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Section 1: 10-Q (REPUBLIC FIRST BANCORP, INC. 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 March 31, 2018.
 
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)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 [   ] (Do not check if a smaller reporting company)      
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
58,747,478
Title of Class
Number of Shares Outstanding as of May 8, 2018
 
 
 
 

 

 
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of March 31, 2018 and December 31, 2017 (unaudited)
1
     
 
Consolidated statements of income for the three months ended March 31, 2018 and 2017 (unaudited) 
2
     
 
Consolidated statements of comprehensive income (loss) for the three months ended March 31, 2018 and 2017 (unaudited)
3
     
 
Consolidated statements of cash flows for the three months ended March 31, 2018 and 2017 (unaudited)
4
     
 
Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2018 and 2017 (unaudited)
5
     
 
Notes to consolidated financial statements (unaudited)
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
     
Item 3.
Quantitative and Qualitative Information about Market Risk
58
     
Item 4.
Controls and Procedures
58
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
59
     
Item 1A.
Risk Factors
59
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
59
     
Item 3.
Defaults Upon Senior Securities
59
     
Item 4.
Mine Safety Disclosures
59
     
Item 5.
Other Information
59
     
Item 6.
Exhibits
60
     
Signatures
61
 
 
 

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2018 and December 31, 2017
(Dollars in thousands, except per share data)
(unaudited)
   
March 31,
2018
   
December 31,
2017
 
ASSETS
           
Cash and due from banks
 
$
21,927
   
$
36,073
 
Interest bearing deposits with banks
   
9,142
     
25,869
 
    Cash and cash equivalents
   
31,069
     
61,942
 
 
               
Investment securities available for sale, at fair value
   
519,692
     
464,430
 
Investment securities held to maturity, at amortized cost (fair value of $502,591 and $463,799, respectively)
   
519,295
     
472,213
 
Restricted stock, at cost
   
5,435
     
1,918
 
Mortgage loans held for sale, at fair value
   
19,685
     
43,375
 
Other loans held for sale
   
5,968
     
2,325
 
Loans receivable (net of allowance for loan losses of $6,650 and $8,599 respectively)
   
1,244,262
     
1,153,679
 
Premises and equipment, net
   
77,153
     
74,947
 
Other real estate owned, net
   
6,966
     
6,966
 
Accrued interest receivable
   
7,756
     
7,009
 
Goodwill
   
5,011
     
5,011
 
Other assets
   
29,172
     
28,532
 
    Total Assets
 
$
2,471,464
   
$
2,322,347
 
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Liabilities
               
Deposits
               
   Demand – non-interest bearing
 
$
464,383
   
$
438,500
 
   Demand – interest bearing
   
826,726
     
807,736
 
   Money market and savings
   
703,263
     
700,322
 
   Time deposits
   
129,079
     
116,737
 
       Total Deposits
   
2,123,451
     
2,063,295
 
Short-term borrowings
   
93,915
     
-
 
Accrued interest payable
   
339
     
293
 
Other liabilities
   
8,431
     
10,618
 
Subordinated debt
   
11,254
     
21,681
 
    Total Liabilities
   
2,237,390
     
2,095,887
 
                 
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 59,252,198 as of March 31, 2018 and 57,518,609 as of December 31, 2017; shares outstanding 58,723,353 as of March 31, 2018 and 56,989,764 as of December 31, 2017
   
592
     
575
 
Additional paid in capital
   
267,313
     
256,285
 
Accumulated deficit
   
(15,566
)
   
(18,983
)
Treasury stock at cost (503,408 shares as of March 31, 2018 and December 31, 2017)
   
(3,725
)
   
(3,725
)
Stock held by deferred compensation plan (25,437 shares as of March 31, 2018 and
December 31, 2017)
   
(183
)
   
(183
)
Accumulated other comprehensive loss
   
(14,357
)
   
(7,509
)
    Total Shareholders’ Equity
   
234,074
     
226,460
 
    Total Liabilities and Shareholders’ Equity
 
$
2,471,464
   
$
2,322,347
 


(See notes to consolidated financial statements)
 
 
1

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 2018 and 2017
(Dollars in thousands, except per share data)
 (unaudited)
 
