Quarterly Report (10-q)

Date : 08/07/2019 @ 5:56PM
Source : Edgar (US Regulatory)
Stock : Republic First Bancorp Inc (FRBK)
Quote : 4.08  0.0 (0.00%) @ 12:00PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[ X ]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019.

or

 

[     ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____.

 

Commission File Number: 000-17007

 

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

23-2486815

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

   

50 South 16 th Street, Philadelphia, Pennsylvania

19102

(Address of principal executive offices)

(Zip code)

 

215-735-4422

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

FRBK 

 

Nasdaq Global Market

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]    NO [   ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [ X ]    NO [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]

Accelerated filer [X]

Non-Accelerated filer [   ] Smaller reporting company [    ]

Emerging growth company [   ]

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

Common Stock, $0.01 per share

58,842,778

Title of Class

Number of Shares Outstanding as of August 5, 2019

 

 

 
 

 

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

     

Part I:  Financial Information

Page

     

Item 1.

Financial Statements

 
 

Consolidated balance sheets as of June 30, 2019 and December 31, 2018 (unaudited)

1

  Consolidated statements of income for the three and six months ended June 30, 2019 and 2018 (unaudited) 2
 

Consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018 (unaudited)

3

 

Consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 (unaudited)

4

 

Consolidated statements of changes in shareholders’ equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

5

 

Notes to consolidated financial statements (unaudited)

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

     

Item 4.

Controls and Procedures

55

     

Part II:  Other Information

 
     

Item 1.

Legal Proceedings

56

     

Item 1A.

Risk Factors

56

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

     

Item 3.

Defaults Upon Senior Securities

56

     

Item 4.

Mine Safety Disclosures

56

     

Item 5.

Other Information

56

     

Item 6.

Exhibits

57

     

Signatures

58

 

 

 
 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2019 and December 31, 2018

(Dollars in thousands, except per share data)

 

   

June 30,

2019

   

December 31,

2018

 

ASSETS

               

Cash and due from banks

  $ 38,770     $ 35,685  

Interest bearing deposits with banks

    90,744       36,788  

Cash and cash equivalents

    129,514       72,473  

Investment securities available for sale, at fair value

    338,286       321,014  

Investment securities held to maturity, at amortized cost (fair value of $725,796 and $747,323, respectively)

    718,534       761,563  

Restricted stock, at cost

    5,130       5,754  

Mortgage loans held for sale, at fair value

    21,346       20,887  

Other loans held for sale

    2,066       5,404  

Loans receivable (net of allowance for loan losses of $8,056 and $8,615, respectively)

    1,500,664       1,427,983  

Premises and equipment, net

    105,311       87,661  

Other real estate owned, net

    6,406       6,223  

Accrued interest receivable

    9,270       9,025  

Operating lease right-of-use asset

    67,117       -  

Goodwill

    5,011       5,011  

Other assets

    32,331       30,299  

Total Assets

  $ 2,940,986     $ 2,753,297  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Liabilities

               

Deposits

               

Demand – non-interest bearing

  $ 544,406     $ 519,056  

Demand – interest bearing

    1,072,415       1,042,561  

Money market and savings

    719,075       676,993  

Time deposits

    192,081       154,257  

Total Deposits

    2,527,977       2,392,867  

Short-term borrowings

    68,979       91,422  

Accrued interest payable

    1,134       558  

Other liabilities

    9,739       12,002  

Operating lease liability

    70,537       -  

Subordinated debt

    11,262       11,259  

Total Liabilities

    2,689,628       2,508,108  
                 

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 59,371,623 as of June 30, 2019 and 59,318,073 as of December 31, 2018; shares outstanding 58,842,778 as of June 30, 2019 and 58,789,228 as of December 31, 2018

    594       593  

Additional paid in capital

    270,789       269,147  

Accumulated deficit

    (7,909 )     (8,716 )

Treasury stock at cost (503,408 shares as of June 30, 2019 and December 31, 2018)

    (3,725 )     (3,725 )

Stock held by deferred compensation plan (25,437 shares as of June 30, 2019 and December 31, 2018)

    (183 )     (183 )

Accumulated other comprehensive loss

    (8,208 )     (11,927 )

