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  $23,511  $(81) $712,369 

 

  At December 31, 2019 

 

 

(dollars in thousands)

 

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

 

Fair

Value

 
                 

U.S. Government agencies

 $38,743  $1  $(439) $38,305 

Collateralized mortgage obligations

  329,492   2,368   (422)  331,438 

Agency mortgage-backed securities

  98,953   82   (98)  98,937 

Municipal securities

  4,064   18   -   4,082 

Corporate bonds

  69,499   79   (3,298)  66,280 

Total securities available for sale

 $540,751  $2,548  $(4,257) $539,042 
                 

U.S. Government agencies

 $94,913  $482  $(294) $95,101 

Collateralized mortgage obligations

  416,177   7,603   (793)  422,987 

Agency mortgage-backed securities

  133,752   1,782   (513)  135,021 

Total securities held to maturity

 $644,842  $9,867  $(1,600) $653,109 

 

14

 

The following table presents investment securities by stated maturity at September 30, 2020. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.

 

  

Available for Sale

  

Held to Maturity

 

 

(dollars in thousands)

 

Amortized

Cost

  

Fair

Value

  

Amortized

Cost

  

Fair

Value

 

Due in 1 year or less

 $440  $441  $757  $766 

After 1 year to 5 years

  50,361   49,908   61,794   64,794 

After 5 years to 10 years

  55,693   52,670   22,138   23,615 

After 10 years

  3,000   2,631   -   - 

Collateralized mortgage obligations

  200,590   203,802   320,408   334,654 

Agency mortgage-backed securities

  130,372   131,203   283,842   288,540 

Total

 $440,456  $440,655  $688,939  $712,369 

 

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

 

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

  

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded at September 30, 2020 and December 31, 2019.

 

15

 

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, 2020

 
  

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

 $8,254  $89  $25,118  $387  $33,372  $476 

Collateralized mortgage obligations

  44,918   60   15,929   3   60,847   63 

Agency mortgage-backed securities

  1,787   6   -   -   1,787   6 

Municipal securities

  -   -   -   -   -   - 

Corporate bonds

  -   -   54,506   3,494   54,506   3,494 

Total Available for Sale

 $54,959  $155  $95,553  $3,884  $150,512  $4,039 

 

  

At September 30, 2020

 
  

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

 $-  $-  $-  $-  $-  $- 

Collateralized mortgage obligations

  13,625   51   494   3   14,119   54 

Agency mortgage-backed securities

  4,942   27   -   -   4,942   27 

Total Held to Maturity

 $18,567  $78  $494  $3  $19,061  $81 

 

  

At December 31, 2019

 
  

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

 $28,136  $439  $-  $-  $28,136  $439 

Collateralized mortgage obligations

  63,384   328   6,164   94   69,548   422 

Agency mortgage-backed securities

  2,924   13   6,411   85   9,335   98 

Municipal securities

  -   -   -   -   -   - 

Corporate bonds

  2,820   180   51,882   3,118   54,702   3,298 

Total Available for Sale

 $97,264  $960  $64,457  $3,297  $161,721  $4,257 

 

  

At December 31, 2019

 
  

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

 $33,092  $220  $3,703  $74  $36,795  $294 

Collateralized mortgage obligations

  24,211   18   64,324   775   88,535   793 

Agency mortgage-backed securities

  14,044   33   52,132   480   66,176   513 

Total Held to Maturity

 $71,347  $271  $120,159  $1,329  $191,506  $1,600 

 

Unrealized losses on securities in the investment portfolio amounted to $4.1 million with a total fair value of $169.6 million as of September 30, 2020 compared to unrealized losses of $5.9 million with a total fair value of $353.2 million as of December 31, 2019. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

 

The Company held four U.S. Government agency securities, fourteen collateralized mortgage obligations and two agency mortgage-backed securities that were in an unrealized loss position at September 30, 2020. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of September 30, 2020.

 

16

 

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, 2020, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At September 30, 2020, the investment portfolio included seven corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. The seven corporate bonds are with five of the largest U.S. financial institutions. Each financial institution is well capitalized.

 

Proceeds associated with the sale of securities available for sale during the three months ended September 30, 2020 were $32.4 million. The tax provision applicable to the net gains of $279,000 for the three months ended September 30, 2020 amounted to $71,000. Proceeds associated with the sale of securities available for sale during the nine months ended September 30, 2020 were $125.2 million. The tax provision applicable to the net gains of $2.8 million for the nine months ended September 30, 2020 amounted to $700,000.

 

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

 

 

Note 6: Loans Receivable and Allowance for Loan Losses

 

The following table sets forth the Company’s gross loans by major category as of September 30, 2020 and December 31, 2019:

 

 

(dollars in thousands)

 

September 30,

2020

  

December 31,

2019

 
         

Commercial real estate

 $676,460  $613,631 

Construction and land development

  164,671   121,395 

Commercial and industrial

  228,145   223,906 

Owner occupied real estate

  427,026   424,400 

Consumer and other

  100,035   101,320 

Residential mortgage

  365,279   263,444 

Paycheck protection program

  683,398   - 

Total loans receivable

  2,645,014   1,748,096 

Deferred (fees) costs

  (15,616)  99 

Allowance for loan losses

  (11,851)  (9,266)

Net loans receivable

 $2,617,547  $1,738,929 

 

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, residential mortgages, and PPP loans. PPP loans are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

 

17

 

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, 2020 and 2019:

 

 

 

(dollars in

thousands)

 

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied Real

Estate

  

 

Consumer

and Other

  

 

Residential

Mortgage

  

Paycheck

Protection

Program

  

 

Unallocated

  

 

 

Total

 
                                     

Three months ended September 30, 2020

                             

Allowance for loan losses:

                                 

Beginning balance:

 $3,732  $952  $1,431  $1,995  $675  $2,255  $-  $-  $11,040 

Charge-offs

  -   -   (33)  -   (2)  (17)  -   -   (52)

Recoveries

  -   -   11   -   2   -   -   -   13 

Provisions (credits)

  235   112   74   (8)  6   429   -   2   850 

Ending balance

 $3,967  $1,064  $1,483  $1,987  $681  $2,667  $-  $2  $11,851 
                                     

Three months ended September 30, 2019

                             

Allowance for loan losses:

                                 

Beginning balance:

 $2,673  $631  $875  $2,158  $562  $1,124  $-  $33  $8,056 

Charge-offs

  -   -   (72)  -   (29)  -   -   -   (101)

Recoveries

  -   -   59   1   2   -   -   -   62 

Provisions (credits)

  198   (10)  (79)  31   36   205   -   69   450 

Ending balance

 $2,871  $621  $783  $2,190  $571  $1,329  $-  $102  $8,467 

 

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, 2020 and 2019:

 

 

(dollars in

thousands)

 

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied Real

Estate

  

 

Consumer

and Other

  

 

Residential

Mortgage

  

Paycheck

Protection

Program

  

 

 

Unallocated

  

 

 

Total

 
                                     

Nine months ended September 30, 2020

                             

Allowance for loan losses:

                                 
                                     

Beginning balance:

 $3,043  $688  $931  $2,292  $590  $1,705  $-  $17  $9,266 

Charge-offs

  -   -   (84)  (48)  (67)  (67)  -   -   (266)

Recoveries

  -   2   38   1   10   -   -   -   51 

Provisions (credits)

  924   374   598   (258)  148   1,029   -   (15)  2,800 

Ending balance

 $3,967  $1,064  $1,483  $1,987  $681  $2,667  $-  $2  $11,851 
                                     

Nine months ended September 30, 2019

                             

Allowance for loan losses:

                                 
                                     

Beginning balance:

 $2,462  $777  $1,754  $2,033  $577  $894  $-  $118  $8,615 

Charge-offs

  -   -   (1,002)  -   (117)  -   -   -   (1,119)

Recoveries

  -   -   213   1   7   -   -   -   221 

Provisions (credits)

  409   (156)  (182)  156   104   435   -   (16)  750 

Ending balance

 $2,871  $621  $783  $2,190  $571  $1,329  $-  $102  $8,467 

 

18

 

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, 2020 and December 31, 2019:

 

 

 

(dollars in thousands)

 

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied Real

Estate

  

 

Consumer

and Other

  

 

Residential

Mortgage

  

Paycheck

Protection

Program

  

 

 

Unallocated

  

 

 

Total

 

September 30, 2020

                                    

Allowance for loan losses:

                                    

Individually evaluated for impairment

 $426  $-  $51  $122  $-  $-  $-  $-  $599 

Collectively evaluated for impairment

  3,541   1,064   1,432   1,865   681   2,667   -   2   11,252 

Total allowance for loan losses

 $3,967  $1,064  $1,483  $1,987  $681  $2,667  $-  $2  $11,851 
                                     

Loans receivable:

                                    

Loans evaluated Individually

 $10,737  $-  $2,972  $4,305  $1,095  $701  $-  $-  $19,810 

Loans evaluated Collectively

  665,723   164,671   225,173   422,721   98,940   364,578   683,398   -   2,625,204 

Total loans receivable

 $676,460  $164,671  $228,145  $427,026  $100,035  $365,279  $683,398  $-  $2,645,014 

 

 

 

(dollars in thousands)

 

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied Real

Estate

  

 

Consumer

and Other

  

 

Residential

Mortgage

  

Paycheck

Protection

Program

  

 

 

Unallocated

  

 

 

Total

 

December 31, 2019

                                    

Allowance for loan losses:

                                    

Individually evaluated for impairment

 $265  $-  $23  $268  $-  $-  $-  $-  $556 

Collectively evaluated for impairment

  2,778   688   908   2,024   590   1,705   -   17   8,710 

Total allowance for loan losses

 $3,043  $688  $931  $2,292  $590  $1,705  $-  $17  $9,266 
                                     

Loans receivable:

                                    

Loans evaluated Individually

 $10,331  $-  $3,087  $3,634  $1,062  $768  $-  $-  $18,882 

Loans evaluated Collectively

  603,300   121,395   220,819   420,766   100,258   262,676      -   1,729,214 

Total loans receivable

 $613,631  $121,395  $223,906  $424,400  $101,320  $263,444  $-  $-  $1,748,096 

 

19

 

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, 2020 and December 31, 2019:

 

  

September 30, 2020

  

December 31, 2019

 

 

 

(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

 $6,561  $6,569  $-  $6,186  $6,192  $- 

Construction and land development

  -   -   -   -   -   - 

Commercial and industrial

  2,617   2,803   -   2,719   2,989   - 

Owner occupied real estate

  3,712   3,920   -   2,127   2,275   - 

Consumer and other

  1,095   1,297   -   1,062   1,375   - 

Residential mortgage

  701   768   -   768   768   - 

Paycheck protection program

  -   -   -   -   -   - 

Total

 $14,686  $15,357  $-  $12,862  $13,599  $- 
                         

With an allowance recorded:

                        

Commercial real estate

  4,176  $4,697  $426  $4,145  $4,667  $265 

Construction and land development

  -   -   -   -   -   - 

Commercial and industrial

  355   371   51   368   383   23 

Owner occupied real estate

  593   612   122   1,507   1,521   268 

Consumer and other

  -   -   -   -   -   - 

Residential mortgage

  -   -   -   -   -   - 

Paycheck protection program

  -   -   -   -   -   - 

Total

  5,124  $5,680  $599  $6,020  $6,571  $556 
                         

Total:

                        

Commercial real estate

 $10,737  $11,266  $426  $10,331  $10,859  $265 

Construction and land development

  -   -   -   -   -   - 

Commercial and industrial

  2,972   3,174   51   3,087   3,372   23 

Owner occupied real estate

  4,305   4,532   122   3,634   3,796   268 

Consumer and other

  1,095   1,297   -   1,062   1,375   - 

Residential mortgage

  701   768   -   768   768   - 

Paycheck protection program

  -   -   -   -   -   - 

Total

 $19,810  $21,037  $599  $18,882  $20,170  $556 

 

20

 

The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2020 and September 30, 2019:

 

  

Three Months Ended September 30,

 
  

2020

  

2019

 

 

 

(dollars in thousands)

 

 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                

Commercial real estate

 $6,534  $69  $7,004  $80 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,615   -   2,821   19 

Owner occupied real estate

  3,491   13   1,801   12 

Consumer and other

  1,114   6   931   4 

Residential mortgage

  724   -   640   1 

Paycheck protection program

  -   -   -   - 

Total

 $14,478  $88  $13,197  $116 
                 

With an allowance recorded:

                

Commercial real estate

 $4,167  $-  $4,114  $- 

Construction and land development

  -   -   -   - 

Commercial and industrial

  37   -   572   - 

Owner occupied real estate

  819   1   1,492   12 

Consumer and other

  10   -   12   - 

Residential mortgage

  -   -   -   - 

Paycheck protection program

  -   -   -   - 

Total

 $5,033  $1  $6,190  $12 
                 

Total:

                

Commercial real estate

 $10,701  $69  $11,118  $80 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,652   -   3,393   19 

Owner occupied real estate

  4,310   14   3,293   24 

Consumer and other

  1,124   6   943   4 

Residential mortgage

  724   -   640   1 

Paycheck protection program

  -   -   -   - 

Total

 $19,511  $89  $19,387  $128 

 

21

 

The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2020 and September 30, 2019:

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 

 

 

(dollars in thousands)

 

 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                

Commercial real estate

 $6,484  $207  $6,532  $220 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,607   1   2,001   19 