   
Three Months Ended
March 31,
 
   
2018
   
2017
 
Interest income
           
Interest and fees on taxable loans
 
$
13,907
   
$
10,941
 
Interest and fees on tax-exempt loans
   
362
     
258
 
Interest and dividends on taxable investment securities
   
6,349
     
4,733
 
Interest and dividends on tax-exempt investment securities
   
109
     
194
 
Interest on federal funds sold and other interest-earning assets
   
172
     
61
 
Total interest income
   
20,899
     
16,187
 
Interest expense
               
   Demand-interest bearing
   
1,257
     
608
 
   Money market and savings
   
972
     
698
 
   Time deposits
   
369
     
296
 
   Other borrowings
   
185
     
366
 
Total interest expense
   
2,783
     
1,968
 
Net interest income
   
18,116
     
14,219
 
Provision for loan losses
   
400
     
-
 
Net interest income after provision for loan losses
   
17,716
     
14,219
 
Non-interest income
               
Loan and servicing fees
   
147
     
337
 
Mortgage banking income
   
2,186
     
2,421
 
Gain on sales of SBA loans
   
992
     
688
 
Service fees on deposit accounts
   
1,175
     
846
 
Other non-interest income
   
35
     
46
 
Total non-interest income
   
4,535
     
4,338
 
Non-interest expenses
               
 Salaries and employee benefits
   
10,645
     
8,582
 
 Occupancy
   
2,113
     
1,715
 
 Depreciation and amortization
   
1,357
     
1,175
 
 Legal
   
291
     
252
 
 Other real estate owned
   
311
     
346
 
 Appraisal and other loan expenses
   
278
     
442
 
 Advertising
   
329
     
245
 
 Data processing
   
824
     
785
 
 Insurance
   
292
     
273
 
 Professional fees
   
468
     
428
 
 Regulatory assessments and costs
   
467
     
329
 
 Taxes, other
   
245
     
236
 
 Other operating expenses
   
2,482
     
1,996
 
Total non-interest expense
   
20,102
     
16,804
 
Income before provision (benefit) for income taxes
   
2,149
     
1,753
 
Provision (benefit) for income taxes
   
372
     
(34
)
Net income
 
$
1,777
   
$
1,787
 
Net income per share
               
Basic
 
$
0.03
   
$
0.03
 
Diluted
 
$
0.03
   
$
0.03
 

(See notes to consolidated financial statements)
 
 
2

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2018 and 2017
(Dollars in thousands)
(unaudited)

   
Three Months Ended
March 31,
 
   
2018
   
2017
 
             
Net income
 
$
1,777
   
$
1,787
 
                 
      Other comprehensive income (loss), net of tax
               
          Unrealized gains (losses) on securities
          (pre-tax ($6,708), and $971 respectively)
   
(5,239
)
   
623
 
                 
Amortization of net unrealized holding losses during the period
(pre-tax $39, and $42 respectively)
   
31
     
27
 
                 
Total other comprehensive income (loss)
   
(5,208
)
   
650
 
                 
Total comprehensive income (loss)
 
$
(3,431
)
 
$
2,437
 
                 
 (See notes to consolidated financial statements)
 
3

 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2018 and 2017
(Dollars in thousands)
(unaudited)
   
Three Months Ended March 31,
 
   
2018
   
2017
 
Cash flows from operating activities
           
Net income
 
$
1,777
   
$
1,787
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
   
400
     
-
 
Write down of other real estate owned
   
-
     
110
 
Depreciation and amortization
   
1,357
     
1,175
 
Stock based compensation
   
521
     
302
 
Amortization of premiums on investment securities
   
756
     
676
 
Accretion of discounts on retained SBA loans
   
(346
)
   
(267
)
Fair value adjustments on SBA servicing assets
   
504
     
265
 
Proceeds from sales of SBA loans originated for sale
   
13,904
     
8,378
 
SBA loans originated for sale
   
(16,555
)
   
(8,881
)
Gains on sales of SBA loans originated for sale
   
(992
)
   
(688
)
Proceeds from sales of mortgage loans originated for sale
   
87,037
     
76,740
 
Mortgage loans originated for sale
   
(61,998
)
   
(70,507
)
Fair value adjustment for mortgage loans originated for sale
   
663
     
(218
)
Gains on mortgage loans originated for sale
   
(2,185
)
   
(1,857
)
Amortization of intangible assets
   
-
     
26
 
Amortization of debt issuance costs
   
2
     
7
 
Increase in accrued interest receivable and other assets
   
(504
)
   
