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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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   YES  [X]     NO  [  ]
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [   ]
Accelerated filer     [X]
Non-Accelerated filer [   ]     Smaller reporting company    [X]
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
58,788,603
Title of Class
Number of Shares Outstanding as of November 6, 2018


REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
     
Part I:  Financial Information
Page
     
Item 1.
Financial Statements
 
 
Consolidated balance sheets as of September 30, 2018 and December 31, 2017 (unaudited)
1
     
 
Consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 (unaudited)
2
     
 
Consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017 (unaudited)
3
 
Consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 (unaudited)
 
4
 
Consolidated statements of changes in shareholders' equity for the nine months ended September 30, 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 Disclosures about Market Risk
61
     
Item 4.
Controls and Procedures
61
     
Part II:  Other Information
 
     
Item 1.
Legal Proceedings
62
     
Item 1A.
Risk Factors
62
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
62
     
Item 3.
Defaults Upon Senior Securities
62
     
Item 4.
Mine Safety Disclosures
62
     
Item 5.
Other Information
62
     
Item 6.
Exhibits
63
     
Signatures
64

Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2018 and December 31, 2017
(Dollars in thousands, except per share data)
(unaudited)
 
 
September 30, 2018
 
December 31, 2017
 
ASSETS
               
Cash and due from banks
 
$          37,303
     
$           36,073
   
Interest bearing deposits with banks
 
108,996
     
25,869
   
    Cash and cash equivalents
 
146,299
     
61,942
   
 
 
             
Investment securities available for sale, at fair value
 
487,524
     
464,430
   
Investment securities held to maturity, at amortized cost (fair value of $461,518 and $463,799, respectively)
 
485,291
     
472,213
   
Restricted stock, at cost
 
1,916
     
1,918
   
Mortgage loans held for sale, at fair value
 
29,702
     
43,375
   
Other loans held for sale
 
3,137
     
2,325
   
Loans receivable (net of allowance for loan losses of $8,084 and $8,599, respectively)
 
1,370,704
     
1,153,679
   
Premises and equipment, net
 
81,912
     
74,947
   
Other real estate owned, net
 
6,768
     
6,966
   
Accrued interest receivable
 
8,301
     
7,009
   
Goodwill
 
5,011
     
5,011
   
Other assets
 
30,641
     
28,532
   
    Total Assets
 
$     2,657,206
     
$     2,322,347
   
 
 
             
LIABILITIES AND SHAREHOLDERS' EQUITY
 
             
Liabilities
 
             
Deposits
 
             
   Demand – non-interest bearing
 
$       509,188
     
$        438,500
   
   Demand – interest bearing
 
1,058,670
     
807,736
   
   Money market and savings
 
703,358
     
700,322
   
   Time deposits
 
129,142
     
116,737
   
       Total Deposits
 
2,400,358
     
2,063,295
   
Accrued interest payable
 
401
     
293
   
Other liabilities
 
9,366
     
10,618
   
Subordinated debt
 
11,257
     
21,681
   
    Total Liabilities
 
2,421,382
     
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 59,317,448 as of September 30, 2018 and 57,518,609 as of December 31, 2017; shares outstanding 58,788,603 as of September 30, 2018 and 56,989,764 as of December 31, 2017
 
593
     
575
   
Additional paid in capital
 
268,613
     
256,285
   
Accumulated deficit
 
(10,873)
     
(18,983)
   
Treasury stock at cost (503,408 shares as of September 30, 2018 and December 31, 2017)
 
(3,725)
     
(3,725)
   
Stock held by deferred compensation plan (25,437 shares as of September 30, 2018 and December 31, 2017)
 
(183)
     
(183)
   
Accumulated other comprehensive loss
 
(18,601)
     
(7,509)
   
    Total Shareholders' Equity
 
235,824
     
226,460
   
    Total Liabilities and Shareholders' Equity
 
$     2,657,206
     
$     2,322,347
   


(See notes to consolidated financial statements)


1


Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands, except per share data)
 (unaudited)

   
   
Three Months Ended September 30,
     
Nine Months Ended September 30,
 
   
2018
 
2017
     
2018
 
2017
 
Interest income:
 
 
 
 
 
 
     
 
 
 
 
 
 
   Interest and fees on taxable loans
 
$
16,353
 
$
12,717
     
$
45,342
 
$
35,727
 
   Interest and fees on tax-exempt loans
   
411
   
272
       
1,148
   
791
 
   Interest and dividends on taxable investment securities
   
6,511
   
4,653
       
19,536
   
14,163
 
   Interest and dividends on tax-exempt investment securities
   
130
   
99
       
367
   
447
 
   Interest on federal funds sold and other interest-earning assets
 
 
153
 
 
181
     
 
388
 
 
312
 
       Total interest income
 
 
23,558
 
 
17,922
     
 
66,781
 
 
51,440
 
Interest expense:
       