Owner occupied real estate

  3,051   21   1,853   40 

Consumer and other

  1,156   13   871   12 

Residential mortgage

  768   1   384   2 

Paycheck protection program

  -   -   -   - 

Total

 $14,066  $243  $11,641  $293 
                 

With an allowance recorded:

                

Commercial real estate

 $4,153  $-  $4,314  $- 

Construction and land development

  -   -   -   - 

Commercial and industrial

  479   -   956   - 

Owner occupied real estate

  1,273   17   962   24 

Consumer and other

  -   -   38   - 

Residential mortgage

  30   1   -   - 

Paycheck protection program

  -   -   -   - 

Total

 $5,935  $18  $6,270  $24 
                 

Total:

                

Commercial real estate

 $10,637  $207  $10,846  $220 

Construction and land development

  -   -   -   - 

Commercial and industrial

  3,086   1   2,957   19 

Owner occupied real estate

  4,324   38   2,815   64 

Consumer and other

  1,156   13   909   12 

Residential mortgage

  798   2   384   2 

Paycheck protection program

  -   -   -   - 

Total

 $20,001  $261  $17,911  $317 

 

22

 

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, 2020 and December 31, 2019:

 

 

 

 

(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, 2020

                            

Commercial real estate

 $-  $6  $4,578  $4,584  $671,876  $676,460  $- 

Construction and land development

  -   -   -   -   164,671   164,671   - 

Commercial and industrial

  -   -   2,972   2,972   225,173   228,145   - 

Owner occupied real estate

  -   611   3,103   3,714   423,312   427,026   - 

Consumer and other

  468   241   1,095   1,804   98,231   100,035   - 

Residential mortgage

  557   -   701   1,258   364,021   365,279   - 

Paycheck protection program

  -   -   -   -   683,398   683,398   - 

Total

 $1,025  $858  $12,449  $14,332  $2,630,682  $2,645,014  $- 

 

 

 

 

(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, 2019

                            

Commercial real estate

 $-  $313  $4,159  $4,472  $609,159  $613,631  $- 

Construction and land development

  -   -   -   -   121,395   121,395   - 

Commercial and industrial

  -   50   3,087   3,137   220,769   223,906   - 

Owner occupied real estate

  -   1,219   3,337   4,556   419,844   424,400   - 

Consumer and other

  112   241   1,062   1,415   99,905   101,320   - 

Residential mortgage

  -   -   768   768   262,676   263,444   - 

Total

 $112  $1,823  $12,413  $14,348  $1,733,748  $1,748,096  $- 

 

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, 2020 and December 31, 2019:

 

 

(dollars in thousands)

 

 

Pass

  

Special

Mention

  

 

Substandard

  

 

Doubtful

  

 

Total

 

At September 30, 2020:

                    

Commercial real estate

 $671,702  $83  $4,675  $-  $676,460 

Construction and land development

  164,671   -   -   -   164,671 

Commercial and industrial

  225,173   -   2,972   -   228,145 

Owner occupied real estate

  422,194   527   4,305   -   427,026 

Consumer and other

  98,940   -   1,095   -   100,035 

Residential mortgage

  364,578   -   701   -   365,279 

Paycheck protection program

  683,398   -   -   -   683,398 

Total

 $2,630,656  $610  $13,748  $-  $2,645,014 

 

 

(dollars in thousands)

 

 

Pass

  

Special

Mention

  

 

Substandard

  

 

Doubtful

  

 

Total

 

At December 31, 2019:

                    

Commercial real estate

 $609,382  $90  $4,159  $-  $613,631 

Construction and land development

  121,395   -   -   -   121,395 

Commercial and industrial

  220,819   -   3,087   -   223,906 

Owner occupied real estate

  418,997   1,770   3,633   -   424,400 

Consumer and other

  100,258   -   1,062   -   101,320 

Residential mortgage

  262,555   121   768   -   263,444 

Total

 $1,733,406  $1,981  $12,709  $-  $1,748,096 

 

23

 

The following table shows non-accrual loans by class as of September 30, 2020 and December 31, 2019:

 

(dollars in thousands)

 

September 30,

2020

  

December 31,

2019

 
         

Commercial real estate

 $4,578  $4,159 

Construction and land development

  -   - 

Commercial and industrial

  2,972   3,087 

Owner occupied real estate

  3,103   3,337 

Consumer and other

  1,095   1,062 

Residential mortgage

  701   768 

Paycheck protection program

  -   - 

Total

 $12,449  $12,413 

 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $190,000 and $587,000 for the three and nine months ended September 30, 2020, respectively, and $145,000 and $378,000 for the three and nine months ended September 30, 2019, respectively.    

 

Troubled Debt Restructurings

 

A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

 

      Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. As of June 30, 2020, we had granted payment deferrals to 491 customers with outstanding balances of $444 million, or 24% of total loans outstanding. As of September 30, 2020, deferrals declined to 95 customers with outstanding balances of $115 million, or 6% of total loans outstanding. Approximately $65 million of the deferral requests, or 3% of total loans, were for deferment of principal balances only. The remaining deferrals include requests to defer both principal and interest payments. Deferrals as of September 30, 2020 were comprised of the following categories: 90 day deferrals amounted to 43 customers with outstanding balances of $45 million and second deferrals amounted to 52 customers with outstanding balances of $70 million.

 

24

 

The following table summarizes information with regard to outstanding troubled debt restructurings at September 30, 2020 and December 31, 2019:

 

 

(dollars in thousands)

 

Number

of Loans

  

Accrual

Status

  

Non-

Accrual

Status

  

Total

TDRs

 

September 30, 2020

                

Commercial real estate

  1  $6,062  $-  $6,062 

Construction and land development

  -   -   -   - 

Commercial and industrial

  -   -   -   - 

Owner occupied real estate

  -   -   -   - 

Consumer and other

  -   -   -   - 

Residential mortgage

  -   -   -   - 

Total

  1  $6,062  $-  $6,062 
                 

December 31, 2019

                

Commercial real estate

  1  $6,173  $-  $6,173 

Construction and land development

  -   -   -   - 

Commercial and industrial

  -   -   -   - 

Owner occupied real estate

  -   -   -   - 

Consumer and other

  -   -   -   - 

Residential mortgage

  -   -   -   - 

Total

  1  $6,173  $-  $6,173 

 

All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into our estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.

 

There were no loan modifications made during the three and nine months ended September 30, 2020 and 2019 that met the criteria of a TDR.

 

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and nine months ended September 30, 2020. There were no TDRs that subsequently defaulted during the year ended December 31, 2019.

 

There was one residential mortgage in the process of foreclosure as of September 30, 2020 and December 31, 2019. There was no other real estate owned relating to residential real estate at September 30, 2020 and December 31, 2019.

 

 

Note 7: Short-Term Borrowings

 

The following is a summary of short-term borrowings by type.

 

  

September 30, 2020

  

December 31, 2019

 

(dollars in thousands)

 

Balance at

End of Period

  

Weighted Average

Interest Rate at

End of Period

  

Balance at

End of Period

  

Weighted Average

Interest Rate at

End of Period

 

Short-term borrowings

                

Paycheck Protection Program

                

Liquidity Facility borrowings

 $646,267   0.35% $-   -%

 

As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowings to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. At September 30, 2020, the Company pledged $646.3 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $646.3 million of funds at a rate of 0.35%.

 

25

 
 

Note 8: Fair Value of Financial Instruments

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

 

The Company follows the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.

 

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).

 

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

26

 

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2020 and December 31, 2019 were as follows:

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

Total

  

(Level 1)

Quoted Prices

in Active

Markets for

Identical Assets

  

(Level 2)

Significant

Other

Observable

Inputs

  

 

(Level 3)

Significant

Unobservable

Inputs

 
                 

September 30, 2020

                

Assets:

                
                 

U.S. Government agencies

 $33,372  $-  $33,372  $- 

Collateralized mortgage obligations

  203,802   -   203,802   - 

Agency mortgage-backed securities

  131,203   -   131,203   - 

Municipal securities

  2,662   -   2,662   - 

Corporate bonds

  69,616   -   66,985   2,631 

Securities Available for Sale

 $440,655  $-  $438,024  $2,631 
                 

Mortgage Loans Held for Sale

 $41,683  $-  $41,683  $- 

SBA Servicing Assets

  4,634   -   -   4,634 

Interest Rate Lock Commitments

  1,451   -   1,451   - 

Best Efforts Forward Loan Sales Commitments

  -   -   -   - 

Mandatory Forward Loan Sales Commitments

  -   -   -   - 
                 

Liabilities:

                
                 

Interest Rate Lock Commitments

  1   -   1   - 

Best Efforts Forward Loan Sales Commitments

  554   -   554   - 

Mandatory Forward Loan Sales Commitments

  525   -   525   - 
                 

December 31, 2019

                

Assets:

                
                 

U.S. Government agencies

 $38,305  $-  $38,305  $- 

Collateralized mortgage obligations

  331,438   -   331,438   - 

Agency mortgage-backed securities

  98,937   -   98,937   - 

Municipal securities

  4,082   -   4,082   - 

Corporate bonds

  66,280   -   63,460   2,820 

Securities Available for Sale

 $539,042  $-  $536,222  $2,820 
                 

Mortgage Loans Held for Sale

 $10,345  $-  $10,345  $- 

SBA Servicing Assets

  4,447   -   -   4,447 

Interest Rate Lock Commitments

  362   -   362   - 

Best Efforts Forward Loan Sales Commitments

  4   -   4   - 

Mandatory Forward Loan Sales Commitments

  2   -   2   - 
                 

Liabilities:

                
                 

Interest Rate Lock Commitments

  -   -   -   - 

Best Efforts Forward Loan Sales Commitments

  133   -   133   - 

Mandatory Forward Loan Sales Commitments

  83   -   83   - 

 

27

 

The following tables present an analysis of the activity in the SBA servicing assets for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months Ended

September 30,

 

(dollars in thousands)

 

2020

  

2019

 

Beginning balance, July 1st

 $4,604  $4,593 

Additions

  173   272 

Fair value adjustments

  (143)  (361)

Ending balance, September 30th

 $4,634  $4,504 

 

  

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2020

  

2019

 

Beginning balance, January 1st

 $4,447  $4,785 

Additions

  488   825 

Fair value adjustments

  (301)  (1,106)

Ending balance, September 30th

 $4,634  $4,504 

 

Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $510,000 and $498,000 for the three months ended September 30, 2020 and 2019, respectively. Servicing fee income, not including fair value adjustments, totaled $1.4 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively. Total loans in the amount of $211.0 million at September 30, 2020 and $201.7 million at December 31, 2019 were serviced for others.

 

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020 and 2019:

 

  

Three Months

Ended

September 30, 2020

  

Three Months

Ended

September 30, 2019

 

Level 3 Investments Only

(dollars in thousands)

 

Corporate Bonds

  

Corporate Bonds

 

Balance, July 1st

 $2,665  $2,999 

Unrealized gains (losses)

  (34)  (108)

Proceeds from sales

  -   - 

Realized losses

  -   - 

Balance, September 30th

 $2,631  $2,891 

 

  

Nine Months

Ended

September 30, 2020

  

Nine Months

Ended

September 30, 2019

 

Level 3 Investments Only

(dollars in thousands)

 

Corporate Bonds

  

Corporate Bonds

 

Balance, January 1st

 $2,819  $3,069 

Unrealized gains (losses)

  (188)  (178)

Proceeds from sales

  -   - 

Realized losses

  -   - 

Balance, September 30th

 $2,631  $2,891 

 

28

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2020 and December 31, 2019 were as follows:

 

 

 

(dollars in thousands)

 

 

 

 

 

Total

  

(Level 1)

Quoted Prices

in Active

Markets for

Identical Assets

  

(Level 2)

Significant

Other

Observable

Inputs

  

 

(Level 3)

Significant

Unobservable

Inputs

 

September 30, 2020

                

Impaired loans

 $5,506  $-  $-  $5,506 

Other real estate owned

  130   -   -   130 
                 

December 31, 2019

                

Impaired loans

 $5,730  $-  $-  $5,730 

Other real estate owned

  899   -   -   899 

 

The table below presents additional quantitative information about level 3 assets measured at fair value on a nonrecurring basis (dollars in thousands): 

 

  

Quantitative Information about Level 3 Fair Value Measurements

Asset Description

 

Fair

Value

 

Valuation

Technique

 

Unobservable Input

 

Range (Weighted

Average)

September 30, 2020

             

Corporate bonds

 $2,631 

Discounted Cash Flows

 

Discount Rate

 (3.49%) 
              

SBA servicing assets

 $4,634 

Discounted Cash Flows

 

Conditional Prepayment Rate

 (13.60%) 
              
       Discount Rate (10.00%) 
              

Impaired loans

 $5,506 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 0%-23%(15%)(3)
              

Other real estate owned

 $130 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 (7%)(3)
              

December 31, 2019

             

Corporate bonds

 $2,820 

Discounted Cash Flows

 

Discount Rate

 (6.66%) 
              

SBA servicing assets

 $4,447 

Discounted Cash Flows

 

Conditional Prepayment Rate

 (13.53%) 
              
       Discount Rate (10.75%) 
              

Impaired loans

 $5,730 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 9%-20%(12%)(3)
              

Other real estate owned

 $899 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 6%-16%(8%)(3)

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)

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.

