REPUBLIC FIRST BANCORP INC - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020.

 

or

 

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

For the transition period from ____ to ____.

 

Commission File Number: 000-17007

 

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania	23-2486815
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
50 South 16th Street, Philadelphia, Pennsylvania	19102
(Address of principal executive offices)	(Zip code)

 

215-735-4422

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		FRBK		Nasdaq Global Market

 

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

 

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

 

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

 

Large accelerated filer ☐	Accelerated filer ☒
Non-Accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

 

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

 

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

 

 YES ☐ NO ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

Common Stock, $0.01 per share	58,850,778
Title of Class	Number of Shares Outstanding as of May 8, 2020

 

 

 

		March 31, 2020				December 31, 2019
ASSETS
Cash and due from banks		$	32,581			$	41,928
Interest bearing deposits with banks			23,936				126,391
Cash and cash equivalents			56,517				168,319
Investment securities available for sale, at fair value			497,511				539,042
Investment securities held to maturity, at amortized cost (fair value of $636,861 and $653,109, respectively)			611,914				644,842
Restricted stock, at cost			2,746				2,746
Mortgage loans held for sale, at fair value			15,439				10,345
Other loans held for sale			1,381				3,004
Loans receivable (net of allowance for loan losses of $10,217 and $9,266, respectively)			1,871,820				1,738,929
Premises and equipment, net			119,893				116,956
Other real estate owned, net			1,144				1,730
Accrued interest receivable			10,475				9,934
Operating leases – right-of-use asset			65,952				64,805
Goodwill			5,011				5,011
Other assets			40,613				35,627
Total Assets		$	3,300,416			$	3,341,290
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand – non-interest bearing		$	676,482			$	661,431
Demand – interest bearing			1,276,816				1,352,360
Money market and savings			768,550				761,793
Time deposits			222,631				223,579
Total Deposits			2,944,479				2,999,163
Accrued interest payable			1,733				1,630
Other liabilities			20,588				11,208
Operating lease liability obligation			70,233				68,856
Subordinated debt			11,267				11,265
Total Liabilities			3,048,300				3,092,122
Shareholders’ Equity
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,379,623 as of March 31, 2020 and 59,371,623 as of December 31, 2019; shares outstanding 58,850,778 as of March 31, 2020 and 58,842,778 as of December 31, 2019			594				594
Additional paid in capital			272,639				272,039
Accumulated deficit			(12,809	)			(12,216	)
Treasury stock at cost (503,408 shares as of March 31, 2020 and December 31, 2019)			(3,725	)			(3,725	)
Stock held by deferred compensation plan (25,437 shares as of March 31, 2020 and December 31, 2019)			(183	)			(183	)
Accumulated other comprehensive loss			(4,400	)			(7,341	)
Total Shareholders’ Equity			252,116				249,168
Total Liabilities and Shareholders’ Equity		$	3,300,416			$	3,341,290

 

		Three Months Ended March 31,
		2020				2019
Interest income
Interest and fees on taxable loans		$	19,623			$	17,380
Interest and fees on tax-exempt loans			550				420
Interest and dividends on taxable investment securities			6,801				7,245
Interest and dividends on tax-exempt investment securities			20				138
Interest on federal funds sold and other interest-earning assets			289				336
Total interest income			27,283				25,519
Interest expense
Demand-interest bearing			3,421				3,938
Money market and savings			1,783				1,452
Time deposits			1,221				624
Other borrowings			104				365
Total interest expense			6,529				6,379
Net interest income			20,754				19,140
Provision for loan losses			950				300
Net interest income after provision for loan losses			19,804				18,840
Non-interest income
Loan and servicing fees			471				210
Mortgage banking income			2,458				2,220
Gain on sales of SBA loans			649				502
Service fees on deposit accounts			2,064				1,612
Gain on sale of investment securities			841				322
Other non-interest income			62				79
Total non-interest income			6,545				4,945
Non-interest expenses
Salaries and employee benefits			13,381				12,359
Occupancy			3,422				2,594
Depreciation and amortization			1,875				1,421
Legal			296				229
Other real estate owned			282				337
Appraisal and other loan expenses			422				461
Advertising			381				315
Data processing			1,574				1,162
Insurance			276				235
Professional fees			634				478
Debit card processing			825				556
Regulatory assessments and costs			630				421
Taxes, other			203				287
Other operating expenses			3,071				2,412
Total non-interest expense			27,272				23,267
Income (loss) before provision for income taxes			(923	)			518
Provision (benefit) for income taxes			(330	)			92
Net income (loss)		$	(593	)		$	426
Net income (loss) per share
Basic		$	(0.01	)		$	0.01
Diluted		$	(0.01	)		$	0.01

 

		Three Months Ended March 31,
		2020				2019
Net income (loss)		$	(593	)		$	426
Other comprehensive income, net of tax
Unrealized gains on securities (pre-tax $4,374, and $2,302 respectively)			3,264				1,770
Reclassification adjustment for securities gains (pre-tax ($841), and ($322) respectively			(628	)			(248	)
Net unrealized gains on securities			2,636				1,522
Amortization of net unrealized holding losses during the period (pre-tax $409, and $312 respectively)			305				240
Total other comprehensive income			2,941				1,762
Total comprehensive income		$	2,348			$	2,188