(1,501
)
Decrease in accrued interest payable and other liabilities
   
(2,229
)
   
(1,223
)
Net cash provided by operating activities
   
22,112
     
4,324
 
                 
Cash flows from investing activities
               
Purchase of investment securities available for sale
   
(75,142
)
   
(909
)
Purchase of investment securities held to maturity
   
(61,083
)
   
-
 
Proceeds from the maturity or call of securities available for sale
   
12,716
     
8,955
 
Proceeds from the maturity or call of securities held to maturity
   
13,740
     
10,352
 
Net purchase of restricted stock
   
(3,517
)
   
-
 
Net increase in loans
   
(90,637
)
   
(60,878
)
Net proceeds from sale of other real estate owned
   
-
     
120
 
Premises and equipment expenditures
   
(3,563
)
   
(3,061
)
Net cash used in investing activities
   
(207,486
)
   
(45,421
)
                 
Cash flows from financing activities
               
Net proceeds from exercise of stock options
   
430
     
292
 
Net increase in demand, money market and savings deposits
   
47,814
     
47,573
 
Net increase (decrease) in time deposits
   
12,342
     
(4,731
)
Increase in short-term borrowings
   
93,915
     
-
 
Net cash provided by financing activities
   
154,501
     
43,134
 
                 
Net (decrease) increase in cash and cash equivalents
   
(30,873
)
   
2,037
 
Cash and cash equivalents, beginning of year
   
61,942
     
34,554
 
Cash and cash equivalents, end of period
 
$
31,069
   
$
36,591
 
                 
Supplemental disclosures
               
Interest paid
 
$
2,849
   
$
1,992
 
Conversion of subordinated debt to common stock
 
$
10,094
   
$
240
 

(See notes to consolidated financial statements)


 
4


 

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three Months Ended March 31, 2018 and 2017
(Dollars in thousands)
(unaudited)

   
Common
Stock
   
Additional
Paid in
Capital
   
Accumulated Deficit
   
Treasury
Stock
   
Stock Held by Deferred Compensation Plan
   
Accumulated Other Comprehensive Loss
   
Total Shareholders’ Equity
 
                                           
Balance 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
                   
1,777
                             
1,777
 
Other comprehensive loss
net of tax
                                           
(5,208
)
   
(5,208
)
Stock based compensation
           
521
                                     
521
 
Conversion of subordinated debt to common stock (1,624,614 shares)
   
16
     
10,078
                                     
10,094
 
Options exercised (108,975 shares)
   
1
     
429
                                     
430
 
                                                         
Balance March 31, 2018
 
$
592
   
$
267,313
   
$
(15,566
)
 
$
(3,725
)
 
$
(183
)
 
$
(14,357
)
 
$
234,074
 
                                                         
Balance January 1, 2017
 
$
573
   
$
253,570
   
$
(27,888
)
 
$
(3,725
)
 
$
(183
)
 
$
(7,294
)
 
$
215,053
 
                                                         
Net income
                   
1,787
                             
1,787
 
Other comprehensive income, net of tax
                                           
650
     
650
 
Stock based compensation
           
302
                                     
302
 
Conversion of subordinated debt to common stock (36,922 shares)
           
240
                                     
240
 
Options exercised (94,800 shares)
   
1
     
291
                                     
292
 
                                                         
Balance March 31, 2017
 
$
574
   
$
254,403
   
$
(26,101
)
 
$
(3,725
)
 
$
(183
)
 
$
(6,644
)
 
$
218,324
 
                                                         

(See notes to consolidated financial statements)
 
5

 
 
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)

Note 1:  Basis of Presentation

Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania.  It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, and Gloucester Counties. In July 2016, Republic acquired Oak Mortgage Company, LLC (“Oak Mortgage”), a residential mortgage lending organization. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Note 2:  Summary of Significant Accounting Policies

Risks and Uncertainties

The earnings of the Company depend primarily on the earnings of Republic.  The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
 
 
6

 

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 servicing released, and the servicing released premium is included in the market price. See Note 10 Derivatives and Risk Management Activities.

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, (see “Note 7” below), 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.
 
 
7

 

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 prospect 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 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 March 31, 2018, 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 March 31, 2018, the maximum number of common shares issuable under the 2014 Plan was 6.0 million shares. During the three months ended March 31, 2018, 1,058,800 options were granted under the 2014 Plan with a fair value of $2,923,473.
 