Total Shareholders’ Equity

    251,358       245,189  

Total Liabilities and Shareholders’ Equity

  $ 2,940,986     $ 2,753,297  

 

(See notes to consolidated financial statements)

 

1

 
 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollars in thousands, except per share data)

(unaudited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Interest income:

                               

Interest and fees on taxable loans

  $ 18,149     $ 15,082     $ 35,529     $ 28,989  

Interest and fees on tax-exempt loans

    420       375       840       737  

Interest and dividends on taxable investment securities

    7,059       6,676       14,304       13,025  

Interest and dividends on tax-exempt investment securities

    99       128       237       237  

Interest on federal funds sold and other interest-earning assets

    518       63       854       235  

Total interest income

    26,245       22,324       51,764       43,223  

Interest expense:

                               

Demand- interest bearing

    4,206       1,549       8,144       2,806  

Money market and savings

    1,628       1,174       3,080       2,146  

Time deposits

    861       366       1,485       735  

Other borrowings

    179       573       544       758  

Total interest expense

    6,874       3,662       13,253       6,445  

Net interest income

    19,371       18,662       38,511       36,778  

Provision for loan losses

    -       800       300       1,200  

Net interest income after provision for loan losses

    19,371       17,862       38,211       35,578  

Non-interest income:

                               

Loan and servicing fees

    689       372       899       519  

Mortgage banking income

    3,031       3,182       5,251       5,368  

Gain on sales of SBA loans

    1,147       846       1,649       1,838  

Service fees on deposit accounts

    1,848       1,326       3,460       2,501  

Gain (loss) on sale of investment securities

    261       (1 )     583       (1 )

Other non-interest income

    50       43       129       78  

Total non-interest income

    7,026       5,768       11,971       10,303  

Non-interest expenses:

                               

Salaries and employee benefits

    13,705       10,883       26,064       21,528  

Occupancy

    2,682       1,888       5,276       4,001  

Depreciation and amortization

    1,539       1,465       2,960       2,822  

Legal

    333       349       562       640  

Other real estate owned

    517       192       854       503  

Appraisal and other loan expenses

    390       455       851       733  

Advertising

    454       297       769       626  

Data processing

    1,184       940       2,346       1,764  

Insurance

    216       217       451       509  

Professional fees

    725       510       1,203       978  

Automated teller machine expenses

    607       442       1,163       829  

Regulatory assessments and costs

    421       395       842       862  

Taxes, other

    207       245       494       490  

Other operating expenses

    2,931       2,451       5,343       4,546  

Total non-interest expense

    25,911       20,729       49,178       40,831  

Income before provision for income taxes

    486       2,901       1,004       5,050  

Provision for income taxes

    105       530       197       902  

Net income

  $ 381     $ 2,371     $ 807     $ 4,148  

Net income per share:

                               

Basic

  $ 0.01     $ 0.04     $ 0.01     $ 0.07  

Diluted

  $ 0.01     $ 0.04     $ 0.01     $ 0.07  

 

(See notes to consolidated financial statements)

 

2

 
 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollars in thousands)

(unaudited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income

  $ 381     $ 2,371     $ 807     $ 4,148  
                                 

Other comprehensive income (loss), net of tax

                               

Unrealized gains (losses) on securities (pre-tax $2,473, ($2,300), $4,775, and ($9,008), respectively)

    1,902       (1,797 )     3,672       (7,036 )

Reclassification adjustment for securities (gains) losses (pre-tax ($261), $1, ($583), and $1, respectively)

    (200 )     1       (448 )     1  

Net unrealized gains/(losses) on securities

    1,702       (1,796 )     3,224       (7,035 )

Amortization of net unrealized holding losses to income during the period (pre-tax $332, $30, $644, and $69 respectively)

    255       23       495       54  
                                 

Total other comprehensive income (loss)

    1,957       (1,773 )     3,719       (6,981 )
                                 

Total comprehensive income (loss)

  $ 2,338     $ 598     $ 4,526     $ (2,833 )

 

(See notes to consolidated financial statements)

 

3

 
 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2019 and 2018

(Dollars in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Cash flows from operating activities

               

Net income

  $ 807     $ 4,148  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for loan losses