 

The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company’s actual sales of other real estate owned which are assessed annually.

 

29

 

Fair Value Assumptions

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019.

 

Investment Securities

 

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities, which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments, are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

 

The types of instruments valued based on matrix pricing in active markets include all of the Company’s U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations held in the investment securities portfolio. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.

 

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Republic has one Level 3 investment classified as available for sale which is a single corporate bond.

 

The corporate bond included in Level 3 was transferred from Level 2 in 2010 and is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.

 

Mortgage Loans Held for Sale (Carried at Fair Value)

 

The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect their economic value. Interest income on loans held for sale, which totaled $248,000 and $497,000 for three and nine months ended September 30, 2020, respectively, and $142,000 and $398,000 for the three and nine months ended September 30, 2019, respectively, are included in interest and fees in the statements of income.

 

30

 

The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of September 30, 2020 and December 31, 2019.

 

  

Carrying

Amount

  

Aggregate Unpaid

Principal Balance

  

Excess Carrying

Amount Over

Aggregate Unpaid

Principal Balance

 

September 30, 2020

 $41,683  $39,983  $1,700 
             

December 31, 2019

 $10,345  $9,983  $362 

 

Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of income in mortgage banking income. Republic did not have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at September 30, 2020 and December 31, 2019.

 

Interest Rate Lock Commitments (“IRLC”)

 

The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan. The Company also considers pull-through as it determines the fair value of IRLCs Factors that affect pull-through rates include the origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.

 

Best Efforts Forward Loan Sales Commitments

 

Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.

 

Mandatory Forward Loan Sales Commitments

 

Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Republic, best efforts mandatory loan sales commitments are classified within Level 2 of the valuation hierarchy.

 

Impaired Loans (Carried at Lower of Cost or Fair Value)

 

Impaired loans are those that the Company has measured impairment based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows or it is calculated based on discounted collateral values if the loans are collateral dependent.

 

31

 

Other Real Estate Owned (Carried at Lower of Cost or Fair Value)

 

These assets are carried at the lower of cost or fair value. Fair value is determined through valuations periodically performed by third-party appraisers, and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties below the initial cost basis are recorded through a valuation expense.

 

SBA Servicing Asset (Carried at Fair Value)

 

The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a quarterly basis and adjustments are presented as loan and servicing fees on the statement of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing the Company’s market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.

 

The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. At September 30, 2020 and December 31, 2019, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are included in the accompanying table.

 

(dollars in thousands)

 

September 30, 2020

  

December 31, 2019

 
         

SBA Servicing Asset

        
         

Fair Value of SBA Servicing Asset

 $4,634  $4,447 
         

Composition of SBA Loans Serviced for Others

        

Fixed-rate SBA loans

  2%  2%

Adjustable-rate SBA loans

  98%  98%

Total

  100%  100%
         

Weighted Average Remaining Term (in years)

 

20.3

  

20.7

 
         

Prepayment Speed

  13.60%  13.53%

Effect on fair value of a 10% increase

 $(167) $(175)

Effect on fair value of a 20% increase

  (323)  (338)
         

Weighted Average Discount Rate

  10.00%  10.75%

Effect on fair value of a 10% increase

 $(151) $(154)

Effect on fair value of a 20% increase

  (293)  (298)

 

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.

 

32

 

Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)

 

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

The estimated fair values of the Company’s financial instruments at September 30, 2020 were as follows.

 

  

Fair Value Measurements at September 30, 2020

 

 

(dollars in thousands)

 

Carrying

Amount

  

Fair

Value

  

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable Inputs

(Level 3)

 

Balance Sheet Data

                    

Financial assets:

                    

Cash and cash equivalents

 $918,161  $918,161  $918,161  $-  $- 

Investment securities available for sale

  440,655   440,655   -   438,024   2,631 

Investment securities held to maturity

  688,939   712,369   -   712,369   - 

Restricted stock

  3,789   3,789   -   3,789   - 

Loans held for sale

  42,549   42,588   -   41,683   905 

Loans receivable, net

  2,617,547   2,606,683   -   -   2,606,683 

SBA servicing assets

  4,634   4,634   -   -   4,634 

Accrued interest receivable

  15,021   15,021   -   15,021   - 

Interest rate lock commitments

  1,451   1,451   -   1,451   - 

Best efforts forward loan sales commitments

  -   -   -   -   - 

Mandatory forward loan sales commitments

  -   -   -   -   - 
                     

Financial liabilities:

                    

Deposits

                    

Demand, savings and money market

 $3,702,310  $3,702,310  $-  $3,702,310  $- 

Time

  203,296   204,384   -   204,384   - 

Short-term borrowings

  646,267   646,267   -   646,267   - 

Subordinated debt

  11,270   8,008   -   -   8,008 

Accrued interest payable

  1,277   1,277   -   1,277   - 

Interest rate lock commitments

  1   1   -   1   - 

Best efforts forward loan sales commitments

  554   554   -   554   - 

Mandatory forward loan sales commitments

  525   525   -   525   - 
                     

Off-Balance Sheet Data

                    

Commitments to extend credit

  -   -   -   -   - 

Standby letters-of-credit

  -   -   -   -   - 

 

33

 

The estimated fair values of the Company’s financial instruments at December 31, 2019 were as follows:

 

  

Fair Value Measurements at December 31, 2019

 

 

(dollars in thousands)

 

Carrying Amount

  

Fair

Value

  

Quoted Prices in Active Markets for Identical Assets

(Level 1)

  

Significant Other Observable Inputs

(Level 2)

  

Significant Unobservable Inputs

(Level 3)

 

Balance Sheet Data

                    

Financial assets:

                    

Cash and cash equivalents

 $168,319  $168,319  $168,319  $-  $- 

Investment securities available for sale

  539,042   539,042   -   536,222   2,820 

Investment securities held to maturity

  644,842   653,109   -   653,109   - 

Restricted stock

  2,746   2,746   -   2,746   - 

Loans held for sale

  13,349   13,349   -   10,345   3,004 

Loans receivable, net

  1,738,929   1,731,876   -   -   1,731,876 

SBA servicing assets

  4,447   4,447   -   -   4,447 

Accrued interest receivable

  9,934   9,934   -   9,934   - 

Interest rate lock commitments

  362   362   -   362   - 

Best efforts forward loan sales commitments

  4   4   -   4   - 

Mandatory forward loan sales commitments

  2   2   -   2   - 
                     

Financial liabilities:

                    

Deposits

                    

Demand, savings and money market

 $2,775,584  $2,775,584  $-  $2,775,584  $- 

Time

  223,579   224,095   -   224,095   - 

Subordinated debt

  11,265   8,540   -   -   8,540 

Accrued interest payable

  1,630   1,630   -   1,630   - 

Interest rate lock commitments

  -   -   -   -   - 

Best efforts forward loan sales commitments

  133   133   -   133   - 

Mandatory forward loan sales commitments

  83   83   -   83   - 
                     

Off-Balance Sheet Data

                    

Commitments to extend credit

  -   -   -   -   - 

Standby letters-of-credit

  -   -   -   -   - 

 

34

 
 

Note 9 – Shareholders’ Equity

 

On August 26, 2020, the Company completed its offering of an aggregate of 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $25.00 per share. The Company will pay dividends on the Series A Preferred Stock when and if declared by its board of directors or an authorized committee thereof. If declared, dividends will be due and payable at a rate of 7.00% per annum, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, beginning with the first dividend payment on December 1, 2020. The Company received net proceeds of $48.3 million from the offering, after deducting offering costs.

 

Holders of shares of Series A Preferred Stock may convert such shares at any time and from time to time into shares of the Company’s common stock at a conversion price of $3.00 per share of our common stock, subject to adjustment upon certain events. At any time after August 26, 2025, the Company may cause the outstanding shares of Series A Preferred Stock to convert into shares of common stock if the price of the common stock exceeds 125% of the Conversion Price then applicable to the Series A Preferred Stock for at least 20 trading days in a period of 30 consecutive trading days.

 

 

Note 10: Changes in Accumulated Other Comprehensive Income (Loss) By Component (1)

 

The following table presents the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2020 and 2019, and the year ended December 31, 2019.

 

  

 

Unrealized Gains (Losses) on Available-For-Sale Securities

  

Unrealized Holding Losses on Securities Transferred From Available-For-Sale To Held-To-Maturity

  

 

Total

 

(dollars in thousands)

            

Balance January 1, 2020

 $(1,275) $(6,066) $(7,341)

Unrealized gain on securities

  3,483   -   3,483 

Amounts reclassified from accumulated other comprehensive income to net income (2)

  (2,060)  1,498   (562)

Net current-period other comprehensive income

  1,423   1,498   2,921 

Total change in accumulated other comprehensive income

  1,423   1,498   2,921 

Balance September 30, 2020

 $148  $(4,568) $(4,420)
             

Balance January 1, 2019

 $(4,736) $(7,191) $(11,927)

Unrealized loss on securities

  4,456   -   4,456 

Amounts reclassified from accumulated other comprehensive income to net income (2)

  (894)  841   (53)

Net current-period other comprehensive income (loss)

  3,562   841   4,403 

Total change in accumulated other comprehensive income (loss)

  3,562   841   4,403 

Balance September 30, 2019

 $(1,174) $(6,350) $(7,524)
             

Balance January 1, 2019

 $(4,736) $(7,191) $(11,927)

Unrealized gain on securities

  4,284   -   4,284 

Amounts reclassified from accumulated other comprehensive income to net income (2)

  (823)  1,125   302 

Net current-period other comprehensive income (loss)

  3,461   1,125   4,586 

Total change in accumulated other comprehensive income

  3,461   1,125   4,586 

Balance December 31, 2019

 $(1,275) $(6,066) $(7,341)

 

 

(1)

All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.

 

(2)

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.

 

35

 

 

Note 11: Goodwill and Other Intangibles

 

In July 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. The goodwill related to the acquisition of Oak Mortgage is detailed in the table below:

 

  

Three Months Ended

September 30,

 

(dollars in thousands)

 

2020

  

2019

 

Balance, July 1st

 $5,011  $5,011 

Additions/Adjustments

  -   - 

Amortization

  -   - 

Impairment

  (5,011)    

Balance, September 30th

 $-  $5,011 

Amortization Period (in years)

     

Indefinite

 

 

  

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2020

  

2019

 

Balance, January 1st

 $5,011  $5,011 

Additions/Adjustments

  -   - 

Amortization

  -   - 

Impairment

  (5,011)    

Balance, September 30th

 $-  $5,011 

Amortization Period (in years)

     

Indefinite

 

 

The Company completed an annual impairment test for goodwill as of July 31, 2019. Future impairment testing was scheduled to continue to be conducted as of July 31 on an annual basis, unless a triggering event occurred in the interim that would suggest impairment, in which case it would be tested as of the date of the triggering event. Triggering events occurred at March 31, 2020, June 30, 2020, and September 30, 2020.

 

The Company performed a qualitative and quantitative analysis of goodwill at March 31, 2020 and June 30, 2020 based on the triggering event. The qualitative and quantitative analysis at both triggering dates determined that it was more likely than not that goodwill was not impaired.

 

At September 30, 2020, the Company performed another quantitative analysis. The quantitative analysis determined that goodwill was impaired based on the impact of the COVID-19 pandemic on the economy and the sustained decline in the Company’s stock price. The Company concluded that all of its goodwill was impaired and recorded a non-cash charge for the amount of the impairment against earnings based on the quantitative analysis. The charge had no impact on tangible capital and a minimal impact on regulatory capital.

 

36

 
 

Note 12: Derivatives and Risk Management Activities

 

Republic did not have any derivative instruments designated as hedging instruments, or subject to master netting and collateral agreements for the nine months ended September 30, 2020 and September 30, 2019. The following table summarizes the amounts recorded in Republic’s statement of financial condition for derivatives not designated as hedging instruments as of September 30, 2020 and December 31, 2019 (in thousands):

 

 

September 30, 2020

Balance Sheet

Presentation

 

Fair

Value

  

Notional

Amount

 
          

Asset derivatives:

         
          

IRLCs

Other Assets

 $1,451  $50,090 

Best efforts forward loan sales commitments

Other Assets

  -   - 

Mandatory forward loan sales commitments

Other Assets

  -   - 
          

Liability derivatives:

         
          

IRLCs

Other Liabilities

 $1  $377 

Best efforts forward loan sales commitments

Other Liabilities

  554   47,773 

Mandatory forward loan sales commitments

Other Liabilities

  525   36,606 

 

 

December 31, 2019

Balance Sheet

Presentation

 

Fair

Value

  

Notional

Amount

 
          

Asset derivatives:

         
          

IRLCs

Other Assets

 $362  $14,586 

Best efforts forward loan sales commitments

Other Assets

  4   875 

Mandatory forward loan sales commitments

Other Assets

  2   288 
          

Liability derivatives:

         
          

IRLCs

Other Liabilities

 $-  $- 

Best efforts forward loan sales commitments

Other Liabilities

  133   13,711 

Mandatory forward loan sales commitments

Other Liabilities

  83   9,614 

 

37

 

The following tables summarize the amounts recorded in Republic’s statement of operations for derivative instruments not designated as hedging instruments for the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

   

Three Months Ended

  

Nine Months Ended

 
 

Statement of Operations

Presentation

 

September 30, 2020

Gain/(Loss)

  

September 30, 2020

Gain/(Loss)

 
          

Asset derivatives:

         
          

IRLCs

Mortgage banking income

 $(191) $1,089 

Best efforts forward loan sales commitments

Mortgage banking income

  (8)  (4)

Mandatory forward loan sales commitments

Mortgage banking income

  -   (2)
          

Liability derivatives:

         
          

IRLCs

Mortgage banking income

 $(1) $(1)

Best efforts forward loan sales commitments

Mortgage banking income

  100   (421)

Mandatory forward loan sales commitments

Mortgage banking income

  (199)  (442)

 

   

Three Months Ended

  

Nine Months Ended

 
 

Statement of Operations

Presentation

 

September 30, 2019

Gain/(Loss)

  

September 30, 2019

Gain/(Loss)

 
          

Asset derivatives:

         
          

IRLCs

Mortgage banking income

 $(201) $96 

Best efforts forward loan sales commitments

Mortgage banking income

  26   38 

Mandatory forward loan sales commitments

Mortgage banking income

  27   17 
          

Liability derivatives:

         
          

IRLCs

Mortgage banking income

 $(2) $(2)

Best efforts forward loan sales commitments

Mortgage banking income

  81   12 

Mandatory forward loan sales commitments

Mortgage banking income

  148   151 

 

The fair value of Republic’s IRLCs, best efforts forward loan sales commitments, and mandatory forward loan sales commitments are based upon the estimated value of the underlying mortgage loan (determined consistent with “Loans Held for Sale”), adjusted for (1) estimated costs to complete and originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. 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.

