or financial condition.  We have recently witnessed the introduction of a number of regulatory proposals that could substantially impact us and others in the financial services industry.  The extent of changes imposed by, and frequency of adoption of, any regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources.  The long-term impact of legislative and regulatory initiatives on our business practices and revenues will depend upon the successful implementation of our strategies, consumer behavior, and competitors' responses to such initiatives, all of which are difficult to predict.  Additionally, we may pursue, through appropriate avenues, legislative and regulatory advocacy to provide our input on possible legislative and regulatory developments.

Profitability, Monetary Policy and Economic Conditions

 

In addition to being affected by general economic conditions, the earnings and growth of Republic will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking and Securities, the FDIC, and the Federal Reserve.  An important function of the Federal Reserve is to regulate the supply of money and other credit conditions in order to manage interest rates.  The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  The effects of such policies upon the future business, earnings and growth of Republic cannot be determined.

Employees

As of December 31, 2016, we had a total of 306 full-time equivalent employees.

Item 1A:  Risk Factors

 

In addition to the other information included elsewhere in this report and in "Management's Discussion and Analysis of Results of Operations and Financial Condition," the following factors could significantly affect our business, financial condition, results of operations, or future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, or future prospects.  If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may be materially adversely affected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also materially adversely affect our business, financial condition, results of operations, or future prospects.

We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers.

Our financial condition and results of operations are affected by the ability of our borrowers to repay their loans, and in a timely manner.  Lending money is a significant part of the banking business.  Borrowers, however, do not always repay their loans.  The risk of non-payment is assessed through our underwriting and loan review procedures based on several factors including credit risks of a particular borrower, changes in economic conditions, the duration of the loan, and in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors.  Despite our efforts, we do and will experience loan losses, and our financial condition and results of operations will be adversely affected. Our non-performing assets were approximately $29.1 million at December 31, 2016.  Our allowance for loan losses was approximately $9.2 million at December 31, 2016. Our loans between thirty and eighty-nine days delinquent totaled $1.1 million at December 31, 2016.

 

 

 

Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance.

A substantial portion of our loan portfolio is comprised of commercial real estate loans.  The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration.  Banking regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real estate lending.  In addition, commercial real estate lenders are making greater provisions for loan losses and accumulating higher capital levels as a result of commercial real estate lending exposures.  Additional losses or regulatory requirements related to our commercial real estate loan concentration could materially adversely affect our business, financial condition and results of operations.

Our allowance for loan losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for loan losses and charge off additional loans in the future, which could materially and adversely affect our business.

We attempt to maintain an allowance for loan losses, established through a provision for loan losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio.  If our allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.

The determination of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. Increases in nonperforming loans have a significant impact on our allowance for loan losses.  Our allowance for loan losses may not be adequate to absorb actual loan losses. If trends in the real estate markets were to deteriorate, we could experience increased delinquencies and credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to-four family residential mortgage loans. As a result, we may have to make provisions for loan losses and charge off loans in the future, which could materially adversely affect our financial condition and results of operations. 

In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for loan losses and may require us to increase the provision for loan losses or recognize further loan charge-offs, based on judgments that differ from those of our management.  If loan charge-offs in future periods exceed the allowance for loan losses, we will need to increase our allowance for loan losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan losses. Any increases in our allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows.

 

 

We are required to make significant estimates and assumptions in the preparation of our financial statements, including our allowance for loan losses, and our estimates and assumptions may not be accurate.

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, require our 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 income and expense during the reporting periods.  Critical estimates are made by management in determining, among other things, the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment ("OTTI") of investment securities, fair value of financial instruments, and the realization of deferred income taxes.  If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely affected.

Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio.

In prior years we recorded other-than-temporary impairment charges for certain bank pooled trust preferred securities, and we may be required to record future impairment charges on our investment securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank's ability to pay dividends, which could materially adversely affect us. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as "well-capitalized" for regulatory purposes.

Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.

Our net income depends on the net income of Republic, and Republic is dependent primarily upon its net interest income, which is the difference between the 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.

Our results of operations will be affected by changes in market interest rates and other economic factors beyond our control.  If our interest-earning assets have longer effective maturities than our interest-bearing liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by material and prolonged increases in interest rates, and positively affected by comparable declines in interest rates.  Conversely, if liabilities re-price more slowly than assets, net interest income would be adversely affected by declining interest rates, and positively affected by increasing interest rates.  At any time, our assets and liabilities will reflect interest rate risk of some degree.

In addition to affecting interest income and expense, changes in interest rates also can affect the value of our interest-earning assets, comprising fixed and adjustable-rate instruments, as well as the ability to realize gains from the sale of such assets.  Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse affect on our results of operations.

 

 

We are a holding company dependent for liquidity on payments from our banking subsidiary, which payments are subject to restrictions.

We are a holding company and depend on dividends, distributions and other payments from Republic to fund dividend payments, if any, and to fund all payments on obligations. Republic and its subsidiaries are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to us.  Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments on our obligations or dividend payments, if any.  In addition, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.

Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area.

Our primary service area consists of Greater Philadelphia and Southern New Jersey.  Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area.  Although our customers' businesses and financial interests may extend well beyond this area, adverse economic conditions that affect our primary service area could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally adversely affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations.

Although the U.S. economy has continued to gradually improve from the depressed levels of 2008 and early 2009, economic growth has been slow and uneven.  We are operating in a challenging and uncertain economic environment, including generally uncertain conditions nationally and globally. While economic conditions in the United States have gradually improved, there can be no assurance that these difficult conditions will not re-emerge.

Economic pressure on consumers and businesses and any resulting lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price.  A worsening of current economic conditions would likely exacerbate the adverse effects of market conditions on us and others in the industry.  In particular, we may face the following risks in connection with these events:

·

increased regulation of our industry and  increased compliance costs;

·

hampering our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure, as such assessments are made more complex by these difficult market and economic conditions;

·

increasing our credit risk, by increasing the likelihood that our major customers become insolvent and unable to satisfy their obligations to us;

·

impairing our ability to originate loans, by making our customers and prospective customers less willing to borrow, and making loans that meet our underwriting criteria difficult to find; and

·

limiting our interest income, by depressing the yields we are able to earn on our investment portfolio.

 

 

Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.

As of December 31, 2016, we had approximately $24.0 million of U.S. Federal net operating loss carryforwards, referred to as "NOLs," available to reduce taxable income in future years.

Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the "Code." These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change.

In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 31, 2016 and December 31, 2015. There are no NOLs that could expire if not utilized for the year ending December 31, 2017.

Our assets as of December 31, 2016 included a deferred tax asset and we may not be able to realize the full amount of such asset.

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2016, the net deferred tax asset was approximately $9.2 million, compared to a balance of approximately $6.5 million at December 31, 2015.

We regularly review our deferred tax assets for recoverability to determine whether it is more likely than not (i.e. likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management's evaluation of both positive and negative evidence.

Based on the analysis of the available positive and negative evidence, we determined that a valuation allowance should be recorded as of December 31, 2016. We did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor to project recoverability of the deferred tax asset balance.   We will exclude future taxable income as a factor until we can show increasing and sustainable profitability. The release of this valuation allowance would have a positive impact on future earnings.  There can be no assurance as to when we could be in a position to recapture the benefits of our deferred tax asset.  Further discussion on the analysis of our deferred tax asset can be found in the "Provision (Benefit) for Income Taxes" section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

 

Potential acquisitions may disrupt the Company's business and dilute shareholder value.

We regularly evaluate opportunities to acquire and invest in banks and in other complementary businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity and capital structure. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a purchase transaction, which could dilute current shareholders'ownership interest. These activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not impact cash flow, tangible capital or liquidity but would decrease shareholders' equity.

Our acquisition activities could involve a number of additional risks, including the risks of:

·

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions;

·

using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or its assets;

·

the time and expense required to integrate the operations and personnel of the combined businesses;

·

creating an adverse short-term effect on our results of operations; and

·

losing key employees and customers as a result of an acquisition that is poorly conceived.

We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value.

We may not be able to manage our growth, which may adversely impact our financial results.

As part of our retail growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new stores and acquiring existing stores of other financial institutions.  To the extent that we undertake additional stores openings and acquisitions, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management's time and attention and general disruption to our business.

As part of our retail strategy, we plan to open new stores in our primary service area, including Southern New Jersey.  We may not, however, be able to identify attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to operate new stores.  In addition, the organizational and overhead costs may be greater than we anticipate.  New stores may take longer than expected to reach profitability, or may not become profitable.  The additional costs of starting new stores may adversely impact our financial results.

 

 

Our ability to manage growth successfully will depend on whether we can continue to fund our growth while maintaining cost controls, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends.  If we are not able to control costs, such growth could adversely impact our earnings and financial condition.

Our retail strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.

In recent years, we have been successful in attracting new and talented employees to Republic, to add to our management team.   We believe that our ability to successfully implement our retail strategy will require us to retain and attract additional management experienced in banking and financial services, and familiar with the communities in our market.  Our ability to retain executive officers, the current management team, branch managers and loan officers of Republic will continue to be important to the successful implementation of our strategy.  It is also critical, as we grow, to be able to attract and retain additional members of the management team and qualified loan officers with the appropriate level of experience and knowledge about our market areas to implement the community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

We are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which could have an adverse impact on our operations and could restrict the scope of our operations.

Both the Company and Republic operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the FDIC and the Pennsylvania Department of Banking and Securities ("PDB"). We are subject to federal and state regulations governing virtually all aspects of our activities, including lines of business, capital, liquidity, investments, payment of dividends, and others. Regulations that apply to us are generally intended to provide protection for depositors and customers rather than investors.

We are subject to extensive regulation and supervision under federal and state laws and regulations. See Item 1. Business - Supervision and Regulation. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing.  Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. For example, Basel III regulations adopted by the federal bank regulatory agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards.  Compliance with these rules could impose additional costs on banking entities and their holding companies.  Management has reviewed the new standards and will continue to evaluate all options and strategies to ensure ongoing compliance with the new standards, notwithstanding Republic's current status as well-capitalized.

