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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. 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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 March 31, 2021.

 

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

58,873,278

Title of Class

Number of Shares Outstanding as of May 7, 2021

 

 

 

 

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

     

Part I: Financial Information

Page

     

Item 1.

Financial Statements

 
 

Consolidated balance sheets as of March 31, 2021 and December 31, 2020 (unaudited)

1

 

Consolidated statements of operations for the three months ended March 31, 2021 and 2020 (unaudited)

2

  Consolidated statements of comprehensive income for the three months ended March 31, 2021 and 2020 (unaudited) 3
 

Consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 (unaudited)

4

 

Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2021 and 2020 (unaudited)

5

     
 

Notes to consolidated financial statements (unaudited)

6

     

Item 2.

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

38

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

60

     

Item 4.

Controls and Procedures

60

     

Part II: Other Information

 
     

Item 1.

Legal Proceedings

61

     

Item 1A.

Risk Factors

61

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

     

Item 3.

Defaults Upon Senior Securities

62

     

Item 4.

Mine Safety Disclosures

62

     

Item 5.

Other Information

62

     

Item 6.

Exhibits

63

     

Signatures

64

 

 

 
 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2021 and December 31, 2020

(Dollars in thousands, except per share data)

 

  

March 31,

2021

unaudited

  

December 31,

2020

 

 

ASSETS

        

Cash and due from banks

 $45,480  $29,746 

Interest bearing deposits with banks

  783,417   745,554 

Cash and cash equivalents

  828,897   775,300 
         

Investment securities available for sale, at fair value

  626,567   528,508 

Investment securities held to maturity, at amortized cost (fair value of $944,809 and $836,972, respectively)

  948,419   814,936 

Equity securities

  9,079   9,039 

Restricted stock, at cost

  3,039   3,039 

Mortgage loans held for sale, at fair value

  28,069   50,387 

Other loans held for sale

  552   2,983 

Loans receivable (net of allowance for credit losses of $16,091 and $12,975, respectively)

  2,689,729   2,632,367 

Premises and equipment, net

  122,867   123,170 

Other real estate owned, net

  1,188   1,188 

Accrued interest receivable

  16,657   16,120 

Operating lease right-of-use asset

  79,614   72,946 

Other assets

  41,281   35,752 

Total Assets

 $5,395,958  $5,065,735 
         

LIABILITIES AND SHAREHOLDERS EQUITY

        

Liabilities

        

Deposits

        

Demand – non-interest bearing

 $1,244,437  $1,006,876 

Demand – interest bearing

  1,874,286   1,776,995 

Money market and savings

  1,058,485   1,043,519 

Time deposits

  185,891   186,361 

Total Deposits

  4,363,099   4,013,751 

Other borrowings

  611,114   633,866 

Accrued interest payable

  819   926 

Other liabilities

  15,193   20,232 

Operating lease liability

  86,084   77,576 

Subordinated debt

  11,273   11,271 

Total Liabilities

  5,087,582   4,757,622 
         

Commitments and contingencies (see note 3)

  -   - 
         

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 March 31, 2021 and December 31, 2020; shares outstanding 2,000,000 as of March 31, 2021 and December 31, 2020

  20   20 

Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,402,123 as of March 31, 2021 and 59,388,623 as of December 31, 2020; shares outstanding 58,873,278 as of March 31, 2021 and 58,859,778 as of December 31, 2020

  594   594 

Additional paid in capital

  322,861   322,321 

Accumulated deficit

  (1,892)  (8,085)

Treasury stock at cost (503,408 shares as of March 31, 2021 and December 31, 2020)

  (3,725)  (3,725)

Stock held by deferred compensation plan (25,437 shares as of March 31, 2021 and December 31, 2020)

  (183)  (183)

Accumulated other comprehensive loss

  (9,299)  (2,829)

Total Shareholders’ Equity

  308,376   308,113 

Total Liabilities and Shareholders’ Equity

 $5,395,958  $5,065,735 

 

(See notes to consolidated financial statements)

 

1

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands, except per share data)

(unaudited)

 

  

Three Months Ended

March 31,

 
  

2021

  

2020

 

Interest income

        

Interest and fees on taxable loans

 $29,467  $19,623 

Interest and fees on tax-exempt loans

  436   550 

Interest and dividends on taxable investment securities

  6,393   6,801 

Interest and dividends on tax-exempt investment securities

  75   20 

Interest on federal funds sold and other interest-earning assets

  49   289 

Total interest income

  36,420   27,283 

Interest expense

        

