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Section 1: 10-Q (FORM 10-Q)

frbk20200930_10q.htm
0000834285 REPUBLIC FIRST BANCORP INC false --12-31 Q3 2020 712,369 653,109 11,851 9,266 0.01 0.01 25.00 25.00 10,000,000 10,000,000 2,000,000 0 2,000,000 0 0.01 0.01 100,000,000 100,000,000 59,384,623 59,371,623 58,855,778 58,842,778 503,408 503,408 25,437 25,437 795 720 4,668 5,495 279 520 2,760 1,103 952 393 2,006 1,037 2,000,000 1,675 5,000 2,000,000 1,675 13,000 53,550 1 4 6.25 6.25 5 7 10 3 0 0 0 0 0 0 0 65 3 0 0 0 1 1 0 0 3.49 13.60 10.00 15 7 6.66 13.53 10.75 12 8 0 0 10 20 0 0 0 0 41 19 7 15 6 5 10 20.24 37 17 8 12 5 5 10 The risk-free interest rate is based on the five to seven year Treasury bond. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to estimate expected volatility. All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income. The expected life reflects an 8 month to 4 year vesting period, the maximum ten year term and review of historical behavior. Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period. Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable. The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value. Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Operations. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 For the quarterly period ended September 30, 2020.

         

or

 

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

 

For the transition period from ____ to ____.

 

Commission File Number: 000-17007

 

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

23-2486815

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

  

50 South 16th Street, Philadelphia, Pennsylvania

19102

(Address of principal executive offices)

(Zip code)

 

215-735-4422

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

FRBK

 

Nasdaq Global Market

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☒

Non-Accelerated filer ☐

Smaller reporting company 

Emerging growth company 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

Common Stock, $0.01 per share

58,859,778

Title of Class

Number of Shares Outstanding as of November 6, 2020

 

1

 

 

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, 2020 and December 31, 2019 (unaudited)

3

  Consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)  4
  Consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 (unaudited)

5

 

Consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 (unaudited)

6

 

Consolidated statements of changes in shareholders’ equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)

7

     
 

Notes to consolidated financial statements (unaudited)

8

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

67

     

Item 4.

Controls and Procedures

67

     

Part II: Other Information

 
     

Item 1.

Legal Proceedings

68

     

Item 1A.

Risk Factors

68

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

     

Item 3.

Defaults Upon Senior Securities

69

     

Item 4.

Mine Safety Disclosures

69

     

Item 5.

Other Information

69

     

Item 6.

Exhibits

70

     

Signatures

71

 

2

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2020 and December 31, 2019

(Dollars in thousands, except per share data)

 

  

September 30,

2020

(unaudited)

  

December 31,

2019

 

ASSETS

        

Cash and due from banks

 $43,689  $41,928 

Interest bearing deposits with banks

  874,472   126,391 

Cash and cash equivalents

  918,161   168,319 
         

Investment securities available for sale, at fair value

  440,655   539,042 

Investment securities held to maturity, at amortized cost (fair value of $712,369 and $653,109, respectively)

  688,939   644,842 

Restricted stock, at cost

  3,789   2,746 

Mortgage loans held for sale, at fair value

  41,683   10,345 

Other loans held for sale

  866   3,004 

Loans receivable (net of allowance for loan losses of $11,851 and $9,266, respectively)

  2,617,547   1,738,929 

Premises and equipment, net

  124,034   116,956 

Other real estate owned, net

  1,113   1,730 

Accrued interest receivable

  15,021   9,934 

Operating leases – right-of-use asset

  68,423   64,805 

Goodwill

  -   5,011 

Other assets

  38,525   35,627 

Total Assets

 $4,958,756  $3,341,290 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Liabilities

        

Deposits

        

Demand – non-interest bearing

 $1,049,169  $661,431 

Demand – interest bearing

  1,618,342   1,352,360 

Money market and savings

  1,034,799   761,793 

Time deposits

  203,296   223,579 

Total Deposits

  3,905,606   2,999,163 

Short-term borrowings

  646,267   - 

Accrued interest payable

  1,277   1,630 

Other liabilities

  18,429   11,208 

Operating lease liability obligation

  72,969   68,856 

Subordinated debt

  11,270   11,265 

Total Liabilities

  4,655,818   3,092,122 
         

Shareholders’ Equity

        