    300       1,200  

Write down of other real estate owned

    16       -  

Depreciation and amortization

    2,960       2,822  

Stock based compensation

    1,382       1,052  

Net (gain) loss on sale of investment securities

    (583 )     1  

Amortization of premiums on investment securities

    1,277       1,497  

Accretion of discounts on retained SBA loans

    (703 )     (678 )

Fair value adjustments on SBA servicing assets

    745       833  

Proceeds from sales of SBA loans originated for sale

    25,099       24,283  

SBA loans originated for sale

    (20,112 )     (23,331 )

Gains on sales of SBA loans originated for sale

    (1,649 )     (1,838 )

Proceeds from sales of mortgage loans originated for sale

    152,784       156,560  

Mortgage loans originated for sale

    (149,557 )     (145,366 )

Fair value adjustment for mortgage loans originated for sale

    49       41  

Gains on mortgage loans originated for sale

    (3,968 )     (4,058 )

Amortization of debt issuance costs

    3       3  

Non-cash expense related to leases

    637       -  

Increase in accrued interest receivable and other assets

    (2,292 )     (807 )

Decrease in accrued interest payable and other liabilities

    (518 )     (616 )

Net cash provided by operating activities

    6,677       15,746  
                 

Cash flows from investing activities

               

Purchase of investment securities available for sale

    (78,751 )     (79,595 )

Purchase of investment securities held to maturity

    -       (61,083 )

Proceeds from the sale of securities available for sale

    43,238       5,713  

Proceeds from the maturity or call of securities available for sale

    22,514       26,378  

Proceeds from the maturity or call of securities held to maturity

    42,898       28,030  

Net redemption (purchase) of restricted stock

    624       (6,461 )

Net increase in loans

    (72,878 )     (156,855 )

Net proceeds from sale of other real estate owned

    401       407  

Premises and equipment expenditures

    (20,610 )     (7,944 )

Net cash used in investing activities

    (62,564 )     (251,410 )
                 

Cash flows from financing activities

               

Proceeds from exercise of stock options

    261       561  

Increase in demand, money market and savings deposits

    97,286       63,787  

Increase in time deposits

    37,824       7,059  

Net (repayment) increase in short-term borrowings

    (22,443 )     161,669  

Net cash provided by financing activities

    112,928       233,076  

Net increase (decrease) in cash and cash equivalents

    57,041       (2,588 )

Cash and cash equivalents, beginning of year

    72,473       61,942  

Cash and cash equivalents, end of period

  $ 129,514     $ 59,354  
                 

Supplemental disclosures

               

Interest paid

  $ 13,829     $ 6,330  

Non-monetary transfers from loans to other real estate owned

  $ 600     $ -  

Conversion of subordinated debt to common stock

  $ -     $ 10,094  

 

(See notes to consolidated financial statements)

 

4

 
 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollars in thousands)

(unaudited)

 

   

Common

Stock

   

Additional

Paid in Capital

   

Accumulated

Deficit

   

Treasury

Stock

   

Stock Held by

Deferred

Compensation

Plan

   

Accumulated

Other

Comprehensive

Loss

   

Total

Shareholders’

Equity

 
                                                         

Balance April 1, 2019

  $ 593     $ 270,155     $ (8,290 )   $ (3,725 )   $ (183 )   $ (10,165 )   $ 248,385  
                                                         

Net income

                    381                               381  

Other comprehensive income, net of tax

                                            1,957       1,957  

Stock based compensation

            614                                       614  

Options exercised (6,000 shares)

    1       20                                       21  
                                                         

Balance June 30, 2019

  $ 594     $ 270,789     $ (7,909 )   $ (3,725 )   $ (183 )   $ (8,208 )   $ 251,358  
                                                         

Balance January 1, 2019

  $ 593     $ 269,147     $ (8,716 )   $ (3,725 )   $ (183 )   $ (11,927 )   $ 245,189  
                                                         

Net income

                    807                               807  

Other comprehensive income, net of tax

                                            3,719       3,719  

Stock based compensation

            1,382                                       1,382  

Options exercised (53,550 shares)

    1       260                                       261  
                                                         

Balance June 30, 2019

  $ 594     $ 270,789     $ (7,909 )   $ (3,725 )   $ (183 )   $ (8,208 )   $ 251,358  
                                                         

