FRBK Republic First Bancorp Inc

 

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.

 

 

 

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.

 

 

 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.

 

 

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.

 

 

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).

 

 

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.

 

 

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.

 

 

 

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

 

 

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

 

 

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.

 

 

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.

 

 

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	)			-				-				(1,018	)
Recoveries			-				-				154				-				5				-				-				159
Provisions (credits)			211				(146	)			(103	)			200				(7	)			230				(85	)			300
Ending balance		$	2,673			$	631			$	875			$	2,158			$	562			$	1,124			$	33			$	8,056
Six months ended June 30, 2018
Allowance for loan losses:
Beginning balance:		$	3,774			$	725			$	1,317			$	1,737			$	573			$	392			$	81			$	8,599
Charge-offs			(1,535	)			-				(151	)			(465	)			(212	)			-				-				(2,363	)
Recoveries			33				-				76				20				1				-				-				130
Provisions (credits)			(233	)			47				207				564				147				246				222				1,200
Ending balance		$	2,039			$	772			$	1,449			$	1,856			$	509			$	638			$	303			$	7,566

 

 

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of June 30, 2019 and December 31, 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
June 30, 2019
Allowance for loan losses:
Individually evaluated for impairment		$	122			$	-			$	114			$	332			$	-			$	-			$	-			$	568
Collectively evaluated for impairment			2,551				631				761				1,826				562				1,124				33				7,488
Total allowance for loan losses		$	2,673			$	631			$	875			$	2,158			$	562			$	1,124			$	33			$	8,056
Loans receivable:
Loans evaluated individually		$	10,274			$	-			$	2,000			$	2,878			$	993			$	768			$	-			$	16,913
Loans evaluated collectively			543,370				111,474				187,632				378,974				96,977				173,195				-				1,491,622
Total loans receivable		$	553,644			$	111,474			$	189,632			$	381,852			$	97,970			$	173,963			$	-			$	1,508,535

 

(dollars in thousands)		Commercial Real Estate				Construction and Land Development				Commercial and Industrial				Owner Occupied Real Estate				Consumer and Other				Residential Mortgage				Unallocated				Total
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment		$	295			$	-			$	867			$	217			$	94			$	-			$	-			$	1,473
Collectively evaluated for impairment			2,167				777				887				1,816				483				894				118				7,142
Total allowance for loan losses		$	2,462			$	777			$	1,754			$	2,033			$	577			$	894			$	118			$	8,615
Loans receivable:
Loans evaluated individually		$	10,947			$	-			$	3,662			$	2,560			$	861			$	-			$	-			$	18,030
Loans evaluated collectively			504,791				121,042				196,761				365,335				90,291				140,364				-				1,418,584
Total loans receivable		$	515,738			$	121,042			$	200,423			$	367,895			$	91,152			$	140,364			$	-			$	1,436,614

 

 

A loan is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include internally classified accruing loans. The following table summarizes information with regard to impaired loans by loan portfolio class as of June 30, 2019 and December 31, 2018:

 

		June 30, 2019												December 31, 2018
(dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Commercial real estate		$	6,260			$	6,265			$	-			$	6,332			$	6,337			$	-
Construction and land development			-				-				-				-				-				-
Commercial and industrial			1,464				4,737				-				1,655				5,418				-
Owner occupied real estate			1,855				1,959				-				1,905				2,013				-
Consumer and other			993				1,266				-				710				1,082				-
Residential mortgage			768				768				-				-				-				-
Total		$	11,340			$	14,995			$	-			$	10,602			$	14,850			$	-
With an allowance recorded:
Commercial real estate		$	4,014			$	4,536			$	122			$	4,615			$	5,498			$	295
Construction and land development			-				-				-				-				-				-
Commercial and industrial			536				599				114				2,007				2,195				867
Owner occupied real estate			1,023				1,071				332				655				704				217
Consumer and other			-				-				-				151				158				94
Residential mortgage			-				-				-				-				-				-
Total		$	5,573			$	6,206			$	568			$	7,428			$	8,555			$	1,473
Total:
Commercial real estate		$	10,274			$	10,801			$	122			$	10,947			$	11,835			$	295
Construction and land development			-				-				-				-				-				-
Commercial and industrial			2,000				5,336				114				3,662				7,613				867
Owner occupied real estate			2,878				3,030				332				2,560				2,717				217
Consumer and other			993				1,266				-				861				1,240				94
Residential mortgage			768				768				-				-				-				-
Total		$	16,913			$	21,201			$	568			$	18,030			$	23,405			$	1,473