New programs and proposals may subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.

 

 

We face significant competition in our market from other banks and financial institutions.

The banking and financial services industry in our market area is highly competitive.  We may not be able to compete effectively in our markets, which could adversely affect our results of operations.  The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and consolidation among financial service providers.  Larger institutions have greater access to capital markets, with higher lending limits and a broader array of services.  Competition may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin.

We may not have the resources to effectively implement new technologies, which could adversely affect our competitive position and results of operations.

The financial services industry is constantly undergoing technological changes with frequent introductions of new technology-driven products and services.  In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand in our market. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.  If we are unable to do so, our competitive position and results of operations could be adversely affected.

Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.

We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the rules and forms of the Securities and Exchange Commission.  We also maintain a system of internal control over financial reporting.  These controls may not achieve their intended objectives.  Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures.  Controls can also be circumvented by collusion or improper management override.  Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis.  If our controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. 

Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

 

 

We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, these security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

If we want to, or are compelled to, raise additional capital in the future, that capital may not be available to us when it is needed or on terms that are favorable to us or current shareholders.

Federal banking regulators require us, and Republic, to maintain capital to support our operations.  Regulatory capital ratios are defined and required ratios are established by laws and regulations promulgated by banking regulatory agencies.  At December 31, 2016, our regulatory capital ratios were above "well capitalized" levels under current bank regulatory guidelines. To be "well capitalized," banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Common Equity Tier 1 ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least 10%. Regulators, however, may require us, or Republic, to maintain higher regulatory capital ratios. 

Our ability to raise additional capital in the future will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on other factors. Accordingly, we may not be able to raise additional capital on terms and time frames acceptable to us, or at all.  If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations.  Our ability to borrow could also be impaired by factors that are nonspecific to us, such as disruption of the financial markets or negative news and expectations about the prospects for the financial services industry.  If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of investors, and could dilute the per share book value and earnings per share of our common stock.  Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price.

 

 

We are exposed to environmental liabilities with respect to real estate that we have or had title to in the past.

A significant portion of our loan portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate, and in doing so could become subject to environmental liabilities with respect to these properties.  We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.  Although we have policies and procedures to perform an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential environmental hazards.  If we were to become subject to significant environmental liabilities, it could materially and adversely affect us.

Our common stock is not insured by any governmental entity and, therefore, an investment in our common stock involves risk.

Our common stock is not a deposit account or other obligation of any bank, and is not insured by the FDIC or any other governmental entity, and is subject to investment risk, including possible loss.

There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of common stock in the future will dilute the ownership interests of our existing shareholders.

 

Additionally, the sale of substantial amounts of our common stock or securities convertible into or exchangeable or exercisable for our common stock, whether directly by us or by existing common shareholders in the secondary market, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could, in turn, materially and adversely affect the market price of our common stock and our ability to raise capital through future offerings of equity or equity-related securities.  We are party to a registration rights agreement with the holders of the convertible trust preferred securities of Republic First Bancorp Capital Trust IV, which requires us, under certain circumstances, to register up to 1.7 million shares of our common stock into which the trust preferred securities may be converted for resale under the Securities Act of 1933.

 

In addition, our Board of Directors is authorized to designate and issue preferred stock without further shareholder approval, and we may issue other equity securities that are senior to our common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios and to comply with any future changes in regulatory standards.

 

Our common stock is currently traded on the Nasdaq Global Market.  During 2016, the average daily trading volume for our common stock was approximately 98,200 shares.  Sales of our common stock may place significant downward pressure on the market price of our common stock. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.

 

 

 

Our common stock is subordinate to our existing and future indebtedness and any preferred stock and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.

Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our Board of Directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries' liquidation or reorganization is subject to the prior claims of that subsidiary's creditors and preferred shareholders. As of December 31, 2016, we had $21.9 million of outstanding debt.

Our ability to pay dividends depends upon the results of operations of our subsidiaries.

We have never declared or paid cash dividends on our common stock.  Our Board of Directors intends to follow a policy of retaining earnings for the purpose of increasing our capital for the foreseeable future.

 

Holders of our common stock are entitled to receive dividends if, as and when declared from time to time by our Board of Directors in its sole discretion out of funds legally available for that purpose, after debt service payments and payments of dividends required to be paid on our outstanding preferred stock, if any.

 

While we, as a bank holding company, are not subject to certain restrictions on dividends applicable to Republic, our ability to pay dividends to the holders of our common stock will depend to a large extent upon the amount of dividends paid by Republic to us.  Regulatory authorities restrict the amount of cash dividends Republic can declare and pay without prior regulatory approval.  Presently, Republic cannot declare or pay dividends in any one-year in excess of retained earnings for that year subject to risk based capital requirements.

If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, current and potential shareholders may lose confidence in our financial reporting and disclosures and could subject us to regulatory scrutiny.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management's report on internal control over financial reporting. While we have reported no material weaknesses in the Form 10-K for the fiscal year ended December 31, 2016, we cannot guarantee that we will not have any material weaknesses in the future.

 

Compliance with the requirements of Section 404 is expensive and time-consuming. If, in the future, we fail to complete this evaluation in a timely manner we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting.  In addition, any failure to maintain an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.

 

 

 

Our governing documents, Pennsylvania law, and current policies of our Board of Directors contain provisions, which may reduce the likelihood of a change in control transaction, which may otherwise be available and attractive to shareholders.

Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by our Board of Directors.  In particular, the articles of incorporation and bylaws classify our Board of Directors into three groups, so that shareholders elect only approximately one-third of the Board each year; permit shareholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; require our shareholders to give us advance notice to nominate candidates for election to the Board of Directors or to make shareholder proposals at a shareholders' meeting; require the vote of the holders of at least 60% of our voting shares for shareholder amendments to our bylaws; require the vote of the holders of at least 75% of our voting shares to approve certain business combinations; and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our outstanding common stock without the approval of two-thirds of our Board of Directors.  These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals desirable.  Such provisions could also make it more difficult for third parties to remove and replace the members of our Board of Directors.  Moreover, these provisions could diminish the opportunities for shareholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation. 

In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold.  For example, Pennsylvania law may restrict a third party's ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock.  Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our articles of incorporation.

Item 1B:  Unresolved Staff Comments

 

None.

Item 2:  Description of Properties

The Company currently has twenty lease agreements that expire on various dates in the future. Six of the leased locations are utilized as back-office support locations, operations centers, loan production offices, training facilities and the Company's corporate headquarters.  The other fourteen leased properties are for store locations, twelve of which are open and operating today and two which will be opened in the future. The spaces covered by these leases range in square footage from approximately 800 square feet to 40,000 square feet.  Please see Note 11 "Commitments and Contingencies" to the Consolidated Financial Statements for further information regarding the leases.  In addition, the Company owns eight properties utilized for store locations.  Seven of the stores are open and operating today, one is scheduled to begin construction during 2017.  Management believes these facilities are adequate to meet the Company's present and immediately foreseeable needs from a real estate perspective.

 

 

 

Item 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.

Item 4:  Mine Safety Disclosures

Not applicable.

PART II

Item 5:  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

Shares of the Company's class of common stock are listed on the Nasdaq Global Market under the symbol "FRBK."  The table below sets forth the high and low sales prices reported for the common stock on the Nasdaq Global Market for the periods indicated.   As of March 8, 2017, there were approximately 2,300 record holders of the Company's common stock.  On March 9, 2017, the closing price of a share of common stock on The Nasdaq Stock Market LLC was $8.18.

Dividend Policy

The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends during 2017.  The Company's ability to pay dividends depends primarily on receipt of dividends from the Company's subsidiary, Republic.  Dividend payments from Republic are subject to legal and regulatory limitations.  The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.

 

 

 

Item 6:  Selected Financial Data

 

		As of or for the Years Ended December 31,
(dollars in thousands, except per share data)		2016				2015				2014				2013				2012
INCOME STATEMENT DATA
Total interest income		$	54,227			$	45,436			$	40,473			$	37,205			$	38,260
Total interest expense			6,863				5,381				4,644				4,590				6,366
Net interest income			47,364				40,055				35,829				32,615				31,894
Provision for loan losses			1,557				500				900				4,935				1,350
Non-interest income			15,312				9,943				8,017				9,216				8,828
Non-interest expenses			56,293				47,091				40,550				40,411				35,902
Income (loss) before benefit for income taxes			4,826				2,407				2,396				(3,515	)			3,470
Benefit for income taxes			(119	)			(26	)			(46	)			(35	)			(144	)
Net income (loss)		$	4,945			$	2,433			$	2,442			$	(3,480	)		$	3,614
PER SHARE DATA
Basic earnings (loss) per share		$	0.13			$	0.06			$	0.07			$	(0.13	)		$	0.14
Diluted earnings (loss) per share		$	0.12			$	0.06			$	0.07			$	(0.13	)		$	0.14
Book value per share		$	3.79			$	3.00			$	2.98			$	2.42			$	2.69
Tangible book value per share		$	3.70			$	3.00			$	2.98			$	2.42			$	2.69
BALANCE SHEET DATA
Total assets		$	1,923,931			$	1,438,824			$	1,214,598			$	961,665			$	988,658
Total loans, net			955,817				866,066				770,404				667,048				608,359
Total investment securities			803,604				460,131				254,402				206,482				193,142
Total deposits			1,677,670				1,249,298				1,072,230				869,534				889,201
Short-term borrowings			-				47,000				-				-				-
Subordinated debt			21,881				21,857				22,476				22,476				22,476
Total shareholders' equity			215,053				113,375				112,811				62,899				69,902
PERFORMANCE RATIOS
Return on average assets			0.30	%			0.19	%			0.23	%			(0.37	)%			0.37	%
Return on average shareholders' equity			3.97	%			2.14	%			2.51	%			(5.07	)%			5.36	%
Net interest margin			3.14	%			3.29	%			3.56	%			3.66	%			3.53	%
Total non-interest expenses as a percentage of average assets			3.45	%			3.59	%			3.80	%			4.25	%			3.70	%
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of loans			0.95	%			0.99	%			1.48	%			1.81	%			1.54	%
Allowance for loan losses as a percentage of non-performing loans			48.45	%			68.95	%			53.81	%			117.69	%			59.46	%
Non-performing loans as a percentage of total loans			1.96	%			1.44	%			2.74	%			1.53	%			2.60	%
Non-performing assets as a percentage of total assets			1.51	%			1.66	%			2.07	%			1.51	%			2.52	%
Net charge-offs as a percentage of average loans, net			0.12	%			0.41	%			0.22	%			0.35	%			0.63	%
LIQUIDITY AND CAPITAL RATIOS
Average equity to average assets			7.63	%			8.67	%			9.12	%			7.22	%			6.95	%
Leverage ratio			12.74	%			9.65	%			11.23	%			8.59	%			9.01	%
CET 1 capital to risk-weighted assets			16.59	%			10.42	%			-				-				-
Tier 1 capital to risk-weighted assets			18.28	%			12.40	%			13.88	%			10.28	%			11.48	%
Total capital to risk-weighted assets			18.99	%			13.19	%			15.10	%			11.53	%			12.73	%

