REPUBLIC FIRST BANCORP INC - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[ X ]

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

For the quarterly period ended September 30, 2019.

or

 

[    ]

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

 For the transition period from ____ to ____.

 

Commission File Number: 000-17007

 

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania	23-2486815
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
50 South 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 [X]   NO [  ]

 

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

 

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

 

Large accelerated filer [   ]	Accelerated filer [X]
Non-Accelerated filer [   ]	Smaller reporting company [   ]
Emerging growth company [   ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 YES [   ] NO [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

Common Stock, $0.01 per share	58,842,778
Title of Class	Number of Shares Outstanding as of November 8, 2019

 

 

 

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		September 30, 2019				December 31, 2018
ASSETS
Cash and due from banks		$	57,562			$	35,685
Interest bearing deposits with banks			143,915				36,788
Cash and cash equivalents			201,477				72,473
Investment securities available for sale, at fair value			379,962				321,014
Investment securities held to maturity, at amortized cost (fair value of $699,054 and $747,323, respectively)			687,425				761,563
Restricted stock, at cost			2,371				5,754
Mortgage loans held for sale, at fair value			18,734				20,887
Other loans held for sale			2,476				5,404
Loans receivable (net of allowance for loan losses of $8,467 and $8,615, respectively)			1,560,913				1,427,983
Premises and equipment, net			111,573				87,661
Other real estate owned, net			6,653				6,223
Accrued interest receivable			9,277				9,025
Operating lease right-of-use asset			65,860				-
Goodwill			5,011				5,011
Other assets			34,189				30,299
Total Assets		$	3,085,921			$	2,753,297
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand – non-interest bearing		$	595,869			$	519,056
Demand – interest bearing			1,227,969				1,042,561
Money market and savings			698,991				676,993
Time deposits			217,203				154,257
Total Deposits			2,740,032				2,392,867
Short-term borrowings			-				91,422
Accrued interest payable			1,655				558
Other liabilities			12,482				12,002
Operating lease liability			69,646				-
Subordinated debt			11,263				11,259
Total Liabilities			2,835,078				2,508,108
Shareholders’ Equity
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,371,623 as of September 30, 2019 and 59,318,073 as of December 31, 2018; shares outstanding 58,842,778 as of September 30, 2019 and 58,789,228 as of December 31, 2018			594				593
Additional paid in capital			271,412				269,147
Accumulated deficit			(9,731	)			(8,716	)
Treasury stock at cost (503,408 shares as of September 30, 2019 and December 31, 2018)			(3,725	)			(3,725	)
Stock held by deferred compensation plan (25,437 shares as of September 30, 2019 and December 31, 2018)			(183	)			(183	)
Accumulated other comprehensive loss			(7,524	)			(11,927	)
Total Shareholders’ Equity			250,843				245,189
Total Liabilities and Shareholders’ Equity		$	3,085,921			$	2,753,297

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Interest income:
Interest and fees on taxable loans		$	18,298			$	16,353			$	53,827			$	45,342
Interest and fees on tax-exempt loans			409				411				1,249				1,148
Interest and dividends on taxable investment securities			6,652				6,511				21,134				19,536
Interest and dividends on tax-exempt investment securities			72				130				131				367
Interest on federal funds sold and other interest-earning assets			777				153				1,631				388
Total interest income			26,208				23,558				77,972				66,781
Interest expense:
Demand- interest bearing			3,753				1,948				11,897				4,754
Money market and savings			1,813				1,308				4,893				3,454
Time deposits			1,123				386				2,608				1,121
Other borrowings			137				770				681				1,528
Total interest expense			6,826				4,412				20,079				10,857
Net interest income			19,382				19,146				57,893				55,924
Provision for loan losses			450				500				750				1,700
Net interest income after provision for loan losses			18,932				18,646				57,143				54,224
Non-interest income:
Loan and servicing fees			257				320				1,156				839
Mortgage banking income			2,797				2,580				8,048				7,948
Gain on sales of SBA loans			944				816				2,593				2,654
Service fees on deposit accounts			1,990				1,386				5,450				3,887
Gain (loss) on sale of investment securities			520				-				1,103				(1	)
Other non-interest income			46				29				175				107
Total non-interest income			6,554				5,131				18,525				15,434
Non-interest expenses:
Salaries and employee benefits			14,314				11,203				40,378				32,731
Occupancy			2,994				1,975				8,270				5,976
Depreciation and amortization			1,740				1,285				4,700				4,107
Legal			462				276				1,024				916
Other real estate owned			799				378				1,653				881
Appraisal and other loan expenses			476				583				1,327				1,316
Advertising			698				290				1,467				916
Data processing			1,434				1,009				3,780				2,773
Insurance			301				181				752				690
Professional fees			661				498				1,864				1,476
Automated teller machine expenses			526				498				1,689				1,327
Regulatory assessments and costs			62				396				904				1,258
Taxes, other			288				243				782				733
Other operating expenses			3,069				2,018				8,412				6,564
Total non-interest expense			27,824				20,833				77,002				61,664
Income (loss) before provision (benefit) for income taxes			(2,338	)			2,944				(1,334	)			7,994
Provision (benefit) for income taxes			(516	)			622				(319	)			1,524
Net income (loss)		$	(1,822	)		$	2,322			$	(1,015	)		$	6,470
Net income (loss) per share:
Basic		$	(0.03	)		$	0.04			$	(0.02	)		$	0.11
Diluted		$	(0.03	)		$	0.04			$	(0.02	)		$	0.11

