0000834285 REPUBLIC FIRST BANCORP INC false --12-31 Q2 2020 583,182 653,109 11,040 9,266 0.01 0.01 10,000,000 10,000,000 0 0 0 0 0.01 0.01 100,000,000 100,000,000 59,379,623 59,371,623 58,850,778 58,842,778 503,408 503,408 25,437 25,437 1,089 2,473 5,463 4,775 1,640 261 2,481 583 646 332 1,055 644 8,000 6,000 53,550 1 4 5 7 10 3 0 0 0 0 0 0 1 0 3.59 13.47 10.00 12 6.66 13.53 10.75 12 8 0 0 10 20 0 0 0 5 10 5 10 The risk-free interest rate is based on the five to seven year Treasury bond. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. 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 estimate expected volatility. All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income. Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period. Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable. The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value. The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior. Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Income. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2020.

 

or

 

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

For the transition period from ____ to ____.

 

Commission File Number: 000-17007

 

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

23-2486815

(State or other jurisdiction of incorporation or organization)

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

   

50 South 16th Street, Philadelphia, Pennsylvania

19102

(Address of principal executive offices)

(Zip code)

 

215-735-4422

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

 

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 ☒ 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 ☒ 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

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 ☒

 

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

58,855,778

Title of Class

Number of Shares Outstanding as of August 7, 2020

 

 

 

 

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, 2020 and December 31, 2019 (unaudited) 

1

  Consolidated statements of income for the three and six months ended June 30, 2020 and 2019 (unaudited) 2
 

Consolidated statements of comprehensive income for the three and six months ended June 30, 2020 and 2019 (unaudited)

3

 

Consolidated statements of cash flows for the six months ended June 30, 2020 and 2019 (unaudited)

4

 

Consolidated statements of changes in shareholders’ equity for the three and six months ended June 30, 2020 and 2019 (unaudited)

5

 

Notes to consolidated financial statements (unaudited)

6

     

Item 2.

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

41

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

66

     

Item 4.

Controls and Procedures

66

     

Part II: Other Information

 
     

Item 1.

Legal Proceedings

66

     

Item 1A.

Risk Factors

67

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

     

Item 3.

Defaults Upon Senior Securities

67

     

Item 4.

Mine Safety Disclosures

67

     

Item 5.

Other Information

68

     

Item 6.

Exhibits

68

     

Signatures

69

 

 

 
 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2020 and December 31, 2019

(Dollars in thousands, except per share data)

 

   

June 30,

2020

(unaudited)

   

December 31,

2019

 

 

ASSETS

               

Cash and due from banks

  $ 36,786     $ 41,928  

Interest bearing deposits with banks

    654,458       126,391  

Cash and cash equivalents

    691,244       168,319  
                 

Investment securities available for sale, at fair value

    382,221       539,042  

Investment securities held to maturity, at amortized cost (fair value of $583,182 and $653,109, respectively)

    556,159       644,842  

Restricted stock, at cost

    3,789       2,746  

Mortgage loans held for sale, at fair value

    24,744       10,345  

Other loans held for sale

    1,382       3,004  

Loans receivable (net of allowance for loan losses of $11,040 and $9,266, respectively)

    2,531,208       1,738,929  

Premises and equipment, net

    121,149       116,956  

Other real estate owned, net

    1,144       1,730  

Accrued interest receivable

    12,393       9,934  

Operating leases – right-of-use asset

    64,693       64,805  

Goodwill

    5,011       5,011  

Other assets

    39,506       35,627  

Total Assets

  $ 4,434,643     $ 3,341,290  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Liabilities

               

Deposits

               

Demand – non-interest bearing

  $ 1,095,782     $ 661,431  

Demand – interest bearing

    1,435,198       1,352,360  

Money market and savings

    902,528       761,793  

Time deposits

    210,446       223,579  

Total Deposits

    3,643,954       2,999,163  

Short-term borrowings

    438,478       -  

Accrued interest payable

    1,403       1,630  

Other liabilities

    15,316       11,208  

Operating lease liability obligation

    69,046       68,856  

Subordinated debt

    11,268       11,265  

Total Liabilities

    4,179,465       3,092,122  
                 

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 59,379,623 as of June 30, 2020 and 59,371,623 as of December 31, 2019; shares outstanding 58,850,778 as of June 30, 2020 and 58,842,778 as of December 31, 2019