 

 

 

Item 7:  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with Item 6 "Selected Financial Data" and the consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, "Risk Factors" and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.

Executive Summary

We continued to make great progress with "The Power of Red is Back" expansion campaign in 2016.  We are successfully expanding our presence in the Philadelphia region through the addition of new stores and the development of new customer relationships. During 2016 we welcomed thousands of new customers into our stores and won them over with extraordinary service. The growth in asset, loan and deposit balances clearly demonstrates our ongoing success with this strategy. While we continue to make significant investments to build a new bank, we are very pleased with our ability to improve profitability as we move forward with our growth plan.

In 2016, we also announced the addition of Vernon W. Hill, II to the Board of Directors. He will serve as Chairman of the Company. Mr. Hill is often credited with reinventing the concept of Retail Banking as the Founder and Chairman of Commerce Bank, a $50 billion financial institution that grew to more than 450 locations primarily in the northeastern corridor of the U.S. More recently, Mr. Hill has achieved significant success with his Retail Banking concept as the Founder and Chairman of Metro Bank in the U.K. which has grown to 48 locations and over $12 billion assets in just six years. Mr. Hill has been a major investor and consultant to Republic Bank for the last several years.  His appointment as Chairman reinforces our commitment to our growth and expansion plan based on creating a legendary, emotional brand by turning customers into Fans.

During 2016, we also expanded our product offerings through the addition of a residential mortgage lending team. In July 2016, we acquired Oak Mortgage Company. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida providing our customers with new opportunities in the residential lending market. The Oak Mortgage team is an important addition to the Republic Team which is committed to extraordinary customer service and has proven to be a perfect complement to the Bank's network of store locations.

Additional highlights for the year ended December 31, 2016 include the following accomplishments:

·

We completed a $100 million common stock offering during the fourth quarter of 2016. As a result, shareholders' equity increased to $215.1 million as of December 31, 2016 compared to $113.4 million as of December 31, 2015. This capital raise will allow us to execute our aggressive expansion plan over the next several years.

·

New stores were opened in Washington Township and Moorestown, NJ during 2016 bringing the total store count to nineteen. We also opened a prototype store at a prime location in Wynnewood, PA where we relocated our store from nearby Ardmore.  We ended the year with a store under construction in Cherry Hill, NJ which is scheduled to be completed in early 2017 and ground will soon be broken on sites in Medford, Sicklerville and Fairless Hills.  There are also several additional sites in various stages of approval and development for future store locations.

 

 

 

 

·

New stores opened since the beginning of the "Power of Red is Back" expansion campaign in 2014 are currently growing deposits at an average rate of $38 million per year, while the average deposit growth for all stores over the last twelve months was approximately $23 million per store.

·

Total revenue grew by 25% during 2016, while non-interest expenses grew at a rate of 20%.

·

Net income increased by 103% to $4.9 million, or $0.12 per diluted share, for the twelve months ended December 31, 2016 compared to $2.4 million, or $0.06 per diluted share, for the twelve months ended December 31, 2015. We continue to open new stores and increase net income despite the additional costs associated with the expansion strategy. The acquisition of Oak Mortgage has also contributed to improved earnings.

·

Total assets increased by $485 million, or 34%, to $1.9 billion as of December 31, 2016 compared to $1.4 billion as of December 31, 2015.

·

Total deposits increased by $428 million, or 34%, to $1.7 billion as of December 31, 2016 compared to $1.2 billion as of December 31, 2015.

·

Total loans grew $90 million, or 10%, to $965 million as of December 31, 2016 compared to $875 million at December 31, 2015.

·

SBA lending continued to be an important part of our lending strategy. More than $70 million in new SBA loans were originated during the year ended December 31, 2016. Our team is currently ranked as the #1 SBA lender in the New Jersey and southeastern Pennsylvania market based on the dollar volume of loan originations.

·

Our Total Risk-Based Capital ratio was 18.99% and Tier I Leverage Ratio was 12.74% at December 31, 2016.

·

Book value per common share increased to $3.79 as of December 31, 2016 compared to $3.00 per share as of December 31, 2015.

Non-GAAP Based Financial Measures

 

Our selected financial data contains a non-GAAP financial measure calculated using non-GAAP amounts.  This measure is tangible book value per common share. Tangible book value per share adjusts the numerator by the amount of Goodwill and Other Intangible Assets (reduction of Shareholders' Equity).  Management uses non-GAAP measures to present historical periods comparable to the current period presentation.  In addition, management believes the use of non-GAAP measures provides additional clarity when assessing our financial results and use of equity.  Disclosures of this type should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

Critical Accounting Policies, Judgments and Estimates

 

In reviewing and understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, carrying values of other real estate owned, other than temporary impairment of securities, fair value of financial instruments and deferred income taxes.  Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

 

We have identified the policies related to the allowance for loan losses, other-than-temporary impairment of securities, loans receivable, mortgage loans held for sale, interest rate lock commitments, forward loan sale commitments, goodwill, other real estate owned, and deferred income taxes as being critical.

Allowance for Loan Losses - Management's ongoing evaluation of the adequacy of the allowance for loan losses is based on our past loan loss experience, the volume and composition of our lending, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio.  The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management, based upon its evaluation, considers adequate to absorb losses inherent in the loan portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.

 

The allowance consists of specific allowances for impaired loans, a general allowance on the remainder of the portfolio, and an unallocated component to account for a level of imprecision in management's estimation process. Although management determines the amount of each element of the allowance separately, the allowance for loan losses is available for the entire loan portfolio.

 

Management establishes an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price, or fair value of collateral if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. A delay or shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

 

Management also establishes a general allowance on non-impaired loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management's evaluation of the collectability of the loan portfolio.

Management also evaluates classified loans, which are not impaired. We segregate these loans by category and assign qualitative factors to each loan based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.  Classification of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.

 

 

The allowance is adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting its primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.

While management uses the best information known to it in order to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, the estimates of the allowance for loan loss have provided adequate coverage against actual losses incurred.  In addition, the Pennsylvania Department of Banking and Securities and the FDIC, as an integral part of their examination processes, periodically review the allowance for loan losses. The Pennsylvania Department of Banking and Securities or the FDIC may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

 

Other-Than-Temporary Impairment of 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 and our intent and ability to retain its investment in the security for a period of time sufficient to allow for 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 prospects 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 the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Mortgage Banking Activities and Mortgage Loans Held for Sale - Loans held for sale are originated and held until sold to permanent investors. In 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 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 24 Derivatives and Risk Management Activities.

Forward Loan Sale Commitments - Forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income in non-interest income in the statements of income.

Goodwill - Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually as of July 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the results of the qualitative review indicate that it is unlikely (less than 50% probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. There was $5.0 million of goodwill at December 31, 2016 and $0 at December 31, 2015.

Other Real Estate Owned - Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure.  They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.

 

Income Taxes - Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, management's estimates and judgments to calculate the deferred tax accounts have not required significant revision.

 

In evaluating our 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.

 

 

Results of Operations

For the year ended December 31, 2016 as compared to the year ended December 31, 2015

We reported net income of $4.9 million, or $0.12 per diluted share, for the twelve months ended December 31, 2016 compared to net income of $2.4 million, or $0.06 per diluted share, for the twelve months ended December 31, 2015. The increase in net income was primarily driven by growth in interest-earning assets along with earnings of the residential mortgage lending team which was acquired during the third quarter of 2016.

Net interest income for the twelve months ended December 31, 2016 increased $7.3 million to $47.4 million as compared to $40.1 million for the twelve months ended December 31, 2015. Interest income increased $8.8 million, or 19.3%, due primarily to an increase in average loans receivable and investment securities balances. Interest expense increased $1.5 million, or 27.5%, primarily due to an increase in average deposit balances.

We recorded a loan loss provision in the amount of $1.6 million for the twelve months ended December 31, 2016 compared to a provision of $500,000 during the twelve months ended December 31, 2015. The higher provision recorded for the twelve months ended December 31, 2016 was driven by an increase in the allowance required for loans individually evaluated for impairment in 2016.

Non-interest income increased $5.4 million to $15.3 million during the twelve months ended December 31, 2016 as compared to $9.9 million during the twelve months ended December 31, 2015 primarily driven by gains on the sale of residential mortgage loans and SBA loans, partially offset by legal settlements recorded during the twelve months ended December 31, 2015.

Non-interest expenses increased $9.2 million to $56.3 million during the twelve months ended December 31, 2016 as compared to $47.1 million during the twelve months ended December 31, 2015.  The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refer to as "The Power of Red is Back", as well as, the addition of Oak Mortgage in 2016.