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Net income (loss)		$	(1,822	)		$	2,322			$	(1,015	)		$	6,470
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities (pre-tax $720, ($3,202), $5,495, and $(12,210), respectively)			583				(2,500	)			4,456				(9,536	)
Reclassification adjustment for securities (gains) losses (pre-tax ($520), $-, ($1,103), and $1, respectively)			(217	)			-				(894	)			1
Net unrealized gains (losses) on securities			366				(2,500	)			3,562				(9,535	)
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity:
Amortization of net unrealized holding losses to income during the period (pre-tax $393, $37, $1,037, and $106 respectively)			318				29				841				83
Total other comprehensive income (loss)			684				(2,471	)			4,403				(9,452	)
Total comprehensive income (loss)		$	(1,138	)		$	(149	)		$	3,388			$	(2,982	)

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		Nine Months Ended September 30,
		2019				2018
Cash flows from operating activities
Net income (loss)		$	(1,015	)		$	6,470
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			750				1,700
Write down of other real estate owned			240				18
Depreciation and amortization			4,700				4,107
Stock based compensation			2,005				1,584
Net (gain) loss on sale of investment securities			(1,103	)			1
Amortization of premiums on investment securities			2,257				2,271
Accretion of discounts on retained SBA loans			(1,083	)			(1,073	)
Fair value adjustments on SBA servicing assets			1,106				1,252
Proceeds from sales of SBA loans originated for sale			37,916				36,811
SBA loans originated for sale			(32,395	)			(34,969	)
Gains on sales of SBA loans originated for sale			(2,593	)			(2,654	)
Proceeds from sales of mortgage loans originated for sale			246,816				355,181
Mortgage loans originated for sale			(239,045	)			(335,734	)
Fair value adjustment for mortgage loans originated for sale			285				474
Gains on sales of mortgage loans originated for sale			(6,215	)			(6,400	)
Amortization of debt issuance costs			4				5
Non-cash expense related to leases			924				-
Increase in accrued interest receivable and other assets			(4,524	)			(1,278	)
Increase (decrease) in accrued interest payable and other liabilities			2,996				(1,049	)
Net cash provided by operating activities			12,026				26,717
Cash flows from investing activities
Purchase of investment securities available for sale			(150,734	)			(81,744	)
Purchase of investment securities held to maturity			-				(61,083	)
Proceeds from the sale of securities available for sale			54,742				5,713
Proceeds from the maturity or call of securities available for sale			41,571				39,409
Proceeds from the maturity or call of securities held to maturity			73,890				46,156
Redemption of restricted stock			3,383				2
Net increase in loans			(133,667	)			(217,967	)
Net proceeds from sale of other real estate owned			401				495
Premises and equipment expenditures			(28,612	)			(11,072	)
Net cash used in investing activities			(139,026	)			(280,091	)
Cash flows from financing activities
Net proceeds from exercise of stock options			261				668
Net increase in demand, money market and savings deposits			284,219				324,658
Net increase in time deposits			62,946				12,405
Repayment of short-term borrowings			(91,422	)			-
Net cash provided by financing activities			256,004				337,731
Net increase in cash and cash equivalents			129,004				84,357
Cash and cash equivalents, beginning of year			72,473				61,942
Cash and cash equivalents, end of period		$	201,477			$	146,299
Supplemental disclosures
Interest paid		$	18,982			$	10,749
Non-cash transfers from loans to other real estate owned		$	1,071			$	315
Conversion of subordinated debt to common stock		$	-			$	10,094