 

 

The following table presents additional information regarding the Company’s impaired loans for the three months ended June 30, 2019 and June 30, 2018:

 

		Three Months Ended June 30,
		2019								2018
(dollars in thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial real estate		$	6,278			$	70			$	13,828			$	72
Construction and land development			-				-				-				-
Commercial and industrial			1,527				-				5,162				28
Owner occupied real estate			1,867				14				2,338				14
Consumer and other			917				6				639				1
Residential mortgage			512				1				-				-
Total		$	11,101			$	91			$	21,967			$	115
With an allowance recorded:
Commercial real estate		$	4,214			$	-			$	-			$	-
Construction and land development			-				-				-				-
Commercial and industrial			842				-				1,774				-
Owner occupied real estate			860				6				1,075				6
Consumer and other			26				-				152				-
Residential mortgage			-				-				-				-
Total		$	5,942			$	6			$	3,001			$	6
Total:
Commercial real estate		$	10,492			$	70			$	13,828			$	72
Construction and land development			-				-				-				-
Commercial and industrial			2,369				-				6.936				28
Owner occupied real estate			2,727				20				3,413				20
Consumer and other			943				6				791				1
Residential mortgage			512				1				-				-
Total		$	17,043			$	97			$	24,968			$	121

 

 

The following table presents additional information regarding the Company’s impaired loans for the six months ended June 30, 2019 and June 30, 2018:

 

		Six Months Ended June 30,
		2019								2018
(dollars in thousands)		Average Recorded Investment				Interes t Income Recognized				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial real estate		$	6,296			$	140			$	12,307			$	144
Construction and land development			-				-				-				-
Commercial and industrial			1,591				-				4,360				33
Owner occupied real estate			1,879				28				2,423				28
Consumer and other			841				8				644				2
Residential mortgage			256				1				-				-
Total		$	10,863			$	177			$	19,734			$	207
With an allowance recorded:
Commercial real estate		$	4,414			$	-			$	2,050			$	-
Construction and land development			-				-				-				-
Commercial and industrial			1,148				-				1,765				3
Owner occupied real estate			697				12				1,118				12
Consumer and other			51				-				217				1
Residential mortgage			-				-				-				-
Total		$	6,310			$	12			$	5,150			$	16
Total:
Commercial real estate		$	10,710			$	140			$	14,357			$	144
Construction and land development			-				-				-				-
Commercial and industrial			2,739				-				6,125				36
Owner occupied real estate			2,576				40				3,541				40
Consumer and other			892				8				861				3
Residential mortgage			256				1				-				-
Total		$	17,173			$	189			$	24,884			$	223

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2019 and December 31, 2018:

 

(dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days				Total Past Due				Current				Total Loans Receivable				Loans Receivable > 90 Days and Accruing
At June 30, 2019
Commercial real estate		$	-			$	127			$	4,030			$	4,157			$	549,487			$	553,644			$	-
Construction and land development			-				-				-				-				111,474				111,474				-
Commercial and industrial			-				2				2,000				2,002				187,630				189,632				-
Owner occupied real estate			233				35				1,531				1,799				380,053				381,852				-
Consumer and other			888				39				993				1,920				96,050				97,970				-
Residential mortgage			-				-				768				768				173,195				173,963				-
Total		$	1,121			$	203			$	9,322			$	10,646			$	1,497,889			$	1,508,535			$	-