Return on average assets and average equity from continuing operations were 0.30% and 3.97%, respectively, during the twelve months ended December 31, 2016 compared to 0.19% and 2.14%, respectively, for the twelve months ended December 31, 2015.

 

 

Average Balances and Net Interest Income

 

Historically, our earnings have depended primarily upon Republic's net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders' equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic's net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, using a rate of 35% in 2016, 2015, and 2014.

Average Balances and Net Interest Income

 

		For the Year Ended December 31, 2016												For the Year Ended December 31, 2015												For the Year Ended December 31, 2014
(dollars in thousands)		Average Balance				Interest Income/ Expense				Yield/ Rate(1)				Average Balance				Interest Income/ Expense				Yield/ Rate(1)				Average Balance				Interest Income/ Expense				Yield/ Rate(1)
Interest-earning assets:
Federal funds sold and other interest earning assets		$	92,452			$	473				0.51	%		$	106,876			$	278				0.26	%		$	75,593			$	187				0.25	%
Investment securities and restricted stock			506,545				12,346				2.44	%			309,018				7,692				2.49	%			217,939				5,613				2.58	%
Loans receivable			936,492				42,304				4.52	%			820,820				38,072				4.64	%			724,231				35,052				4.84	%
Total interest-earning assets			1,535,489				55,123				3.59	%			1,236,714				46,042				3.72	%			1,017,763				40,852				4.01	%
Other assets			96,902												73,873												49,647
Total assets		$	1,632,391											$	1,310,587											$	1,067,410
Interest bearing liabilities:
Demand – non-interest bearing		$	284,326											$	235,810											$	189,810
Demand – interest bearing			510,745				2,088				0.41	%			349,055				1,401				0.40	%			233,693				888				0.38	%
Money market & savings			586,750				2,639				0.45	%			508,846				2,170				0.43	%			439,484				1,929				0.44	%
Time deposits			89,713				942				1.05	%			73,819				695				0.94	%			78,073				719				0.92	%
Total deposits			1,471,534				5,669				0.39	%			1,167,530				4,266				0.37	%			941,060				3,536				0.38	%
Total interest bearing deposits			1,187,208				5,669				0.48	%			931,720				4,266				0.46	%			751,250				3,536				0.47	%
Other borrowings			27,471				1,194				4.35	%			22,008				1,115				5.07	%			21,875				1,108				5.07	%
Total interest-bearing liabilities			1,214,679				6,863				0.57	%			953,728				5,381				0.56	%			773,125				4,644				0.60	%
Total deposits and other borrowings			1,499,005				6,863				0.46	%			1,189,538				5,381				0.45	%			962,935				4,644				0.48	%
Non-interest bearing other liabilities			8,867												7,340												7,084
Shareholders' equity			124,519												113,709												97,391
Total liabilities and shareholders' equity		$	1,632,391											$	1,310,587											$	1,067,410
Net interest income(2)						$	48,260											$	40,661											$	36,208
Net interest spread											3.02	%											3.16	%											3.41	%
Net interest margin(2)											3.14	%											3.29	%											3.56	%

⁽¹⁾ Yields on investments are calculated based on amortized cost.

⁽²⁾ Net interest income and net interest margin are presented on a tax equivalent basis.  Net interest income has been increased over the financial statement amount by $896, $606, and $379 in 2016, 2015, and 2014, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.

 

 

 

 

Rate/Volume Analysis of Changes in Net Interest Income

 

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.

Net Interest Income and Net Interest Margin

Net interest income, on a fully tax-equivalent basis, for the twelve months of 2016 increased by $7.6 million, or 18.7%, over the same period in 2015. Interest income on interest-earning assets totaled $55.1 million for the twelve months of 2016, an increase of $9.1 million, compared to the same period in 2015. The increase in interest income earned was the result of an increase in the average balance of loans receivable and investment securities that helped to offset a 12 bp decrease in the yield on loans receivable. Total interest expense for the twelve months of 2016 increased $1.5 million, or 27.5%, to $6.9 million from $5.4 million over the same period in 2015. Interest expense on deposits increased by $1.4 million, or 32.9%, for the twelve months of 2016 versus the same period of 2015. Interest expense on other borrowings increased by $79,000 for the twelve months of 2016 compared to the same period in 2015.

Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 3.02% during the twelve months of 2016 versus 3.16% during the twelve months of 2015. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets.  For the twelve months of 2016 and 2015, the fully tax-equivalent net interest margin was 3.14% and 3.29%, respectively.  The net interest margin for the year ending December 31, 2016 decreased primarily as a result of a decrease in the yield on loans receivable.

 

 

 

Provision for Loan Losses

We recorded a provision for loan losses in the amount of $1.6 million for the twelve months ended December 31, 2016 compared to a $500,000 provision for the twelve months ended December 31, 2016. The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.

The provision recorded for the twelve months ended December 31, 2016 as compared to the twelve months ended December 31, 2015 increased primarily as a result of a single loan relationship that moved to non-accrual status during 2016. This resulted in an increase in the allowance for loan losses individually evaluated for impairment.

Non-Interest Income 

Total noninterest income for the twelve months of 2016 increased by $5.4 million, or 54.0%, from the same period in 2015. Mortgage banking income totaled $5.1 million during 2016 primarily due to gains on the sale of residential mortgage loans of $4.7 million originated through Oak Mortgage which was acquired by us in 2016.  Gains on the sale of SBA loans totaled $5.0 million during 2016 compared to $3.1 million in the same period of 2015. We recognized gains of $656,000 on the sale of securities during 2016 compared to gains of $108,000 on sales of securities in 2015. Service charges, fees, and other operating income totaled $4.8 million for 2016 which represents an increase of $602,000 compared to 2015. This increase was driven by growth in customer deposit accounts and transaction volume. In 2015, we recorded a $2.6 million insurance settlement which was related to a claim against a corporate insurance policy originally submitted in 2010.

Non-Interest Expenses

 

In 2016, noninterest expenses increased by $9.2 million, or 19.5%, compared to 2015. An explanation of changes in noninterest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits in 2016 were $28.6 million, an increase of $6.1 million, or 27.2%, compared to 2015 primarily driven by annual merit increases along with increased staffing levels related to our aggressive growth strategy of adding and relocating stores, which we refer to as "The Power of Red is Back." There were nineteen stores open as of December 31, 2016 compared to seventeen stores open at December 31, 2015.  The addition of Oak Mortgage in July 2016 also contributed to the increase in salary and employee benefits.

Occupancy related expenses increased by $1.2 million, or 23.9%, and depreciation and amortization expense increased by $438,000, or 14.2%, in 2016 compared to 2015, also as a result of our growth and relocation strategy.

Other real estate owned expenses totaled $2.2 million during 2016, a decrease of $2.1 million, when compared to 2015 primarily due to a reduction in writedowns on foreclosed assets held in other real estate owned.

All other noninterest expenses for the twelve months of 2016 increased $3.5 million compared to the same period last year. This increase was mainly attributable to the addition of expenses related to the residential mortgage loan operations of Oak Mortgage.  Increases in data processing expenses, fraud losses associated with debit cards, charitable contributions, professional fees, transaction fees, insurance, regulatory assessment and advertising expense resulting from our growth strategy also contributed to the growth in other operating expenses.

 

 

One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterest expenses to average assets. For purposes of this calculation, net noninterest expenses equal noninterest expenses less noninterest income and nonrecurring expense. For the twelve month period ended December 31, 2016, the ratio equaled 2.51% compared to 2.83% for the twelve month period ended December 31, 2015, respectively.  The decline in this ratio was mainly due to higher average assets related to our growth strategy of adding and relocating stores.

Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses to net interest income plus noninterest income. The efficiency ratio equaled 89.8% for the twelve months of 2016, compared to 94.2% for the twelve months of 2015. The decrease for the twelve months ended December 31, 2016 versus December 31, 2015 was due to both net interest income and noninterest income increasing at a faster rate than noninterest expenses.

Provision (Benefit) for Income Taxes

 

We recorded a benefit for income taxes of $119,000 for the twelve months ended December 31, 2016, compared to a $26,000 benefit for the twelve months ended December 31, 2015.  The $119,000 benefit recorded during the twelve months of 2016 was the net result of an estimated tax provision in the amount of $1.2 million calculated on the net profit generated during the period using our normal estimated tax rate, offset by an adjustment to the deferred tax asset valuation allowance in the amount of $1.3 million.  The effective tax rates for the twelve month periods ended December 31, 2016 and 2015 were 25% and 38%, respectively, excluding an adjustment to the deferred tax asset valuation allowance.

We evaluate the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management's evaluation of both positive and negative evidence.

In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business.  In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company. In addition, it is also important to consider that net operating loss carryforwards ("NOLs") for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.

In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available.  Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.  Based on the analysis of available positive and negative evidence, we determined that a valuation allowance should be recorded as of December 31, 2016 and December 31, 2015.

 

 

We did assess tax planning strategies as defined under ASC 740 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes on future fixed asset purchases. We believe that these tax planning strategies are (a) prudent and feasible, (b) steps that we would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (c) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. We believe that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, has no present intention to implement such strategies.

The net deferred tax asset balance before consideration of a valuation allowance was $21.4 million as of December 31, 2016 and $20.2 million as of December 31, 2015.  After assessment of all available tax planning strategies, we determined that a partial valuation allowance in the amount of $12.2 million as of December 31, 2016 and $13.7 million as of December 31, 2015 should be recorded.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.  When the determination is made that a valuation allowance is no longer required, it will be reduced accordingly resulting in a corresponding increase in net income.

Net Income and Net Income per Common Share

Net income for the twelve month period ended December 31, 2016 was $4.9 million, an increase of $2.5 million compared to $2.4 million for the twelve month period ended December 31, 2015. For the twelve month period ended December 31, 2016, basic and fully-diluted net income per common share were $0.13 and $0.12, respectively, compared to basic and fully-diluted net income per common share of $0.06 for the twelve month period ended December 31, 2015.