 
8

 

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 2018 and 2017 are as follows:

   
2018
 
2017
 
Dividend yield(1)
 
0.0%
 
0.0%
 
Expected volatility
 
  28.22%
(2)
  45.50% to 50.09%
(3)
Risk-free interest rate(4)
 
2.38 to 2.84%
 
1.89% to 2.26%
 
Expected life(5)
 
6.25 years
 
5.5 to 7.0 years
 
Assumed forfeiture rate(6)
 
4.0%
 
6.0%
 

(1) A dividend yield of 0.0% is utilized because cash dividends have never been paid.
(2) The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to provide a basis for a reasonable estimate of fair value.
(3) Expected volatility is based on Bloomberg’s five and one-half to seven year volatility calculation for “FRBK” stock.
(4) The risk-free interest rate is based on the five to seven year Treasury bond.
(5)  The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.
(6)  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, 2018 and 2017, 716,364 options and 478,374 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At March 31, 2018, the intrinsic value of the 3,951,650 options outstanding was $11.0 million, while the intrinsic value of the 1,954,112 exercisable (vested) options was $8.1 million.  At March 31, 2017, the intrinsic value of the 3,121,500 options outstanding was $10.5 million, while the intrinsic value of the 1,423,648 exercisable (vested) options was $6.7 million. During the three months ended March 31, 2018, 108,975 options were exercised with cash received of $429,972 and 4,000 options were forfeited with a weighted average grant date fair value of $10,000. During the three months ended March 31, 2017, 94,800 options were exercised with cash received of $291,981 and 9,600 options were forfeited with a weighted average grant date fair value of $44,000.

Information regarding stock based compensation for the three months ended March 31, 2018 and 2017 is set forth below:

   
2018
 
2017
 
Stock based compensation expense recognized
 
$    521,000
 
$    302,000
 
Number of unvested stock options
 
   1,997,538
 
   1,697,852
 
Fair value of unvested stock options
 
$ 5,548,196
 
$ 4,583,209
 
Amount remaining to be recognized as expense
 
$ 4,893,747
 
$ 3,935,014
 

The remaining unrecognized expense amount of $4,893,747 will be recognized ratably as expense through February 2022.

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, 2018.  CSEs consisted of dilutive stock options granted through the Company’s stock option plans and convertible securities related to trust preferred securities issued in 2008 for the three months ended March 31, 2017.  The convertible securities related to trust preferred securities issued in 2008 fully converted to common stock in 2018. In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance was added back to the net income for the three months ended March 31, 2017.  There was no interest expense in 2018 related to the trust preferred securities issuance. For the three months ended March 31, 2017, the effect of CSEs (convertible securities related to the trust preferred securities only) and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculations.
 
9

 

The calculation of EPS for the three months ended March 31, 2018 and 2017 is as follows (in thousands, except per share amounts):

   
Three Months Ended
March 31,
 
   
2018
   
2017
 
             
Net income - basic and diluted
 
$
1,777
   
$
1,787
 
                 
Weighted average shares outstanding
   
57,100
     
56,824
 
                 
Net income per share – basic
 
$
0.03
   
$
0.03
 
                 
Weighted average shares outstanding (including dilutive CSEs)
   
58,370
     
58,048
 
                 
Net income per share – diluted
 
$
0.03
   
$
0.03
 

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.

   
Three Months Ended March 31,
 
(in thousands)
 
2018
   
2017
 
             
Anti-dilutive securities
           
             
   Share based compensation awards
   
2,681
     
1,897
 
                 
   Convertible securities
   
-
     
1,625
 
                 
      Total anti-dilutive securities
   
2,681
     
3,522
 

Recent Accounting Pronouncements

ASU 2014-09
       In May 2014, the FASB issued Accounting Standards Update  (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40).”  ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue.  The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification.  In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with The Company (Topic 606): Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.  The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes interest income as well as many other revenues for financial assets and liabilities including revenue derived from loans, investment securities, and derivatives. This ASU was effective for the Company on January 1, 2018. The Company adopted this ASU on a modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. The adoption of this ASU did not have a material impact to its financial condition, results of operations, and consolidated financial statements. Refer to Note 11: Revenue Recognition for further disclosure as to the impact of Topic 606.
 
 
10

 
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 March 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 will be 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 will be 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 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption. The Company does not intend to early adopt this ASU.
 