    594       594  

Additional paid in capital

    273,118       272,039  

Accumulated deficit

    (10,297 )     (12,216 )

Treasury stock at cost (503,408 shares as of June 30, 2020 and December 31, 2019)

    (3,725 )     (3,725 )

Stock held by deferred compensation plan (25,437 shares as of June 30, 2020 and December 31, 2019)

    (183 )     (183 )

Accumulated other comprehensive loss

    (4,329 )     (7,341 )

Total Shareholders’ Equity

    255,178       249,168  

Total Liabilities and Shareholders’ Equity

  $ 4,434,643     $ 3,341,290  

 

(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, 2020 and 2019

(Dollars in thousands, except per share data)

 (unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest income:

                               

Interest and fees on taxable loans

  $ 22,183     $ 18,149     $ 41,806     $ 35,529  

Interest and fees on tax-exempt loans

    554       420       1,104       840  

Interest and dividends on taxable investment securities

    5,053       7,059       11,854       14,304  

Interest and dividends on tax-exempt investment securities

    19       99       39       237  

Interest on federal funds sold and other interest-earning assets

    50       518       339       854  

Total interest income

    27,859       26,245       55,142       51,764  

Interest expense:

                               

Demand- interest bearing

    2,856       4,206       6,277       8,144  

Money market and savings

    1,431       1,628       3,214       3,080  

Time deposits

    1,033       861       2,254       1,485  

Other borrowings

    112       179       216       544  

Total interest expense

    5,432       6,874       11,961       13,253  

Net interest income

    22,427       19,371       43,181       38,511  

Provision for loan losses

    1,000       -       1,950       300  

Net interest income after provision for loan losses

    21,427       19,371       41,231       38,211  

Non-interest income:

                               

Loan and servicing fees

    764       689       1,235       899  

Mortgage banking income

    3,389       3,031       5,847       5,251  

Gain on sales of SBA loans

    269       1,147       918       1,649  

Service fees on deposit accounts

    2,328       1,848       4,392       3,460  

Gain on sale of investment securities

    1,640       261       2,481       583  

Other non-interest income

    34       50       96       129  

Total non-interest income

    8,424       7,026       14,969       11,971  

Non-interest expenses:

                               

Salaries and employee benefits

    13,177       13,705       26,558       26,064  

Occupancy

    3,312       2,682       6,734       5,276  

Depreciation and amortization

    2,242       1,539       4,117       2,960  

Legal

    253       333       549       562  

Other real estate owned

    75       517       357       854  

Appraisal and other loan expenses

    539       390       961       851  

Advertising

    288       454       669       769  

Data processing

    1,567       1,184       3,141       2,346  

Insurance

    281       216       557       451  

Professional fees

    756       725       1,390       1,203  

Debit card processing

    899       607       1,724       1,163  

Regulatory assessments and costs

    675       421       1,305       842  

Taxes, other

    283       207       486       494  

Other operating expenses

    2,317       2,931       5,388       5,343  

Total non-interest expense

    26,664       25,911       53,936       49,178  

Income before provision for income taxes

    3,187       486       2,264       1,004  

Provision for income taxes

    675       105       345       197  

Net income

  $ 2,512     $ 381     $ 1,919     $ 807  

Net income per share:

                               

Basic

  $ 0.04     $ 0.01     $ 0.03     $ 0.01  

Diluted

  $ 0.04     $ 0.01     $ 0.03     $ 0.01  

 

(See notes to consolidated financial statements)

 

2

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2020 and 2019

(Dollars in thousands)

(unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income

  $ 2,512     $ 381     $ 1,919     $ 807  
                                 

Other comprehensive income, net of tax

                               

Unrealized gains on securities (pre-tax $1,089, $2,473, $5,463, and $4,775, respectively)

    813       1,902       4,077       3,672  

Reclassification adjustment for securities gains (pre-tax ($1,640), ($261), ($2,481), and ($583), respectively)

    (1,224 )     (200 )     (1,852 )     (448 )

Net unrealized gains (losses) on securities

    (411 )     1,702       2,225       3,224  

Amortization of net unrealized holding losses to income during the period (pre-tax $646, $332, $1,055, and $644 respectively)

    482       255       787       495  
                                 

Total other comprehensive income

    71       1,957       3,012       3,719  
                                 

Total comprehensive income

  $ 2,583     $ 2,338     $ 4,931     $ 4,526  

 

(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, 2020 and 2019

(Dollars in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Cash flows from operating activities

               

Net income

  $ 1,919     $ 807  

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

               

Provision for loan losses

    1,950       300  

Write down of other real estate owned

    -       16  

Depreciation and amortization

    4,117       2,960  

Stock based compensation

    1,056       1,382  

Net (gain) loss on sale of investment securities

    (2,481 )     (583 )

Amortization of premiums on investment securities

    3,610       1,277  

Accretion of discounts on retained SBA loans

    (429 )     (703 )

Fair value adjustments on SBA servicing assets

    158       745  

Proceeds from sales of SBA loans originated for sale

    15,179       25,099  

SBA loans originated for sale

    (12,639 )     (20,112 )

Gains on sales of SBA loans originated for sale

    (918 )     (1,649 )

Proceeds from sales of mortgage loans originated for sale

    148,131       152,784  

Mortgage loans originated for sale

    (158,637 )     (149,557 )

Fair value adjustment for mortgage loans originated for sale

    (589 )     49  

Gains on mortgage loans originated for sale

    (3,822 )     (3,968 )

Amortization of debt issuance costs

    3       3  

Non-cash expense related to leases

    255       637  

Increase in accrued interest receivable and other assets

    (6,190 )     (2,292 )

Increase (decrease) in accrued interest payable and other liabilities

    3,117       (518 )

Net cash (used in) provided by operating activities

    (6,210 )     6,677  
                 

Cash flows from investing activities

               

Purchase of investment securities available for sale

    (16,906 )     (78,751 )

Proceeds from the sale of securities available for sale

    92,804       43,238  

Proceeds from the paydown, maturity, or call of securities available for sale

    84,036       22,514  

Proceeds from the paydown, maturity, or call of securities held to maturity

    88,476       42,898  

Net (purchase) redemption of restricted stock

    (1,043 )     624  

Net increase in loans

    (793,800 )     (72,878 )

Net proceeds from sale of other real estate owned

    586       401  

Premises and equipment expenditures

    (8,310 )     (20,610 )

Net cash used in investing activities

    (554,157 )     (62,564 )
                 

Cash flows from financing activities

               

Proceeds from exercise of stock options

    23       261  

Increase in demand, money market and savings deposits

    657,924       97,286  

Net (decrease) increase in time deposits

    (13,133 )     37,824  

Net increase (repayment) in short-term borrowings

    438,478       (22,443 )

Net cash provided by financing activities

    1,083,292       112,928  
                 

Net increase (decrease) in cash and cash equivalents

    522,925       57,041  

Cash and cash equivalents, beginning of year

    168,319       72,473  

Cash and cash equivalents, end of period

  $ 691,244     $ 129,514  
                 

Supplemental disclosures

               

Interest paid

  $ 11,734     $ 13,829  

Non-monetary transfers from loans to other real estate owned

  $ -     $ 600  

 

(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, 2020 and 2019

(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, 2020

  $ 594     $ 272,639     $ (12,809 )   $ (3,725 )   $ (183 )   $ (4,400 )   $ 252,116  
                                                         

Net income

                    2,512                               2,512  

Other comprehensive income, net of tax

                                            71       71  

Stock based compensation

            479                                       479  
                                                         

Balance June 30, 2020

  $ 594     $ 273,118     $ (10,297 )   $ (3,725 )   $ (183 )   $ (4,329 )   $ 255,178  
                                                         

Balance January 1, 2020

  $ 594     $ 272,039     $ (12,216 )   $ (3,725 )   $ (183 )   $ (7,341 )   $ 249,168  
                                                         

Net income

                    1,919                               1,919  

Other comprehensive income, net of tax

                                            3,012       3,012  

Stock based compensation

            1,056                                       1,056  

Options exercised (8,000 shares)

    -       23                                       23  
                                                         

Balance June 30, 2020

  $ 594     $ 273,118     $ (10,297 )   $ (3,725 )   $ (183 )   $ (4,329 )   $ 255,178  
                                                         

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  

 

(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. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division of 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 US 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

 

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.

 

6

 

The coronavirus ("COVID-19") outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions during the six months ended June 30, 2020 that did not exist at December 31, 2019. In response to these evolving conditions, the Board of Governors of the Federal Reserve System reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve (“Federal Reserve”) has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.

 

The recession that has begun in the U.S. as a result of the government-mandated business closures and stay-at-home orders is significantly impacting the labor market, consumer spending, business investment and profitability. As a result, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which is the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term. The uncertain nature of the current economic environment and the potential impact of the stimulus programs initiated by the federal government may have a significant impact on the earnings, financial condition, liquidity, and capital of the Company in future periods.

 

Mortgage Banking Activities and Mortgage Loans Held for Sale

 

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

 

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 11 Derivatives and Risk Management Activities for further detail of IRLCs.

 

7

 

Use of Estimates

 

The preparation of financial statements in conformity with US 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.

 

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, 2020, 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.

 

8

 

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. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At June 30, 2020, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the six months ended June 30, 2020, 1,205,600 options were granted under the 2014 Plan with a fair value of $1,058,853.

 

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 2020 and 2019 are as follows:

 

   

2020

   

2019

 

Dividend yield(1)

    0.0%         0.0%    

Expected volatility(2)

    28.61%         28.81%    

Risk-free interest rate(3)

  0.50% to 1.22%     1.95% to 2.70%  

Expected life(4) (in years)

    6.25         6.25    

Assumed forfeiture rate(5)

    5.0%         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 estimate expected volatility.

(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, 2020 and 2019, 907,790 shares and 808,898 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At June 30, 2020, the intrinsic value of the 5,997,450 options outstanding was $102,000, while the intrinsic value of the 3,403,375 exercisable (vested) options was $102,000. 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. During the six months ended June 30, 2020, 8,000 options were exercised resulting in  cash receipts of $23,000 and 179,625 options were forfeited with a weighted average grant date fair value of $340,931. During the six months ended June 30, 2019, 53,550 options were exercised resulting in  cash receipts of $261,000 and 44,250 options were forfeited with a weighted average grant date fair value of $130,983.

 

Information regarding stock based compensation for the six months ended June 30, 2020 and 2019 is set forth below:

   

2020

   

2019

 

Stock based compensation expense recognized

  $ 1,056,000     $ 1,382,000  

Number of unvested stock options

    2,594,075       2,348,765  

Fair value of unvested stock options

  $ 4,900,923     $ 6,000,570  

Amount remaining to be recognized as expense

  $ 3,578,456     $ 4,625,447  

 

The remaining unrecognized expense amount of $3,578,456 will be recognized ratably as expense through May 2024.

 

9

 

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, 2020 and June 30, 2019.

 

The calculation of EPS for the three and six months ended June 30, 2020 and 2019 is as follows (in thousands, except per share amounts):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income - basic and diluted

  $ 2,512     $ 381     $ 1,919     $ 807  
                                 

Weighted average shares outstanding

    58,851       58,841       58,849       58,823  
                                 

Net income per share – basic

  $ 0.04     $ 0.01     $ 0.03     $ 0.01  
                                 

Weighted average shares outstanding (including dilutive CSEs)

    58,883       59,401       58,911       59,501  
                                 

Net income per share – diluted

  $ 0.04     $ 0.01     $ 0.03     $ 0.01  

 

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,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Anti-dilutive securities

                               
                                 

Share based compensation awards

    5,965       4,419       5,936       4,301  
                                 

Total anti-dilutive securities

    5,965       4,419       5,936       4,301  

 

Recent Accounting Pronouncements

 

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.  

 

10

 

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 has evaluated 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 were run parallel to the calculations under existing guidance to assess and evaluate the potential impact to the Company’s financial statements.  The new model includes different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and considers 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. The Company expected an initial increase to the allowance for loan losses, in the range of 0% to 11% of the December 31, 2019 allowance for loan losses, or an incremental increase to the allowance for loan losses in the range of $0 up to approximately $1.0 million. When finalized, this one-time increase as a result of the adoption of ASU 2016-13 will be recorded, net of tax, as an adjustment to retained earnings effective January 1, 2020. This estimate is subject to change based on continuing refinement and validation of the model and methodologies. The Company has elected to defer the adoption of this ASU as permitted by Section 4014 of the CARES Act, which provides that financial institutions are not required to comply with the ASU during the period beginning on March 27, 2020 until the earlier of (i) the date on which the national emergency concerning the COVID-19 outbreak declared under the National Emergencies Relief Act terminates or (ii) December 31, 2020.

 

11

 

 

Note 3: Legal Proceedings

 

The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are 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. Republic does not have loan production offices in those states.