 
                   
   Demand- interest bearing
   
1,948
   
772
       
4,754
   
2,075
 
   Money market and savings
   
1,308
   
788
       
3,454
   
2,218
 
   Time deposits
   
386
   
312
       
1,121
   
903
 
   Other borrowings
 
 
770
 
 
338
     
 
1,528
 
 
1,046
 
       Total interest expense
 
 
4,412
 
 
2,210
     
 
10,857
 
 
6,242
 
Net interest income
   
19,146
 
 
15,712
       
55,924
   
45,198
 
Provision for loan losses
 
 
500
 
 
-
     
 
1,700
 
 
500
 
       Net interest income after provision for loan losses
 
 
18,646
 
 
15,712
     
 
54,224
 
 
44,698
 
Non-interest income:
       
 
                   
   Loan and servicing fees
   
320
   
677
       
839
   
1,330
 
   Mortgage banking income
   
2,580
   
3,159
       
7,948
   
8,551
 
   Gain on sales of SBA loans
   
816
   
831
       
2,654
   
2,315
 
   Service fees on deposit accounts
   
1,386
   
1,067
       
3,887
   
2,820
 
   Loss on sale of investment securities
   
-
   
-
       
(1)
   
(61)
 
   Other non-interest income
 
 
29
 
 
44
     
 
107
 
 
130
 
Total non-interest income
 
 
5,131
 
 
5,778
     
 
15,434
 
 
15,085
 
Non-interest expenses:
       
 
                   
   Salaries and employee benefits
   
11,203
   
9,829
       
32,731
   
27,800
 
   Occupancy
   
1,975
   
1,772
       
5,976
   
5,239
 
   Depreciation and amortization
   
1,285
   
1,292
       
4,107
   
3,588
 
   Legal
   
276
   
156
       
916
   
535
 
   Other real estate owned
   
378
   
746
       
881
   
1,704
 
   Appraisal and other loan expenses
   
583
   
598
       
1,316
   
1,421
 
   Advertising
   
290
   
394
       
916
   
861
 
   Data processing
   
1,009
   
785
       
2,773
   
2,335
 
   Insurance
   
181
   
277
       
690
   
750
 
   Professional fees
   
498
   
454
       
1,476
   
1,389
 
   Regulatory assessments and costs
   
396
   
355
       
1,258
   
1,008
 
   Taxes, other
   
243
   
242
       
733
   
716
 
   Other operating expenses
 
 
2,516
 
 
2,265
     
 
7.891
 
 
6,308
 
       Total non-interest expense
 
 
20,833
 
 
19,165
     
 
61,664
 
 
53,654
 
Income before provision (benefit) for income taxes
   
2,944
 
 
2,325
       
7,994
   
6,129
 
Provision (benefit) for income taxes
 
 
622
 
 
4
     
 
1,524
 
 
(38)
 
Net income
 
$
2,322
 
$
2,321
     
$
6,470
 
$
6,167
 
Net income per share:
       
 
                   
Basic
 
$
0.04
 
$
0.04
     
$
0.11
 
$
0.11
 
Diluted
 
$
0.04
 
$
0.04
     
$
0.11
 
$
0.11
 
 

 
(See notes to consolidated financial statements)
 
 
2

 
 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands)
(unaudited)
 
   
   
Three Months Ended September 30,
      Nine Months Ended September 30,    
   
2018
 
2017
     
2018
 
2017
   
         
 
 
       
 
 
 
 
   
Net income
 
$
2,322
 
$
2,321
     
$
6,470
 
$
6,167
   
                                 
Other comprehensive income (loss), net of tax
                               
Unrealized (losses) gains on securities (pre-tax ($3,202) ($7), ($12,210), and $2,615, respectively)
   
(2,500)
   
(5)
       
(9,536)
   
1,676
   
Reclassification adjustment for securities losses (pre-tax $-, $-, $1, and $61, respectively)
   
-
   
-
       
1
   
39
   
Net unrealized gains (losses) on securities
   
(2,500)
   
(5)
       
(9,535)
   
1,715
   
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity:
                               
Amortization of net unrealized holding losses to income during the period (pre-tax $37, $44, $106, and $129 respectively)
   
29
   
28
       
83
   
83
   
   
 
 
   
 
     
 
 
 
 
 
   
Total other comprehensive income (loss)
 
 
(2,471)
 
 
23
     
 
(9,452)
 
 
1,798
   
                     
 
 
 
 
   
Total comprehensive income (loss)
 
$
(149)
 
$
2,344
     
$
(2,982)
 
$
7,965
   
 