 
11

 

ASU 2016-09

 In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU 2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU 2016-09 was effective January 1, 2017. There was no material impact on the consolidated financial statements upon adoption.

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 been gathering the data necessary to measure expected credit losses in accordance with the guidance provided in the ASU. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.

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.
 
 
12

 

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 has not yet determined the impact the adoption of ASU 2017-04 will have 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 Company has not yet determined the impact the adoption of ASU 2017-08 will have 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 of 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.
 
 
13

 

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 bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its stores.
 
 
14

 

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, 2018 and December 31, 2017 is as follows:

   
At March 31, 2018
 
 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
 
$
372,976
   
$
2
   
$
(12,725
)
 
$
360,253
 
Agency mortgage-backed securities
   
71,055
     
1
     
(1,927
)
   
69,129
 
Municipal securities
   
17,182
     
5
     
(464
)
   
16,723
 
Corporate bonds
   
62,648
     
95
     
(2,661
)
   
60,082
 
Asset-backed securities
   
12,971
     
-
     
(27
)
   
12,944
 
Trust preferred securities
   
725
     
-
     
(164
)
   
561
 
Total securities available for sale
 
$
537,557
   
$
103
   
$
(17,968
)
 
$
519,692
 
                                 
U.S. Government agencies
 
$
116,880
   
$
-
   
$
(4,816
)
 
$
112,064
 
Collateralized mortgage obligations
   
262,382
     
745
     
(7,020
)
   
256,107
 
Agency mortgage-backed securities
   
139,033
     
-
     
(5,613
)
   
133,420
 
Other securities
   
1,000
     
-
     
-
     
1,000
 
Total securities held to maturity
 
$
519,295
   
$
745
   
$
(17,449
)
 
$
502,591
 


   
At December 31, 2017
 
 
 
(dollars in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
Collateralized mortgage obligations
 
$
327,972
   
$
-
   
$
(7,731
)
 
$
320,241
 
Agency mortgage-backed securities
   
55,664
     
2
     
(800
)
   
54,866
 
Municipal securities
   
15,142
     
20
     
(62
)
   
15,100
 
Corporate bonds
   
62,670
     
103
     
(2,491
)
   
60,282
 
Asset-backed securities
   
13,414
     
38
     
-
     
13,452
 
Trust preferred securities
   
725
     
-
     
(236
)
   
489
 
Total securities available for sale
 
$
475,587
   
$
163
   
$
(11,320
)
 
$
464,430
 
                                 
U.S. Government agencies
 
$
112,605
   
$
50
   
$
(2,235
)
 
$
110,420
 
Collateralized mortgage obligations
   
215,567
     
314
     
(3,970
)
   
211,911
 
Agency mortgage-backed securities
   
143,041
     
47
     
(2,620
)
   
140,468
 
Other securities
   
1,000
     
-
     
-
     
1,000
 
Total securities held to maturity
 
$
472,213
   
$
411
   
$
(8,825
)
 
$
463,799
 




15

 

The following table presents investment securities by stated maturity at March 31, 2018. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.
   
Available for Sale
   
Held to Maturity
 
 
(dollars in thousands)
 
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
Due in 1 year or less
 
$
2,802
   
$
2,799
   
$
-
   
$
-
 
After 1 year to 5 years
   
4,938
     
4,918
     
21,525
     
21,098
 
After 5 years to 10 years
   
80,553
     
77,373
     
96,355
     
91,966
 
After 10 years
   
5,233
     
5,220
     
-
     
-
 
Collateralized mortgage obligations
   
372,976
     
360,253
     
262,382
     
256,107
 
Agency mortgage-backed securities
   
71,055
     
69,129
     
139,033
     
133,420
 
Total
 
$
537,557
   
$
519,692
   
$
519,295
   
$
502,591
 

      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, 2018 and December 31, 2017.  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 trust preferred securities for the three months ended March 31, 2018 and March 31, 2017.
 