Demand-interest bearing

  3,258   3,421 

Money market and savings

  1,118   1,783 

Time deposits

  539   1,221 

Other borrowings

  73   104 

Total interest expense

  4,988   6,529 

Net interest income

  31,432   20,754 

Provision for loan losses

  3,000   950 

Net interest income after provision for loan losses

  28,432   19,804 

Non-interest income

        

Loan and servicing fees

  633   471 

Mortgage banking income

  4,564   2,458 

Gain on sales of SBA loans

  761   649 

Service fees on deposit accounts

  3,960   2,064 

Gain on sale of investment securities

  -   841 

Other non-interest income

  357   62 

Total non-interest income

  10,275   6,545 

Non-interest expenses

        

Salaries and employee benefits

  14,721   13,381 

Occupancy

  3,777   3,422 

Depreciation and amortization

  2,294   1,875 

Legal

  217   296 

Other real estate owned

  98   282 

Appraisal and other loan expenses

  714   422 

Advertising

  171   381 

Data processing

  1,757   1,574 

Insurance

  335   276 

Professional fees

  808   634 

Debit card processing

  986   825 

Regulatory assessments and costs

  726   630 

Taxes, other

  322   203 

Other operating expenses

  2,421   3,071 

Total non-interest expense

  29,347   27,272 

Income (loss) before provision for income taxes

  9,360   (923)

Provision (benefit) for income taxes

  2,292   (330)

Net income (loss)

 $7,068  $(593)

Preferred stock dividends

  875   - 

Net income (loss) available to common shareholders

 $6,193  $(593)

Net income (loss) per share

        

Basic earnings per common share

 $0.11  $(0.01)

Diluted earnings per common share

 $0.09  $(0.01)

 

(See notes to consolidated financial statements)

 

2

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands)

(unaudited)

 

  

Three Months Ended

March 31,

 
  

2021

  

2020

 
         

Net income (loss)

 $7,068  $(593)
         

Other comprehensive (loss) income, net of tax

        

Unrealized (losses) gains on securities (pre-tax ($9,508), and $4,374 respectively)

  (7,098)  3,264 

Reclassification adjustment for securities gains (pre-tax $-, and ($841) respectively

  -   (628)

Net unrealized gains on securities

  (7,098)  2,636 

Amortization of net unrealized holding losses during the period (pre-tax $838, and $409 respectively)

  628   305 
         

Total other comprehensive (loss) income

  (6,470)  2,941 
         

Total comprehensive income

 $598  $2,348 

 

(See notes to consolidated financial statements)

 

3

 
 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands)

(unaudited)

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Cash flows from operating activities

        

Net income (loss)

 $7,068  $(593)

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

        

Provision for loan losses

  3,000   950 

Depreciation and amortization

  2,294   1,875 

Stock based compensation

  497   577 

Gain on sale of investment securities

  -   (841)

Fair value adjustment on equity securities

  (40)  - 

Amortization of premiums on investment securities

  1,828   1,583 

Accretion of discounts on retained SBA loans

  (229)  (220)

Fair value adjustments on SBA servicing assets

  187   41 

Proceeds from sales of SBA loans originated for sale

  7,443   10,745 

SBA loans originated for sale

  (4,251)  (8,474)

Gains on sales of SBA loans originated for sale

  (761)  (649)

Proceeds from sales of mortgage loans originated for sale

  167,758   50,258 

Mortgage loans originated for sale

  (141,393)  (55,072)

Fair value adjustment for mortgage loans originated for sale

  1,766   556 

Gains on mortgage loans originated for sale

  (4,521)  (1,734)

Amortization of debt issuance costs

  2   2 

Non-cash expense related to leases

  108   183 

Increase in accrued interest receivable and other assets

  (2,434)  (4,865)

Net (decrease) increase in accrued interest payable and other liabilities

  (6,327)  8,894 

Net cash provided by operating activities

  31,995   3,216 
         

Cash flows from investing activities

        

Purchase of investment securities available for sale

  (134,750)  (16,906)

Purchase of investment securities held to maturity

  (202,977)  - 

Proceeds from the sale of securities available for sale

  -   26,869 

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

  26,382   34,703 

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

  69,306   32,823 

Net increase in loans

  (60,133)  (133,621)

Net proceeds from sale of other real estate owned

  -   586 

Premises and equipment expenditures

  (1,991)  (4,812)

Net cash used in investing activities

  (304,163)  (60,358)
         

Cash flows from financing activities

        