Return on Average Assets and Average Equity

 

Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve month periods ended December 31, 2016 and 2015 was 0.30% and 0.19%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the twelve month period ended December 31, 2016 was 3.97%, compared to 2.14% for the twelve month period ended December 31, 2015.

Results of Operations

For the year ended December 31, 2015 as compared to the year ended December 31, 2014

We reported net income of $2.4 million, or $0.06 per share, for the twelve months ended December 31, 2015 compared to net income of $2.4 million, or $0.07 per share, for the twelve months ended December 31, 2014.

 

 

Net interest income for the twelve months ended December 31, 2015 increased $4.2 million to $40.1 million as compared to $35.8 million for the twelve months ended December 31, 2014.  Interest income increased $5.0 million, or 12.3%, due primarily to an increase in average loans receivable and investment securities balances. Interest expense increased $737,000 or 15.9%, primarily due to an increase in average deposit balances.

We recorded a loan loss provision in the amount of $500,000 for the twelve months ended December 31, 2015 compared to a provision of $900,000 during the twelve months ended December 31, 2014.  The lower provision recorded for the twelve months ended December 31, 2015 was driven by a decrease in the reserve required for loans individually evaluated for impairment in 2015.

Non-interest income increased $1.9 million to $9.9 million during the twelve months ended December 31, 2015 as compared to $8.0 million during the twelve months ended December 31, 2014 primarily driven by a $2.6 million insurance settlement recorded in 2015 which was related to a bond claim against a corporate insurance policy originally submitted in 2010.

Non-interest expenses increased $6.5 million to $47.1 million during the twelve months ended December 31, 2015 as compared to $40.6 million during the twelve months ended December 31, 2014.  The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refers to as "The Power of Red is Back." In addition, we made a decision in 2015 to aggressively pursue a potential sale of our largest OREO asset resulting in a write-down of approximately $2.2 million.

Return on average assets and average equity from continuing operations were 0.19% and 2.14%, respectively, during the twelve months ended December 31, 2015 compared to 0.23% and 2.51%, respectively, for the twelve months ended December 31, 2014.

Net Interest Income and Net Interest Margin

Net interest income, on a fully tax-equivalent basis, for the twelve months of 2015 increased by $4.5 million, or 12.3%, over the same period in 2014. Interest income on interest-earning assets totaled $46.0 million for the twelve months of 2015, an increase of $5.2 million, compared to the same period in 2014. The increase in interest income earned was the result of an increase in the average balance of loans receivable and investment securities that helped to offset a 20 bp decrease in the yield on loans receivable. Total interest expense for the twelve months of 2015 increased $737,000, or 15.9%, to $5.4 million from $4.6 million over the same period in 2014. Interest expense on deposits increased by $730,000, or 20.6%, for the twelve months of 2015 versus the same period of 2014. Interest expense on other borrowings increased by $7,000 for the twelve months of 2015 compared to the same period in 2014.

Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 3.16% during the twelve months of 2015 versus 3.41% during the twelve months of 2014. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets.  For the twelve months of 2015 and 2014, the fully tax-equivalent net interest margin was 3.29% and 3.56%, respectively.  The net interest margin for the year ending December 31, 2015 decreased primarily as a result of a decrease in the yield on loans receivable.

 

 

Provision for Loan Losses

We recorded a provision for loan losses in the amount of $500,000 for the twelve months ended December 31, 2015 compared to a $900,000 provision for the twelve months ended December 31, 2014. The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.

The provision recorded for the twelve months ended December 31, 2015 as compared to the twelve months ended December 31, 2014 decreased due to an improvement in asset quality, which resulted in a reduction in the allowance for loan losses required for loans individually evaluated for impairment in 2015.

Non-Interest Income 

Total noninterest income for the twelve months of 2015 increased by $1.9 million, or 24.0%, from the same period in 2014. We recorded a $2.6 million insurance settlement in 2015 which was related to a claim against a corporate insurance policy originally submitted in 2010.  Loan advisory and servicing fees increased by $774 thousand in 2015 due to higher servicing fee income on SBA loans. Service fees on deposit accounts increased by $496,000 in 2015 compared to 2014 due to the growth in the number of customer accounts and deposit balances. We recognized gains of $108,000 on the sale of investment securities during 2015 compared to gains of $458,000 on the sale of investment securities in 2014. Gains recognized on the sale of SBA loans were $3.1 million during the twelve months of 2015 compared to $4.7 million in the same period of 2014 primarily due to a decrease in the volume of loans originated and sold in 2015.

Non-Interest Expenses

 

In 2015, noninterest expenses increased by $6.5 million, or 16.1%, compared to 2014. An explanation of changes in noninterest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits in 2015 were $22.5 million, an increase of $2.4 million, or 11.9%, compared to 2014 primarily driven by annual merit increases along with increased staffing levels related to our aggressive growth strategy of adding and relocating stores, which we refer to as "The Power of Red is Back."

Occupancy related expenses increased by $1.4 million, or 20.8%, in 2015 compared to 2014, also as a result of the growth and relocation strategy. Three new stores were opened during 2015 and two additional sites were under construction at year end.

Other real estate owned expenses totaled $4.2 million during 2015, an increase of $2.4 million, when compared to 2014 primarily due to higher writedowns on foreclosed assets held in other real estate owned. A writedown of $2.2 million was recorded against the largest asset held in other real estate owned during 2015 as a result of our decision to aggressively pursue a potential sale of this asset.

In addition, minor increases in data processing, other operating expenses, regulatory assessments, insurance, other taxes, and advertising for the twelve months of 2015 versus the same period last year were offset by minor decreases in legal expenses and professional fees.

One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterest expenses to average assets. For purposes of this calculation, net noninterest expenses equal noninterest expenses less noninterest income and nonrecurring expense. For the twelve month period ended December 31, 2015, the ratio equaled 2.83% compared to 3.05% for the twelve month period ended December 31, 2014, respectively, reflecting higher average assets related to our growth strategy.

 

 

Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses to net interest income plus noninterest income. The efficiency ratio equaled 94.2% for the twelve months of 2015, compared to 92.5% for the twelve months of 2014. The increase for the twelve months ended December 31, 2015 versus December 31, 2014 was due to an increase in total noninterest expenses.

Provision (Benefit) for Income Taxes

 

We recorded a benefit for income taxes of $26,000 for the twelve months ended December 31, 2015, compared to a $46,000 benefit for the twelve months ended December 31, 2014.  The $26,000 benefit recorded during the twelve months of 2015 was the net result of an estimated tax provision in the amount of $911,000 calculated on the net profit generated during the period using our normal estimated tax rate, offset by an adjustment to the deferred tax asset valuation allowance in the amount of $937,000.  The effective tax rates for the twelve month periods ended December 31, 2015 and 2014 were 38% and 26%, respectively, excluding an adjustment to the deferred tax asset valuation allowance.

We evaluate the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management's evaluation of both positive and negative evidence.

In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business.  In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company. In addition, it is also important to consider that net operating loss carryforwards ("NOLs") for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.

In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available.  Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.

When calculating an estimate for a valuation allowance, we assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carry forwards as defined in ASC 740. We did not use projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor in the analysis. We will exclude future taxable income as a factor until we can show consistent and sustainable profitability. Based on the analysis of available positive and negative evidence, we determined that a valuation allowance should be recorded as of December 31, 2015 and December 31, 2014.

 

 

We did assess tax planning strategies as defined under ASC 740 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes on future fixed asset purchases. We believe that these tax planning strategies are (a) prudent and feasible, (b) steps that we would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (c) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. We believe that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, has no present intention to implement such strategies.

The net deferred tax asset balance before consideration of a valuation allowance was $20.2 million as of December 31, 2015 and $19.6 million as of December 31, 2014.  After assessment of all available tax planning strategies, we determined that a partial valuation allowance in the amount of $13.7 million as of December 31, 2015 and $14.7 million as of December 31, 2014 should be recorded.

The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.  When the determination is made to include projections of future taxable income as a factor in recovering the deferred tax asset, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.

Net Income and Net Income per Common Share

Net income for the twelve month periods ended December 31, 2015 and 2014 was $2.4 million. For the twelve month period ended December 31, 2015, basic and fully-diluted net income per common share was $0.06 compared to basic and fully-diluted net income per common share of $0.07 for the twelve month period ended December 31, 2014.

Return on Average Assets and Average Equity

 

Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve month periods ended December 31, 2015 and 2014 was 0.19% and 0.23%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the twelve month period ended December 31, 2015 was 2.14%, compared to 2.51% for the twelve month period ended December 31, 2014.

 

 

 

Financial Condition

December 31, 2016 compared to December 31, 2015

Total assets increased by $485.1 million to $1.9 billion at December 31, 2016, compared to $1.4 billion at December 31, 2015.

Cash and Cash Equivalents

 

Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories increased by $7.4 million to $34.6 million at December 31, 2016, from $27.1 million at December 31, 2015.

Loans Held for Sale

Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration ("SBA") which we usually originate with the intention of selling in the future and residential mortgage loans originated by Republic's subsidiary, Oak Mortgage, which we also intend to sell in the future. Total SBA loans held for sale were $4.2 million at December 31, 2016 compared to $3.7 million at December 31, 2015.  Residential mortgage loans held for sale totaled $23.9 million at December 31, 2016. Loans held for sale, as a percentage of our total assets, were less than 1.5% at December 31, 2016.

Loans Receivable

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $27.0 million at December 31, 2016. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit. There were no loans in excess of the legal lending limit at December 31, 2016.  An $18.0 million threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal monitoring guideline.  There were no such relationships in excess of $18.0 million at December 31, 2016.