 
16

 

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at March 31, 2018 and 2017 for which a portion of OTTI, as applicable, was recognized in other comprehensive income:
 
(dollars in thousands)
 
2018
   
2017
 
             
Beginning Balance, January 1st
 
$
274
   
$
937
 
Additional credit-related impairment loss on securities for which an
               
other-than-temporary impairment was previously recognized
   
-
     
-
 
Ending Balance, March 31st
 
$
274
   
$
937
 
 

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, 2018 and December 31, 2017:

   
At March 31, 2018
 
   
Less than 12 months
   
12 months or more
   
Total
 
 
(dollars in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
                                     
Collateralized  mortgage obligations
 
$
176,823
   
$
4,600
   
$
163,503
   
$
8,125
   
$
340,326
   
$
12,725
 
Agency mortgage-backed securities
   
47,543
     
946
     
19,691
     
981
     
67,234
     
1,927
 
Municipal securities
   
11,537
     
312
     
2,539
     
152
     
14,076
     
464
 
Corporate bonds
   
1,646
     
5
     
52,344
     
2,656
     
53,990
     
2,661
 
Asset backed securities
   
12,944
     
27
     
-
     
-
     
12,944
     
27
 
Trust preferred securities
   
-
     
-
     
561
     
164
     
561
     
164
 
Total Available for Sale
 
$
250,493
   
$
5,890
   
$
238,638
   
$
12,078
   
$
489,131
   
$
17,968
 

 
At March 31, 2018
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
(dollars in thousands)
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
                                     
U.S. Government agencies
 
$
55,240
   
$
1,521
   
$
56,824
   
$
3,295
   
$
112,064
   
$
4,816
 
Collateralized mortgage obligations
   
122,102
     
1,879
     
113,696
     
5,141
     
235,798
     
7,020
 
Agency mortgage-backed securities
   
55,003
     
1,498
     
78,417
     
4,115
     
133,420
     
5,613
 
Total Held to Maturity
 
$
232,345
   
$
4,898
   
$
248,937
   
$
12,551
   
$
481,282
   
$
17,449
 

   
At December 31, 2017
 
   
Less than 12 months
   
12 months or more
   
Total
 
 
(dollars in thousands)
 
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized Losses
 
                                     
Collateralized  mortgage obligations
 
$
150,075
   
$
1,565
   
$
170,166
   
$
6,166
   
$
320,241
   
$
7,731
 
Agency mortgage-backed securities
   
29,967
     
226
     
21,045
     
574
     
51,012
     
800
 
Municipal securities
   
5,742
     
27
     
2,656
     
35
     
8,398
     
62
 
Corporate bonds
   
-
     
-
     
52,509
     
2,491
     
52,509
     
2,491
 
Asset backed securities
   
-
     
-
     
-
     
-
     
-
     
-
 
Trust preferred securities
   
-
     
-
     
489
     
236
     
489
     
236
 
Total Available for Sale
 
$
185,784
   
$
1,818
   
$
246,865
   
$
9,502
   
$
432,649
   
$
11,320
 

 
At December 31, 2017
 
 
Less than 12 months
   
12 months or more
   
Total
 
 
(dollars in thousands)
Fair
Value
 
Unrealized Losses
   
Fair
Value
 
Unrealized Losses
   
Fair
Value
 
Unrealized Losses
 
                                     
U.S. Government agencies
 
$
42,045
   
$
213
   
$
59,594
   
$
2,022
   
$
101,639
   
$
2,235
 
Collateralized mortgage obligations
   
56,955
     
767
     
107,986
     
3,203
     
164,941
     
3,970
 
Agency mortgage-backed securities
   
55,170
     
221
     
82,479
     
2,399
     
137,649
     
2,620
 
Total Held to Maturity
 
$
154,170
   
$
1,201
   
$
250,059
   
$
7,624
   
$
404,229
   
$
8,825
 
 
 
 
17

 
 
Unrealized losses on securities in the investment portfolio amounted to $35.4 million with a total fair value of $970.4 million as of March 31, 2018 compared to unrealized losses of $20.1 million with a total fair value of $836.9 million as of December 31, 2017. 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 fourteen U.S. Government agency securities, eighty-five collateralized mortgage obligations and twenty-nine agency mortgage-backed securities that were in an unrealized loss position at March 31, 2018. 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, 2018.

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, 2018, the investment portfolio included twenty municipal securities that were in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of credit deterioration.

At March 31, 2018, the investment portfolio included two asset-backed securities that were in an unrealized loss position. The asset-backed securities held in the investment securities portfolio consist solely of Sallie Mae bonds, collateralized by student loans which are insured by the U.S. Department of Education.  Management believes the unrealized losses on these securities were driven by changes in market interest rates and not a result of credit deterioration.  At March 31, 2018, the investment portfolio included seven corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration.