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		Common Stock				Additional Paid in Capital				Accumulated Deficit				Treasury Stock				Stock Held by Deferred Compensation Plan				Accumulated Other Comprehensive Loss				Total Shareholders’ Equity
Balance July 1, 2019		$	594			$	270,789			$	(7,909	)		$	(3,725	)		$	(183	)		$	(8,208	)		$	251,358
Net loss											(1,822	)															(1,822	)
Other comprehensive income, net of tax																							684				684
Stock based compensation							623																				623
Balance September 30, 2019		$	594			$	271,412			$	(9,731	)		$	(3,725	)		$	(183	)		$	(7,524	)		$	250,843
Balance January 1, 2019		$	593			$	269,147			$	(8,716	)		$	(3,725	)		$	(183	)		$	(11,927	)		$	245,189
Net loss											(1,015	)															(1,015	)
Other comprehensive income, net of tax																							4,403				4,403
Stock based compensation							2,005																				2,005
Options exercised (53,550 shares)			1				260																				261
Balance September 30, 2019		$	594			$	271,412			$	(9,731	)		$	(3,725	)		$	(183	)		$	(7,524	)		$	250,843
Balance July 1, 2018		$	593			$	267,974			$	(13,195	)		$	(3,725	)		$	(183	)		$	(16,130	)		$	235,334
Net income											2,322																2,322
Other comprehensive loss, net of tax																							(2,471	)			(2,471	)
Stock based compensation							532																				532
Options exercised (28,750 shares)							107																				107
Balance September 30, 2018		$	593			$	268,613			$	(10,873	)		$	(3,725	)		$	(183	)		$	(18,601	)		$	235,824
Balance January 1, 2018		$	575			$	256,285			$	(18,983	)		$	(3,725	)		$	(183	)		$	(7,509	)		$	226,460
Reclassification due to the adoption of ASU 2018-02											1,640												(1,640	)			-
Net income											6,470																6,470
Other comprehensive loss, net of tax																							(9,452	)			(9,452	)
Stock based compensation							1,584																				1,584
Conversion of subordinated debt to common stock (1,624,614 shares)			16				10,078																				10,094
Options exercised (174,225 shares)			2				666																				668
Balance September 30, 2018		$	593			$	268,613			$	(10,873	)		$	(3,725	)		$	(183	)		$	(18,601	)		$	235,824

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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 nine month period ended September 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 September 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 September 30, 2019, the maximum number of common shares issuable under the 2014 Plan was 6.3 million shares. During the nine months ended September 30, 2019, 1.3 million options were granted under the 2014 Plan with a fair value of $2,900,495.

 

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:

 

 

⁽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 nine months ended September 30, 2019 and 2018, 842,898 shares and 753,864 shares vested, respectively. Expense is recognized ratably over the period required to vest. At September 30, 2019, the intrinsic value of the 5,007,725 options outstanding was $780,000, while the intrinsic value of the 2,645,960 exercisable (vested) options was $753,000. At September 30, 2018, the intrinsic value of the 3,841,275 options outstanding was $6.7 million, while the intrinsic value of the 1,905,112 exercisable (vested) options was $5.4 million. During the nine months ended September 30, 2019, 53,550 options were exercised resulting in cash receipts of $261,143 and 142,875 options were forfeited with a weighted average grant date fair value of $381,811. During the nine months ended September 30, 2018, 174,225 options were exercised resulting in cash receipts of $668,194 and 70,125 options were forfeited with a weighted average grant date fair value of $215,201.

 

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

 

 

The remaining unrecognized expense amount of $4,183,148 will be recognized ratably as expense through August 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 nine months ended September 30, 2019 and September 30, 2018.

 

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

 

 

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 non-interest 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 September 30, 2019 and December 31, 2018 is as follows:

 

 

 

The following table presents investment securities by stated maturity at September 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.

 

 

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 September 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 any securities held in the portfolio for the three and nine months ended September 30, 2019 and September 30, 2018.

 

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

 

 

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:

 

 

 

 

 

 

Unrealized losses on securities in the investment portfolio amounted to $5.4 million with a total fair value of $297.0 million as of September 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 four U.S. Government agency securities, twenty-nine collateralized mortgage obligations and seventeen agency mortgage-backed securities that were in an unrealized loss position at September 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 September 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 September 30, 2019, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At September 30, 2019, the investment portfolio included eight 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 September 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 September 30, 2019 were $11.5 million. The tax provision applicable to the net gains of $520,000 for the three months ended September 30, 2019 amounted to $132,000. Proceeds associated with the sale of securities available for sale during the nine months ended September 30, 2019 were $54.7 million. Gross gains of $1.2 million and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $1.1 million for the nine months ended September 30, 2019 amounted to $280,000. 

 

There were no proceeds from the sale of investments securities for the three months ended September 30, 2018. During the nine months ended September 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 nine months ended September 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 September 30, 2019 and December 31, 2018:

 

 

 

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 September 30, 2019 and 2018:

 

 

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

 

 

 

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 September 30, 2019 and December 31, 2018:

 

 

 

 

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 September 30, 2019 and December 31, 2018:

 

 

 

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

 

 

 

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

 

 

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 September 30, 2019 and December 31, 2018:

 

 

 

 

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 September 30, 2019 and December 31, 2018:

 

 

 

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

 

 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $145,000 and $378,000 for the three and nine months ended September 30, 2019, respectively, and $156,000 and $519,000 for the three and nine months ended September 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 September 30, 2019 and December 31, 2018:

 

 

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 nine months ended September 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 nine months ended September 30, 2019. There were three TDRs that subsequently defaulted during the year ended December 31, 2018.

 

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