Loans increased $90.2 million, or 10%, to $965.0 million at December 31, 2016, versus $874.8 million at December 31, 2015.  This growth was the result of an increase in loan demand in the owner occupied real estate, commercial real estate, consumer, construction and development, and residential categories driven by the successful execution of our relationship banking strategy which focuses on customer service.

Investment Securities

 

Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes.  Our investment securities classified as available-for-sale consist primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), municipal securities, corporate bonds, asset-backed securities (ABS), and pooled trust preferred securities (CDO).  Available-for-sale securities totaled $369.7 million at December 31, 2016, compared to $284.8 million at December 31, 2015. The increase was primarily due to the purchase of available-for-sale securities totaling $207.5 million partially offset by sales and pay downs of securities totaling $115.6 million during 2016. At December 31, 2016, the portfolio had a net unrealized loss of $10.7 million compared to a net unrealized loss of $4.0 million at December 31, 2015.  The change in value of the investment portfolio was driven by an increase in market interest rates which drove a decrease in value of the securities held in our portfolio during 2016.

 

 

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMO's and MBS's. The fair value of securities held-to-maturity totaled $425.2 million and $171.8 million at December 31, 2016 and December 31, 2015, respectively. The increase was due to the purchase of $294.2 million of held-to-maturity securities partially offset by pay downs of securities totaling $33.2 million during 2016.

Restricted Stock

At December 31, 2016 and December 31, 2015, the investment in FHLB stock totaled $1.2 million and $2.9 million, respectively.  The decrease was due to a short-term borrowing from FHLB at December 31, 2015 which resulted in a higher required investment as of that date.  At both December 31, 2016 and December 31, 2015, ACBB stock totaled $143,000.

Other Real Estate Owned

 

The balance of other real estate owned decreased to $10.2 million at December 31, 2016 from $11.3 million at December 31, 2015, primarily due to sales totaling $1.4 million in the current year.

Goodwill

Goodwill resulting from the acquisition of Oak Mortgage in July 2016 amounted to $5.0 million at December 31, 2016.  There was no goodwill recorded at December 31, 2015.

Deposits

 

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic's major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.

Total deposits increased by $428.4 million to $1.7 billion at December 31, 2016, from $1.2 billion at December 31, 2015.  The increase was the result of growth across all deposit categories, led by a significant rise in demand deposit balances. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction.  We are also in the midst of an aggressive expansion and relocation plan which we refer to as "The Power of Red is Back".  Over the last three years, we have opened nine new store locations and have several more in various stages of construction and development.  This strategy has also allowed us to nearly eliminate our dependence upon the more volatile sources of funding found in brokered and public fund certificates of deposit.

 

 

Short-term Borrowings

 

As of December 31, 2016, there were no short-term borrowings from FHLB compared to $47.0 million at December 31, 2015. The decrease in borrowings was the result of a temporary outflow of deposits at the end of the year in 2015, which returned in the early part of 2016.

Shareholders' Equity

 

Total shareholders' equity increased $101.7 million to $215.1 million at December 31, 2016, compared to $113.4 million at December 31, 2015. We completed a capital raise in the amount of $100 million through a registered direct offering of our common stock in a private placement offering in December 2016.

Investment Securities Portfolio

 

Republic's investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest rate risk. The securities portfolio consists primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), corporate bonds, municipal securities, asset-backed securities (ABS), pooled trust preferred securities (CDO), and U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds. Our ALCO committee monitors and reviews all security purchases.

A summary of investment securities available-for-sale and investment securities held-to-maturity at December 31, 2016, 2015, and 2014 is as follows:

 

		At December 31,
(dollars in thousands)		2016				2015				2014
Available for sale
Collateralized mortgage obligations		$	230,252			$	180,795			$	98,626
Agency mortgage-backed securities			37,973				10,073				13,271
Municipal securities			26,825				22,814				15,784
Corporate bonds			66,718				54,294				33,840
Asset-backed securities			15,565				17,631				18,353
Trust preferred securities			3,063				3,070				5,261
Other securities			-				115				115
Total amortized cost of securities		$	380,396			$	288,792			$	185,250
Total fair value of investment securities		$	369,739			$	284,795			$	185,379
Held to maturity
U.S. Government agencies		$	98,538			$	17,067			$	1
Collateralized mortgage obligations			202,990				146,458				67,845
Agency mortgage-backed securities			129,951				7,732				-
Other securities			1,020				1,020				20
Total amortized cost of securities		$	432,499			$	172,277			$	67,866
Total fair value of investment securities		$	425,183			$	171,845			$	68,253

 

 

The strong growth in deposit balances during 2016, 2015, and 2014 has resulted in a corresponding increase in interest earning assets.  A capital raise in the amount of $100 million completed in December 2016 also contributed to the growth of interest earning assets during the current year. The total amortized cost of the investment securities portfolio has grown to $812.9 million at December 31, 2016 compared to $461.1 million at December 31, 2015 and $253.1 million at December 31, 2014.  Investment securities represented 42% of total assets at December 31, 2016 and 32% of total assets at December 31, 2015.  We evaluate our investment securities portfolio on a continual basis in light of the interest rate environment and changing market conditions and when appropriate, take necessary actions to improve and enhance our overall positioning.  We consider the portfolio to be well structured and of high quality. At December 31, 2016, 86% of the portfolio consisted of U.S. government agency securities which were rated Aaa /AA+ by the major credit rating agencies.

       The investment securities portfolio includes securities classified as both available for sale and held to maturity. During 2016 and 2015, we designated a portion of our securities portfolio as held to maturity based our intent and ability to hold those securities until they mature.

       The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates rise and increases when interest rates fall. In addition, the fair value generally decreases when credit spreads widen and increases when credit spreads tighten. Net unrealized losses in the total investment securities portfolio increased to $18.0 million at December 31, 2016 compared to net unrealized losses of $4.4 million at December 31, 2015 as a result of a rise in interest rates in 2016. The comparable amounts for the securities classified as available for sale were unrealized losses of $10.7 million at December 31, 2016 and unrealized gains of $4.0 million at December 31, 2015.

No single issuer of securities (excluding government agencies) in the portfolio exceeded more than 10% of shareholders' equity at December 31, 2016. No single issuer of securities (excluding government agencies) in the portfolio exceeded more than 10% of shareholders' equity at December 31, 2015 with the exception of corporate bonds issued by Goldman Sachs and Morgan Stanley.  The Goldman Sachs bonds had a book value of $18.0 million and a market value of $17.9 million. The Morgan Stanley bonds had a book value of $15.0 million and a market value of $15.1 million at December 31, 2015.

At December 31, 2016, the investment portfolio included forty-six municipal securities with a total market value of $26.5 million.  These securities are reviewed quarterly for impairment.  Research on each issuer is completed to assess the financial stability of the municipal entity.  The largest geographic concentration was in Pennsylvania and New Jersey where forty-two municipal securities had a market value of $24.8 million. As of December 31, 2016, management found no evidence of other than temporary impairment ("OTTI") on any of the municipal securities held in the investment securities portfolio.

At December 31, 2016, the portfolio included two asset-backed securities with a total market value of $15.1 million, the majority of which (97%) is guaranteed by the U.S. Dept. of Education, which were in an unrealized loss position. Management believes the unrealized losses on these securities were driven by market interest rates and not a result of any credit deterioration.

At December 31, 2016, the portfolio also included three pooled trust preferred securities (CDOs) with a market value of $1.8 million. The unrealized loss for the CDOs was due to the secondary market for such securities becoming inactive and is considered temporary.

 

 

During 2016, we sold no CDO securities. During 2015, we sold four CDO securities. Proceeds from the sale of the CDO securities totaled $2.0 million. Gross gains of $70,000 and gross losses of $288,000 were realized on these sales.  The tax provision applicable to the net losses for the twelve months ended December 31, 2015 amounted to $78,000. Management had previously stated that it did not intend to sell the CDO securities prior to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to maturity or recovery of the cost bases.  This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2015, management received several inquiries regarding the availability of the CDO securities and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell the four CDOs resulting in a net loss of $218,000 during 2015 which was offset by gains on sales of agency mortgage-backed securities and corporate bonds.  The Bank continues to demonstrate the ability and intent to hold the remaining CDOs until maturity or recovery of the cost bases, but will evaluate future opportunities to sell the remaining CDOs if they arise.

During 2016, we sold eight collateralized mortgage obligations, two agency mortgage-backed securities, and one corporate bond. Proceeds of sales totaled $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 gross gains amounted to $244,000. During 2015, we also sold twenty-nine agency mortgage-backed securities and two corporate bonds. Proceeds of sales totaled $9.7 million. Gross gains of $326,000 were realized on these sales. The tax provision applicable to the gross gains amounted to $117,000.

The following table presents the maturity distribution and weighted average yield by holding type and year of maturity of our investment securities portfolio at December 31, 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.