Balance April 1, 2018

  $ 592     $ 267,313     $ (15,566 )   $ (3,725 )   $ (183 )   $ (14,357 )   $ 234,074  
                                                         

Net income

                    2,371                               2,371  

Other comprehensive loss, net of tax

                                            (1,773 )     (1,773 )

Stock based compensation

            531                                       531  

Options exercised (36,500 shares)

    1       130                                       131  
                                                         

Balance June 30, 2018

  $ 593     $ 267,974     $ (13,195 )   $ (3,725 )   $ (183 )   $ (16,130 )   $ 235,334  
                                                         

Balance January 1, 2018

  $ 575     $ 256,285     $ (18,983 )   $ (3,725 )   $ (183 )   $ (7,509 )   $ 226,460  
                                                         

Reclassification due to the adoption of ASU 2018-02

                    1,640                       (1,640 )     -  

Net income

                    4,148                               4,148  

Other comprehensive loss, net of tax

                                            (6,981 )     (6,981 )

Stock based compensation

            1,052                                       1,052  

Conversion of subordinated debt to common stock (1,624,614 shares)

    16       10,078                                       10,094  

Options exercised (145,475 shares)

    2       559                                       561  
                                                         

Balance June 30, 2018

  $ 593     $ 267,974     $ (13,195 )   $ (3,725 )   $ (183 )   $ (16,130 )   $ 235,334  

 

(See notes to consolidated financial statements)

 

5

 

 

Republic First Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 1:   Basis of Presentation

 

Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania.  It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, Atlantic, Gloucester, and New York Counties. On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division with Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.

 

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.

 

The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.  

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

6

 

 

 

Note 2:   Summary of Significant Accounting Policies

 

Risks and Uncertainties

 

The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.

 

Mortgage Banking Activities and Mortgage Loans Held for Sale

 

Mortgage loans held for sale are originated and held until sold to permanent investors. Management has adopted 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.

 

Mortgage 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. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

 

Interest Rate Lock Commitments (“IRLCs”)

 

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging . Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included 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 where the servicing is released, and the servicing released premium is included in the market price. See Note 10 Derivatives and Risk Management Activities for further detail of IRLCs.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

 

In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.

 

In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the 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 portion of the decline related to credit impairment is charged to earnings.

 

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material 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.

 

7

 

 

 Stock-Based Compensation

 

The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of June 30, 2019, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.

 

On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants.  Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At June 30, 2019, the maximum number of common shares issuable under the 2014 Plan was 6.3 million shares. During the six months ended June 30, 2019, 1.2 million options were granted under the 2014 Plan with a fair value of $2,710,685.

 

The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant. A summary of the assumptions used in the Black-Scholes option pricing model for 2019 and 2018 are as follows:

 

   

2019

   

2018

 

Dividend yield (1)

  0.0%     0.0%  

Expected volatility (2)

  28.81%     28.22%  

Risk-free interest rate (3)

   1.95% to 2.70%      2.35% to 2.91%  

Expected life (4) (in years)

  6.25     6.25  

Assumed forfeiture rate (5)

  4.0%     4.0%  

 

(1) A dividend yield of 0.0% is utilized because cash dividends have never been paid.

(2) The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to provide a basis for a reasonable estimate of fair value.

(3) The risk-free interest rate is based on the five to seven year Treasury bond.

( 4 ) The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.

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

 

During the six months ended June 30, 2019 and 2018, 808,898 shares and 717,364 shares vested, respectively. Expense is recognized ratably over the period required to vest. At June 30, 2019, the intrinsic value of the 4,979,350 options outstanding was $2.6 million, while the intrinsic value of the 2,630,585 exercisable (vested) options was $2.4 million. At June 30, 2018, the intrinsic value of the 3,886,775 options outstanding was $8.1 million, while the intrinsic value of the 1,918,112 exercisable (vested) options was $6.7 million. During the six months ended June 30, 2019, 53,550 options were exercised resulting in cash receipts of $261,143 and 44,250 options were forfeited with a weighted average grant date fair value of $130,983. During the six months ended June 30, 2018, 145,475 options were exercised resulting in cash receipts of $561,082 and 43,375 options were forfeited with a weighted average grant date fair value of $124,944.