       The unrealized loss on the trust preferred security is primarily the result of the secondary market for such a security becoming inactive and is also considered temporary at this time. The following table provides additional detail on the trust preferred security held in the portfolio as of March 31, 2018.

 (dollars in thousands)
Class /
Tranche
Amortized Cost
Fair
Value
Unrealized
Losses
Lowest
Credit
Rating
Assigned
Number of
Banks
Currently Performing
Deferrals / Defaults
as % of
Current
Balance

Conditional
Default
Rates for
2018 and
beyond
Cumulative
OTTI Life
to Date
TPREF Funding II
Class B Notes
$
725
$
561
$
(164)
C
18
    29%
    0.39%
$
274

No securities were sold during the three months ended March 31, 2018 and March 31, 2017.



18

 

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, 2018 and December 31, 2017:

(dollars in thousands)
 
March 31,
2018
   
December 31,
2017
 
             
Commercial real estate
 
$
467,585
   
$
433,304
 
Construction and land development
   
118,607
     
104,617
 
Commercial and industrial
   
189,420
     
173,343
 
Owner occupied real estate
   
315,418
     
309,838
 
Consumer and other
   
78,992
     
76,183
 
Residential mortgage
   
81,048
     
64,764
 
Total loans receivable
   
1,251,070
     
1,162,049
 
Deferred costs (fees)
   
(158
)
   
229
 
Allowance for loan losses
   
(6,650
)
   
(8,599
)
Net loans receivable
 
$
1,244,262
   
$
1,153,679
 

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, 2018 and 2017:
 
 
 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and
Industrial
   
Owner Occupied Real Estate
   
Consumer
and Other
   
Residential Mortgage
   
Unallocated
   
Total
 
                                             
Three months ended March 31, 2018
                                           
Allowance for loan losses:
                                           
                                                 
Beginning balance:
 
$
3,774
   
$
725
   
$
1,317
   
$
1,737
   
$
573
   
$
392
   
$
81
   
$
8,599
 
Charge-offs
   
(1,535
)
   
-
     
(151
)
   
(465
)
   
(198
)
   
-
     
-
     
(2,349
)
Recoveries
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Provisions (credits)
   
(336
)
   
26
     
95
     
420
     
85
     
116
     
(6
)
   
400
 
Ending balance
 
$
1,903
   
$
751
   
$
1,261
   
$
1,692
   
$
460
   
$
508
   
$
75
   
$
6,650
 
                                                                 
Three months ended March 31, 2017
                                                         
Allowance for loan losses:
                                                         
                                                                 
Beginning balance:
 
$
3,254
   
$
557
   
$
2,884
   
$
1,382
   
$
588
   
$
58
   
$
432
   
$
9,155
 
Charge-offs
   
-
     
-
     
-
     
(8
)
   
(2
)
   
-
     
-
     
(10
)
Recoveries
   
7
     
-
     
29
     
-
     
-
     
-
     
-
     
36
 
Provisions (credits)
   
(299
)
   
(11
)
   
(143
)
   
253
     
(11
)
   
72
     
139
     
-
 
Ending balance
 
$
2,962
   
$
546
   
$
2,770
   
$
1,627
   
$
575
   
$
130
   
$
571
   
$
9,181
 
 
 
 
19


 
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, 2018 and December 31, 2017:

 
 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and
Industrial
   
Owner Occupied Real Estate
   
Consumer
and Other
   
Residential Mortgage
   
Unallocated
   
Total
 
                                                 
March 31, 2018
                                               
Allowance for loan losses:
                                               
Individually evaluated for impairment
 
$
-
   
$
-
   
$
448
   
$
169
   
$
51
   
$
-
   
$
-
   
$
668
 
Collectively evaluated for impairment
   
1,903
     
751
     
813
     
1,523
     
409
     
508
     
75
     
5,982
 
Total allowance for loan losses
 
$
1,903
   
$
751
   
$
1,261
   
$
1,692
   
$
460
   
$
508
   
$
75
   
$
6,650
 
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
 
$
13,844
   
$
-
   
$
7,091
   
$
3,425
   
$
791
   
$
-
   
$
-
   
$
25,151
 
Loans evaluated collectively
   
453,741
     
118,607
     
182,329
     
311,993
     
78,201
     
81,048
     
-
     
1,225,919
 
Total loans receivable
 
$
467,585
   
$
118,607
   
$
189,420
   
$
315,418
   
$
78,992
   
$
81,048
   
$
-
   
$
1,251,070
 

 
 