 
 (See notes to consolidated financial statements)


3

 
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands)
(unaudited)

   
Nine Months Ended September 30,
 
   
2018
 
2017
 
Cash flows from operating activities
 
 
 
 
 
 
 
Net income
 
$
6,470
 
$
6,167
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
             
Provision for loan losses
   
1,700
   
500
 
Write down of other real estate owned
   
18
   
777
 
Depreciation and amortization
   
4,107
   
3,588
 
Stock based compensation
   
1,584
   
1,329
 
Loss on sale of investment securities
   
1
   
61
 
Amortization of premiums on investment securities
   
2,271
   
1,788
 
Accretion of discounts on retained SBA loans
   
(1,073)
   
(859)
 
Fair value adjustments on SBA servicing assets
   
1,252
   
711
 
Proceeds from sales of SBA loans originated for sale
   
36,811
   
28,564
 
SBA loans originated for sale
   
(34,969)
   
(22,395)
 
Gains on sales of SBA loans originated for sale
   
(2,654)
   
(2,315)
 
Proceeds from sales of mortgage loans originated for sale
   
355,181
   
263,689
 
Mortgage loans originated for sale
   
(335,734)
   
(274,133)
 
Fair value adjustment for mortgage loans originated for sale
   
474
   
(716)
 
Gains on sales of mortgage loans originated for sale
   
(6,400)
   
(6,340)
 
Amortization of intangible assets
   
-
   
61
 
Amortization of debt issuance costs
   
5
   
22
 
        Increase in accrued interest receivable and other assets
   
(1,278)
   
(3,720)
 
Decrease in accrued interest payable and other liabilities
   
(1,049)
   
(34)
 
              Net cash provided by (used in) operating activities
   
26,717
   
(3,255)
 
     
 
   
 
 
Cash flows from investing activities
             
Purchase of investment securities available for sale
   
(81,744)
   
(53,052)
 
Purchase of investment securities held to maturity
   
(61,083)
   
(21,958)
 
Proceeds from the sale of securities available for sale
   
5,713
   
21,167
 
Proceeds from the maturity or call of securities available for sale
   
39,409
   
25,665
 
Proceeds from the maturity or call of securities held to maturity
   
46,156
   
36,629
 
Redemption (purchase) of restricted stock
   
2
   
(312)
 
Net increase in loans
   
(217,967)
   
(131,100)
 
Net proceeds from sale of other real estate owned
   
495
   
357
 
Premises and equipment expenditures
   
(11,072)
   
(18,263)
 
             Net cash used in investing activities
   
(280,091)
   
(140,867)
 
     
 
   
 
 
Cash flows from financing activities
             
Net proceeds from exercise of stock options
   
668
   
615
 
Net increase in demand, money market and savings deposits
   
324,658
   
197,431
 
Net increase in time deposits
   
12,405
   
10,304
 
             Net cash provided by financing activities
   
337,731
   
208,350
 
     
 
   
 
 
Net increase in cash and cash equivalents
   
84,357
   
64,228
 
Cash and cash equivalents, beginning of year
   
61,942
   
34,554
 
Cash and cash equivalents, end of period
 
$
146,299
 
$
98,782
 
     
 
   
 
 
Supplemental disclosures
             
Interest paid
 
$
10,749
 
$
6,109
 
Income taxes paid
 
$
-
 
$
75
 
Non-cash transfers from loans to other real estate owned
 
$
315
 
$
129
 
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 Nine Months Ended September 30, 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
                   
6,470
                             
6,470
 
Other comprehensive loss, net of tax
                                           
(9,452
)
   
(9,452
)
Stock based compensation
           
1,584
                                     
1,584
 
Conversion of subordinated debt to common stock (1,624,614 shares)
   
16
     
10,078
                                     
10,094
 
Options exercised (174,225 shares)
   
2
     
666
                                     
668
 
                                                         
Balance September 30, 2018
 
$
593
   
$
268,613
   
$
(10,873
)
 
$
(3,725
)
 
$
(183
)
 
$
(18,601
)
 
$
235,824
 
                                                         
                                                         
Balance January 1, 2017
 
$
573
   
$
253,570
   
$
(27,888
)
 
$
(3,725
)
 
$
(183
)
 
$
(7,294
)
 
$
215,053
 
                                                         
Net income
                   
6,167
                             
6,167
 
Other comprehensive income, net of tax
                                           
1,798
     
1,798
 
Stock based compensation
           
1,329
                                     
1,329
 
Conversion of subordinated debt to common stock (36,922 shares)
           
240
                                     
240
 
Options exercised (186,850 shares)
   
2
     
613
                                     
615
 
                                                         
Balance September 30, 2017
 
$
575
   
$
255,752
   
$
(21,721
)
 
$
(3,725
)
 
$
(183
)
 
$
(5,496
)
 
$
225,202
 

(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 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 through its offices and store locations in Greater Philadelphia and Southern New Jersey. 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 and nine month periods ended September 30, 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.