 

Information regarding stock based compensation for the six months ended June 30, 2019 and 2018 is set forth below:

 

   

2019

   

2018

 

Stock based compensation expense recognized

  $ 1,382,000     $ 1,052,000  

Number of unvested stock options

    2,348,765       1,968,663  

Fair value of unvested stock options

  $ 6,000,570     $ 5,555,672  

Amount remaining to be recognized as expense

  $ 4,625,447     $ 4,387,864  

 

The remaining unrecognized expense amount of $4,625,447 will be recognized ratably as expense through June 2023.

 

8

 

 

Earnings per Share

 

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans for the six months ended June 30, 2019 and June 30, 2018.

 

The calculation of EPS for the three and six months ended June 30, 2019 and 2018 is as follows (in thousands, except per share amounts):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income (basic and diluted)

  $ 381     $ 2,371     $ 807     $ 4,148  
                                 

Weighted average shares outstanding

    58,841       58,746       58,823       57,927  
                                 

Net income per share – basic

  $ 0.01     $ 0.04     $ 0.01     $ 0.07  
                                 

Weighted average shares outstanding (including dilutive CSEs)

    59,401       59,911       59,501       59,147  
                                 

Net income per share – diluted

  $ 0.01     $ 0.04     $ 0.01     $ 0.07  

 

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

 

(in thousands)

 

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Anti-dilutive securities

                               
                                 

Share based compensation awards

    4,419       2,721       4,301       2,666  

 

Recent Accounting Pronouncements

 

ASU 2014-09

 

       In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. In August 2015, the FASB issued ASU 2015-14,  Revenue from   Contracts with The Company (Topic 606): Deferral of the Effective Date . The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes interest income as well as many other revenues for financial assets and liabilities including revenue derived from loans, investment securities, and derivatives. This ASU was effective for the Company on January 1, 2018. The Company adopted this ASU on a modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. The adoption of this ASU did not have a material impact to its financial condition, results of operations, and consolidated financial statements. Refer to Note 11: Revenue Recognition for further disclosure as to the impact of Topic 606.

 

ASU 2016-01

 

       In January 2016, the FASB issued ASU No. 2016-01,  Financial Instruments - Overall.  The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance was effective for the Company on January 1, 2018 and was adopted using a modified retrospective approach. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (4) above, the Company measured the fair value of its loan portfolio as of December 31, 2018 using an exit price notion (see Note 7 Fair Value of Financial Instruments).

 

9

 

 

ASU 2016-02

 

In February 2016, the FASB issued ASU No. 2016-02,  Leases.  From the Company’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the landlord perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease is treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  

 

In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provided lessees the option to apply the new leasing standard to all open leases as of the adoption date. Prior to this ASU issuance, a modified retrospective transition approach was required.

 

In December 2018, the FASB issued ASU 2018-20 "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which provided lessors a policy election to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Additionally, the update requires certain lessors to exclude from variable payments lessor costs paid by lessees directly to third parties.

 

The Company adopted this ASU on January 1, 2019. The Company recognized an ROU asset of $34.2 million and total operating lease liability obligations of $35.1 million at January 1, 2019. Capital ratios remained in compliance with the regulatory definition of well capitalized. There were no material changes to the recognition of operating lease expense in the consolidated statements of income. The Company adopted certain practical expedients available under the new guidance, which did not require it to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification for any expired or existing leases, (3) reassess initial direct costs for any existing leases, and (4) evaluate whether certain sales taxes and other similar taxes are lessor costs. The Company elected the use-of-hindsight practical expedient. Additionally, the Company elected to apply the new lease guidance at the adoption date, rather than at the beginning of the earliest period presented.

 

ASU 2016-13

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company is currently evaluating the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations of expected losses under the new guidance are currently being run parallel to the calculations under existing guidance to assess and evaluate the potential impact to the Company’s financial statements.  The Company expects that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company's allowance for loan losses which will depend upon the nature and characteristics of the Company's loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019.

 

ASU 2016-15

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The ASU addresses classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance was adopted on January 1, 2018, on a retrospective basis. The adoption of 2016-15 did not result any changes in classifications in the Consolidated Statement of Cash Flows.