 

 

Note 13: Revenue Recognition

 

On January 1, 2018, the Company adopted ASU 2014-09Revenue from Contracts with Customers(Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 2 Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement of recognition of revenue. Management determined that a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

 

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investments. In addition, certain non-interest income streams such as gains on sales of residential mortgage and SBA loans, income associated with servicing assets, and loan fees, including residential mortgage originations to be sold and prepayment and late fees charged across all loan categories are also not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams such as service charges on deposit accounts. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Non-interest revenue streams in-scope of Topic 606 are discussed below.

 

38

 

Service Charges on Deposit Accounts

 

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), ATM fees, NSF fees, interchange fees, and other deposit related fees.

 

The Company’s performance obligation for account analysis fees and monthly services fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided, which is typically one month. Revenue is recognized at month end after the completion of the service period and payment for these service charges on deposit accounts is primarily received through a direct charge to customers’ accounts.

 

ATM fees, NSF fees, interchange fees, and other deposit related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and the related revenue recognized, at a point in time. Payment for these service charges are received immediately through a direct charge to customers’ accounts.

 

For the Company, there are no other material revenue streams within the scope of Topic 606.

 

The following tables present non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2020 and 2019.

 

  

Three Months Ended
September 30,

 

(dollars in thousands)

 

2020

  

2019

 

Non-interest income

        

In-scope of Topic 606

        

Service charges on deposit accounts

 $2,134  $1,990 

Other non-interest income

  1,090   46 

Non-interest income (in-scope of Topic 606)

  3,224   2,036 

Non-interest income (out-of-scope of Topic 606)

  6,807   4,518 

Total non-interest income

 $10,031  $6,554 

 

  

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2020

  

2019

 

Non-interest income

        

In-scope of Topic 606

        

Service charges on deposit accounts

 $6,166  $5,450 

Other non-interest income

  1,546   175 

Non-interest income (in-scope of Topic 606)

  7,712   5,625 

Non-interest income (out-of-scope of Topic 606)

  17,288   12,900 

Total non-interest income

 $25,000  $18,525 

 

Contract Balances

 

A contract assets balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transaction activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2020 and December 31, 2019, the Company did not have any significant contract balances.

 

39

 

Contract Acquisition Costs

 

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize as an expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the assets that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

 

 

Note 14: Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The new standard was adopted by the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption ( January 1, 2019) and will not restate comparative periods. Adoption of ASU 2016-02 resulted in the recognition of total operating lease liability obligations totaling $35.1 million and the recognition of operating lease right-of-use assets totaling $34.2 million at the date of adoption. The initial balance sheet gross up upon adoption was related to operating leases on land and buildings for twenty-three lease agreements. The Company has no finance leases or material subleases for which it is the lessor of property or equipment. The Company has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases.

 

At September 30, 2020, the Company had forty-one operating lease agreements, which include operating leases for nineteen branch locations, seven offices that are used for general office space, and fifteen operating leases for equipment. One of the real property operating leases did not include one or more options to extend the lease term. Six of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The forty-one operating leases have maturity dates ranging from December 2020 to August 2059 most of which include options for multiple five and ten year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 20.24 years as of September 30, 2020

 

At September 30, 2019, the Company had thirty-seven operating lease agreements, which include operating leases for seventeen branch stores, eight offices that are used for general office space, and twelve operating leases for equipment. All of the real property operating leases did include one of more options to extend the lease term. Five of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The thirty-nine operating leases have maturity dates ranging from December 2019 to December 2058 which includes options for multiple five and ten year extensions which the Company is reasonably certain to exercise. The weighted average remaining operating lease term for these leases is 19.1 years as of September 30, 2019.

 

40

 

The discount rate used in determining the operating lease liability obligation for each individual lease was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to. The weighted average operating lease discount rate was 3.53% and 3.58% as of September 30, 2020 and 2019, respectively.

 

The following table presents operating lease costs net of sublease income for the three and nine months ended September 30, 2020 and 2019.

 

  

Three Months

Ended

September 30, 2020

  

Nine Months
Ended

September 30, 2020

 

(dollars in thousands)

        

Operating lease cost

 $2,086  $5,920 

Sublease income

  -   - 

Total lease cost

 $2,086  $5,920 

 

  

Three Months

Ended

September 30, 2019

  

Nine Months
Ended

September 30, 2019

 

(dollars in thousands)

        

Operating lease cost

 $1,890  $4,920 

Sublease income

  (80)  (241)

Total lease cost

 $1,810  $4,679 

 

The following table presents a maturity analysis of total operating lease liability obligations and reconciliation of the undiscounted cash flows to total operating lease liability obligations at September 30, 2020 and 2019.

 

  

September 30, 2020

  

September 30, 2019

 

(dollars in thousands)

        

Operating lease payments due:

        

Within one year

 $6,521  $6,962 

One to three years

  11,804   11,806 

Three to five years

  10,529   10,106 

More than five years

  77,596   72,030 

Total undiscounted cash flows

  106,450   100,904 

Discount on cash flows

  (33,481)  (31,258)

Total operating lease liability obligations

 $72,969  $69,646 

 

41

 

The following table presents cash and non-cash activities for the three and nine months ended September 30 2020 and 2019.

 

  

Three Months

Ended

September 30, 2020

  

Three Months

Ended

September 30, 2019

 

(dollars in thousands)

        

Cash paid for amounts included in the measurement of lease liabilities

        

Operating cash flows from operating leases

 $1,893  $1,706 
         

Non-cash investing and financing activities

        

Additions to Operating leases – right of use asset

        

New operating lease liability obligation

 $5,121  $101 

 

  

Nine Months

Ended

September 30, 2020

  

Nine Months

Ended

September 30, 2019

 

(dollars in thousands)

        

Cash paid for amounts included in the measurement of lease liabilities

        

Operating cash flows from operating leases

 $5,432  $3,755 
         

Non-cash investing and financing activities

        

Additions to Operating leases – right of use asset

        

New operating lease liability obligation

 $5,310  $72,457 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of our financial condition, changes in financial condition, and results of operations in the accompanying consolidated financial statements. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.

 

We may from time to time make written or oral "forward-looking statements", including statements contained in this quarterly report. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  For example, risks and uncertainties can arise as a result of the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in general economic conditions; changes in customer behavior; changes in the adequacy of our allowance for loan losses and our methodology for determining such allowance; adverse changes in our loan portfolio and credit risk-related losses and expenses; changes in concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area; changes in interest rates; our ability to identify, negotiate, secure and develop new store locations and renew, modify, or terminate leases or dispose of properties for existing store locations effectively; business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items; changes in deposit flows and loan demand; the regulatory environment, including evolving banking industry standards, changes in legislation or regulation; our securities portfolio and the valuation of our securities; changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; litigation liabilities, including costs, expenses, settlements and judgments; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. You should carefully review the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2019, our Quarterly Reports for the quarters ended March 31, 2020 and June 30, 2020, and other documents we file from time to time with the Securities and Exchange Commission. The words "would be," "could be," "should be," "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions are intended to identify forward-looking statements. All such statements are made in good faith by us pursuant to the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us, except as may be required by applicable law or regulations.

 

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Executive Summary

 

Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank. We offer a variety of credit and depository banking services to individuals and businesses primarily in Greater Philadelphia, Southern New Jersey and New York City through our offices and branch locations in those markets. We commonly refer to our branch locations as stores to reflect our retail oriented approach to customer service and convenience.

 

We serve our customers through 31 store locations, in addition to 4 loan offices that specialize in commercial, small business and residential mortgage lending. Our stores are open 7 days a week, 361 days a year, with extended lobby and drive-thru hours providing customers with some of the most convenient hours compared to any bank in the markets in which we operate. We offer free checking, free coin counting, and ATM/Debit cards issued on the spot. We also provide access to more than 55,000 surcharge free ATM machines worldwide through the Allpoint network to our customers. Our commitment to deliver best in class customer service not only applies to our store locations, but includes by phone, online and mobile options as well. Our business model is built on customer loyalty and engagement, understanding customer needs and offering the financial products and services to help them achieve their goals and objectives.

 

Current Economic Environment – Regulatory Developments

 

The COVID-19 pandemic is a highly unusual, unprecedented and evolving public health and economic crisis that may have a significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

 

The CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to address the economic effects of the COVID-19 pandemic. Among other things, the CARES Act provides for the following:

 

 

Paycheck Protection Program (“PPP”). The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet U.S. Small Business Administration (“SBA”) requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. In conjunction with the PPP, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility (“PPPLF”) will extend credit to depository institutions with a term equal to the term of the pledged loans at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. The Company participated in both the PPP loan program and the PPPLF in 2020.  

 

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Troubled Debt Restructuring Relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the COVID–19 outbreak (the “national emergency”), a financial institution may elect to suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a troubled debt restructured (“TDR”), including impairment accounting. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. The Company elected to exclude modifications meeting these requirements from TDR classification.  

 

 

CECL Delay. Banks, savings associations, credit unions, bank holding companies and their affiliates are not required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses (“CECL”), from the date of the law’s enactment until the earlier of the end of the national emergency or December 31, 2020. On March 27, 2020, the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”), and the Office of the Comptroller of the Currency issued an interim final rule that allows banking organizations that are required to adopt CECL this year to mitigate the estimated cumulative regulatory capital effects for up to two years. The relief afforded by the CARES Act and interim final rule is in addition to the three-year transition period already in place. The Company has elected to delay the adoption of CECL.

 

 

Forbearance. The CARES Act codified in part guidance from state and federal regulators and government-sponsored enterprises, including the 60-day suspension of foreclosures on federally-backed mortgages and requirements that servicers grant forbearance to borrowers affected by COVID-19.

 

COVID-19 Response Efforts

 

Republic is committed to providing the financial resources necessary to support the economic recovery in our market. We have taken an active role in participating in the PPP. We quickly developed a process to accept PPP loan applications not only from our valued small business customers, but from non-customers throughout our community as well. As of September 30, 2020, we processed and obtained SBA approval for more than 5,100 PPP loan applications resulting in approximately $683 million in loans. We are now evaluating the guidelines of the Main Street Lending Program designed by the Federal Reserve to support small and medium-sized businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan. Through the date of issuance, we have not received any applications for Main Street Lending Program loans.

 

We have also taken a number of steps to mitigate the potential spread of the coronavirus and to assist our customers, employees and other members of the community during this pandemic crisis. As of September 30, 2020 we have:

 

 

Put procedures and supplies in place at all of our store locations such as plastic shields, notices, hand sanitizer, etc., in accordance with CDC guidelines. Our store lobbies have been re-opened for all transactions including new account openings. 

 

 

Encouraged customers to utilize our online, mobile and telephone banking systems. In addition, we continue to offer more than 55,000 surcharge free ATM machines to all of our customers.

 

 

Directed our commercial lenders to contact each of their customers to discuss the impact of the current economic conditions on their business and to develop a plan for assistance if required.

 

 

Implemented a temporary work from home policy for all employees whose primary responsibilities can be completed in this manner.

 

 

Initiated additional preventative measures by providing guidance and proper supplies to all employees to support appropriate hygiene and social distancing.

 

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Loss Mitigation and Loan Portfolio Analysis

 

We have taken a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the economic shutdown begin to unfold. A detailed analysis of loan concentrations and segments that may present the areas of highest risk has been prepared. Our commercial lending team has initiated contact with a majority of our loan customers to discuss the impact that this pandemic crisis has had on their businesses to date and the expected ramifications that could be felt in the future. We have executed loan modifications and initiated payment deferrals for all customers that had an immediate need for assistance.