 

		Three Months Ended March 31,
		2020				2019
Cash flows from operating activities
Net income (loss)		$	(593	)		$	426
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			950				300
Write down of other real estate owned			-				16
Depreciation and amortization			1,875				1,421
Stock based compensation			577				768
Gain on sale of investment securities			(841	)			(322	)
Amortization of premiums on investment securities			1,583				593
Accretion of discounts on retained SBA loans			(220	)			(331	)
Fair value adjustments on SBA servicing assets			41				365
Proceeds from sales of SBA loans originated for sale			10,745				9,456
SBA loans originated for sale			(8,474	)			(5,566	)
Gains on sales of SBA loans originated for sale			(649	)			(502	)
Proceeds from sales of mortgage loans originated for sale			50,258				67,000
Mortgage loans originated for sale			(55,072	)			(58,555	)
Fair value adjustment for mortgage loans originated for sale			556				281
Gains on mortgage loans originated for sale			(1,734	)			(1,803	)
Amortization of debt issuance costs			2				1
Non-cash expense related to leases			183				282
Increase in accrued interest receivable and other assets			(4,864	)			(1,612	)
Increase (decrease) in accrued interest payable and other liabilities			8,894				(2,613	)
Net cash provided by operating activities			3,217				9,605
Cash flows from investing activities
Purchase of investment securities available for sale			(16,906	)			-
Proceeds from the sale of securities available for sale			26,869				24,757
Proceeds from the paydown, maturity, or call of securities available for sale			34,703				10,636
Proceeds from the paydown, maturity or call of securities held to maturity			32,823				19,076
Net redemption of restricted stock			-				3,657
Net increase in loans			(133,621	)			(41,172	)
Net proceeds from sale of other real estate owned			586				119
Premises and equipment expenditures			(4,812	)			(8,150	)
Net cash (used in) provided by investing activities			(60,358	)			8,923
Cash flows from financing activities
Net proceeds from exercise of stock options			23				240
Net (decrease) increase in demand, money market and savings deposits			(53,736	)			79,515
Net (decrease) increase in time deposits			(948	)			6,571
Repayment of short-term borrowings			-				(91,422	)
Net cash used in financing activities			(54,661	)			(5,096	)
Net (decrease) increase in cash and cash equivalents			(111,802	)			13,432
Cash and cash equivalents, beginning of year			168,319				72,473
Cash and cash equivalents, end of period		$	56,517			$	85,905
Supplemental disclosures
Interest paid		$	6,632			$	6,649

 

		Common Stock				Additional Paid in Capital				Accumulated Deficit				Treasury Stock				Stock Held by Deferred Compensation Plan				Accumulated Other Comprehensive Loss				Total Shareholders’ Equity
Balance January 1, 2020		$	594			$	272,039			$	(12,216	)		$	(3,725	)		$	(183	)		$	(7,341	)		$	249,168
Net loss											(593	)															(593	)
Other comprehensive income net of tax																							2,941				2,941
Stock based compensation							577																				577
Options exercised (8,000 shares)							23																				23
Balance March 31, 2020		$	594			$	272,639			$	(12,809	)		$	(3,725	)		$	(183	)		$	(4,400	)		$	252,116
Balance January 1, 2019		$	593			$	269,147			$	(8,716	)		$	(3,725	)		$	(183	)		$	(11,927	)		$	245,189
Net income											426																426
Other comprehensive income net of tax																							1,762				1,762
Stock based compensation							768																				768
Options exercised (47,550 shares)							240																				240
Balance March 31, 2019		$	593			$	270,155			$	(8,290	)		$	(3,725	)		$	(183	)		$	(10,165	)		$	248,385

 

Note 1: Basis of Presentation

 

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

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with 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 three month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

Note 2: Summary of Significant Accounting Policies

 

Risks and Uncertainties

 

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

 

 

The coronavirus (COVID-19) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions as of the end of the first quarter of 2020 that did not exist at the beginning of the quarter. These conditions have continued to worsen as we progress into the second quarter. In response to these evolving conditions, the Board of Governors of the Federal Reserve System reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.

 

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

 

 

Mortgage Banking Activities and Mortgage Loans Held for Sale

 

Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.

 

Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

 

Interest Rate Lock Commitments (“IRLCs”)

 

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 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 December 31, 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. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At March 31, 2020, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the three months ended March 31, 2020, 1,203,600 options were granted under the 2014 Plan with a fair value of $1,057,549.