Preferred stock, par value $0.01 per share; liquidation preference $25.00 per share; 10,000,000 shares authorized; share issued 2,000,000 as of September 30, 2020 and no shares as of December 31,2019; shares outstanding 2,000,000 as of September 30, 2020 and no shares as of December 31, 2019

  20   - 

Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,384,623 as of September 30, 2020 and 59,371,623 as of December 31, 2019; shares outstanding 58,855,778 as of September 30, 2020 and 58,842,778 as of December 31, 2019

  594   594 

Additional paid in capital

  321,915   272,039 

Accumulated deficit

  (11,263)  (12,216)

Treasury stock at cost (503,408 shares as of September 30, 2020 and December 31, 2019)

  (3,725)  (3,725)

Stock held by deferred compensation plan (25,437 shares as of September 30, 2020 and December 31, 2019)

  (183)  (183)

Accumulated other comprehensive loss

  (4,420)  (7,341)

Total Shareholders’ Equity

  302,938   249,168 

Total Liabilities and Shareholders’ Equity

 $4,958,756  $3,341,290 

 

(See notes to consolidated financial statements)

 

3

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2020 and 2019

(Dollars in thousands, except per share data)

 (unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest income:

                               

Interest and fees on taxable loans

  $ 24,135     $ 18,298     $ 65,941     $ 53,827  

Interest and fees on tax-exempt loans

    548       409       1,652       1,249  

Interest and dividends on taxable investment securities

    3,758       6,652       15,612       21,134  

Interest and dividends on tax-exempt investment securities

    20       72       59       131  

Interest on federal funds sold and other interest-earning assets

    99       777       438       1,631  

Total interest income

    28,560       26,208       83,702       77,972  

Interest expense:

                               

Demand- interest bearing

    3,056       3,753       9,333       11,897  

Money market and savings

    1,613       1,813       4,827       4,893  

Time deposits

    884       1,123       3,138       2,608  

Other borrowings

    77       137       293       681  

Total interest expense

    5,630       6,826       17,591       20,079  

Net interest income

    22,930       19,382       66,111       57,893  

Provision for loan losses

    850       450       2,800       750  

Net interest income after provision for loan losses

    22,080       18,932       63,311       57,143  

Non-interest income:

                               

Loan and servicing fees

    917       257       2,152       1,156  

Mortgage banking income

    4,962       2,797       10,809       8,048  

Gain on sales of SBA loans

    649       944       1,567       2,593  

Service fees on deposit accounts

    2,134       1,990       6,166       5,450  

Gain on sale of investment securities

    279       520       2,760       1,103  

Other non-interest income

    1,090       46       1,546       175  

Total non-interest income

    10,031       6,554       25,000       18,525  

Non-interest expenses:

                               

Salaries and employee benefits

    14,596       14,314       41,154       40,378  

Occupancy

    3,560       2,994       10,294       8,270  

Depreciation and amortization

    1,964       1,740       6,081       4,700  

Legal

    261       462       810       1,024  

Other real estate owned

    80       799       437       1,653  

Appraisal and other loan expenses

    619       476       1,580       1,327  

Advertising

    386       698       1,055       1,467  

Data processing

    1,606       1,434       4,747       3,780  

Insurance

    279       301       836       752  

Professional fees

    679       661       2,069       1,864  

Debit card processing

    915       526       2,639       1,689  

Regulatory assessments and costs

    625       62       1,930       904  

Taxes, other

    303       288       789       782  

Goodwill impairment

    5,011       -       5,011       -  

Other operating expenses

    2,696       3,069       8,084       8,412  

Total non-interest expense

    33,580       27,824       87,516       77,002  

Income (loss) before benefit for income taxes

    (1,469 )     (2,338 )     795       (1,334 )

Benefit for income taxes

    (503 )     (516 )     (158 )     (319 )

Net income (loss)

  $ (966 )   $ (1,822 )   $ 953     $ (1,015 )