 

12

 

 

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, 2020 and December 31, 2019 is as follows:

 

    At June 30, 2020  

 

 

(dollars in thousands)

 

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

 

Fair

Value

 
                                 

U.S. Government agencies

  $ 35,312     $ -     $ (216 )   $ 35,096  

Collateralized mortgage obligations

    224,578       3,986       (508 )     228,056  

Agency mortgage-backed securities

    42,126       946       -       43,072  

Municipal securities

    2,637       28       -       2,665  

Corporate bonds

    76,295       292       (3,255 )     73,332  

Total securities available for sale

  $ 380,948     $ 5,252     $ (3,979 )   $ 382,221  
                                 

U.S. Government agencies

  $ 87,958     $ 4,731     $ -     $ 92,689  

Collateralized mortgage obligations

    350,375       16,827       (23 )     367,179  

Agency mortgage-backed securities

    117,826       5,489       (1 )     123,314  

Total securities held to maturity

  $ 556,159     $ 27,047     $ (24 )   $ 583,182  

 

    At December 31, 2019  

 

 

(dollars in thousands)

 

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

 

Fair

Value

 
                                 

U.S. Government agencies

  $ 38,743     $ 1     $ (439 )   $ 38,305  

Collateralized mortgage obligations

    329,492       2,368       (422 )     331,438  

Agency mortgage-backed securities

    98,953       82       (98 )     98,937  

Municipal securities

    4,064       18       -       4,082  

Corporate bonds

    69,499       79       (3,298 )     66,280  

Total securities available for sale

  $ 540,751     $ 2,548     $ (4,257 )   $ 539,042  
                                 

U.S. Government agencies

  $ 94,913     $ 482     $ (294 )   $ 95,101  

Collateralized mortgage obligations

    416,177       7,603       (793 )     422,987  

Agency mortgage-backed securities

    133,752       1,782       (513 )     135,021  

Total securities held to maturity

  $ 644,842     $ 9,867     $ (1,600 )   $ 653,109  

 

13

 

The following table presents investment securities by stated maturity at June 30, 2020. 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

  $ 790     $ 792     $ -     $ -  

After 1 year to 5 years

    55,111       55,210       65,237       68,362  

After 5 years to 10 years

    55,343       52,426       22,721       24,327  

After 10 years

    3,000       2,665       -       -  

Collateralized mortgage obligations

    224,578       228,056       350,375       367,179  

Agency mortgage-backed securities

    42,126       43,072       117,826       123,314  

Total

  $ 380,948     $ 382,221     $ 556,159     $ 583,182  

 

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, 2020 and December 31, 2019. 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) recorded at June 30, 2020 and December 31, 2019.

 

14

 

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, 2020

 
   

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

  $ 35,096     $ 216     $ -     $ -     $ 35,096     $ 216  

Collateralized mortgage obligations

    116,028       365       12,946       143       128,974       508  

Agency mortgage-backed securities

    -       -       -       -       -       -  

Municipal securities

    -       -       -       -       -       -  

Corporate bonds

    -       -       54,745       3,255       54,745       3,255  

Total Available for Sale

  $ 151,124     $ 581     $ 67,691     $ 3,398     $ 218,815     $ 3,979  

 

   

At June 30, 2020

 
   

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

  $ -     $ -     $ -     $ -     $ -     $ -  

Collateralized mortgage obligations

    8,534       16       1,032       7       9,566       23  

Agency mortgage-backed securities

    6,275       1       -       -       6,275       1  

Total Held to Maturity

  $ 14,809     $ 17     $ 1,032     $ 7     $ 15,841     $ 24  

 

   

At December 31, 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

  $ 28,136     $ 439     $ -     $ -     $ 28,136     $ 439  

Collateralized mortgage obligations

    63,384       328       6,164       94       69,548       422  

Agency mortgage-backed securities

    2,924       13       6,411       85       9,335       98  

Municipal securities

    -       -       -       -       -       -  

Corporate bonds

    2,820       180       51,882       3,118       54,702       3,298  

Total Available for Sale

  $ 97,264     $ 960     $ 64,457     $ 3,297     $ 161,721     $ 4,257  

 

   

At December 31, 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

  $ 33,092     $ 220     $ 3,703     $ 74     $ 36,795     $ 294  

Collateralized mortgage obligations

    24,211       18       64,324       775       88,535       793  

Agency mortgage-backed securities

    14,044       33       52,132       480       66,176       513  

Total Held to Maturity

  $ 71,347     $ 271     $ 120,159     $ 1,329     $ 191,506     $ 1,600  

 

Unrealized losses on securities in the investment portfolio amounted to $4.0 million with a total fair value of $234.7 million as of June 30, 2020 compared to unrealized losses of $5.9 million with a total fair value of $353.2 million as of December 31, 2019. 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.