 

The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant. A summary of the assumptions used in the Black-Scholes option pricing model for 2020 and 2019 are as follows:

 

 

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

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

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

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

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

 

During the three months ended March 31, 2020 and 2019, 907,790 options and 806,898 options vested, respectively. Expense is recognized ratably over the period required to vest. At March 31, 2020, the intrinsic value of the 6,067,450 options outstanding was $52,000, while the intrinsic value of the 3,456,750 exercisable (vested) options was $52,000. At March 31, 2019, the intrinsic value of the 4,977,975 options outstanding was $3.2 million, while the intrinsic value of the 2,635,335 exercisable (vested) options was $2.9 million. During the three months ended March 31, 2020, 8,000 options were exercised with cash received of $23,780 and 107,625 options were forfeited with a weighted average grant date fair value of $216,331. During the three months ended March 31, 2019, 47,550 options were exercised with cash received of $240,553 and 30,625 options were forfeited with a weighted average grant date fair value of $81,589.

 

 

Information regarding stock based compensation for the three months ended March 31, 2020 and 2019 is set forth below:

 

 

The remaining unrecognized expense amount of $4,055,481 will be recognized ratably as expense through February 2024.

 

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 three months ended March 31, 2020 and March 31, 2019.

 

The calculation of EPS for the three months ended March 31, 2020 and 2019 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 that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.

 

 

 

Recent Accounting Pronouncements

 

ASU 2016-02

 

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

 

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

 

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

 

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

 

ASU 2016-13

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company has evaluated the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations of expected losses under the new guidance were run parallel to the calculations under existing guidance to assess and evaluate the potential impact to the Company’s financial statements. The new model includes different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and considers expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company's allowance for loan losses which will depend upon the nature and characteristics of the Company's loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. The Company expected an initial increase to the allowance for loan losses, in the range of 0% to 11% of the December 31, 2019 allowance for loan losses, or an incremental increase to the allowance for loan losses in the range of $0 up to approximately $1.0 million. When finalized, this one-time increase as a result of the adoption of ASU 2016-13 will be recorded, net of tax, as an adjustment to retained earnings effective January 1, 2020. This estimate is subject to change based on continuing refinement and validation of the model and methodologies. The Company has elected to defer the adoption of this ASU as permitted by Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, which provides that financial institutions are not required to comply with the ASU during the period beginning on March 27, 2020 until the earlier of (i) the date on which the national emergency concerning the COVID-19 outbreak declared under the National Emergencies Relief Act terminates or (ii) December 31, 2020.

 

 

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

 

Note 4: Segment Reporting

 

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

 

Note 5: Investment Securities

 

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at March 31, 2020 and December 31, 2019 is as follows:

 

 

 

 

The following table presents investment securities by stated maturity at March 31, 2020. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.

 

 

      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 March 31, 2020 and December 31, 2019. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

 

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

  

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded at March 31, 2020 and December 31, 2019.

 

 

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 as of March 31, 2020 and December 31, 2019:

 

 

 

 

 

Unrealized losses on securities in the investment portfolio amounted to $5.1 million with a total fair value of $272.9 million as of March 31, 2020 compared to unrealized losses of $5.9 million with a total fair value of $353.2 million as of December 31, 2019. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

 

The Company held four U.S. Government agency securities, twenty-one collateralized mortgage obligations and no agency mortgage-backed securities that were in an unrealized loss position at March 31, 2020. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of March 31, 2020.

 

 

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At March 31, 2020, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At March 31, 2020, the investment portfolio included seven corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. The seven corporate bonds are with five of the largest U.S. financial institutions. Each financial institution is well capitalized.

 

Proceeds associated with the sale of securities available for sale during the three months ended March 31, 2020 were $26.9 million. Gross gains of $841,000 were realized on these sales. The tax provision applicable to the net gains of $841,000 for the three months ended March 31, 2020 amounted to $213,000.

 

Proceeds associated with the sale of securities available for sale during the three months ended March 31, 2019 were $24.8 million. Gross gains of $389,000 and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $322,000 for the three months ended March 31, 2019 amounted to $74,000.

 

Note 6: Loans Receivable and Allowance for Loan Losses

 

The following table sets forth the Company’s gross loans by major category as of March 31, 2020 and December 31, 2019:

 

 

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 March 31, 2020 and 2019:

 

 

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 March 31, 2020 and December 31, 2019:

 

 

 

 

 

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 March 31, 2020 and December 31, 2019:

 

 

 

The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2020 and 2019:

 

 

 

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 March 31, 2020 and December 31, 2019:

 

 

 

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 March 31, 2020 and December 31, 2019:

 

 

 

 

The following table shows non-accrual loans by class as of March 31, 2020 and December 31, 2019:

 

 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $224,000 and $112,000 for the three months ended March 31, 2020 and 2019, 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.

 

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. As of May 5, 2020, we have received requests to defer loan payments from 415 customers with total outstanding balances of $357 million. As of March 31, 2020, none of the documentation to formally modify those loans to incorporate the deferral requests had been executed.

 

The following table summarizes information with regard to outstanding troubled debt restructurings at March 31, 2020 and December 31, 2019:

 

 

 

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 the Company’s 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 months ended March 31, 2020 and 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 months ended March 31, 2020 and the year ended December 31, 2019.

 

There was one residential mortgage in the process of foreclosure as of March 31, 2020 and December 31, 2019. There was no other real estate owned relating to residential real estate at March 31, 2020 and December 31, 2019.