 

 

(dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				Greater than 90 Days				Total Past Due				Current				Total Loans Receivable				Loans Receivable > 90 Days and Accruing
At December 31, 2018
Commercial real estate		$	339			$	921			$	4,631			$	5,891			$	509,847			$	515,738			$	-
Construction and land development			-				-				-				-				121,042				121,042				-
Commercial and industrial			280				-				3,661				3,941				196,482				200,423				-
Owner occupied real estate			-				653				1,188				1,841				366,054				367,895				-
Consumer and other			214				-				861				1,075				90,077				91,152				-
Residential mortgage			302				-				-				302				140,062				140,364				-
Total		$	1,135			$	1,574			$	10,341			$	13,050			$	1,423,564			$	1,436,614			$	-

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2019 and December 31, 2018:

 

(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
At June 30, 2019:
Commercial real estate		$	548,491			$	1,123			$	4,030			$	-			$	553,644
Construction and land development			111,474				-				-				-				111,474
Commercial and industrial			187,631				1				1,720				280				189,632
Owner occupied real estate			377,152				1,823				2,877				-				381,852
Consumer and other			96,977				-				993				-				97,970
Residential mortgage			173,073				122				768				-				173,963
Total		$	1,494,798			$	3,069			$	10,388			$	280			$	1,508,535

 

 

(dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
At December 31, 2018:
Commercial real estate		$	510,186			$	921			$	4,631			$	-			$	515,738
Construction and land development			121,042				-				-				-				121,042
Commercial and industrial			196,751				10				3,382				280				200,423
Owner occupied real estate			364,032				1,303				2,560				-				367,895
Consumer and other			90,291				-				861				-				91,152
Residential mortgage			140,240				124				-				-				140,364
Total		$	1,422,542			$	2,358			$	11,434			$	280			$	1,436,614

 

 

The following table shows non-accrual loans by class as of June 30, 2019 and December 31, 2018:

 

(dollars in thousands)		June 30, 2019				December 31, 2018
Commercial real estate		$	4,030			$	4,631
Construction and land development			-				-
Commercial and industrial			2,000				3,661
Owner occupied real estate			1,531				1,188
Consumer and other			993				861
Residential mortgage			768				-
Total		$	9,322			$	10,341

 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $121,000 and $233,000 for the three and six months ended June 30, 2019, respectively, and $184,000 and $363,000 for the three and six months ended June 30, 2018, respectively.

 

Troubled Debt Restructurings

 

A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

 

The following table summarizes information with regard to outstanding troubled debt restructurings at June 30, 2019 and December 31, 2018:

 

(dollars in thousands)		Number of Loans				Accrual Status				Non- Accrual Status				Total TDRs
June 30, 2019
Commercial real estate			1			$	6,245			$	-			$	6,245
Construction and land development			-				-				-				-
Commercial and industrial			-				-				-				-
Owner occupied real estate			-				-				-				-
Consumer and other			-				-				-				-
Residential mortgage			-				-				-				-
Total			1			$	6,245			$	-			$	6,245
December 31, 2018
Commercial real estate			1			$	6,316			$	-			$	6,316
Construction and land development			-				-				-				-
Commercial and industrial			3				-				1,224				1,224
Owner occupied real estate			1				-				242				242
Consumer and other			-				-				-				-
Residential mortgage			-				-				-				-
Total			5			$	6,316			$	1,466			$	7,782

 

All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into our estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.

 

There were no loan modifications made during the three and six months ended June 30, 2019 that met the criteria of a TDR.

 

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and six months ended June 30, 2019. There were three TDRs that subsequently defaulted during the year ended December 31, 2018.

 

There were no residential mortgages in the process of foreclosure as of June 30, 2019 and December 31, 2018. There was no other real estate owned relating to residential real estate at June 30, 2019 and December 31, 2018.