 

The balance of loan deferrals has declined quarter to quarter. As of June 30, 2020, we had granted payment deferrals to 491 customers with total outstanding balances of $444 million, or 24% of total loans outstanding. As of September 30, 2020, 95 customers were deferring loan payments with total outstanding balances of $115 million, or 6% of total loans outstanding. Deferrals as of September 30, 2020 were comprised of the following categories: 90 day deferrals amounted to 43 customers with outstanding balances of $45 million and second deferrals amounted to 52 customers with outstanding balances of $70 million. Approximately $65 million, or 3%, of the deferral requests were for deferment of principal balances only. The remaining deferrals include requests to defer both principal and interest payments. The regulatory agencies that supervise financial institutions have issued an Interagency Statement that encourages financial institutions to actively work with borrowers that have been impacted by the effects of the COVID-19 pandemic.

 

As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of Republic’s allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan to values on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic begin to unfold. Based on the incurred loss methodology currently utilized by Republic, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and length of the economic downturn and the full impact on our loan portfolio.

 

Financial Condition

 

Assets

 

Total assets increased by $1.6 billion to $5.0 billion at September 30, 2020, compared to $3.3 billion at December 31, 2019. A portion of this increase was temporary in nature driven by short-term borrowings related to the PPP loan program. The Company borrowed $646 million through the Paycheck Protection Program Liquidity Facility (“PPPLF”) as of September 30, 2020 provided by the Federal Reserve Bank. This borrowing was repaid shortly after the quarter ended. The remaining increase was a result of the Company’s continuing growth and expansion strategy which includes the opening of new store locations. During 2020, this expansion effort has been supported by the Company’s participation in the PPP loan program which has resulted in significant growth in relationships with small business customers.

 

Cash and Cash Equivalents

 

Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount of these two categories increased by $749.8 million to $918.2 million at September 30, 2020, from $168.3 million at December 31, 2019. The increase is primarily driven by short-term borrowings provided by the PPPLF to fund PPP loans. In addition, a portion of the deposit balances related to funding of PPP loans remain in customer accounts as of September 30, 2020.

 

Loans Held for Sale

 

Loans held for sale are comprised of loans guaranteed by the SBA which we usually originate with the intention of selling in the future and residential mortgage loans originated which we also intend to sell in the future. Total SBA loans held for sale were $866,000 at September 30, 2020 as compared to $3.0 million at December 31, 2019. Residential mortgage loans held for sale were $41.7 million at September 30, 2020 compared to $10.3 million at December 31, 2019. The increase in residential mortgage loans held for sale is a result of the higher level of mortgage loan originations in 2020. Loans held for sale, as a percentage of total Company assets, were less than 1% at September 30, 2020.

 

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Loans Receivable

 

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $38.2 million at September 30, 2020. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit.

 

Loans increased $878.6 million, or 51%, to $2.6 billion at September 30, 2020, versus $1.7 billion at December 31, 2019. This growth was primarily the result of $683.4 million in PPP loans that were funded by Republic during the second quarter of 2020. Most of these loans are expected to be repaid or forgiven by the SBA in the coming quarters. The remaining increase was a result of loan demand across all categories driven by the successful execution of our relationship banking strategy which focuses on delivering high levels of customer service.

 

Investment Securities

 

Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of SBA bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Available-for-sale securities totaled $440.7 million at September 30, 2020, compared to $539.0 million at December 31, 2019. The decrease was primarily due to the paydown, maturity, or call, of securities totaling $144.1 million and the sale of securities totaling $125.2 million partially offset by the purchase of securities totaling $166.6 million during the first nine months of 2020. At September 30, 2020, the portfolio had a net unrealized gain of $199,000 compared to a net unrealized loss of $1.7 million at December 31, 2019. The change in value of the investment portfolio was driven by a decrease in market interest rates which drove an increase in the value of the securities available-for-sale in our portfolio during the first nine months of 2020.

 

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (“SBIC”) and SBA bonds, CMOs and MBSs. The fair value of securities held-to-maturity totaled $712.4 million and $653.1 million at September 30, 2020 and December 31, 2019, respectively. The increase was primarily due to the purchase of investment securities totaling $208.2 million and an increase of $15.2 million in the value of securities held in the portfolio partially offset by a paydown, maturity, or call of securities totaling $161.0 million during the first nine months of 2020. The change in value of the investment portfolio was driven by a decrease in market interest rates which drove an increase in value of the securities held-to-maturity in our portfolio during the first nine months of 2020.

 

Restricted Stock 

 

Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, is carried at cost as of September 30, 2020 and December 31, 2019. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”). 

 

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At September 30, 2020 and December 31, 2019, the investment in FHLB capital stock totaled $3.6 million and $2.6 million, respectively. At both September 30, 2020 and December 31, 2019, ACBB capital stock totaled $143,000.  Both the FHLB and ACBB issued dividend payments during the third quarter of 2020.

 

Premises and Equipment

 

The balance of premises and equipment increased to $124.0 million at September 30, 2020 from $117.0 million at December 31, 2019. The increase was primarily due to premises and equipment expenditures of $13.2 million less depreciation and amortization expenses of $6.1 million during the first nine months of 2020. New stores were opened in Northfield, NJ in January 2020 and Bensalem, PA in September 2020 bringing the total store count to thirty-one. There are also multiple sites in various stages of development for future store locations.

 

Other Real Estate Owned

 

       The balance of other real estate owned was $1.1 million at September 30, 2020 and $1.7 million at December 31, 2019. The decrease was primarily due to sale of one property totaling $586,000 during the nine months ended September 30, 2020.

 

Operating Leases – Right of Use Asset

 

Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the FASB. ASC 842 represents a significant overhaul of the accounting treatment for leases, with the most significant change being that most leases, including most operating leases, will now be capitalized on the balance sheet. Under ASC 840, FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to twelve months in length.

 

The right-of-use asset is valued as the initial amount of the lease liability obligation adjusted for any initial direct costs, prepaid or accrued rent, and any lease incentives. At September 30, 2020 and December 31, 2019, the balance of operating leases – right-of-use asset was $68.4 million and $64.8 million, respectively.

 

Goodwill

 

Goodwill amounted to $0 at September 30, 2020 and $5.0 million at December 31, 2019. Goodwill was initially recorded in July 2016 upon the acquisition of Oak Mortgage Company and has been evaluated on an annual basis for impairment. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. There was no goodwill impairment recorded during the year ended December 31, 2019.

 

In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and other intangibles for potential impairment as of September 30, 2020. As a result of the continuing impact of the COVID-19 pandemic, the uncertainty surrounding future economic conditions, and the sustained decrease in the market value of the Company’s common stock, management determined that a triggering event had occurred with respect to goodwill and potential impairment and performed an Interim Period Quantitative Goodwill Impairment Tests as of September 30, 2020. This analysis resulted in an impairment charge of $5.0 million which was recorded during the third quarter of 2020. This charge resulted in a complete write-off of all goodwill currently on the balance sheet. The estimated fair value of the Company was determined based on a combination of methods including discounted cash flows of future earnings and an estimated sales price based on observable market transactions of similar financial institutions. The impairment charge represents a non-cash accounting transaction which had no impact on tangible capital and minimal effect on regulatory capital as of September 30, 2020.

 

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Deposits

 

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic’s major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.

 

Total deposits increased by $906.4 million to $3.9 billion at September 30, 2020 from $3.0 billion at December 31, 2019. This increase was partially attributed to the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction. This strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon the more volatile sources of funding found in brokered and wholesale deposits. The increase in demand deposits is also a result of our participation in the PPP loan program. When the PPP loans were closed the funds were deposited in Republic checking accounts. These deposits are expected to decline as the borrowers spend the funds on qualified expenses under the program.

 

Short-Term Borrowings

 

At September 30, 2020, we had short-term borrowings totaling $646.3 million compared to $0 at December 31, 2019. The source of the $646.3 million in short-term borrowings at September 30, 2020 was the PPPLF for the purpose of funding PPP loans currently held on the balance sheet. 

 

Operating Lease Liability Obligation

 

Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the FASB. ASC 842 represents a significant modification to the accounting treatment for leases, with the most significant change being that most leases, including operating leases, will now be capitalized on the balance sheet. Under the previous guidance (ASC 840), FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to twelve months in length.

 

The operating lease liability obligation is calculated as the present value of the lease payments, using the discount rate specified in the lease, or if that is not available, our incremental borrowing rate. At September 30, 2020 and December 31, 2019, the balance of the operating lease liability obligation was $73.0 million and $68.9 million, respectively.

 

Shareholders’ Equity

 

Total shareholders’ equity increased $53.8 million to $302.9 million at September 30, 2020 compared to $249.2 million at December 31, 2019. The increase during the first nine months of 2020 was primarily due to the net proceeds of a preferred stock offering of $48.3 million, a $2.9 million decrease in accumulated other comprehensive losses associated with an increase in the market value of the investment securities portfolio, stock based compensation of $1.5 million, and net income of $953,000. The shift in market value of the securities portfolio was primarily driven by a decrease in market interest rates which drove an increase in the market value of the securities held in our portfolio.

 

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Results of Operations

 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

We reported a net loss of $966,000, or ($0.02) per diluted share, for the three months ended September 30, 2020 and compared to a net loss of $1.8 million, or ($0.03) per diluted share for the three months ended September 30, 2019. Excluding a $5.0 million goodwill impairment charge, core earnings of $2.8 million, or $.04 per diluted share, were recognized. The increase in core earnings year over year was primarily driven by participation in the PPP loan program in addition to cost control measures implemented by management. We have recognized origination fees associated with the PPP loan program as interest income during the third quarter of 2020. The net interest margin decreased to 2.35% for the three month period ended September 30, 2020 compared to 2.82% for the three month period ended September 30, 2019. The interest rate on the loans originated under the PPP loan program is fixed at 1.00% which caused a decline in the yield on interest earning assets in the third quarter of 2020. In addition, the rate cuts enacted by the Federal Reserve during the first quarter of 2020 has created a lower interest rate environment resulting in margin compression.

 

Net interest income was $22.9 million for the three month period ended September 30, 2020 compared to $19.4 million for the three months ended September 30, 2019. Interest income increased $2.4 million, or 9%, primarily due to an increase in average loans receivable balances driven by our growth strategy along with participation in the PPP loan program. Interest expense decreased $1.2 million, or 18%, primarily due to a decrease in the average rate paid on deposit balances. The net interest margin decreased by 47 basis points to 2.35% during the third quarter of 2020 compared to 2.82% during the third quarter of 2019.

 

We recorded a provision for loan losses in the amount of $850,000 for the three months ended September 30, 2020 and a provision for loan losses in the amount of $450,000 for the three months ended September 30, 2019. A higher provision was primarily due to an increase in the allowance required for loans collectively evaluated for impairment which includes increasing qualitative factors for considerations related to COVID-19, specifically those factors that account for the state of the economic environment that Republic is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio. We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the three months ended September 30, 2020.

 

Non-interest income increased by $3.5 million to $10.0 million during the three months ended September 30, 2020 compared to $6.6 million during the three months ended September 30, 2019. The increase during the three months ended September 30, 2020 was primarily due to mortgage banking income driven by mortgage loan originations, loan and servicing fees, and higher service fees on deposit accounts which is driven by growth in deposit balances and an increase in the number of accounts, partially offset by a decrease in gains on sale of SBA loans and a decrease in the gains on the sale of investment securities.

 

Non-interest expenses increased $5.8 million to $33.6 million during the three months ended September 30, 2020 compared to $27.8 million during the three months ended September 30, 2019. This increase was primarily driven by a non-recurring goodwill impairment charge totaling $5.0 million during the third quarter of 2020. We have incurred costs related to our expansion into New York City as we hired a management and lending team and commenced rent payments for our store locations. Our first store in New York City opened at 14th Street & 5th Avenue in Manhattan in July 2019. Construction was completed on a second store location at 51st Street & 3rd Avenue in November 2019. The full year impact of the New York expansion has resulted in non-interest expense during 2020. Cost control measures implemented by management have had a positive effect in limiting expense growth in other areas of operation.

 

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We recorded a benefit for income taxes in the amount of $503,000 during the three months ended September 30, 2020 compared to a $516,000 benefit for income taxes during the three months ended September 30, 2019.

 

Return on average assets and average equity from continuing operations was (0.09%) and (1.40%), respectively, during the three months ended September 30, 2020 compared to (0.24%) and (2.88%), respectively, for the three months ended September 30, 2019.

 

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

 

We reported net income of $953,000, or $0.02 per diluted share, for the nine months ended September 30, 2020 compared to a net loss of $1.0 million, or ($0.02) per diluted share, for the nine months ended September 30, 2019. Excluding a $5.0 million goodwill impairment charge, core earnings of $4.7 million, or $.08 per diluted share, were recognized. The increase in core earnings year over year was primarily driven by participation in the PPP loan program in addition to cost control measures implemented by management. We have recognized the origination fees associated with the PPP loan program as interest income during the nine months ended September 30, 2020. The net interest margin decreased by 39 basis points to 2.53% during nine months ended September 30, 2020 compared to 2.92% during the nine months ended September 30, 2019. The interest rate on the loans originated under the PPP loan program is fixed at 1.00% which caused a decline in the yield on interest earning assets. In addition, the rate cuts enacted by the Federal Reserve during the first quarter of 2020 has created a lower interest rate environment resulting in margin compression.

 

Net interest income for the nine months ended September 30, 2020 was $66.1 million as compared to $57.9 million for the nine months ended September 30, 2019. Interest income increased $5.7 million, or 7%, primarily due to an increase in average loans receivable balances driven by our growth strategy along with participation in the PPP loan program. Interest expense decreased $2.5 million, or 12%, primarily due to a decrease in the average rate paid on deposit balances. The net interest margin decreased to 2.53% during nine months ended September 30, 2020 compared to 2.92% during the nine months ended September 30, 2019.

 

We recorded a provision for loan losses of $2.8 million for the nine months ended September 30, 2020 compared to a provision for loan losses of $750,000 for the nine months ended September 30, 2019. A higher provision in 2020 was primarily due to an increase in the allowance required for loans collectively evaluated for impairment which includes increasing qualitative factors for considerations related to COVID-19, specifically those factors that account for the state of the economic environment that Republic is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio. We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the nine months ended September 30, 2020.

 

Non-interest income increased $6.5 million to $25.0 million during the nine months ended September 30, 2020 compared to $18.5 million during the nine months ended September 30, 2019. The increase during the nine months ended September 30, 2020 was primarily due to increases in mortgage banking income, gains on the sale of investment securities, loan and servicing fees, and service fees and deposit accounts, partially offset by a decrease in gains on the sale of SBA loans.

 

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Non-interest expenses increased $10.5 million to $87.5 million during the nine months ended September 30, 2020 as compared to $77.0 million during the nine months ended September 30, 2019. This increase was primarily driven by a non-recurring goodwill impairment charge totaling $5.0 million during 2020. We have incurred costs related to our expansion into New York City as we hired a management and lending team and commenced rent payments for our store locations. Our first store in New York City opened at 14th Street & 5th Avenue in Manhattan in July 2019. Construction was completed on a second store location at 51st Street & 3rd Avenue in November 2019. The full year impact of the New York expansion has also driven the increase in non-interest expense during 2020. Cost control measures implemented by management have had a positive effect in limiting expense growth in other areas of operation.

 

We recorded a benefit for income taxes in the amount of $158,000 during the nine months ended September 30, 2020 compared to a $319,000 benefit for income taxes during the nine months ended September 30, 2019.

 

Return on average assets and average equity from continuing operations were 0.03% and 0.49%, respectively, during the nine months ended September 30, 2020 compared to (0.05%) and (0.55%), respectively, for the nine months ended September 30, 2019.

 

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Analysis of Net Interest Income

 

Historically, our earnings have depended primarily upon Republic’s net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, a non-GAAP measure, using a rate of 21% in 2020 and 21% in 2019.

 

Average Balances and Net Interest Income

 

   

For the three months ended

September 30, 2020

   

For the three months ended

September 30, 2019

 

(dollars in thousands)

 

Average

Balance

   

 

Interest

   

Yield/

Rate(1)

   

Average

Balance

   

 

Interest

   

Yield/

Rate(1)

 

Interest-earning assets:

                                               

Federal funds sold and other interest-earning assets

  $ 383,632     $ 99       0.10

%

  $ 146,446     $ 777       2.10

%

Investment securities and restricted stock (2)

    908,166       3,784       1.67

%

    1,055,154       6,743       2.56

%

Loans receivable (2)

    2,617,981       24,829       3.77

%

    1,540,834       18,816       4.84

%

Total interest-earning assets

    3,909,779       28,712       2.92

%

    2,742,434       26,336       3.81

%

Other assets

    269,111                       247,682                  

Total assets

  $ 4,178,890                     $ 2,990,116                  
                                                 

Interest-earning liabilities:

                                               

Demand – non-interest bearing

  $ 1,043,116                     $ 563,691                  

Demand – interest bearing

    1,541,837       3,056       0.79

%

    1,168,404       3,752       1.27

%

Money market & savings

    980,979       1,613       0.65

%

    702,547       1,814       1.02

%

Time deposits

    217,554       884       1.62

%

    208,624       1,123       2.14

%

Total deposits

    3,783,486       5,553       0.58

%

    2,643,266       6,689       1.00

%

Total interest-bearing deposits

    2,740,370       5,553       0.81

%

    2,079,575       6,689       1.28

%

Other borrowings

    32,343       77       0.95

%

    14,037       137       3.87

%

Total interest-bearing liabilities

    2,772,713       5,630       0.81

%

    2,093,612       6,826       1.29

%

Total deposits and other borrowings

    3,815,829       5,630       0.59

%

    2,657,303       6,826       1.02

%

Non-interest bearing other liabilities

    87,878                       81,872                  

Shareholders’ equity

    275,183                       250,941                  

Total liabilities and shareholders’ equity

  $ 4,178,890                     $ 2,990,116                  

Net interest income (2)

          $ 23,082                     $ 19,510          

Net interest spread

                    2.11

%

                    2.52 %

Net interest margin (2)

                    2.35

%

                    2.82 %

 

(1)Yields on investments are calculated based on amortized cost.

(2)Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure. Net interest income has been increased over the financial statement amount by $152 and $128 for the three months ended September 30, 2020 and 2019, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.

 

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Average Balances and Net Interest Income

 

   

For the nine months ended

September 30, 2020

   

For the nine months ended

September 30, 2019

 

 

(dollars in thousands)

 

Average

Balance

   

Interest

   

Yield/

Rate(1)

   

Average

Balance

   

Interest

   

Yield/

Rate(1)

 

Interest-earning assets:

                                               

Federal funds sold and other interest-earning assets

  $ 221,698     $ 438       0.26

%

  $ 96,245     $ 1,631       2.27

%

Investment securities and restricted stock (2)

    1,032,289       15,687       2.03

%

    1,069,304       21,347       2.66

%

Loans receivable (2)

    2,255,283       68,032       4.03

%

    1,506,482       55,408       4.92

%

Total interest-earning assets

    3,509,270       84,157       3.20

%

    2,672,031       78,386       3.92

%

Other assets

    265,498                       218,947                  

Total assets

  $ 3,774,768                     $ 2,890,978                  
                                                 

Interest-earning liabilities:

                                               

Demand – non-interest bearing

  $ 891,385                     $ 533,922                  

Demand – interest bearing

    1,426,181       9,333       0.87

%

    1,142,515       11,896       1.39

%

Money market & savings

    864,517       4,827       0.75

%

    691,876       4,894       0.95

%

Time deposits

    217,526       3,138       1.93

%

    179,936       2,608       1.94

%

Total deposits

    3,399,609       17,298       0.68

%

    2,548,249       19,398       1.02

%

Total interest-bearing deposits

    2,508,224       17,298       0.92

%

    2,014,327       19,398       1.29

%

Other borrowings

    29,932       293       1.31

%

    26,836       681       3.39

%

Total interest-bearing liabilities

    2,538,156       17,591       0.93

%

    2,041,163       20,079       1.32

%

Total deposits and other borrowings

    3,429,541       17,591       0.69

%

    2,575,085       20,079       1.04

%

Non-interest bearing other liabilities

    85,481                       67,182                  

Shareholders’ equity

    259,746                       248,711                  

Total liabilities and shareholders’ equity

  $ 3,774,768                     $ 2,890,978                  

Net interest income (2)

          $ 66,566                     $ 58,307          

Net interest spread

                    2.27

%

                    2.60

%

Net interest margin (2)

                    2.53

%

                    2.92

%

 

 

(1)Yields on investments are calculated based on amortized cost.

  (2)Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure. Net interest income has been increased over the financial statement amount by $455 and $414 for the nine months ended September 30, 2020 and 2019, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.

 

53

 

Rate/Volume Analysis of Changes in Net Interest Income

 

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.

 

   

For the three months ended

September 30, 2020 vs. 2019

   

For the nine months ended

September 30, 2020 vs. 2019

 
   

Changes due to:

           

Changes due to:

         

(dollars in thousands)

 

Average

Volume

   

Average

Rate

   

Total

Change

   

Average Volume

   

Average

Rate

   

Total

Change

 

Interest earned:

                                               

Federal funds sold and other interest-earning assets

  $ 80     $ (758 )   $ (678 )   $ 248     $ (1,441 )   $ (1,193 )

Securities

    (763 )     (2,196 )     (2,959 )     (562 )     (5,098 )     (5,660 )

Loans

    10,503       (4,490 )     6,013       22,447       (9,823 )     12,624  

Total interest-earning assets

    9,820       (7,444 )     2,376       22,133       (16,362 )     5,771  
                                                 

Interest expense:

                                               

Deposits

                                               

Interest-bearing demand deposits

    772       (1,468 )     (696 )     1,854       (4,417 )     (2,563 )

Money market and savings

    498       (699 )     (201 )     995       (1,062 )     (67 )

Time deposits

    7       (246 )     (239 )     542       (12 )     530  

Total deposit interest expense

    1,277       (2,413 )     (1,136 )     3,391       (5,491 )     (2,100 )

Other borrowings

    16       (76 )     (60 )     8       (396 )     (388 )

Total interest expense

    1,293       (2,489 )     (1,196 )     3,399       (5,887 )     (2,488 )

Net interest income

  $ 8,527     $ (4,955 )   $ 3,572     $ 18,734     $ (10,475 )   $ 8,259  

 

Net Interest Income and Net Interest Margin

 

Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the three months ended September 30, 2020 increased $3.6 million, or 18%, over the same period in 2019. Interest income on interest-earning assets totaled $28.7 million and $26.3 million for the three months ended September 30, 2020 and 2019, respectively. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable related to our growth and expansion strategy along with our participation in the PPP loan program. The increase in interest income on loans was partially offset by a decline in interest income related to the securities portfolio. The decline has been driven by an increase in prepayment speeds on mortgage-backed securities held in the investment portfolio resulting in an acceleration of premiums. Total interest expense for the three months ended September 30, 2020 decreased by $1.2 million, or 18%, to $5.6 million from $6.8 million for the same period in 2019. Interest expense on deposits decreased by $1.1 million, or 17%, for the three months ended September 30, 2020 versus the same period in 2019 due primarily to a decrease in the average rate on deposit balances. Interest expense on other borrowings decreased by $60,000 for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 due to a decrease in the average rate on overnight borrowings.

 

Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the nine months ended September 30, 2020 increased $8.3 million, or 14%, over the same period in 2019. Interest income on interest-earning assets totaled $84.2 million and $78.4 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable related to our growth and expansion strategy along with our participation in the PPP loan program. The increase in interest income on loans was partially offset by a decline in interest income related to the securities portfolio. This decline has been driven by an increase in prepayment speeds on mortgage-backed securities held in the investment portfolio resulting in an acceleration of premiums. Total interest expense for the nine months ended September 30, 2020 decreased by $2.5 million, or 12%, to $17.6 million from $20.1 million for the same period in 2019. Interest expense on deposits decreased by $2.1 million, or 11%, for the nine months ended September 30, 2020 versus the same period in 2019 due primarily to a decrease in the average rate on deposit balances. Interest expense on other borrowings decreased by $388,000 for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 due to a decrease in the average rate overnight borrowings.

 

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     Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.11% during the three months ended September 30, 2020 compared to 2.52% during the three months ended September 30, 2019 and was 2.27% during the nine months ended September 30, 2020 compared to 2.60% during nine months ended September 30, 2019. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the three months ended September 30, 2020 and September 30, 2019, the fully tax-equivalent net interest margin was 2.35% and 2.82%, respectively. The decrease in the net interest margin for the three months ended September 30, 2020 was a result of the challenging nature of the interest rate environment driven by a flat yield curve, actions taken by the Federal Reserve in the first quarter of 2020, and fixed rate 1.00% loans generated through PPP lending. For the nine months ended September 30, 2020 and September 30, 2019, the fully tax-equivalent net interest margin was 2.53% and 2.92%, respectively. The net interest margin for the nine months ended September 30, 2020 decreased primarily due to the challenging nature of the interest rate environment driven by a flat yield curve, actions taken by the Federal Reserve in the first quarter of 2020, and fixed rate 1.00% loans generated through PPP lending.

 

Provision for Loan Losses

 

We recorded an $850,000 provision for loan losses for the three months ended September 30, 2020 as compared to $450,000 provision for the three months ended September 30, 2019. We recorded a $2.8 million provision for loan losses for the nine months ended September 30, 2020 as compared to $750,000 for the nine months ended September 30, 2019. During the three and nine months ended September 30, 2020, there was an increase in the allowance required for loans collectively evaluated for impairment which has been adjusted for certain qualitative factors related to COVID-19, specifically those factors that account for the state of the economic environment that Republic is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio. We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the three and nine months ended September 30, 2020.

 

As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of Republic’s allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic begin to unfold. Based on the incurred loss methodology currently utilized by Republic, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and length of the economic downturn and the full impact on our loan portfolio.

 

Non-Interest Income

 

Total non-interest income for the three months ended September 30, 2020 increased $3.5 million, or 53%, compared to the three months ended September 30, 2019. Mortgage banking income totaled $5.0 million during the three months ended September 30, 2020 which represents an increase of $2.2 million from the same period in 2019. The increase in mortgage banking income has been driven by an increase in residential mortgage loan volumes. Lower interest rates have resulted in a significant increase in customer applications for refinancing and new home purchases. Loan and servicing fees totaled $917,000 for the three months ended September 30, 2020 which represents an increase of $660,000 from the same period in 2019. Service fees on deposit accounts totaled $2.1 million for the three months ended September 30, 2020 which represents an increase of $144,000 over the same period in 2019. This increase was due to the growth in the number of customer accounts and transaction volume. Gains of $279,000 were recognized on the sale of investment securities during the three months ended September 30, 2020 compared to gains of $520,000 on the sale of investment securities during the three months ended September 30, 2019. Gains on the sale of SBA loans totaled $649,000 for the three months ended September 30, 2020, a decrease of $295,000, compared to $944,000 for the same period in 2019.