Basic

  $ (0.02 )   $ (0.03 )   $ 0.02     $ (0.02 )

Diluted

  $ (0.02 )   $ (0.03 )   $ 0.02     $ (0.02 )

 

(See notes to consolidated financial statements)

 

4

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2020 and 2019

(Dollars in thousands)

(unaudited)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net income (loss)

 $(966) $(1,822) $953  $(1,015)
                 

Other comprehensive income (loss), net of tax

                
Unrealized gains (losses) on securities (pre-tax ($795), $720, $4,668, and $5,495, respectively)  (593)  583   3,483   4,456 

Reclassification adjustment for securities (gains) (pre-tax ($279), ($520), ($2,760), and ($1,103), respectively)

  (208)  (217)  (2,060)  (894)

Net unrealized gains (losses) on securities

  (801)  366   1,423   3,562 

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 $952, $393, $2,006, and $1,037 respectively)  710   318   1,498   841 
                 

Total other comprehensive income (loss)

  (91)  684   2,921   4,403 
                 

Total comprehensive income (loss)

 $(1,057) $(1,138) $3,874  $3,388 

 

(See notes to consolidated financial statements)

 

5

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2020 and 2019

(Dollars in thousands)

(unaudited)

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

Cash flows from operating activities

               

Net income (loss)

  $ 953     $ (1,015 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

               

Goodwill impairment

    5,011       -  

Provision for loan losses

    2,800       750  

Write down of other real estate owned

    31       240  

Depreciation and amortization

    6,081       4,700  

Stock based compensation

    1,538       2,005  

Net gain on sale of investment securities

    (2,760 )     (1,103 )

Amortization of premiums on investment securities

    5,573       2,257  

Accretion of discounts on retained SBA loans

    (655 )     (1,083 )

Fair value adjustments on SBA servicing assets

    301       1,106  

Proceeds from sales of SBA loans originated for sale

    22,999       37,916  

SBA loans originated for sale

    (19,294 )     (32,395 )

Gains on sales of SBA loans originated for sale

    (1,567 )     (2,593 )

Proceeds from sales of mortgage loans originated for sale

    289,521       246,816  

Mortgage loans originated for sale

    (312,150 )     (239,045 )

Fair value adjustment for mortgage loans originated for sale

    (1,338 )     285  

Gains on sales of mortgage loans originated for sale

    (7,590 )     (6,215 )

Amortization of debt issuance costs

    5       4  

Non-cash expense related to leases

    448       924  

Increase in accrued interest receivable and other assets

    (8,149 )     (4,524 )

Increase in accrued interest payable and other liabilities

    6,004       2,996  

Net cash (used in) provided by operating activities

    (12,238 )     12,026  
                 

Cash flows from investing activities

               

Purchase of investment securities available for sale

    (166,622 )     (150,734 )

Purchase of investment securities held to maturity

    (208,230 )     -  

Proceeds from the sale of securities available for sale

    125,222       54,742  

Proceeds from the paydown, maturity, or call of securities available for sale

    144,057       41,571  

Proceeds from the paydown, maturity, or call of securities held to maturity

    160,964       73,890  

Net (purchase) redemption of restricted stock

    (1,043 )     3,383  

Net increase in loans

    (880,763 )     (133,667 )

Net proceeds from sale of other real estate owned

    586       401  

Premises and equipment expenditures

    (13,159 )     (28,612 )

Net cash used in investing activities

    (838,988 )     (139,026 )
                 

Cash flows from financing activities

               

Net proceeds from issuance of preferred stock

    48,325       -  

Net proceeds from exercise of stock options

    33       261  

Net increase in demand, money market and savings deposits

    926,726       284,219  

Net (decrease) increase in time deposits

    (20,283 )     62,946  

Net increase (repayment) of short-term borrowings

    646,267       (91,422 )

Net cash provided by financing activities

    1,601,068       256,004  
                 

Net increase in cash and cash equivalents

    749,842       129,004  

Cash and cash equivalents, beginning of year

    168,319       72,473  

Cash and cash equivalents, end of period

  $ 918,161     $ 201,477  
                 

Supplemental disclosures

               