 

15

 

The Company held four U.S. Government agency securities, twenty collateralized mortgage obligations and one agency mortgage-backed securities that were in an unrealized loss position at June 30, 2020. 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, 2020.

 

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, 2020, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At June 30, 2020, 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 seven corporate bonds are with five of the largest U.S. financial institutions. Each financial institution is well capitalized.

 

Proceeds associated with the sale of securities available for sale during the three months ended June 30, 2020 were $65.9 million. The tax provision applicable to the net gains of $1.6 million for the three months ended June 30, 2020 amounted to $416,000. Proceeds associated with the sale of securities available for sale during the six months ended June 30, 2020 were $92.8 million. The tax provision applicable to the net gains of $2.5 million for the six months ended June 30, 2020 amounted to $629,000.

 

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.

 

 

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, 2020 and December 31, 2019:

 

 

(dollars in thousands)

 

June 30,

2020

   

December 31,

2019

 
                 

Commercial real estate

  $ 664,605     $ 613,631  

Construction and land development

    150,156       121,395  

Commercial and industrial

    224,504       223,906  

Owner occupied real estate

    434,422       424,400  

Consumer and other

    101,793       101,320  

Residential mortgage

    313,287       263,444  

Paycheck protection program

    670,912       -  

Total loans receivable

    2,559,679       1,748,096  

Deferred (fees) costs

    (17,431 )     99  

Allowance for loan losses

    (11,040 )     (9,266 )

Net loans receivable

  $ 2,531,208     $ 1,738,929  

 

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, residential mortgages, and PPP loans. PPP loans are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

 

 

16

 

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, 2020 and 2019:

 

 

 

(dollars in thousands)

 

 

Commercial

Real Estate

   

Construction

and Land

Development

   

Commercial

and

Industrial

   

Owner

Occupied Real

Estate

   

 

Consumer

and Other

   

 

Residential

Mortgage

   

Paycheck

Protection

Program

   

 

Unallocated

   

 

 

Total

 
                                                                         

Three months ended June 30, 2020

                                                                 

Allowance for loan losses:

                                                                 
                                                                         

Beginning balance:

  $ 3,402     $ 834     $ 1,442     $ 1,859     $ 634     $ 1,912     $ -     $ 134     $ 10,217  

Charge-offs

    -       -       (51 )     (48 )     (43 )     (50 )     -       -       (192 )

Recoveries

    -       2       10       1       2       -       -       -       15  

Provisions (credits)

    330       116       30       183       82       393       -       (134 )     1,000  
                                                                         

Ending balance

  $ 3,732     $ 952     $ 1,431     $ 1,995     $ 675     $ 2,255     $ -     $ -     $ 11,040  
                                                                         

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  

 

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, 2020 and 2019:

 

 

(dollars in thousands)

 

 

Commercial

Real Estate

   

Construction

and Land

Development

   

Commercial

and

Industrial

   

Owner

Occupied Real

Estate

   

 

Consumer

and Other

   

 

Residential

Mortgage

   

Paycheck

Protection

Program

   

 

 

Unallocated

   

 

 

Total

 
                                                                         

Six months ended June 30, 2020

                                                                 

Allowance for loan losses:

                                                                 
                                                                         

Beginning balance:

  $ 3,043     $ 688     $ 931     $ 2,292     $ 590     $ 1,705     $ -     $ 17     $ 9,266  

Charge-offs

    -       -       (51 )     (48 )     (65 )     (50 )     -       -       (214 )

Recoveries

    -       2       27       1       8       -       -       -       38  

Provisions (credits)

    689       262       524       (250 )     142       600       -       (17 )     1,950  
                                                                         

Ending balance

  $ 3,732     $ 952     $ 1,431     $ 1,995     $ 675     $ 2,255     $ -     $ -     $ 11,040  
                                                                         

Six months ended June 30, 2019

                                                                 

Allowance for loan losses:

                                                                 
                                                                         

Beginning balance:

  $ 2,462     $ 777     $