 

55

 

Total non-interest income for the nine months ended September 30, 2020 increased $6.5 million, or 35%, compared to the nine months ended September 30, 2019. Mortgage banking income totaled $10.8 million for the nine months ended September 30, 2020, an increase of $2.8 million, compared to $8.0 million during the nine months ended September 30, 2019. The increase in mortgage banking income has been driven by an increase in residential mortgage loan volumes. Lower interest rates have resulted in a significant increase in customer applications for refinancing and new home purchases. Gains of $2.8 million were recognized on the sale of investment securities during the nine months ended September 30, 2020 compared to gains of $1.1 million on the sale of investment securities during the nine months ended September 30, 2019. Loan and servicing fees totaled $2.2 million for the nine months ended September 30, 2020 which represents an increase of $996,000 from the same period in 2019. Service fees on deposit accounts totaled $6.2 million for the nine months ended September 30, 2020 which represents an increase of $716,000 over the same period in 2019. This increase was due to the growth in the number of customer accounts and transaction volume. Gains on the sale of SBA loans totaled $1.6 million for the nine months ended September 30, 2020, a decrease of $1.0 million, compared to $2.6 million for the same period in 2019.

 

Non-Interest Expenses

 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

Non-interest expenses increased $5.8 million, or 21%, for the three months ended September 30, 2020 compared to the same period in 2019. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.

 

Salaries and employee benefits increased by $282,000, or 2%, for the three months ended September 30, 2020 compared to the same period in 2019. Increases driven by new store openings have been offset by cost control initiatives which have had a positive effect on salary and benefit costs. There were thirty-one stores open as of September 30, 2020 compared to twenty-eight stores at September 30, 2019.

 

Occupancy expense, including depreciation and amortization expenses, increased by $790,000, or 17%, for the three months ended September 30, 2020 compared to the same period last year, as a result of our continuing growth and expansion strategy.

 

Other real estate expenses totaled $80,000 during the three months ended September 30, 2020, a decrease of $719,000, or 90%, compared to the same period in 2019. The decrease is related to lower costs on foreclosed assets as a result of a reduction in the number of OREO properties held in 2020 as compared to 2019.

 

All other non-interest expenses increased by $5.4 million, or 68%, for the three months ended September 30, 2020 compared to the same period last year. A goodwill impairment charge of $5.0 million was recorded in the third quarter of 2020. Other increases in regulatory assessments and costs, debit card processing, data processing, appraisal and other loan expenses, and other expenses resulting from our expansion strategy also contributed to the growth in other operating expenses.

 

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

 

Non-interest expenses increased $10.5 million, or 13%, for the nine months ended September 30, 2020 compared to the same period in 2019. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.

 

56

 

Salaries and employee benefits increased by $776,000, or 2%, for the nine months ended September 30, 2020 compared to the same period in 2019. Increases driven by new store openings have been offset by cost control initiatives which have had a positive effect on salary and benefit costs. There were thirty-one stores open as of September 30, 2020 compared to twenty-eight stores at September 30, 2019.

 

Occupancy expense, including depreciation and amortization expenses, increased by $3.4 million, or 26%, for the nine months ended September 30, 2020 compared to the same period last year, as a result of our continuing growth and expansion strategy.

 

Other real estate expenses totaled $437,000 during the nine months ended September 30, 2020, a decrease of $1.2 million, or 74%, compared to the same period in 2019. The decrease is related to lower costs on foreclosed assets as a result of a reduction in the number of OREO properties held in 2020 as compared to 2019.

 

All other non-interest expenses increased by $7.5 million, or 34%, for the nine months ended September 30, 2020 compared to the same period last year. A goodwill impairment charge of $5.0 million was recorded in the third quarter of 2020. Other increases in regulatory assessments and costs, debit card processing, data processing, appraisal and other loan expenses, and other expenses resulting from our expansion strategy also contributed to the growth in other operating expenses.

 

One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net non-interest expenses to average assets, a non-GAAP measure. For the purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the three months ended September 30, 2020, this ratio was 2.24% compared to 2.82% for the three months ended September 30, 2019. For the nine months ended September 30, 2020, the ratio was 2.21% compared to 2.70% for the nine months ended September 30, 2019, respectively. The decrease in this ratio was mainly due to the increase in average assets.

 

       Another productivity measure utilized by management is the operating efficiency ratio, a non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. For the three months ended September 30, 2020, the operating efficiency ratio was 101.9% compared to 107.3% for the three months ended September 30, 2019. The efficiency ratio was 96.1% for the nine months ended September 30, 2019 compared to 100.8% for the nine months ended September 30, 2019. The decrease in this ratio for three and nine months ended September 30, 2020 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.

 

Benefit for Income Taxes

 

We recorded a benefit for income taxes in the amount of $503,000 for the three months ended September 30, 2020, compared to a $516,000 benefit for the three months ended September 30, 2019. For the nine months ended September 30, 2020, we recorded a benefit for income taxes of $158,000 compared to a $319,000 benefit for the nine months ended September 30, 2019. The effective tax rates for the three months ended September 30, 2020 and 2019 were (34%) and (22%), respectively. For the nine months ended September 30, 2020 and 2019, the effective tax rates were (20%) and (24%), respectively. Differences in the effective tax rates are a result of the level of tax exempt interest income relative to pre-tax income (loss).

 

We evaluate the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence.  If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.

 

57

 

       In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by a financial institution and the ability to absorb potential losses are important distinctions to be considered for bank holding companies like us. In addition, it is also important to consider that net operating loss carryforwards (“NOLs”) calculated for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years, for NOLs created prior to January 1, 2018. Federal NOLs generated after December 31, 2017 can be carried forward indefinitely and carried back five years to the extent the losses are generated in taxable years beginning before January 1, 2021. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.

 

       In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

 

Based on the guidance provided in ASC 740, we believed that the positive evidence considered at September 30, 2020 and December 31, 2019 outweighed the negative evidence and that it was more likely than not that all of our deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance is not required.

 

The net deferred tax asset balance was $12.1 million as of September 30, 2020 and $12.6 million as of December 31, 2019. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.

 

Net Income (Loss) and Net Income (Loss) per Common Share

 

       The net loss for the three months ended September 30, 2020 was $966,000, an increase of $856,000, compared to a net loss of $1.8 million recorded for the three months ended September 30, 2020. The net loss for the three months ended September 30, 2020 was primarily driven by goodwill impairment partially offset by participation in the PPP loan program and cost control measures implemented by management.

 

Net income for the nine months ended September 30, 2020 was $953,000, an increase of $2.0 million, compared to net loss of $1.0 million recorded for the nine months ended September 30, 2019. The increase in net income for the nine months ended September 30, 2020 was due to participation in the PPP loan program and cost control measures implemented by management partially offset by goodwill impairment.

 

For the three month period ended September 30, 2020, basic and fully-diluted net loss per common share was ($0.02) and for the three month period ended September 30, 2019, basic and fully-diluted net income per common share was ($0.03). For the nine month period ended September 30, 2020, basic and fully-diluted net income per common share was $0.02 and for the nine month period ended September 30, 2019, basic and fully-diluted net loss per common share was ($0.02).

 

Return on Average Assets and Average Equity

 

       Return on average assets (“ROA”) measures our net income in relation to our total average assets. The ROA for the three months ended September 30, 2020 was (0.09%), compared to (0.24%) for the three months ended September 30, 2019. The ROA for the nine months ended September 30, 2020 and 2019 was 0.03% and (0.05%), respectively. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by our shareholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE was (0.24%) for the three months September 30, 2020, compared to (2.88%) for the three months ended September 30, 2019. The ROE for the nine months ended September 30, 2020 and 2019 was 0.49% and (0.55%), respectively.

 

58

 

Commitments, Contingencies and Concentrations

 

Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately $388.7 million and $329.9 million, and standby letters of credit of approximately $18.4 million and $17.2 million, at September 30, 2020 and December 31, 2019, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $407.1 million of commitments to extend credit at September 30, 2020 were committed as variable rate credit facilities.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.

 

Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of liability as of September 30, 2020 and December 31, 2019 for guarantees under standby letters of credit issued is not material. 

 

Regulatory Matters 

 

We are required to comply with certain “risk-based” capital adequacy guidelines issued by the Federal Reserve and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.

 

Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

 

Management believes that the Company and Republic met, as of September 30, 2020 and December 31, 2019, all applicable capital adequacy requirements. In the current year, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification which management believes would have changed Republic’s category.

 

59

 

The Company and Republic’s ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on Republic’s loan customers and Republic’s ability to manage its interest rate risk, growth and other operating expenses.

 

The following table presents our regulatory capital ratios at September 30, 2020, and December 31, 2019.

 

(dollars in thousands)

 

 

 

Actual

   

Minimum Capital

Adequacy

   

 

Minimum Capital

Adequacy with

Capital Buffer

   

To Be Well

Capitalized Under

Prompt Corrective

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

At September 30, 2020:

                                                               
                                                                 

Total risk-based capital

                                                               

Republic

  $ 292,585       12.72

%

  $ 183,998       8.00

%

  $ 241,497       10.50

%

  $ 229,997       10.00

%

Company

    322,285       13.98

%

    184,462       8.00

%

    242,106       10.50

%

    -       -

%

Tier 1 risk-based capital

                                                               

Republic

    280,734       12.21

%

    137,998       6.00

%

    195,498       8.50

%

    183,998       8.00

%

Company

    310,434       13.46

%

    138,346       6.00

%

    195,990       8.50

%

    -       -

%

CET 1 risk-based capital

                                                               

Republic

    280,734       12.21

%

    103,499       4.50

%

    160,998       7.00

%

    149,498       6.50

%

Company

    251,109       10.89

%

    103,760       4.50

%

    161,404       7.00

%

    -       -

%

Tier 1 leveraged capital

                                                               

Republic

    280,949       7.98

%

    140,749       4.00

%

    140,749       4.00

%

    175,937       5.00

%

Company

    302,938       8.81

%

    140,978       4.00

%

    140,978       4.00

%

    -       -

%

                                                                 

At December 31, 2019:

                                                               
                                                                 

Total risk-based capital

                                                               

Republic

  $ 252,307       11.94

%

  $ 169,016       8.00

%

  $ 221,833       10.50

%

  $ 211,270       10.00

%

Company

    261,759       12.37

%

    169,251       8.00

%

    222,141       10.50

%

    -       -

%

Tier 1 risk-based capital

                                                               

Republic

    243,041       11.50

%

    126,762       6.00

%

    179,579       8.50

%

    169,016       8.00

%

Company

    252,493       11.93

%

    126,938       6.00

%

    179,829       8.50

%

    -       -

%

CET 1 risk-based capital

                                                               

Republic

    243,041       11.50

%

    95,071       4.50

%

    147,889       7.00

%

    137,325       6.50

%

Company

    241,493       11.41

%

    95,203       4.50

%

    148,094       7.00

%

    -       -

%

Tier 1 leveraged capital

                                                               

Republic

    245,158       7.54

%

    128,935       4.00

%

    128,935       4.00

%

    161,169       5.00

%

Company

    249,168       7.83

%

    129,058       4.00

%

    129,058       4.00

%

    -       -

%

 

Dividend Policy

 

We have not paid any cash dividends on our common stock. We have no plans to pay cash dividends on our common stock in 2020. Dividends payable on our Series A Preferred Stock are non-cumulative and will be paid, if and when declared by the Board of Directors, at the per annum rate of 7.00%, quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. Our ability to pay dividends depends primarily on receipt of dividends from our subsidiary, Republic. Dividend payments from Republic are subject to legal and regulatory limitations.  The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.

 

Liquidity

 

A financial institution must maintain and manage liquidity to ensure it has the ability to meet its financial obligations. These obligations include the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loans and other funding commitments; and the ability to take advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing liabilities. Our most liquid assets consist of cash, amounts due from banks and federal funds sold.

 

60

 

Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we have formed an asset/liability committee (“ALCO”), comprised of certain members of Republic’s Board of Directors and senior management to monitor such ratios. The ALCO committee is responsible for managing the liquidity position and interest sensitivity. That committee’s primary objective is to maximize net interest income while configuring Republic’s interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. The ALCO committee meets on a quarterly basis or more frequently if deemed necessary.

 

Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $918.2 million at September 30, 2020, compared to $168.3 million at December 31, 2019. The increase is primarily driven by short-term borrowings provided by the PPPLF to fund the PPP loans. Loan maturities and repayments are another source of asset liquidity. At September 30, 2020, Republic estimated that more than $95.0 million of loans would mature or repay in the six-month period ending March 31, 2021. Additionally, a significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At September 30, 2020, we had outstanding commitments (including unused lines of credit and letters of credit) of $407.1 million. Certificates of deposit scheduled to mature in one year totaled $189.5 million at September 30, 2020. We anticipate that we will have sufficient funds available to meet all current commitments.

 

Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB. Our maximum borrowing capacity with the FHLB was $1.0 billion at September 30, 2020. At September 30, 2020 and December 31, 2019, we had no outstanding term borrowings. At September 30, 2020, we had outstanding overnight borrowings of $646.3 million. The outstanding overnight borrowings of $646.3 million were repaid on October 1, 2020. We had no outstanding overnight borrowings at December 31, 2019. As of September 30, 2020, FHLB had issued letters of credit, on Republic’s behalf, totaling $250.0 million against our available credit line as compared to $150.0 million as of December 31, 2019. We also established a contingency line of credit of $10.0 million with ACBB and a Fed Funds line of credit with Zions Bank in the amount of $15.0 million to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit or the Zions Fed Funds line at both September 30, 2020 and December 31, 2019.