Interest paid

  $ 17,238     $ 18,982  

Non-cash transfers from loans to other real estate owned

  $ -     $ 1,071  

 

(See notes to consolidated financial statements)

 

6

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Three and Nine Months Ended September 30, 2020 and 2019

(Dollars in thousands)

(unaudited)

 

  

Preferred

Stock

  

Common

Stock

  

 

Additional

Paid in

Capital

  

 

 

Accumulated

Deficit

  

 

 

Treasury

Stock

  

Stock Held by

Deferred

Compensation

Plan

  

Accumulated

Other

Comprehensive

Loss

  

 

Total

Shareholders’

Equity

 
                                 

Balance July 1, 2020

 $-  $594  $273,118  $(10,297) $(3,725) $(183) $(4,329) $255,178 
                                 

Net loss

              (966)              (966)

Other comprehensive loss, net of tax

                          (91)  (91)

Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675

  20       48,305                   48,325 

Stock based compensation

          482                   482 

Options exercised (5,000 shares)

          10                   10 
                                 

Balance September 30, 2020

 $20  $594  $321,915  $(11,263) $(3,725) $(183) $(4,420) $302,938 
                                 

Balance January 1, 2020

 $-  $594  $272,039  $(12,216) $(3,725) $(183) $(7,341) $249,168 
                                 

Net income

              953               953 

Other comprehensive income, net of tax

                          2,921   2,921 

Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675

  20       48,305                   48,325 

Stock based compensation

          1,538                   1,538 

Options exercised (13,000 shares)

          33                   33 
                                 

Balance September 30, 2020

 $20  $594  $321,915  $(11,263) $(3,725) $(183) $(4,420) $302,938 
                                 

Balance July 1, 2019

 $-  $594  $270,789  $(7,909) $(3,725) $(183) $(8,208) $251,358 
                                 

Net loss

              (1,822)              (1,822)

Other comprehensive income, net of tax

                          684   684 

Stock based compensation

          623                   623 
                                 

Balance September 30, 2019

 $-  $594  $271,412  $(9,731) $(3,725) $(183) $(7,524) $250,843 
                                 

Balance January 1, 2019

 $-  $593  $269,147  $(8,716) $(3,725) $(183) $(11,927) $245,189 
                                 

Net loss

              (1,015)              (1,015)

Other comprehensive income, net of tax

                          4,403   4,403 

Stock based compensation

          2,005                   2,005 

Options exercised (53,550 shares)

      1   260                   261 
                                 

Balance September 30, 2019

 $-  $594  $271,412  $(9,731) $(3,725) $(183) $(7,524) $250,843 

 

(See notes to consolidated financial statements)

 

7

 

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, Southern New Jersey, and New York City markets through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, Atlantic, Gloucester, and New York Counties. On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with US GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

 

Note 2: Summary of Significant Accounting Policies

 

Risks and Uncertainties

 

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

 

8

 

The coronavirus (“COVID-19”) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions during the nine months ended September 30, 2020 that did not exist at December 31, 2019. In response to these evolving conditions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.

 

The economic downturn that began in the U.S. as a result of the government-mandated business closures and stay-at-home orders is significantly impacting the labor market, consumer spending, business investment and profitability. As a result, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which is the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term. We obtained approval from the SBA for more than 5,100 loan applications which has resulted in $683 million in outstanding PPP loans at September 30, 2020. Almost all of these loans have a two year term, an interest rate of 1.00% and included an origination fee paid by the SBA between 1% and 5% of the loan balance. Gross origination fees of approximately $23 million were earned by Republic which will be amortized and reported as interest income over the life of the loans. After deduction of deferred costs and fees related to the PPP program, $15 million of net revenue has been deferred and will be recognized as income in future periods.

 

Mortgage Banking Activities and Mortgage Loans Held for Sale

 

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

 

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

 

Interest Rate Lock Commitments (“IRLCs”)

 

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 12 Derivatives and Risk Management Activities for further detail of IRLCs.

 

9

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

 

In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.

 

In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings.

 

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

 

Stock-Based Compensation

 

The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of September 30, 2020, 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.