 

		Year Ended December 31, 2016								Year Ended December 31, 2015								Year Ended December 31, 2014
Level 3 Investments Only (dollars in thousands)		Trust Preferred Securities				Corporate Bonds				Trust Preferred Securities				Corporate Bonds				Trust Preferred Securities				Corporate Bonds
Balance, January 1,		$	1,883			$	2,834			$	3,193			$	3,005			$	2,850			$	3,006
Security transferred to Level 3 measurement			-				-				-				-				-				-
Unrealized gains (losses)			(56	)			137				882				(171	)			360				(1	)
Paydowns			-				-				(19	)			-				(10	)			-
Proceeds from sales			-				-				(1,952	)			-				-				-
Realized losses			-				-				(218	)			-				-				-
Impairment charges on Level 3			(7	)			-				(3	)			-				(7	)			-
Balance, December 31,		$	1,820			$	2,971			$	1,883			$	2,834			$	3,193			$	3,005

		At December 31,
(dollars in thousands)		2016				2015				2014				2013				2012
Commercial real estate		$	378,519			$	349,726			$	379,259			$	342,794			$	335,561
Construction and land development			61,453				46,547				29,861				23,977				26,659
Commercial and industrial			174,744				181,850				145,113				118,209				103,768
Owner occupied real estate			276,986				246,398				188,025				160,229				126,242
Consumer and other			63,660				48,126				39,713				31,981				23,449
Residential mortgage			9,682				2,380				408				2,359				2,442
Total loans		$	965,044			$	875,027			$	782,379			$	679,549			$	618,121
Deferred loan fees			72				258				439				238				220
Total loans, net of deferred loan fees		$	964,972			$	874,769			$	781,940			$	679,311			$	617,901

(dollars in thousands)		Commercial Real Estate				Construction and Land Development				Commercial and Industrial				Owner Occupied Real Estate				Consumer and Other				Residential Mortgage				Total
Fixed rate:
1 year or less		$	66,932			$	11,278			$	16,002			$	21,075			$	348			$	-			$	115,635
1-5 years			212,487				3,216				49,329				116,465				449				-				381,946
After 5 years			67,197				2,475				34,752				68,322				9,658				9,682				192,086
Total fixed rate			346,616				16,969				100,083				205,862				10,455				9,682				689,667
Adjustable rate:
1 year or less		$	12,623			$	6,712			$	42,830			$	5,585			$	683			$	-			$	68,433
1-5 years			17,269				26,570				20,602				7,276				3,566				-				75,283
After 5 years			2,011				11,202				11,229				58,263				48,956				-				131,661
Total adjustable rate			31,903				44,484				74,661				71,124				53,205				-				275,377
Total		$	378,519			$	61,453			$	174,744			$	276,986			$	63,660			$	9,682			$	965,044

		For the Year Ended December 31,
(dollars in thousands)		2016				2015				2014				2013				2012
Interest income that would have been recorded had the loans been in accordance with their original terms		$	1,024			$	765			$	980			$	488			$	699
Interest income included in net income		$	-			$	-			$	-			$	-			$	-

		For the Year Ended December 31,
(dollars in thousands)		2016				2015				2014				2013				2012
Balance at beginning of period		$	8,703			$	11,536			$	12,263			$	9,542			$	12,050
Charge-offs:
Commercial real estate			-				2,624				364				1,291				1,582
Construction and land development			60				260				303				60				1,004
Commercial and industrial			143				408				1,185				611				1,304
Owner occupied real estate			1,052				133				150				320				-
Consumer and other			11				-				10				75				102
Residential mortgage			10				-				-				-				-
Total charge-offs			1,276				3,425				2,012				2,357				3,992
Recoveries:
Commercial real estate			6				4				5				54				-
Construction and land development			-				5				214				-				105
Commercial and industrial			163				49				166				63				-
Owner occupied real estate			-				-				-				-				-
Consumer and other			2				34				-				26				29
Residential mortgage			-				-				-				-				-
Total recoveries			171				92				385				143				134
Net charge-offs			1,105				3,333				1,627				2,214				3,858
Provision for loan losses			1,557				500				900				4,935				1,350
Balance at end of period		$	9,155			$	8,703			$	11,536			$	12,263			$	9,542
Average loans outstanding(1)		$	936,492			$	820,820			$	724,231			$	640,233			$	609,943

As a percent of average loans:(1)
Net charge-offs			0.12	%			0.41	%			0.22	%			0.35	%			0.63	%
Provision for loan losses			0.17	%			0.06	%			0.12	%			0.77	%			0.22	%
Allowance for loan losses			0.98	%			1.06	%			1.59	%			1.92	%			1.56	%
Allowance for loan losses to:
Total loans, net of unearned income			0.95	%			0.99	%			1.48	%			1.81	%			1.54	%
Total non-performing loans			48.45	%			68.95	%			53.81	%			117.69	%			59.46	%

		At December 31,
		2016								2015								2014								2013								2012
(dollars in thousands)		Amount				% of Loans				Amount				% of Loans				Amount				% of Loans				Amount				% of Loans				Amount				% of Loans
Commercial real estate		$	3,254				39.2	%		$	2,393				40.0	%		$	6,828				48.5	%		$	6,454				50.4	%		$	3,979				54.3	%
Construction and land development			557				6.4	%			338				5.3	%			917				3.8	%			1,948				3.5	%			1,273				4.3	%
Commercial and industrial			2,884				18.1	%			2,932				20.8	%			1,579				18.5	%			2,309				17.4	%			1,880				16.8	%
Owner occupied real estate			1,382				28.7	%			2,030				28.1	%			1,638				24.0	%			985				23.6	%			1,967				20.4	%
Consumer and other			588				6.6	%			295				5.5	%			234				5.1	%			225				4.7	%			234				3.8	%
Residential mortgage			58				1.0	%			14				0.3	%			2				0.1	%			14				0.4	%			17				0.4	%
Unallocated			432				-				701				-				338				-				328				-				192				-
Total allowance for loan losses		$	9,155				100	%		$	8,703				100	%		$	11,536				100	%		$	12,263				100	%		$	9,542				100	%

(dollars in thousands)		December 31,
		2016				2015				2014
Impaired loans without a valuation allowance		$	15,740			$	15,497			$	16,742
Impaired loans with a valuation allowance			12,430				6,632				18,902
Total impaired loans		$	28,170			$	22,129			$	35,644
Valuation allowance related to impaired loans		$	3,468			$	2,238			$	5,130
Total nonaccrual loans			18,594				12,622				21,440
Total loans past-due ninety days or more and
still accruing			302				-				-

(dollars in thousands)			December 31,
			2016				2015				2014
30 to 59 days past due		$	1,060			$	2,878			$	1,681
60 to 89 days past due			31				9,315				14,062
Total loans 30 to 89 days past due		$	1,091			$	12,193			$	15,743

(dollars in thousands)		At December 31,
		2016				2015				2014
Demand deposits, non-interest bearing		$	324,912			$	243,695			$	224,245
Demand deposits, interest bearing			605,950				381,499				283,768
Money market & savings deposits			635,644				556,526				488,848
Time deposits			111,164				67,578				75,369
Total deposits		$	1,677,670			$	1,249,298			$	1,072,230

		For the Years Ended December 31,
		2016								2015								2014
(dollars in thousands)		Average Balance				Rate				Average Balance				Rate				Average Balance				Rate
Demand deposits:
Non-interest bearing		$	284,326							$	235,810							$	189,810
Interest bearing			510,745				0.41	%			349,055				0.40	%			233,693				0.38	%
Money market & savings deposits			586,750				0.45	%			508,846				0.43	%			439,484				0.44	%
Time deposits			89,713				1.05	%			73,819				0.94	%			78,073				0.92	%
Total deposits		$	1,471,534				0.39	%		$	1,167,530				0.37	%		$	941,060				0.38	%

(dollars in thousands)
Maturity:
3 months or less		$	11,190
3 to 6 months			4,234
6 to 12 months			22,788
Over 12 months			36,131
Total		$	74,343

(dollars in thousands)
Maturity:
2017		$	65,247
2018			21,554
2019			1,605
2020			21,793
2021			965
Thereafter			-
Total		$	111,164

Change in Interest Rates in Basis Points (Rate Shock)		Net Portfolio Value												NPV as a % of Portfolio Value of Assets
		Amount				$ Change				% Change				NPV Ratio				Change (in Basis Points)
+400		$	411,407			$	95,828				30.38	%			24.26	%			766
+300			396,593				81,044				25.68	%			22.71	%			611
+200			379,061				63,512				20.13	%			21.07	%			447
+100			352,680				37,131				11.77	%			19.04	%			244
Static			315,549				-				0.00	%			16.60	%			-
-100			253,473				(62,076	)			(19.67	)%			13.09	%			(351	)

Change in Interest Rates in Basis Points(1)		Net Interest Income				$ Change				% Change
+400		$	67,295				5,323				8.59	%
+300			66,013				4,041				6.52	%
+200			64,701				2,729				4.40	%
+100			63,323				1,351				2.18	%
Static			61,972				-				0.00	%
-100			61,171				(801	)			(1.29	)%

(dollars in thousands)		Actual								Minimum Capital Adequacy									Minimum Capital Adequacy with Capital Buffer								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount					Ratio				Amount				Ratio				Amount				Ratio
At December 31, 2016:
Total risk based capital
Republic		$	179,057				13.93	%			$	102,811				8.00	%		$	110,843				8.625	%		$	128,514				10.00	%
Company			245,043				18.99	%				103,226				8.00	%			111,290				8.625	%			-				-	%
Tier one risk based capital
Republic			169,902				13.22	%				77,108				6.00	%			85,140				6.625	%			102,811				8.00	%
Company			235,888				18.28	%				77,419				6.00	%			85,484				6.625	%			-				-	%
CET 1 risk based capital
Republic			169,902				13.22	%				57,831				4.50	%			65,863				5.125	%			83,534				6.50	%
Company			214,088				16.59	%				58,064				4.50	%			66,129				5.125	%			-				-	%
Tier one leveraged capital
Republic			169,902				9.20	%				73,843				4.00	%			73,843				4.00	%			92,304				5.00	%
Company			235,888				12.74	%				74,073				4.00	%			74,073				4.00	%			-				-	%
At December 31, 2015:
Total risk based capital
Republic		$	138,566				12.65	%			$	87,617				8.00	%		$	-				-	%		$	109,521				10.00	%
Company			145,089				13.19	%				87,976				8.00	%			-				-	%			-				-	%
Tier one risk based capital
Republic			129,863				11.86	%				65,712				6.00	%			-				-	%			87,617				8.00	%
Company			136,386				12.40	%				65,982				6.00	%			-				-	%			-				-	%
CET 1 risk based capital
Republic			129,863				11.86	%				49,284				4.50	%			-				-	%			71,189				6.50	%
Company			114,586				10.42	%				49,487				4.50	%			-				-	%			-				-	%
Tier one leveraged capital
Republic			129,863				9.22	%				56,328				4.00	%			-				-	%			70,410				5.00	%
Company			136,386				9.65	%				56,531				4.00	%			-				-	%			-				-	%