Net proceeds from exercise of stock options

  44   24 

Net increase (decrease) in demand, money market and savings deposits

  349,818   (53,736)

Decrease in time deposits

  (470)  (948)

Decrease in other borrowings

  (22,752)  - 

Preferred stock dividends paid

  (875)  - 

Net cash provided by (used in) financing activities

  325,765   (54,660)
         

Net increase (decrease) in cash and cash equivalents

  53,597   (111,802)

Cash and cash equivalents, beginning of year

  775,300   168,319 

Cash and cash equivalents, end of period

 $828,897  $56,517 
         

Supplemental disclosures

        

Interest paid

 $4,881  $6,632 
Income taxes paid $4,770  $- 

 

(See notes to consolidated financial statements)

 

4

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity

For the Three Months Ended March 31, 2021 and 2020

(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 January 1, 2021

 $20  $594  $322,321  $(8,085) $(3,725) $(183) $(2,829) $308,113 

Net income

              7,068               7,068 

Preferred stock dividends paid (1)

              (875)              (875)

Other comprehensive loss, net of tax

                          (6,470)  (6,470)

Stock based compensation

          497                   497 

Options exercised (13,500 shares)

        43                   43 
                                 

Balance March 31, 2021

 $20  $594  $322,861  $(1,892) $(3,725) $(183) $(9,299) $308,376 
                                 

Balance January 1, 2020

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

Net loss

              (593)              (593)

Other comprehensive income, net of tax

                          2,941   2,941 

Stock based compensation

          577                   577 

Options exercised (8,000 shares)

          23                   23 
                                 

Balance March 31, 2020

 $-  $594  $272,639  $(12,809) $(3,725) $(183) $(4,400) $252,116 

 

(1)

Dividends per share of $0.44 were declared and paid on preferred stock for the three months ended March 31, 2021

 

(See notes to consolidated financial statements)

 

5

 

Republic First Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 1: Basis of Presentation

 

Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, 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. In 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. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. In 2018, Oak Mortgage was merged into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

 

6

 

 

Note 2: Summary of Significant Accounting Policies

 

Risks and Uncertainties

 

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

 

The coronavirus (“COVID-19”) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions. 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. In December 2020, the Economic Aid Act was signed into law, which extended certain provisions of the CARES Act and provides additional support and financial assistance for small businesses, non-profit organizations and other entities.

 

In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The Company continues to accrue interest on loans modified in accordance with the CARES Act. To the extent those borrowers are unable to resume normal contractual payments, the Company could experience additional losses of principal and interest. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

 

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

 

Significant estimates are made by management in determining the allowance for credit 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.

 

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.

 

7

 

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 interest rate lock commitments (“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.

 

Use of Estimates

 

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

 

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

 

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

 

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

 

8

 

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

 

Stock-Based Compensation

 

The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of March 31, 2021, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.

 

On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At March 31, 2021, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the three months ended March 31, 2021, 520 thousand stock units were granted under the 2014 Plan with a fair value of $1.7 million.

 

On April 27, 2021 the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 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 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of March 31, 2021, no shares have been granted under the 2021 Plan.

 

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.

 

During the three months ended March 31, 2021 and 2020, 632,635 options and 907,790 options vested, respectively.  Expense is recognized ratably over the period required to vest.  At March 31, 2021, the intrinsic value of the 5,672,875 options outstanding was $1.6 million, while the intrinsic value of the 3,851,635 exercisable (vested) options was $793 thousand. At March 31, 2020, the intrinsic value of the 6,067,450 options outstanding was $52,000, while the intrinsic value of the 3,456,750 exercisable (vested) options was $52,000. During the three months ended March 31, 2021, 13,500 options were exercised with cash received of $43,503 and 208,230 options were forfeited with a weighted average grant date fair value of $433,395. During the three months ended March 31, 2020, 8,000 options were exercised with cash received of $23,780 and 107,625 options were forfeited with a weighted average grant date fair value of $216,331.

 

9

 

Information regarding stock option compensation for the three months ended March 31, 2021 and 2020 is set forth below:

 

  

2021

  

2020

 

Stock based compensation expense recognized

 $436,000  $577,000 

Number of unvested stock options

  1,826,040   2,610,700 

Fair value of unvested stock options

 $3,000,864  $4,912,774 

Amount remaining to be recognized as expense

 $2,703,509  $4,055,481 

 

The remaining unrecognized expense amount of $2,703,509 will be recognized ratably as expense through February 2024.

 

The Company granted stock units under the 2014 Plan during the three month period ended March 31, 2021. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.