 

10

 

On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At September 30, 2020, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the nine months ended September 30, 2020, 1,248,100 options were granted under the 2014 Plan with a fair value of $1,084,888.

 

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

 

  

2020

  

2019

 

Dividend yield(1)

  0.0%    0.0%  

Expected volatility(2)

  28.61%    28.81%  

Risk-free interest rate(3)

 0.36%to1.22%  1.42% to2.78% 

Expected life(4) (in years)

  6.25%    6.25%  

Assumed forfeiture rate(5)

  5.0%    4.0%  

 

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

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

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

(4) The expected life reflects an 8 month to 4 year vesting period, the maximum ten year term and review of historical behavior.

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

 

During the nine months ended September 30, 2020 and 2019, 907,790 shares and 842,898 shares vested, respectively. Expense is recognized ratably over the period required to vest. At September 30, 2020, the intrinsic value of the 5,993,700 options outstanding was $11,000, while the intrinsic value of the 3,384,500 exercisable (vested) options was $11,000. At September 30, 2019, the intrinsic value of the 5,007,725 options outstanding was $780,000, while the intrinsic value of the 2,645,960 exercisable (vested) options was $753,000. During the nine months ended September 30, 2020, 13,000 options were exercised resulting in cash receipts of $33,000 and 220,875 options were forfeited with a weighted average grant date fair value of $419,999. During the nine months ended September 30, 2019, 53,550 options were exercised resulting in cash receipts of $261,000 and 142,875 options were forfeited with a weighted average grant date fair value of $381,811.

 

Information regarding stock based compensation for the nine months ended September 30, 2020 and 2019 is set forth below:

 

  

2020

  

2019

 

Stock based compensation expense recognized

 $1,538,000  $2,005,000 

Number of unvested stock options

  2,609,200   2,361,765 

Fair value of unvested stock options

 $4,915,841  $6,095,468 

Amount remaining to be recognized as expense

 $3,121,499  $4,183,148 

 

The remaining unrecognized expense amount of $3,121,499 will be recognized ratably as expense through September 2024.

 

11

 

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 and convertible preferred stock for the nine months ended September 30, 2020. CSEs consist of dilutive stock options granted through the Company’s stock option plans for the nine months September 30, 2019.

 

The calculation of EPS for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands, except per share amounts):

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net income (loss) - basic and diluted

 $(966) $(1,822) $953  $(1,015)
                 

Weighted average shares outstanding

  58,853   58,843   58,851   58,830 

Net income per share – basic

 $(0.02) $(0.03) $0.02  $(0.02)

Weighted average shares outstanding (including dilutive CSEs)

  58,853   58,843   60,751   58,830 

Net income per share – diluted

 $(0.02) $(0.03) $0.02  $(0.02)

 

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,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Anti-dilutive securities

                
                 

Share based compensation awards

  5,994   5,008   5,945   5,008 

 

Recent Accounting Pronouncements

 

ASU 2016-02

 

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

 

12

 

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

 

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

 

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

 

ASU 2016-13

 

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

 

13

 
 

Note 3: Legal Proceedings

 

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

 

 

Note 4: Segment Reporting

 

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

 

 

Note 5: Investment Securities

 

A summary of the amortized cost and market value of securities available for sale and securities held to maturity at September 30, 2020 and December 31, 2019 is as follows:

 

  At September 30, 2020 

 

 

(dollars in thousands)

 

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

 

Fair

Value

 
                 

U.S. Government agencies

 $33,848  $-  $(476) $33,372 

Collateralized mortgage obligations

  200,590   3,275   (63)  203,802 

Agency mortgage-backed securities

  130,372   837   (6)  131,203 

Municipal securities

  2,635   27   -   2,662 

Corporate bonds

  73,011   99   (3,494)  69,616 

Total securities available for sale

 $440,456  $4,238  $(4,039) $440,655 
                 

U.S. Government agencies

 $84,689  $4,486  $-  $89,175 

Collateralized mortgage obligations

  320,408   14,300   (54)  334,654 

Agency mortgage-backed securities

  283,842   4,725   (27)  288,540 

Total securities held to maturity

 $688,939  $