 

ASU 2017-01

 

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

 

ASU 2017-04

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test For Goodwill Impairment. The ASU simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company early adopted this ASU on July 1, 2018 using the simplified method. The adoption of ASU 2017-04 did not have a material impact on the consolidated financial statements.

 

10

 

 

ASU 2017-08

 

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

 

ASU 2017-09

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification in ASC 718. The ASU also provides that modification accounting is only required if the fair value, vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The ASU became effective January 1, 2018 on a prospective basis for awards modified on or after the adoption date. The adoption of ASU-2017-09 did not have a material impact on the consolidated financial statements.

 

ASU 2018-02

 

In February 2018, the FASB issued ASU 2018-02,  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows for reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act described in the "Income Taxes" section below. The amount of the reclassification should include the effect of the change in the federal corporate income tax rate related to items remaining in accumulated other comprehensive income (loss). The ASU would require an entity to disclose whether it elects to reclassify stranded tax effects from accumulated other comprehensive income (loss) to retained earnings in the period of adoption and, more generally, a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income (loss). The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption of the amendments in this update is permitted for periods for which financial statements have not yet been issued or made available for issuance, including in the period the Act was enacted. The Company adopted this ASU on January 1, 2018, by recording the reclassification adjustment to its beginning retained earnings in the amount of $1.6 million. The Company utilized the portfolio approach when releasing tax effects from AOCI for its investment securities.

 

ASU 2018-03

 

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10). The ASU was issued to clarify certain aspects of ASU 2016-01 such as treatment for discontinuations and adjustments for equity securities without a readily determinable market value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. The Company adopted this ASU on January 1, 2018. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations and consolidated financial statements.

 

ASU 2018-07

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). The ASU simplifies the accounting for share based payments granted to non-employees for goods and services. The ASU applies to all share based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor’s own operations by issuing share based payment awards. With the amended guidance from ASU 2018-07, non-employees share based payments are measured with an estimate of the fair value of the equity of the business is obligated to issue at the grant date (the date that the business and the stock award recipient agree to the terms of the award). Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for goods and services instead of stock. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on January 1, 2019. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations, and consolidated financial statements.

 

 

Note 3: Legal Proceedings

 

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.

 

 

Note 4: Segment Reporting

 

The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. We do not have loan production offices in those states.

 

11

 

 

 

Note 5: Investment Securities

 

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at June 30, 2019 and December 31, 2018 is as follows:

 

    At June 30, 2019  

 

 

(dollars in thousands)

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

 

Fair

Value

 
                                 

Collateralized mortgage obligations

  $ 233,262     $ 2,294     $ (919 )   $ 234,637  

Agency mortgage-backed securities

    22,005       29       (102 )     21,932  

Municipal securities

    15,053       406       -       15,459  

Corporate bonds

    69,499       8       (3,249 )     66,258  

Total securities available for sale

  $ 339,819     $ 2,737     $ (4,270 )   $ 338,286  
                                 

U.S. Government agencies

  $ 101,621     $ 832     $ (393 )   $ 102,060  

Collateralized mortgage obligations

    471,514       8,191       (1,269 )     478,436  

Agency mortgage-backed securities

    145,399       1,240       (1,339 )     145,300  

Total securities held to maturity

  $ 718,534     $ 10,263     $ (3,001 )   $ 725,796  

 

    At December 31, 2018  
(dollars in thousands)  

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 

Collateralized mortgage obligations

  $ 197,812     $ 567     $ (2,120 )   $ 196,259  

Agency mortgage-backed securities

    39,105       5       (611 )     38,499  

Municipal securities

    20,807       64       (232 )     20,639  

Corporate bonds

    62,583       87       (3,396 )     59,274  

Asset-backed securities

    6,433       -       (90 )     6,343  

Total securities available for sale

  $ 326,740     $ 723     $ (6,449 )   $ 321,014  
                                 

U.S. Government agencies

  $ 107,390     $ -     $ (3,772 )   $ 103,618  

Collateralized mortgage obligations

    500,690       570       (5,793 )     495,467  

Agency mortgage-backed securities

    153,483       -       (5,245 )     148,238  

Total securities held to maturity

  $ 761,563     $ 570     $ (14,810 )   $ 747,323  

 

The following table presents investment securities by stated maturity at June 30, 2019. 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 with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.