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.
 
 
7

 
 
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. A valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

      Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan ("the 2005 Plan"), under which the Company granted options, restricted stock or stock appreciation rights to the Company's employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company's 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of September 30, 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 September 30, 2018, the maximum number of common shares issuable under the 2014 Plan was 6.0 million shares. During the nine months ended September 30, 2018, 1,079,800 options were granted under the 2014 Plan with a fair value of $2,978,510.


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)
   45.46% to 50.09%
(3)
Risk-free interest rate(4)
 
2.35% to 2.96%
 
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 nine months ended September 30, 2018 and 2017, 753,864 shares and 526,624 shares vested, respectively.  Expense is recognized ratably over the period required to vest.  At September 30, 2018, the intrinsic value of the 3,841,275 options outstanding was $6.7 million, while the intrinsic value of the 1,905,112 exercisable (vested) options was $5.4 million. At September 30, 2017, the intrinsic value of the 3,038,450 options outstanding was $12,954,271, while the intrinsic value of the 1,379,848 exercisable (vested) options was $7,764,313. During the nine months ended September 30, 2018, 174,225 options were exercised resulting in cash receipts of $668,194 and 70,125 options were forfeited with a weighted average grant date fair value of $215,201. During the nine months ended September 30, 2017, 186,850 options were exercised resulting in cash receipts of $615,226 and 14,100 options were forfeited with a weighted average grant date fair value of $53,246.

Information regarding stock based compensation for the nine months ended September 30, 2018 and 2017 is set forth below:
 
   
2018
 
2017
 
Stock based compensation expense recognized
 
$
1,584,000
 
$
1,329,000
 
Number of unvested stock options
   
1,936,163
   
1,658,602
 
Fair value of unvested stock options
 
$
5,499,104
 
$
4,553,854
 
Amount remaining to be recognized as expense
 
$
3,886,278
 
$
2,966,049
 

The remaining unrecognized expense amount of $3,886,278 will be recognized ratably as expense through August 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 and nine months ended September 30, 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 and nine months ended September 30, 2017.  The convertible securities related to trust preferred securities issued in 2008 fully converted to common stock in 2018.  There was no interest expense in 2018 related to the trust preferred securities issuance. In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance would normally be added back to the net income for the three and nine months ended September 30, 2017.  However, 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 and nine months ended September 30, 2018 and 2017 is as follows (in thousands, except per share amounts):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
                       
Net income (basic and diluted)
$
2,322
 
$
2,321
 
$
6,470
 
$
6,167
                       
Weighted average shares outstanding
 
58,774
   
56,974
   
58,213
   
56,915
                       
Net income per share – basic
$
0.04
 
$
0.04
 
$
0.11
 
$
0.11
                       
Weighted average shares outstanding (including dilutive CSEs)
 
59,774
   
58,314
   
59,338
   
58,213
                       
Net income per share – diluted
$
0.04
 
$
0.04
 
$
0.11
 
$
0.11

The following is a summary of securities that could potentially dilute basic earnings per common share in future periods. These securities were not included in the computation of diluted earnings per common share because the effect would have been anti-dilutive for the periods presented.

(in thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
                       
Anti-dilutive securities
                     
                       
    Share based compensation awards
 
2,845
   
1,698
   
2,720
   
1,740
                       
    Convertible securities
 
-
   
1,625
   
-
   
1,625
                       
    Total anti-dilutive securities
 
2,845
   
3,323
   
2,720
   
3,365

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 September 30, 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 is currently evaluating the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. The Company expects that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company's allowance for loan losses which will depend upon the nature and characteristics of the Company's loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company currently does not intend to early adopt this new guidance.

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 early adopted this ASU on July 1, 2018 using the simplified method. The adoption of ASU 2017-04 did not have a material impact on the consolidated financial statements.

ASU 2017-08

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The 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, residential mortgage and 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 September 30, 2018 and December 31, 2017 is as follows:

 
At September 30, 2018
 
 
(dollars in thousands)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Fair
Value
                       
Collateralized mortgage obligations
$
350,237
 
$
-
 
$
(16,609)
 
$
333,628
Agency mortgage-backed securities
 
71,100
   
-
   
(2,980)
   
68,120
Municipal securities
 
19,532
   
5
   
(602)
   
18,935
Corporate bonds
 
62,605
   
208
   
(3,188)
   
59,625
Asset-backed securities
 
6,691
   
-
   
(22)
   
6,669
Trust preferred securities
 
725
   
-
   
(178)
   