 

The following table details the Stock Units for the three months ended March 31, 2021:

 

  

Number of

Units

  

Weighted

Average

Grant Date

Fair Value

 

Beginning balance

  0  $- 

Granted

  520,350   3.34 

Vested

  0   3.34 

Forfeited

  (4,800)  3.34 

Ending balance

  515,550  $3.34 

 

Information regarding stock unit compensation for the three months ended March 31, 2021 and 2020 is set forth below:

 

  

2021

  

2020

 

Stock based compensation expense recognized

 $61,000   - 

Number of unvested stock units

  515,550   - 

Fair value of unvested stock units

 $1,721,937   - 

Amount remaining to be recognized as expense

 $1,660,937   - 

 

The remaining unrecognized expense amount of $1,660,937 will be recognized ratably as expense through February 2025.

 

Earnings per Share

 

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans for the three months ended March 31, 2021 and March 31, 2020.

 

10

 

The calculation of EPS for the three months ended March 31, 2021 and 2020 is as follows (in thousands, except per share amounts):

 

  

Three Months Ended

March 31,

 
  

2021

  

2020

 
         

Net income (loss) available to common shareholders

 $6,193  $(593)
         

Weighted average shares outstanding

  58,860   58,848 
         

Net income (loss) per share – basic

 $0.11  $(0.01)
         

Weighted average shares outstanding (including dilutive CSEs)

  75,817   58,848 
         

Net income (loss) per share – diluted

 $0.09  $(0.01)

 

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

 

  

Three Months Ended

March 31,

 

(in thousands)

 

2021

  

2020

 
         

Anti-dilutive securities

        
         

Share based compensation awards

  5,902   6,067 
         

Convertible preferred stock

  -   - 
         

Total anti-dilutive securities

  5,902   6,067 

 

Recent Accounting Pronouncements

 

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 have been 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 to calculate credit losses, such as estimating losses over the estimated life of a financial asset and considers expected future changes in macroeconomic conditions. The Company was initially required to adopt this ASU on January 1, 2020. The Company elected to defer the adoption of this ASU as permitted by Section 4014 of the CARES Act, which allowed financial institutions to postpone adoption 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. The Economic Aid Act approved in December 2020 extended the option to defer this ASU until January 1, 2021 or January 1, 2022. The Company has chosen to defer adoption until January 1, 2022. While based on the parallel calculations run to date, the Company does not anticipate a material increase to the allowance for credit losses at the present time, the impact on the date of adoption is unknown.

 

11

 

ASU 2020-04

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU became effective March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.

 

ASU 2021-01

 

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.

 

 

Note 3: Commitments and Contingencies

 

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.

 

12

 

 

Note 5: Investment Securities

 

A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities at March 31, 2021 and December 31, 2020 is as follows:

 

  

At March 31, 2021

 

(dollars in thousands)

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 

Available for sale

                

U.S. Government agencies

 $30,789  $868  $(1,327) $30,330 

Collateralized mortgage obligations

  222,655   2,886   (5,191)  220,350 

Agency mortgage-backed securities

  246,823   500   (4,935)  242,388 

Municipal securities

  8,188   166   -   8,354 

Corporate bonds

  126,300   150   (1,305)  125,145 

Investment securities available for sale

 $634,755  $4,570  $(12,758) $626,567 
                 

Held to maturity

                

U.S. Government agencies

 $78,484  $2,381  $-  $80,865 

Collateralized mortgage obligations

  417,227   9,571   (10,506)  416,292 

Agency mortgage-backed securities

  452,708   3,199   (8,255)  447,652 

Investment securities held to maturity

 $948,419  $15,151  $(18,761) $944,809 
                 

Equity securities (1)

             $9,079 

 

(1)

Equity securities consist of investments in non-cumulative preferred stock.

 

 

  

At December 31, 2020

 

(dollars in thousands)

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 

Available for sale

                

U.S. Government agencies

 $32,312  $-  $(426) $31,886 

Collateralized mortgage obligations

  218,232   3,584   (270)  221,546 

Agency mortgage-backed securities

  149,325   1,204   (1)  150,528 

Municipal securities

  8,201   24   -   8,225 

Corporate bonds

  119,118   595   (3,390)  116,323 

Investment securities available for sale

 $527,188  $5,407  $(4,087) $528,508 
                 

Held to maturity

                

U.S. Government agencies

 $82,093  $4,185  $-  $86,278 

Collateralized mortgage obligations

  363,363   12,687   (231)  375,819 

Agency mortgage-backed securities

  369,480   5,640   (245)  374,875 

Investment securities held to maturity

 $814,936  $22,512  $(476) $836,972 
                 

Equity securities (1)

             $9,039 

 

(1)

Equity securities consist of investments in non-cumulative preferred stock.