 

   

Available for Sale

   

Held to Maturity

 

 

(dollars in thousands)

 

Amortized

Cost

   

Fair

Value

   

Amortized

Cost

   

Fair

Value

 

Due in 1 year or less

  $ 3,789     $ 3,798     $ -     $ -  

After 1 year to 5 years

    11,889       11,932       12,574       12,790  

After 5 years to 10 years

    64,388       61,462       89,047       89,270  

After 10 years

    4,486       4,525       -       -  

Collateralized mortgage obligations

    233,262       234,637       471,514       478,436  

Agency mortgage-backed securities

    22,005       21,932       145,399       145,300  

Total

  $ 339,819     $ 338,286     $ 718,534     $ 725,796  

 

12

 

 

The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of June 30, 2019 and December 31, 2018. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

 

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.

 

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale.

 

There were no impairment charges (credit losses) on a single trust preferred security held in the portfolio for the three and six months ended June 30, 2019 and June 30, 2018. The trust preferred security was sold in December 2018.

 

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at June 30, 2019 and 2018 for which a portion of OTTI was recognized in other comprehensive income:

 

(dollars in thousands)

 

2019

   

2018

 

Beginning Balance, January 1 st

  $ -     $ 274  

Additional credit-related impairment loss on securities for which an other-than-temporary impairment was previously recognized

    -       -  

Ending Balance, June 30 th

  $ -     $ 274  

 

13

 

 

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

 

   

At June 30, 2019

 
   

Less than 12 months

   

12 months or more

   

Total

 

 

(dollars in thousands)

 

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 

Collateralized mortgage obligations

  $ 48,874     $ 609     $ 35,810     $ 310     $ 84,684     $ 919  

Agency mortgage-backed securities

    -       -       13,061       102       13,061       102  

Corporate bonds

    2,999       2       51,753       3,247       54,752       3,249  

Total Available for Sale

  $ 51,873     $ 611     $ 100,624     $ 3,659     $ 152,497     $ 4,270  

 

   

At June 30, 2019

 
   

Less than 12 months

   

12 months or more

   

Total

 

 

(dollars in thousands)

 

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 

U.S. Government agencies

  $ -     $ -     $ 37,533     $ 393     $ 37,533     $ 393  

Collateralized mortgage obligations

    30,149       97       91,719       1,172       121,868       1,269  

Agency mortgage-backed securities

    -       -       79,624       1,339       79,624       1,339  

Total Held to Maturity

  $ 30,149     $ 97     $ 208,876     $ 2,904     $ 239,025     $ 3,001  

 

   

At December 31, 2018

 
   

Less than 12 months

   

12 months or more

   

Total

 

 

(dollars in thousands)

 

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 

Collateralized mortgage obligations

  $ 58,883     $ 270     $ 83,377     $ 1,850     $ 142,260     $ 2,120  

Agency mortgage-backed securities

    1,134       10       16,768       601       17,902       611  

Municipal securities

    1,549       7       12,154       225       13,703       232  

Corporate bonds

    -       -       53,189       3,396       53,189       3,396  

Asset backed securities

    6,343       90       -       -       6,343       90  

Total Available for Sale

  $ 67,909     $ 377     $ 165,488     $ 6,072     $ 233,397     $ 6,449  

 

   

At December 31, 2018

 
   

Less than 12 months

   

12 months or more

   

Total

 

 

(dollars in thousands)

 

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 

U.S. Government agencies

  $ 5,351     $ 26     $ 98,267     $ 3,746     $ 103,618     $ 3,772  

Collateralized mortgage obligations

    44,574       475       173,467       5,318       218,041       5,793  

Agency mortgage-backed securities

    -       -       119,243       5,245       119,243       5,245  

Total Held to Maturity

  $ 49,925     $ 501     $ 390,977     $ 14,309     $ 440,902     $ 14,810  

 

Unrealized losses on securities in the investment portfolio amounted to $7.3 million with a total fair value of $391.5 million as of June 30, 2019 compared to unrealized losses of $21.3 million with a total fair value of $674.3 million as of December 31, 2018. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

 

The Company held five U.S. Government agency securities, thirty-nine collateralized mortgage obligations and eighteen agency mortgage-backed securities that were in an unrealized loss position at June 30, 2019. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of June 30, 2019.