 

Investment Securities Portfolio

 

At September 30, 2020, we identified certain investment securities that were being held for indefinite periods of time, including securities that will be used as part of our asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as available-for-sale and are intended to increase the flexibility of our asset/liability management. Our investment securities classified as available for sale consist primarily of SBA bonds, CMOs, MBSs, municipal securities, and corporate bonds. Available for sale securities totaled $440.7 million and $539.0 million as of September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, securities classified as available for sale had a net unrealized gain of $198,000 and a net unrealized loss of $1.7 million at December 31, 2019.

 

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Loan Portfolio

 

Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic’s commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic’s legal lending limit of approximately $38.2 million at September 30, 2020. Individual customers may have several loans often secured by different collateral.

 

During the second and third quarters of 2020 we participated in the PPP loan program which had a significant effect on outstanding loan balances as of September 30, 2020. We viewed this program as an opportunity to not only assist existing small business customers throughout our footprint during this extraordinary time of need, but to provide assistance to non-customers as well. We obtained approval from the SBA for more than 5,100 loan applications which resulted in an increase in $683 million in outstanding loans at September 30, 2020. Almost all of these loans have a two year maturity, but most are expected to be forgiven by the SBA and repaid much earlier than the stated maturity date. These loans have 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. The Federal Reserve Bank has established the PPPLF program to provide funding for the PPP loans which, if utilized, results in exclusion of the PPP asset balances from the regulatory leverage ratio calculation.  

 

Credit Quality

 

Republic’s written lending policies require specified underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee consisting of senior management and certain members of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans.

 

Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.

 

While a loan is classified as non-accrual, any collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

 

62

 

The following table shows information concerning loan delinquency and non-performing assets as of the dates indicated (dollars in thousands):

 

   

September 30,

2020

   

December 31,
2019

 

Loans accruing, but past due 90 days or more

  $ -     $ -  

Non-accrual loans

    12,449       12,413  

Total non-performing loans

    12,449       12,413  

Other real estate owned

    1,113       1,730  

Total non-performing assets

  $ 13,562     $ 14,143  
                 

Non-performing loans as a percentage of total loans, net of unearned income

    0.47 %     0.71 %

Non-performing assets as a percentage of total assets

    0.27 %     0.42 %

 

Non-performing asset balances decreased by $581,000 to $13.6 million as of September 30, 2020 from $14.1 million at December 31, 2019. Non-accrual loans remained relatively flat at $12.4 million at September 30, 2020 compared to December 31, 2019. There were no loans accruing, but past due 90 days or more at both September 30, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, all identified impaired loans are internally classified and individually evaluated for impairment in accordance with the guidance under ASC 310.

 

We have taken a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the economic downturn begin to unfold. A detailed analysis of loan concentrations and segments that may present the areas of highest risk has been prepared. Our commercial lending team has initiated contact with a majority of our loan customers to discuss the impact that this pandemic crisis has had on their businesses to date and the expected ramifications that could be felt in the future. We have initiated payment deferrals for all customers that had an immediate need for assistance. Further, where appropriate we have worked with borrowers to facilitate access to PPP loans. These loans will assist in addressing liquidity needs of our borrowers, and mitigate credit issues for the terms of the loans. The regulatory agencies that supervise financial institutions have issued an Interagency Statement that not only encourages financial institutions to actively work with borrowers that have been impacted by the effects of COVID-19, but will not automatically consider loan modifications granted under these circumstances as troubled debt restructurings.

 

The following table presents our 30 to 89 days past due loans at September 30, 2020 and December 31, 2019.  

 

(dollars in thousands)

 

September 30,

   

December 31,

 
   

2020

   

2019

 

30 to 59 days past due

  $ 1,025     $ 112  

60 to 89 days past due

    858       1,823  

Total loans 30 to 89 days past due

  $ 1,883     $ 1,935  

 

Loans with payments 30 to 89 days past due decreased to $1.9 million at September 30, 2020. Payment deferrals were granted to customers in the third quarter of 2020 that made requests and had an immediate need for assistance. Through the date of issuance, more than 89% of the customers that were granted approval for deferral of loan payments have resumed the originally scheduled payment of their outstanding loans.

 

63

 

Other Real Estate Owned

 

The balance of other real estate owned was $1.1 million at September 30, 2020 and $1.7 million at December 31, 2019. The following table presents a reconciliation of other real estate owned for the nine months ended September 30, 2020 and the year ended December 31, 2019:

 

(dollars in thousands)

 

September 30,

2020

   

December 31,

2019

 

Beginning Balance, January 1st

  $ 1,730     $ 6,223  

Additions

    -       1,225  

Valuation adjustments

    (31 )     (646 )

Dispositions

    (586 )     (5,072 )

Ending Balance

  $ 1,113     $ 1,730  

 

At September 30, 2020, we had no credit exposure to “highly leveraged transactions” as defined by the FDIC.

 

Allowance for Loan Losses

 

We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the nine months ended September 30, 2020, effective as of January 1, 2020.

 

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish an allowance against loan losses on a quarterly basis. When an increase in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan losses consists of three components. The first component is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310 Receivables. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310-10 (“non-impaired loans”). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450 Contingencies. PPP loans are fully guaranteed by the US Government and as such have no allowance associated with them. The third component is an unallocated allowance to account for a level of imprecision in management’s estimation process.

 

We evaluate loans for impairment and potential charge-off on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary repayment source. If the primary repayment source is determined to be insufficient and unlikely to repay the debt, we then look to the secondary repayment sources. Secondary sources are conservatively reviewed for liquidation values. Updated appraisals and financial data are obtained to substantiate current values. If the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs associated with the resolution of a troubled loan, an estimate of the deficient amount will be calculated and a specific allocation of loan loss reserve is recorded.

 

Factors considered in the calculation of the allowance for non-impaired loans include several qualitative and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan balances, changes in risk composition and underwriting standards, experience and ability of management, and general economic conditions along with other external factors. Historical loss experience is analyzed by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below. The allowance for non-impaired loans includes increasing qualitative factors for considerations related to COVID-19, specifically those factors that account for the state of the economic environment that Republic is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio.

 

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The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators. Our primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding the adequacy and the methodology employed in their determination.

 

An analysis of the allowance for loan losses for the nine months ended September 30, 2020 and 2019, and the twelve months ended December 31, 2019 is as follows:

 

(dollars in thousands)

 

For the nine

months ended

September 30,

2020

   

For the twelve

months ended

December 31,

2019

   

For the nine

months ended

September 30,

2019

 
                         

Balance at beginning of period

  $ 9,266       8,615     $ 8,615  

Charge-offs:

                       

Commercial real estate

    -       -       -  

Construction and land development

    -       -       -  

Commercial and industrial

    84       1,356       1,002  

Owner occupied real estate

    48       -       -  

Consumer and other

    67       126       117  

Residential mortgage

    67       -       -  

Paycheck protection program

    -       -       -  

Total charge-offs

    266       1,482       1,119  

Recoveries:

                       

Commercial real estate

    -       -       -  

Construction and land development

    2       -       -  

Commercial and industrial

    38       217       213  

Owner occupied real estate

    1       2       1  

Consumer and other

    10       9       7  

Residential mortgage

    -       -       -  

Paycheck protection program

    -       -       -  

Total recoveries

    51       228       221  

Net charge-offs/(recoveries)

    215       1,254       898  

Provision for loan losses

    2,800       1,905       750  

Balance at end of period

  $ 11,851       9,266     $ 8,467  
                         

Average loans outstanding(1)

  $ 2,255,283       1,544,904     $ 1,506,482  

As a percent of average loans:(1)

                       

Net charge-offs (annualized)

    0.01 %     0.08 %     0.08 %

Provision for loan losses (annualized)

    0.17 %     0.12 %     0.07 %

Allowance for loan losses

    0.53 %     0.60 %     0.56 %

Allowance for loan losses to:

                       

Total loans, net of unearned income

    0.45 %     0.53 %     0.54 %

Total non-performing loans

    95.20 %     74.65 %     70.25 %

 

(1)Includes non-accruing loans.

 

We recorded a provision for loan losses of $850,000 for the three month period ended September 30, 2020 and $2.8 million for the nine months ended September 30, 2020. We recorded a provision for loan losses of $450,000 for the three month period ended September 30, 2019 and $750,000 for the nine months ended September 30, 2019. During the first nine months of 2020, there was an increase in the allowance required for loans collectively evaluated for impairment.

 

65

 

The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 95.2% at September 30, 2020, compared to 74.7% at December 31, 2019 and 70.3% at September 30, 2019. Total non-performing loans were $12.4 million, $12.4 million, and $12.1 million at September 30, 2020, December 31, 2019 and September 30, 2019, respectively.

 

Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that it determines is adequate to absorb inherent losses in the loan portfolio. The Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the management team. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the allowance for loan losses. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses.

 

We evaluate loans for impairment and potential charge-offs on a quarterly basis. Any loan rated as substandard or lower will have a collateral evaluation analysis completed in accordance with the guidance under GAAP on impaired loans to determine if a deficiency exists. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance from all potential sources. When a loan is determined to be uncollectible it is charged-off against the allowance for loan losses. Unsecured commercial loans and all consumer loans are charged-off immediately upon reaching the 90-day delinquency mark unless they are well-secured and in the process of collection. The timing on charge-offs of all other loan types is subjective and will be recognized when management determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or guarantors, will not be sufficient and that repayment is unlikely. A full or partial charge-off is recognized equal to the amount of the estimated deficiency calculation.

 

Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised collateral values and deteriorating financial condition of borrowers and guarantors are factors considered when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a borrower’s financial condition is also assessed when considering a charge-off.

 

Partial charge-offs of non-performing and impaired loans can significantly reduce the coverage ratio and other credit loss statistics due to the fact that the balance of the allowance for loan losses will be reduced while still carrying the remainder of a non-performing loan balance in the impaired loan category. The amount of non-performing loans for which partial charge-offs have been recorded amounted to $4.2 million at September 30, 2020 and $3.6 million December 31, 2019.

 

The following table provides additional analysis of partially charged-off loans.

 

(dollars in thousands)

 

September 30,

2020

   

December 31,

2019

 

Total nonperforming loans

  $ 12,449     $ 12,413  

Nonperforming and impaired loans with partial charge-offs

    4,237       3,642  
                 

Ratio of nonperforming loans with partial charge-offs to total loans

    0.16

%

    0.21

%

Ratio of nonperforming loans with partial charge-offs to total nonperforming loans

    34.03

%

    29.34

%

Coverage ratio net of nonperforming loans with partial charge-offs

    279.70

%

    254.42

%

 

Our charge-off policy is reviewed on an annual basis and updated as necessary. During the nine month period ended September 30, 2020, there were no changes made to this policy.

 

Effects of Inflation

 

The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on its financial results is through our need and ability to react to changes in interest rates. Management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.

 

66

 

ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

 

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 16, 2020.

 

ITEM 4: CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures  

 

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

 The Company’s management, with the participation of the principal executive officer and the principal financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the principal executive officer and the principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

 

Changes in Internal Controls

 

The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended September 30, 2019 that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended September 30, 2020.

 

Limitations on the Effectiveness of Controls

 

Control systems, no matter how well designed and operated, can provide only reasonable, not an absolute, level of assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

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PART II. OTHER INFORMATION

 

ITEM 1. 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.

 

ITEM 1A. RISK FACTORS

 

Significant risk factors could adversely affect the Company’s business, financial condition and results of operation.  Risk factors discussing these risks can be found in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the risk factors included in Part II, Item 1A. Risk Factors in the Company’s Form 10-Q for the quarter ended June 30, 2020. You should carefully consider these risk factors. The risks described in the Company’s Form 10-K and Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

       Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for quarterly reports on Form 10-Q).

 

Exhibit Number

 

 

Description

 

 

Location

         

3.1

 

Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc.

 

Incorporated by reference to Form 10-K filed March 10, 2017

         

3.2

 

Amended and Restated By-laws of Republic First Bancorp, Inc.

 

Incorporated by reference to Form 10-Q filed May 11, 2020

         
4.1   Statement with Respect to Shares regarding 7% Perpetual Non-Cumulative, Convertible Preferred Stock, Series A   Incorporated by reference to Form 8-K filed August 21, 2020
         

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Republic First Bancorp, Inc.

 

Filed herewith

         

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Republic First Bancorp, Inc.

 

Filed herewith

         

32.1

 

Section 1350 Certification of Harry D. Madonna

 

Furnished herewith

         

32.2

 

Section 1350 Certification of Frank A. Cavallaro

 

Furnished herewith

         

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL; (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, (v) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019, and (vi) Notes to Consolidated Financial Statements.

   
         

104

 

The cover page of Republic First Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (contained in Exhibit 101)

   

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

REPUBLIC FIRST BANCORP, INC.

 
       

Date: November 9, 2020

By:

/s/ Harry D. Madonna

 
   

Harry D. Madonna

 
   

President and Chief Executive Officer

(principal executive officer)

 
       

Date: November 9, 2020

By:

/s/ Frank A. Cavallaro

 
   

Frank A. Cavallaro

 
   

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

 
       

 

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