547
Total securities available for sale
$
510,890
 
$
213
 
$
(23,579)
 
$
487,524
                       
U.S. Government agencies
$
111,550
 
$
-
 
$
(6,084)
 
$
105,466
Collateralized mortgage obligations
 
245,967
   
43
   
(10,126)
   
235,884
Agency mortgage-backed securities
 
127,774
   
-
   
(7,606)
   
120,168
Total securities held to maturity
$
485,291
 
$
43
 
$
(23,816)
 
$
461,518

 
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 September 30, 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
$
2,047
 
$
2,044
 
$
-
 
$
-
After 1 year to 5 years
 
6,898
   
6,877
   
14,814
   
14,433
After 5 years to 10 years
 
75,375
   
71,569
   
96,736
   
91,033
After 10 years
 
5,233
   
5,286
   
-
   
-
Collateralized mortgage obligations
 
350,237
   
333,628
   
245,967
   
235,884
Agency mortgage-backed securities
 
71,100
   
68,120
   
127,774
   
120,168
Total
$
510,890
 
$
487,524
 
$
485,291
 
$
461,518

      The Company's investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities.  There were no private label mortgage-backed securities ("MBS") or collateralized mortgage obligations ("CMO") held in the investment securities portfolio as of September 30, 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 any security held in the investment portfolio for the three and nine month periods ended September 30, 2018 and 2017.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at September 30, 2018 and 2017 for which a portion of OTTI 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
 
-
   
-
Reductions for securities sold during the period
 
-
   
(483)
Ending Balance, September 30th
$
274
 
$
454


16

 
The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position in the available for sale and held to maturity section:

 
At September 30, 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
$
136,643
$
4,278
 
$
196,985
$
12,331
 
$
333,628
$
16,609
Agency mortgage-backed securities
 
41,522
 
1,388
   
26,598
 
1,592
   
68,120
 
2,980
Municipal securities
 
11,906
 
293
   
4,892
 
309
   
16,798
 
602
Corporate bonds
 
1,604
 
3
   
51,815
 
3,185
   
53,419
 
3,188
Asset backed securities
 
6,669
 
22
   
-
 
-
   
6,669
 
22
Trust preferred securities
 
-
 
-
   
547
 
178
   
547
 
178
Total Available for Sale
$
198,344
$
5,984
 
$
280,837
$
17,595
 
$
    479,181
$
23,579

 
At September 30, 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
  $
42,809
$
1,832
 
  $
62,657
$
4,252
 
   $
105,466
$
6,084
Collateralized mortgage obligations
 
112,206
 
3,679
   
120,449
 
6,447
   
232,655
 
10,126
Agency mortgage-backed securities
 
25,745
 
1,193
   
94,423
 
6,413
   
120,168
 
7,606
Total Held to Maturity
$
180,760
$
6,704
 
 $
277,529
$
17,112
 
$
458,289
$
23,816

 
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

Unrealized losses on securities in the investment portfolio amounted to $47.4 million with a total fair value of $937.5 million as of September 30, 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.
 
 
17

 
       The Company held fourteen U.S. Government agency securities, eighty-nine collateralized mortgage obligations and twenty-nine agency mortgage-backed securities that were in an unrealized loss position at September 30, 2018. Principal and interest payments of the underlying collateral for each of these securities carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of September 30, 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 September 30, 2018, the investment portfolio included twenty-three 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 September 30, 2018, the investment portfolio included one asset-backed security that was in an unrealized loss position. The asset-backed security held in the investment securities portfolio is a Sallie Mae bond, collateralized by student loans which are guaranteed by the U.S. Department of Education. Management believes the unrealized loss on this security was driven by changes in market interest rates and not a result of credit deterioration. At September 30, 2018, the investment portfolio also 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 becoming inactive for this type of security and is also considered temporary at this time. The following table provides additional detail about the trust preferred security held in the portfolio as of September 30, 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
$
547
$
(178)
C
18
    29%
    0.32%
$
274

There were no proceeds from the sale of investments securities for the three months ended September 30, 2018. During the nine months ended September 30, 2018, the proceeds from the sale of investment securities were $5.7 million. A gross loss of $1,000 was realized on the sale of investment securities for the nine months ended September 30, 2018.

There were no proceeds from the sale of investments securities for the three months ended September 30, 2017. During the nine months ended September 30, 2017, the proceeds from the sale of investment securities were $21.2 million. Gross gains of $487,000 were realized on these sales which were offset by gross losses of $548,000. The tax benefit applicable to the net losses for the three and nine months ended September 30, 2017 was $22,000. Included in the 2017 sales activity was the sale of one CDO security. Proceeds from the sale of the CDO security totaled $970,000. A gross loss of $548,000 was recognized on this sale. Management had previously stated that it did not intend to sell the CDO security prior to its maturity or the recovery of its cost basis, nor would it be forced to sell this security prior to maturity or recovery of the cost basis.  This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2017, management received several inquiries regarding the availability of its remaining CDO securities and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell one CDO resulting in a net loss of $548,000 during the nine months ended September 30, 2017 which was partially offset by gains on sales of twenty-eight municipal securities, one agency mortgage-backed security and one collateralized mortgage obligation. The Bank continues to demonstrate the ability and intent to hold the remaining CDO until maturity or recovery of the cost basis, but will evaluate future opportunities to sell the remaining CDO if they arise.
 
 
18


Note 6:  Loans Receivable and Allowance for Loan Losses

       The following table sets forth the Company's gross loans by major categories as of September 30, 2018 and December 31, 2017:

(dollars in thousands)
September 30,
 2018
 
December 31,
 2017
Commercial real estate
$
495,529
 
$
433,304
Construction and land development
 
125,512
   
104,617
Commercial and industrial
 
195,493
   
173,343
Owner occupied real estate
 
358,956
   
309,838
Consumer and other
 
86,897
   
76,183
Residential mortgage
 
116,376
   
64,764
Total loans receivable
 
1,378,763
   
1,162,049
Deferred costs
 
25
   
229
Allowance for loan losses
 
(8,084)
   
(8,599)
Net loans receivable
$
1,370,704
 
$
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 September 30, 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 September 30, 2018
             
Allowance for loan losses:
             
Beginning balance:
$
2,039
$
772
$
1,449
$
1,856
$
509
$
638
$
303
$
7,566
Charge-offs
 
-
 
-
 
-
 
-
 
(1)
 
-
 
-
 
(1)
Recoveries
 
17
 
-
 
1
 
-
 
       1
 
-
 
-
 
19
Provisions (credits)
 
202
 
34
 
193
 
156
 
38
 
103
 
(226)
 
500
 
Ending balance
$
2,258
$
806
$
1,643
$
2,012
$
547
$
741
$
77
$
8,084
         
Three months ended September 30, 2017
             
Allowance for loan losses:
             
Beginning balance:
$
3,171
$
580
$
2,496
$
1,598
$
544
$
238
$
827
$
9,454
Charge-offs
 
-
 
-
 
(1,195)
 
(49)
 
(4)
 
-
 
-
 
(1,248)
Recoveries
 
47
 
-
 
5
 
-
 
        -
 
-
 
-
 
52
Provisions (credits)
 
381
 
69
 
(85)
 
87
 
11
 
85
 
(548)
 
-
 
Ending balance
$
3,599
$
649
$
1,221
$
1,636
$
551
$
323
$
279
$
8,258


19

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the nine months ended September 30, 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
               
Nine months ended September 30, 2018
             
Allowance for loan losses:
             
Beginning balance:
$
3,774
$
725
$
1,317
$
1,737
$
573
$
392
$
81
$
8,599
Charge-offs
 
(1,535)
 
-
 
(151)
 
(465)
 
(213)
 
-
 
-
 
(2,364)
Recoveries
 
50
 
-
 
77
 
20
 
2
 
-
 
-
 
        149
Provisions (credits)
 
(31)
 
81
 
400
 
720
 
185
 
349
 
(4)
 
1,700
 
Ending balance
$
2,258
$
806
$
1,643
$
2,012
$
547
$
741
$
77
$
8,084
         
Nine months ended September 30, 2017
             
Allowance for loan losses:
             
Beginning balance:
$
3,254
$
557
$
2,884
$
1,382
$
588
$
58
$
432
$
9,155
Charge-offs
 
-
 
-
 
(1,347)
 
(157)
 
(12)
 
-
 
-
 
(1,516)
Recoveries
 
54
 
-
 
64
 
-
 
1
 
-
 
-
 
119
Provisions (credits)
 
291
 
92
 
(380)
 
411
 
(26)
 
265
 
(153)
 
500
 
Ending balance
$
3,599
$
649
$
1,221
$
1,636
$
551
$
323
$
279
$
8,258


The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of September 30, 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
                 
September 30, 2018
               
Allowance for loan losses:
               
Individually evaluated for impairment
$
194
$
-
$
792
$
242
$
85
$
-
$
-
$
1,313
Collectively evaluated for impairment
 
2,064
 
806
 
851
 
1,770
 
462
 
741
 
77
 
6,771
Total allowance for loan losses
$
2,258
$
806
$
1,643
$
2,012
$
547
$
741
$
77
$
8,084
                 
Loans receivable:
                               
Loans evaluated individually
$
13,510
$
-
$
3,979
$
3,035
$
801
$
-
$
-
$
21,325
Loans evaluated collectively
 