 

14

 

 

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At June 30, 2019, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At June 30, 2019, the investment portfolio included seven corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration.

 

       The unrealized loss on the trust preferred security at June 30, 2018 was primarily the result of the secondary market becoming inactive for such a security and was considered temporary at that time. During 2018, management received several inquiries regarding the availability of the remaining trust preferred CDO security 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 remaining CDO security in December 2018.

 

Proceeds associated with the sale of securities available for sale during the three months ended June 30, 2019 were $18.2 million. The tax provision applicable to the net gains of $261,000 for the three months ended June 30, 2019 amounted to $61,000. Proceeds associated with the sale of securities available for sale during the six months ended June 30, 2019 were $43.2 million. Gross gains of $650,000 and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $583,000 for the six months ended June 30, 2019 amounted to $135,000.

 

During the three months and six months ended June 30, 2018, the proceeds from the sale of investment securities were $5.7 million. A gross loss of $1,000 was realized on the sale of investment securities for the three and six months ended June 30, 2018.

 

 

Note 6: Loans Receivable and Allowance for Loan Losses

 

       The following table sets forth the Company’s gross loans by major category as of June 30, 2019 and December 31, 2018:

 

 

(dollars in thousands)

 

June 30,

2019

   

December 31,

2018

 
                 

Commercial real estate

  $ 553,644     $ 515,738  

Construction and land development

    111,474       121,042  

Commercial and industrial

    189,632       200,423  

Owner occupied real estate

    381,852       367,895  

Consumer and other

    97,970       91,152  

Residential mortgage

    173,963       140,364  

Total loans receivable

    1,508,535       1,436,614  

Deferred costs (fees)

    185       (16 )

Allowance for loan losses

    (8,056 )     (8,615 )

Net loans receivable

  $ 1,500,664     $ 1,427,983  

 

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

 

15

 

 

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended June 30, 2019 and 2018:

 

 

 

(dollars in thousands)

 

Commercial

Real Estate

   

Construction

and Land

Development

   

Commercial

and Industrial

   

Owner

Occupied

Real Estate

   

 

Consumer

and Other

   

 

Residential

Mortgage

   

 

 

Unallocated

   

 

 

Total

 
                                                                 

Three months ended June 30, 2019

                                                               
Allowance for loan losses:                                                                
                                                                 

Beginning balance:

  $ 2,672     $ 703     $ 1,037     $ 1,867     $ 536     $ 985     $ 100     $ 7,900  

Charge-offs

    -       -       (1 )     -       -       -       -       (1 )

Recoveries

    -       -       153       -       4       -       -       157  

Provisions (credits)

    1       (72 )     (314 )     291       22       139       (67 )     -  
                                                                 

Ending balance

  $ 2,673     $ 631     $ 875     $ 2,158     $ 562     $ 1,124     $ 33     $ 8,056  
                                                                 
Three months ended June 30, 2018                                                                
Allowance for loan losses:                                                                
                                                                 

Beginning balance:

  $ 1,903     $ 751     $ 1,261     $ 1,692     $ 460     $ 508     $ 75     $ 6,650  

Charge-offs

    -       -       -       -       (14 )     -       -       (14 )

Recoveries

    33       -       76       20       1       -       -       130  

Provisions (credits)

    103       21       112       144       62       130       228       800  
                                                                 

Ending balance

  $ 2,039     $ 772     $ 1,449     $ 1,856     $ 509     $ 638     $ 303     $ 7,566  

 

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the six months ended June 30, 2019 and 2018:

 

 

 

(dollars in thousands)

 

Commercia l

Real Estate

   

Construction

and Land

Development

   

Commercial

and Industrial

   

Owner

Occupied

Real Estate

   

 

Consumer

and Other

   

 

Residential Mortgage

   

 

 

Unallocated

   

 

 

Total

 
                                                                 

Six months ended June 30, 2019

                                                               

Allowance for loan losses:

                                                               
                                                                 

Beginning balance:

  $ 2,462     $ 777     $ 1,754     $ 2,033     $ 577     $ 894     $ 118     $ 8,615  

Charge-offs

    -       -       (930 )     (75 )     (13 )     -