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 June 30, 2020.
or
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☐ |
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)
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Pennsylvania |
23-2486815 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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50 South 16th Street, Philadelphia, Pennsylvania |
19102 |
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(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:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock |
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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.
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Large accelerated filer ☐ |
Accelerated filer ☒ |
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Non-Accelerated filer ☐ |
Smaller reporting company ☐ |
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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.
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Common Stock, $0.01 per share |
58,855,778 |
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Title of Class |
Number of Shares Outstanding as of August 7, 2020 |
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REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES |
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TABLE OF CONTENTS |
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2020 and December 31, 2019
(Dollars in thousands, except per share data)
|
June 30, 2020 (unaudited) |
December 31, 2019
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ASSETS |
||||||||
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Cash and due from banks |
$ | 36,786 | $ | 41,928 | ||||
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Interest bearing deposits with banks |
654,458 | 126,391 | ||||||
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Cash and cash equivalents |
691,244 | 168,319 | ||||||
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Investment securities available for sale, at fair value |
382,221 | 539,042 | ||||||
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Investment securities held to maturity, at amortized cost (fair value of $583,182 and $653,109, respectively) |
556,159 | 644,842 | ||||||
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Restricted stock, at cost |
3,789 | 2,746 | ||||||
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Mortgage loans held for sale, at fair value |
24,744 | 10,345 | ||||||
|
Other loans held for sale |
1,382 | 3,004 | ||||||
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Loans receivable (net of allowance for loan losses of $11,040 and $9,266, respectively) |
2,531,208 | 1,738,929 | ||||||
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Premises and equipment, net |
121,149 | 116,956 | ||||||
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Other real estate owned, net |
1,144 | 1,730 | ||||||
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Accrued interest receivable |
12,393 | 9,934 | ||||||
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Operating leases – right-of-use asset |
64,693 | 64,805 | ||||||
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Goodwill |
5,011 | 5,011 | ||||||
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Other assets |
39,506 | 35,627 | ||||||
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Total Assets |
$ | 4,434,643 | $ | 3,341,290 | ||||
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LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
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Liabilities |
||||||||
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Deposits |
||||||||
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Demand – non-interest bearing |
$ | 1,095,782 | $ | 661,431 | ||||
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Demand – interest bearing |
1,435,198 | 1,352,360 | ||||||
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Money market and savings |
902,528 | 761,793 | ||||||
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Time deposits |
210,446 | 223,579 | ||||||
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Total Deposits |
3,643,954 | 2,999,163 | ||||||
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Short-term borrowings |
438,478 | - | ||||||
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Accrued interest payable |
1,403 | 1,630 | ||||||
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Other liabilities |
15,316 | 11,208 | ||||||
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Operating lease liability obligation |
69,046 | 68,856 | ||||||
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Subordinated debt |
11,268 | 11,265 | ||||||
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Total Liabilities |
4,179,465 | 3,092,122 | ||||||
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Shareholders’ Equity |
||||||||
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Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding |
- | - | ||||||
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Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,379,623 as of June 30, 2020 and 59,371,623 as of December 31, 2019; shares outstanding 58,850,778 as of June 30, 2020 and 58,842,778 as of December 31, 2019 |
594 | 594 | ||||||
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Additional paid in capital |
273,118 | 272,039 | ||||||
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Accumulated deficit |
(10,297 | ) | (12,216 | ) | ||||
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Treasury stock at cost (503,408 shares as of June 30, 2020 and December 31, 2019) |
(3,725 | ) | (3,725 | ) | ||||
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Stock held by deferred compensation plan (25,437 shares as of June 30, 2020 and December 31, 2019) |
(183 | ) | (183 | ) | ||||
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Accumulated other comprehensive loss |
(4,329 | ) | (7,341 | ) | ||||
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Total Shareholders’ Equity |
255,178 | 249,168 | ||||||
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Total Liabilities and Shareholders’ Equity |
$ | 4,434,643 | $ | 3,341,290 | ||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2020 and 2019
(Dollars in thousands, except per share data)
(unaudited)
|
Three Months Ended June 30, |