482,019
 
125,512
 
191,514
 
355,921
 
86,096
 
116,376
 
-
 
1,357,438
Total loans receivable
$
495,529
$
125,512
$
195,493
$
358,956
$
86,897
$
116,376
$
-
$
1,378,763

 
 
(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 September 30, 2018 and December 31, 2017:


 
September 30, 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
$
8,894
$
8,899
$
-
 
$
9,264
$
9,268
$
-
Construction and land development
 
-
 
-
 
-
   
-
 
-
 
-
Commercial and industrial
 
1,969
 
5,728
 
-
   
2,756
 
6,674
 
-
Owner occupied real estate
 
2,198
 
2,298
 
-
   
2,595
 
2,743
 
-
Consumer and other
 
649
 
1,008
 
-
   
655
 
981
 
-
Residential mortgage
 
-
 
-
 
-
   
-
 
-
 
-
Total
$
13,710
$
17,933
$
-
 
$
15,270
$
19,666
$
-

With an allowance recorded:
             
Commercial real estate
$
4,616
$
5,500
$
194
 
$
6,151
$
6,165
$
1,964
Construction and land development
 
-
 
-
 
-
   
-
 
-
 
-
Commercial and industrial
 
2,010
 
2,198
 
792
   
1,745
 
1,752
 
374
Owner occupied real estate
 
837
 
894
 
242
   
1,203
 
1,206
 
235
Consumer and other
 
152
 
155
 
85
   
347
 
379
 
217
Residential mortgage
 
-
 
-
 
-
   
-
 
-
 
-
Total
$
  7,615
$
8,747
$
1,313
 
$
9,446
$
9,502
$
2,790

Total:
             
Commercial real estate
$
13,510
$
14,399
$
194
 
$
15,415
$
15,433
$
1,964
Construction and land development
 
-
 
-
 
-
   
-
 
-
 
-
Commercial and industrial
 
3,979
 
7,926
 
792
   
4,501
 
8,426
 
374
Owner occupied real estate
 
3,035
 
3,192
 
242
   
3,798
 
3,949
 
235
Consumer and other
 
801
 
1,163
 
85
   
1,002
 
1,360
 
217
Residential mortgage
 
-
 
-
 
-
   
-
 
-
 
-
Total
$
21,325
$
26,680
$
1,313
 
$
24,716
$
29,168
$
2,790



21

 
The following table presents additional information regarding the Company's impaired loans for the three months ended September 30, 2018 and September 30, 2017:
 
 
Three Months Ended September 30,
 
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
$
9,748
$
72
 
$
7,024
$
106
Construction and land development
 
-
 
-
   
-
 
-
Commercial and industrial
 
2,566
 
12
   
2,366
 
8
Owner occupied real estate
 
2,255
 
15
   
2,313
 
17
Consumer and other
 
647
 
10
   
923
 
9
Residential mortgage
 
-
 
-
   
-
 
-
Total
$
15,216
$
109
 
$
12,626
$
140
 
With an allowance recorded:
         
Commercial real estate
$
3,976
$
    -
 
$
6,391
$
4
Construction and land development
 
-
 
-
   
-
 
-
Commercial and industrial
 
1,948
 
1
   
2,118
 
16
Owner occupied real estate
 
905
 
6
   
1,100
 
8
Consumer and other
 
169
 
-
   
346
 
2
Residential mortgage
 
-
 
-
   
-
 
-
Total
$
6,998
$
7
 
$
9,955
$
30

Total:
         
Commercial real estate
$
13,724
$
72
 
$
13,415
$
110
Construction and land development
 
-
 
-
   
-
 
-
Commercial and industrial
 
4,514
 
13
   
4,484
 
24
Owner occupied real estate
 
3,160
 
21
   
3,413
 
25
Consumer and other
 
816
 
10
   
1,269
 
11
Residential mortgage
 
-
 
-
   
-
 
-
Total
$
22,214
$
116
 
$
22,581
$
170


22

 

The following table presents additional information regarding the Company's impaired loans for the nine months ended September 30, 2018 and September 30, 2017:
 
 
Nine Months Ended September 30,
 
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
$
11,454
$
216
 
$
9,657
$
271
Construction and land development
 
-
 
-
   
-
 
-
Commercial and industrial
 
3,762
 
45
   
2,149
 
26
Owner occupied real estate
 
2,367
 
43
   
1,719
 
46
Consumer and other
 
645
 
12
   
837
 
17
Residential mortgage
 
-
 
-
   
33
 
1
Total
$
18,228
$
316
 
$
14,395
$
361
 
With an allowance recorded:
         