 

13

 

The following table presents investment securities by stated maturity at March 31, 2021. 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

 $12,620  $12,558  $407  $410 

After 1 year to 5 years

  82,985   83,192   70,743   72,874 

After 5 years to 10 years

  52,748   52,403   7,334   7,581 

After 10 years

  16,924   15,676   -   - 

Collateralized mortgage obligations

  222,655   220,350   417,227   416,292 

Agency mortgage-backed securities

  246,823   242,388   452,708   447,652 

Total investment securities

 $634,755  $626,567  $948,419  $944,809 

 

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. Equity securities consist of investments in non-cumulative preferred stock. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of March 31, 2021 and December 31, 2020. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

 

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

 

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded at March 31, 2021 and December 31, 2020.

 

14

 

The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020:

 

  

At March 31, 2021

 
  

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

 $13,056  $868  $30,330  $459  $43,386  $1,327 

Collateralized mortgage obligations

  107,343   5,191   -   -   107,343   5,191 

Agency mortgage-backed securities

  216,260   4,935   -   -   216,260   4,935 

Municipal securities

  -   -   -   -   -   - 

Corporate bonds

  13,254   322   42,017   983   55,271   1,305 

Investment Securities Available for Sale

 $349,913  $11,316  $72,347  $1,442  $422,260  $12,758 

 

  

At March 31, 2021

 
  

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

  186,170   10,506   -   -   186,170   10,506 

Agency mortgage-backed securities

  289,378   8,255   -   -   289,378   8,255 

Investment Securities Held to Maturity

 $475,548  $18,761  $-  $-  $475,548  $18,761 

 

  

At December 31, 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

 $-  $-  $31,886  $426  $31,886  $426 

Collateralized mortgage obligations

  99,497   270   -   -   99,497   270 

Agency mortgage-backed securities

  20,934   1   -   -   20,934   1 

Municipal securities

  -   -   -   -   -   - 

Corporate bonds

  4,559   39   54,649   3,351   59,208   3,390 

Investment Securities Available for Sale

 $124,990  $310  $86,535  $3,777  $211,525  $4,087 

 

  

At December 31, 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

  62,603   231   -   -   62,603   231 

Agency mortgage-backed securities

  54,537   245   -   -   54,537   245 

Investment Securities Held to Maturity

 $117,140  $476  $-  $-  $117,140  $476 

 

Unrealized losses on securities in the investment portfolio amounted to $31.5 million with a total fair value of $897.8 million as of March 31, 2021 compared to unrealized losses of $4.6 million with a total fair value of $328.7 million as of December 31, 2020. 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 five U.S. Government agency securities, twenty collateralized mortgage obligations and twenty-two agency mortgage-backed securities that were in an unrealized loss position at March 31, 2021. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of March 31, 2021.

 

15

 

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At March 31, 2021, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At March 31, 2021, the investment portfolio included nine 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. Five of the nine corporate bonds are issued by four of the largest U.S. financial institutions. Each financial institution is well capitalized.

 

There were no proceeds from the sale of securities during the three months ended March 31, 2021. Proceeds associated with the sale of securities available for sale during the three months ended March 31, 2020 were $26.9 million. Gross gains of $841,000 were realized on these sales. The tax provision applicable to the net gains of $841,000 for the three months ended March 31, 2020 amounted to $213,000.

 

 

Note 6: Loans Receivable and Allowance for Loan Losses

 

The following table sets forth the Company’s gross loans by major category as of March 31, 2021 and December 31, 2020:

 

(dollars in thousands)

 

March 31,

2021

  

December 31,

2020

 
         

Commercial real estate

 $708,547  $705,748 

Construction and land development

  153,062   142,821 

Commercial and industrial

  211,192   200,188 

Owner occupied real estate

  477,316   475,206 

Consumer and other

  97,850   102,368 

Residential mortgage

  425,106   395,174 

Paycheck protection program

  649,696   636,637 

Total loans receivable

  2,722,769   2,658,142 

Deferred costs (fees)

  (16,949)  (12,800)

Allowance for loan losses

  (16,091)  (12,975)

Net loans receivable

 $2,689,729  $2,632,367 

 

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 loans issued under the Paycheck Protection Program (“PPP”). 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.

 

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The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2021 and 2020: