ACQUISITION OF CORNERSTONE BANCORP, INC.

9 Months Ended

Sep. 30, 2016

ACQUISITION OF CORNERSTONE BANCORP, INC.

ACQUISITION OF CORNERSTONE BANCORP, INC.

2. ACQUISITION OF CORNERSTONE BANCORP, INC.

OVERVIEW

On May 17, 2016, the Company completed its acquisition of Cornerstone Bancorp, Inc. (“Cornerstone”), and its wholly-owned bank subsidiary Cornerstone Community Bank (“CCB”), for approximately $32 million in cash. The primary reason for the acquisition of Cornerstone was to expand the Company’s footprint in the Tampa, Florida metropolitan statistical area.

ACQUISITION SUMMARY

The following table provides a summary of the assets acquired and liabilities assumed as recorded by Cornerstone, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, recast adjustments to those previously reported preliminary fair values, and the fair values of those assets and liabilities as recorded by the Company. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary resultant fair values shown in the following table continue to be evaluated by management and may be subject to further recast adjustments.

Acquisition of Cornerstone Bancorp, Inc.  - Summary of Assets Acquired and Liabilities Assumed
		May 17, 2016
	As Previously Reported					As Recasted
		As Recorded		Fair Value			Recast			As Recorded
(in thousands)		by Cornerstone		Adjustments (1)			Adjustments (1)			by Republic
Assets acquired:
Cash and cash equivalents	$	22,707	$	—		$	—		$	22,707
Investment securities		329		—			—			329
Loans		195,136		(5,525)	a		13	a		189,624
Allowance for loan and lease losses		(1,955)		1,955	a		—			—
Loans, net		193,181		(3,570)			13			189,624
Federal Home Loan Bank stock, at cost		224		—			—			224
Premises and equipment, net		7,770		4,457	b		—			12,227
Core deposit intangible		—		1,205	c		—			1,205
Deferred income taxes		3,714		(74)	d		—			3,640
Bank owned life insurance		7,461		—			—			7,461
Other assets and accrued interest receivable		658		—			—			658
Total assets acquired	$	236,044	$	2,018		$	13		$	238,075
Liabilities assumed:
Deposits
Noninterest-bearing	$	52,908	$	—		$	—		$	52,908
Interest-bearing		152,257		92	e		—			152,349
Total deposits		205,165		92			—			205,257
Subordinated note		4,124		—			—			4,124
Other liabilities and accrued interest payable		2,244		787	f		—			3,031
Total liabilities assumed		211,533		879			—			212,412
Net assets acquired	$	24,511	$	1,139		$	13			25,663
Cash consideration paid										(31,795)
Goodwill									$	6,132

(1) The Company’s acquisition of Cornerstone closed on May 17, 2016. The fair value adjustments reported are preliminary estimates based on information obtained subsequent to May 17, 2016 and through September 30, 2016. Management is continuing to evaluate each of its estimates and may provide additional recast adjustments in future periods based on this continuing evaluation. To the extent that additional recast adjustments are posted in future periods, the resultant fair values and the amount of goodwill recorded by the Company will change.

Explanation of preliminary fair value adjustments:

a. Adjustment reflects the fair value adjustment based on the Company’s evaluation of the acquired loan portfolio and to eliminate the recorded allowance for loan losses.

b. Adjustment reflects the fair value adjustment based on the Company’s evaluation of the premises and equipment acquired.

c. Adjustment reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.

d. This adjustment reflects the differences in the carrying values of acquired assets and assumed liabilities for financial reporting purposes and their basis for federal income tax purposes.

e. Adjustment reflects the fair value adjustment based on the Company’s evaluation of the assumed time deposits.

f. Adjustment reflects the amount needed to adjust other liabilities to estimated fair value and to record certain liabilities directly attributable to the acquisition of Cornerstone.

Goodwill of approximately $6 million, which is the excess of the merger consideration over the fair value of net assets acquired, is expected to be recorded in the Cornerstone acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Traditional Banking segment and is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the Cornerstone acquisition will change.

CORNERSTONE CONTRIBUTION FOR THE REPORTING PERIOD

The Company’s consolidated statements of income include the impact of the Company’s Cornerstone acquisition for the three and nine months ended September 30, 2016. The results of operations of the assets acquired and liabilities assumed in the Company’s Cornerstone acquisition, inclusive of any pre-acquisition related costs, are summarized in the following table:

	Three Months Ended							Nine Months Ended
	September 30, 2016							September 30, 2016
(in thousands)	Non-Acquisition Related		Acquisition-Related			Total		Non-Acquisition Related		Acquisition-Related			Total
INTEREST INCOME:
Loans, including fees	$	2,348	$	34	a	$	2,382	$	3,403	$	34	a	$	3,437
Taxable investment securities		547		—			547		750		—			750
Total interest income		2,895		34			2,929		4,153		34			4,187
INTEREST EXPENSE:
Deposits		144		(5)	b		139		215		(9)	b		206
Borrowings		848		—			848		1,099		—			1,099
Subordinated note		25		—			25		37		—			37
Total interest expense		1,017		(5)			1,012		1,351		(9)			1,342
NET INTEREST INCOME		1,878		39			1,917		2,802		43			2,845
Provision for loan and lease losses		9		—			9		95		—			95
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		1,869		39			1,908		2,707		43			2,750
NONINTEREST INCOME:
Service charges on deposit accounts		86		—			86		123		—			123
Interchange fee income		57		—			57		76		—			76
Other		140		—			140		176		—			176
Total noninterest income		283		—			283		375		—			375
NONINTEREST EXPENSES:
Salaries and employee benefits		831		—			831		1,250		274	c		1,524
Occupancy and equipment, net		225		—			225		325		—			325
Communication and transportation		67		—			67		97		10	d		107
Marketing and development		100		—			100		127		—			127
FDIC insurance expense		11		—			11		30		—			30
Data processing		3		212	e		215		—		663	e		663
Supplies		24		—			24		31		20	f		51
Legal and professional fees		11		—			11		40		150	g		190
Other		152		45	h		197		220		76	h		296
Total noninterest expenses		1,424		257			1,681		2,120		1,193			3,313
INCOME (LOSS) BEFORE INCOME TAX EXPENSE		728		(218)			510		962		(1,150)			(188)
INCOME TAX EXPENSE (BENEFIT)		218		(67)			151		288		(348)			(60)
NET INCOME (LOSS)	$	510	$	(151)		$	359	$	674	$	(802)		$	(128)

Explanation of acquisition-related items:

a. Accretion of loan discounts.

b. Amortization of deposit premiums.

c. Severance payouts and signing bonuses for former Cornerstone employees.

d. Notices to former Cornerstone stakeholders of change in ownership and merger-related travel.

e. Primarily core system conversion-related costs.

f. Costs to update forms and supplies to RB&T brand.

g. Includes legal, audit, tax and other acquisition related consulting costs.

h. Includes amortization of core deposit intangible asset.