Commercial real estate
$
2,692
$
-
 
$
6,575
$
13
Construction and land development
 
-
 
-
   
-
 
-
Commercial and industrial
 
1,826
 
4
   
2,710
 
50
Owner occupied real estate
 
1,047
 
18
   
1,437
 
22
Consumer and other
 
201
 
1
   
438
 
8
Residential mortgage
 
-
 
-
   
-
 
-
Total
$
5,766
$
23
 
$
11,160
$
93

Total:
         
Commercial real estate
$
14,146
$
216
 
$
16,232
$
284
Construction and land development
 
-
 
-
   
-
 
-
Commercial and industrial
 
5,588
 
49
   
4,859
 
76
Owner occupied real estate
 
3,414
 
61
   
3,156
 
68
Consumer and other
 
846
 
13
   
1,275
 
25
Residential mortgage
 
-
 
-
   
33
 
1
Total
$
23,994
$
339
 
$
25,555
$
454


23

 
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2018 and December 31, 2017:
 
 
 
 
(dollars in thousands)
 
30-59
Days Past
Due
 
60-89
Days Past
Due
 
 
Greater
than 90
Days
 
 
Total
Past Due
 
 
 
Current
 
Total
Loans
Receivable
 
Loans
Receivable >
90 Days and
Accruing
At September 30, 2018
             
Commercial real estate
$
1,148
$
128
$
7,159
$
8,435
$
487,094
$
495,529
$
-
Construction and land development
 
-
 
-
 
-
 
-
 
125,512
 
125,512
 
-
Commercial and industrial
 
-
 
108
 
3,868
 
3,976
 
191,517
 
195,493
 
-
Owner occupied real estate
 
-
 
-
 
1,651
 
1,651
 
357,305
 
358,956
 
-
Consumer and other
 
221
 
-
 
801
 
1,022
 
85,875
 
86,897
 
-
Residential mortgage
 
125
 
-
 
-
 
125
 
116,251
 
116,376
 
-
Total
$
1,494
$
236
$
13,479
$
15,209
$
1,363,554
$
1,378,763
$
-
 
 
 
(dollars in thousands)
 
30-59
Days Past
Due
 
60-89
Days Past
Due
 
 
Greater
than 90
Days
 
 
Total
Past Due
 
 
 
Current
 
Total
Loans
Receivable
 
Loans
Receivable >
 90 Days and Accruing
At December 31, 2017
             
Commercial real estate
$
-
$
-
$
8,963
$
8,963
$
424,341
$
433,304
$
-
Construction and land development
 
-
 
-
 
-
 
-
 
104,617
 
104,617
 
-
Commercial and industrial
 
969
 
-
 
2,895
 
3,864
 
169,479
 
173,343
 
-
Owner occupied real estate
 
-
 
-
 
2,136
 
2,136
 
307,702
 
309,838
 
-
Consumer and other
 
144
 
-
 
851
 
995
 
75,188
 
76,183
 
-
Residential mortgage
 
-
 
-
 
-
 
-
 
64,764
 
64,764
 
-
Total
$
1,113
$
-
$
14,845
$
15,958
$
1,146,091
$
1,162,049
$
-


The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of September 30, 2018 and December 31, 2017:

 
(dollars in thousands)
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
At September 30, 2018:
         
Commercial real estate
$
487,438
$
932
$
7,159
$
-
$
495,529
Construction and land development
 
125,512
 
-
 
-
 
-
 
125,512
Commercial and industrial
 
191,499
 
15
 
3,699
 
280
 
195,493
Owner occupied real estate
 
354,595
 
1,326
 
3,035
 
-
 
358,956
Consumer and other
 
86,096
 
-
 
801
 
-
 
86,897
Residential mortgage
 
116,251
 
125
 
-
 
-
 
116,376
Total
$
1,361,391
$
2,398
$
14,694
$
280
$
1,378,763

 
(dollars in thousands)
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
At December 31, 2017:
         
Commercial real estate
$
423,382
$
959
$
8,963
$
-
$
433,304
Construction and land development
 
104,617
 
-
 
-
 
-
 
104,617
Commercial and industrial
 
168,702
 
140
 
4,221
 
280
 
173,343
Owner occupied real estate
 
306,040
 
-
 
3,798
 
-
 
309,838
Consumer and other
 
75,181
 
-
 
1,002
 
-
 
76,183
Residential mortgage
 
64,637
 
127
 
-
 
-
 
64,764
Total
$
1,142,559
$
1,226
$
17,984
$
280
$
1,162,049


24

The following table shows non-accrual loans by class as of September 30, 2018 and December 31, 2017:

(dollars in thousands)
September 30,
2018
 
December 31,
2017
           
Commercial real estate
$
7,159
 
$
8,963
Construction and land development
 
-
   
-
Commercial and industrial
 
3,868
   
2,895
Owner occupied real estate
 
1,651