(dollars in thousands)
 
Commercial Real Estate
   
Construction and Land Development
   
Commercial and
Industrial
   
Owner Occupied Real Estate
   
Consumer
and Other
   
Residential Mortgage
   
Unallocated
   
Total
 
                                                 
December 31, 2017
                                               
Allowance for loan losses:
                                               
Individually evaluated for impairment
 
$
1,964
   
$
-
   
$
374
   
$
235
   
$
217
   
$
-
   
$
-
   
$
2,790
 
Collectively evaluated for impairment
   
1,810
     
725
     
943
     
1,502
     
356
     
392
     
81
     
5,809
 
Total allowance for loan losses
 
$
3,774
   
$
725
   
$
1,317
   
$
1,737
   
$
573
   
$
392
   
$
81
   
$
8,599
 
                                                                 
Loans receivable:
                                                               
Loans evaluated individually
 
$
15,415
   
$
-
   
$
4,501
   
$
3,798
   
$
1,002
   
$
-
   
$
-
   
$
24,716
 
Loans evaluated collectively
   
417,889
     
104,617
     
168,842
     
306,040
     
75,181
     
64,764
     
-
     
1,137,333
 
Total loans receivable
 
$
433,304
   
$
104,617
   
$
173,343
   
$
309,838
   
$
76,183
   
$
64,764
   
$
-
   
$
1,162,049
 




20

 

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, 2018 and December 31, 2017:

   
March 31, 2018
   
December 31, 2017
 
 
 
(dollars in thousands)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
 
With no related allowance recorded:
                                   
  Commercial real estate
 
$
13,844
   
$
15,040
   
$
-
   
$
9,264
   
$
9,268
   
$
-
 
  Construction and land development
   
-
     
-
     
-
     
-
     
-
     
-
 
  Commercial and industrial
   
5,507
     
9,432
     
-
     
2,756
     
6,674
     
-
 
  Owner occupied real estate
   
2,583
     
2,732
     
-
     
2,595
     
2,743
     
-
 
  Consumer and other
   
639
     
976
     
-
     
655
     
981
     
-
 
  Residential mortgage
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
22,573
   
$
28,180
   
$
-
   
$
15,270
   
$
19,666
   
$
-
 

With an allowance recorded:
                                   
  Commercial real estate
 
$
-
   
$
-
   
$
-
   
$
6,151
   
$
6,165
   
$
1,964
 
  Construction and land development
   
-
     
-
     
-
     
-
     
-
     
-
 
  Commercial and industrial
   
1,584
     
1,599
     
448
     
1,745
     
1,752
     
374
 
  Owner occupied real estate
   
842
     
849
     
169
     
1,203
     
1,206
     
235
 
  Consumer and other
   
152
     
152
     
51
     
347
     
379
     
217
 
  Residential mortgage
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
2,578
   
$
2,600
   
$
668
   
$
9,446
   
$
9,502
   
$
2,790
 

Total:
                                   
  Commercial real estate
 
$
13,844
   
$
15,040
   
$
-
   
$
15,415
   
$
15,433
   
$
1,964
 
  Construction and land development
   
-
     
-
     
-
     
-
     
-
     
-
 
  Commercial and industrial
   
7,091
     
11,031
     
448
     
4,501
     
8,426
     
374
 
  Owner occupied real estate
   
3,425
     
3,581
     
169
     
3,798
     
3,949
     
235
 
  Consumer and other
   
791
     
1,128
     
51
     
1,002
     
1,360
     
217
 
  Residential mortgage
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
25,151
   
$
30,780
   
$
668
   
$
24,716
   
$
29,168
   
$
2,790
 




21

 

The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
(dollars in thousands)
Average Recorded Investment
 
Interest
Income Recognized
 
Average Recorded Investment
 
Interest
Income Recognized
 
With no related allowance recorded:
               
Commercial real estate
 
$
11,554
   
$
72
   
$
12,290
   
$
70
 
Construction and land development
   
-
     
-
     
-
     
-
 
Commercial and industrial
   
4,132
     
5
     
1,931
     
8
 
Owner occupied real estate
   
2,589