		December 31, 2016				December 31, 2015
ASSETS
Cash and due from banks		$	19,830			$	13,777
Interest bearing deposits with banks			14,724				13,362
Cash and cash equivalents			34,554				27,139
Investment securities available for sale, at fair value			369,739				284,795
Investment securities held to maturity, at amortized cost (fair value of $425,183 and $171,845, respectively)			432,499				172,277
Restricted stock, at cost			1,366				3,059
Loans held for sale			28,065				3,653
Loans receivable (net of allowance for loan losses of $9,155 and $8,703, respectively)			955,817				866,066
Premises and equipment, net			57,040				46,164
Other real estate owned, net			10,174				11,313
Accrued interest receivable			5,497				4,216
Goodwill			5,011				-
Intangible asset			61				-
Other assets			24,108				20,142
Total Assets		$	1,923,931			$	1,438,824
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand – non-interest bearing		$	324,912			$	243,695
Demand – interest bearing			605,950				381,499
Money market and savings			635,644				556,526
Time deposits			111,164				67,578
Total Deposits			1,677,670				1,249,298
Short-term borrowings			-				47,000
Accrued interest payable			444				245
Other liabilities			8,883				7,049
Subordinated debt			21,881				21,857
Total Liabilities			1,708,878				1,325,449
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 57,283,712 as of December 31, 2016 and 38,365,848 as of December 31, 2015; shares outstanding 56,754,867 as of December 31, 2016 and 37,837,003 as of December 31, 2015			573				384
Additional paid in capital			253,570				152,897
Accumulated deficit			(27,888	)			(32,833	)
Treasury stock at cost (503,408 shares as of December 31, 2016 and December 31, 2015)			(3,725	)			(3,725	)
Stock held by deferred compensation plan (25,437 shares as of December 31, 2016 and December 31, 2015)			(183	)			(183	)
Accumulated other comprehensive loss			(7,294	)			(3,165	)
Total Shareholders' Equity			215,053				113,375
Total Liabilities and Shareholders' Equity			1,923,931			$	1,438,824

		Years Ended December 31,
		2016				2015				2014
Interest income
Interest and fees on taxable loans		$	40,827			$	37,241			$	34,530
Interest and fees on tax-exempt loans			960				540				339
Interest and dividends on taxable investment securities			11,264				6,792				5,053
Interest and dividends on tax-exempt investment securities			703				585				364
Interest on federal funds sold and other interest-earning assets			473				278				187
Total interest income			54,227				45,436				40,473
Interest expense
Demand- interest bearing			2,088				1,401				888
Money market and savings			2,639				2,170				1,929
Time deposits			942				695				719
Other borrowings			1,194				1,115				1,108
Total interest expense			6,863				5,381				4,644
Net interest income			47,364				40,055				35,829
Provision for loan losses			1,557				500				900
Net interest income after provision for loan losses			45,807				39,555				34,929
Non-interest income
Loan advisory and servicing fees			1,627				2,226				1,452
Mortgage banking income			5,062				-				-
Gain on sales of SBA loans			4,981				3,139				4,717
Service fees on deposit accounts			2,658				1,720				1,224
Legal settlements			-				2,550				-
Gain on sale of investment securities			656				108				458
Net securities impairment losses recognized in earnings			(7	)			(3	)			(7	)
Other non-interest income			335				203				173
Total non-interest income			15,312				9,943				8,017
Non-interest expenses
Salaries and employee benefits			28,602				22,488				20,089
Occupancy			6,109				4,929				4,247
Depreciation and amortization			3,518				3,080				2,382
Legal			459				915				1,290
Other real estate owned			2,182				4,239				1,794
Advertising			811				627				597
Data processing			2,408				1,593				1,345
Insurance			962				720				586
Professional fees			1,580				1,268				1,468
Regulatory assessments and costs			1,413				1,248				1,065
Taxes, other			366				689				616
Other operating expenses			7,883				5,295				5,071
Total non-interest expense			56,293				47,091				40,550
Income before benefit for income taxes			4,826				2,407				2,396
Benefit for income taxes			(119	)			(26	)			(46	)
Net income		$	4,945			$	2,433			$	2,442
Net income per share
Basic		$	0.13			$	0.06			$	0.07
Diluted		$	0.12			$	0.06			$	0.07

		Years Ended December 31,
		2016				2015				2014
Net income		$	4,945			$	2,433			$	2,442
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities (pre-tax $(6,011), $(4,021) and $4,992, respectively)			(3,853	)			(2,577	)			3,199
Reclassification adjustment for securities gains (pre-tax $(656), $(108) and $(458), respectively)			(420	)			(69	)			(293	)
Reclassification adjustment for impairment charge (pre-tax $7, $3 and $7, respectively)			4				2				4
Net unrealized gains (losses) on securities			(4,269	)			(2,644	)			2,910
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $-, $- and $(1,233), respectively)			-				-				(790	)
Amortization of net unrealized holding losses during the period (pre-tax $219, $173 and $118, respectively)			140				111				76
Total other comprehensive income (loss)			(4,129	)			(2,533	)			2,196
Total comprehensive income (loss)		$	816			$	(100	)		$	4,638

		2016				2015				2014
Cash flows from operating activities
Net income		$	4,945			$	2,433			$	2,442
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,557				500				900
Loss on sale of other real estate owned			-				-				9
Write down of other real estate owned			355				3,069				1,138
Depreciation and amortization			3,518				3,080				2,382
Deferred income taxes			(380	)			(84	)			(142	)
Stock based compensation			759				600				420
Gain on sale of investment securities			(656	)			(108	)			(458	)
Impairment charges on investment securities			7				3				7
Amortization of premiums on investment securities			1,980				840				540
Accretion of discounts on retained SBA loans			(1,364	)			(1,005	)			(899	)
Fair value adjustments on SBA servicing assets			1,075				14				655
Proceeds from sales of SBA loans originated for sale			58,107				32,922				51,388
SBA loans originated for sale			(53,627	)			(31,760	)			(43,416	)
Gains on sales of SBA loans originated for sale			(4,981	)			(3,139	)			(4,717	)
Proceeds from sales of mortgage loans originated for sale			163,414				-				-
Mortgage loans originated for sale			(161,717	)			-				-
Gains on mortgage loans originated for sale			(4,737	)			-				-
Amortization of intangible assets			43				-				-
Amortization of debt issuance costs			24				24				24
Increase in accrued interest receivable and other assets			(1,993	)			(2,966	)			(1,796	)
Net (decrease) increase in accrued interest payable and other liabilities			(1,040	)			213				325
Net cash provided by operating activities			5,289				4,636				8,802
Cash flows from investing activities
Purchase of investment securities available for sale			(207,482	)			(146,668	)			(78,825	)
Purchase of investment securities held to maturity			(294,187	)			(121,402	)			-
Proceeds from the sale of securities available for sale			78,585				11,707				5,700
Proceeds from the paydowns, maturity or call of securities available for sale			36,982				31,159				25,822
Proceeds from the paydowns, maturity or call of securities held to maturity			33,160				16,689				2,308
Net redemption (purchase) of restricted stock			1,693				(1,902	)			413
Net increase in loans			(89,428	)			(106,616	)			(104,357	)
Net proceeds from sale of other real estate owned			1,400				792				197
Net cash paid in acquisition			(5,913	)			-				-
Premises and equipment expenditures			(14,291	)			(14,214	)			(14,664	)
Net cash used in investing activities			(459,481	)			(330,455	)			(163,406	)
Cash flows from financing activities
Net proceeds from stock offering			99,175				-				44,853
Net proceeds from exercise of stock options			726				64				1
Net increase in demand, money market and savings deposits			384,786				184,859				206,163
Net increase (decrease) in time deposits			43,586				(7,791	)			(3,467	)
(Repayment) increase in short-term borrowings			(66,666	)			47,000				-
Net cash provided by financing activities			461,607				224,132				247,550
Net increase (decrease) in cash and cash equivalents			7,415				(101,687	)			92,946
Cash and cash equivalents, beginning of year			27,139				128,826				35,880
Cash and cash equivalents, end of year		$	34,554			$	27,139			$	128,826
Supplemental disclosures
Interest paid		$	6,664			$	5,401			$	4,616
Income taxes paid		$	190			$	-			$	70
Non-cash transfers from loans to other real estate owned		$	616			$	11,459			$	1,000
Transfer of available-for-sale-securities to held-to-maturity securities		$	-			$	-			$	70,118

		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, 2014		$	265				107,078				(37,708	)			(3,099	)			(809	)			(2,828	)			62,899
Net income											2,442																2,442
Other comprehensive income, net of tax																							2,196				2,196
Proceeds from shares issued under common stock offering (11,842,106 shares) net of offering costs of $147			118				44,735																				44,853
Stock based compensation							420																				420
Options exercised (500 shares)							1																				1
Transfer from deferred compensation plan to treasury stock (87,105 shares)															(626	)			626								-
Balance December 31, 2014			383				152,234				(35,266	)			(3,725	)			(183	)			(632	)			112,811
Net income											2,433																2,433
Other comprehensive loss, net of tax																							(2,533	)			(2,533	)
Stock based compensation							600																				600
Options exercised (21,500 shares)			1				63																				64
Balance December 31, 2015			384				152,897				(32,833	)			(3,725	)			(183	)			(3,165	)			113,375
Net income											4,945																4,945
Other comprehensive loss, net of tax																							(4,129	)			(4,129	)
Proceeds from shares issued under common stock offering (18,691,589 shares) net of offering costs of $825			187				98,988																				99,175
Stock based compensation							759																				759
Stock options issued in acquisition							202																				202
Options exercised (226,275 shares)			2				724																				726
Balance December 31, 2016		$	573			$	253,570			$	(27,888	)		$	(3,725	)		$	(183	)		$	(7,294	)		$	215,053