Six Months Ended June 30, |
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2020 |
2019 |
2020 |
2019 |
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Interest income: |
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Interest and fees on taxable loans |
$ | 22,183 | $ | 18,149 | $ | 41,806 | $ | 35,529 | ||||||||
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Interest and fees on tax-exempt loans |
554 | 420 | 1,104 | 840 | ||||||||||||
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Interest and dividends on taxable investment securities |
5,053 | 7,059 | 11,854 | 14,304 | ||||||||||||
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Interest and dividends on tax-exempt investment securities |
19 | 99 | 39 | 237 | ||||||||||||
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Interest on federal funds sold and other interest-earning assets |
50 | 518 | 339 | 854 | ||||||||||||
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Total interest income |
27,859 | 26,245 | 55,142 | 51,764 | ||||||||||||
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Interest expense: |
||||||||||||||||
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Demand- interest bearing |
2,856 | 4,206 | 6,277 | 8,144 | ||||||||||||
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Money market and savings |
1,431 | 1,628 | 3,214 | 3,080 | ||||||||||||
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Time deposits |
1,033 | 861 | 2,254 | 1,485 | ||||||||||||
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Other borrowings |
112 | 179 | 216 | 544 | ||||||||||||
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Total interest expense |
5,432 | 6,874 | 11,961 | 13,253 | ||||||||||||
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Net interest income |
22,427 | 19,371 | 43,181 | 38,511 | ||||||||||||
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Provision for loan losses |
1,000 | - | 1,950 | 300 | ||||||||||||
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Net interest income after provision for loan losses |
21,427 | 19,371 | 41,231 | 38,211 | ||||||||||||
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Non-interest income: |
||||||||||||||||
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Loan and servicing fees |
764 | 689 | 1,235 | 899 | ||||||||||||
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Mortgage banking income |
3,389 | 3,031 | 5,847 | 5,251 | ||||||||||||
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Gain on sales of SBA loans |
269 | 1,147 | 918 | 1,649 | ||||||||||||
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Service fees on deposit accounts |
2,328 | 1,848 | 4,392 | 3,460 | ||||||||||||
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Gain on sale of investment securities |
1,640 | 261 | 2,481 | 583 | ||||||||||||
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Other non-interest income |
34 | 50 | 96 | 129 | ||||||||||||
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Total non-interest income |
8,424 | 7,026 | 14,969 | 11,971 | ||||||||||||
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Non-interest expenses: |
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Salaries and employee benefits |
13,177 | 13,705 | 26,558 | 26,064 | ||||||||||||
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Occupancy |
3,312 | 2,682 | 6,734 | 5,276 | ||||||||||||
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Depreciation and amortization |
2,242 | 1,539 | 4,117 | 2,960 | ||||||||||||
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Legal |
253 | 333 | 549 | 562 | ||||||||||||
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Other real estate owned |
75 | 517 | 357 | 854 | ||||||||||||
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Appraisal and other loan expenses |
539 | 390 | 961 | 851 | ||||||||||||
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Advertising |
288 | 454 | 669 | 769 | ||||||||||||
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Data processing |
1,567 | 1,184 | 3,141 | 2,346 | ||||||||||||
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Insurance |
281 | 216 | 557 | 451 | ||||||||||||
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Professional fees |
756 | 725 | 1,390 | 1,203 | ||||||||||||
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Debit card processing |
899 | 607 | 1,724 | 1,163 | ||||||||||||
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Regulatory assessments and costs |
675 | 421 | 1,305 | 842 | ||||||||||||
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Taxes, other |
283 | 207 | 486 | 494 | ||||||||||||
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Other operating expenses |
2,317 | 2,931 | 5,388 | 5,343 | ||||||||||||
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Total non-interest expense |
26,664 | 25,911 | 53,936 | 49,178 | ||||||||||||
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Income before provision for income taxes |
3,187 | 486 | 2,264 | 1,004 | ||||||||||||
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Provision for income taxes |
675 | 105 | 345 | 197 | ||||||||||||
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Net income |
$ | 2,512 | $ | 381 | $ | 1,919 | $ | 807 | ||||||||
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Net income per share: |
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Basic |
$ | 0.04 | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||||
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Diluted |
$ | 0.04 | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2020 and 2019
(Dollars in thousands)
(unaudited)
|
Three Months Ended June 30, |
Six Months Ended June 30, |
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2020 |
2019 |
2020 |
2019 |
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Net income |
$ | 2,512 | $ | 381 | $ | 1,919 | $ | 807 | ||||||||
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Other comprehensive income, net of tax |
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Unrealized gains on securities (pre-tax $1,089, $2,473, $5,463, and $4,775, respectively) |
813 | 1,902 | 4,077 | 3,672 | ||||||||||||
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Reclassification adjustment for securities gains (pre-tax ($1,640), ($261), ($2,481), and ($583), respectively) |
(1,224 | ) | (200 | ) | (1,852 | ) | (448 | ) | ||||||||
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Net unrealized gains (losses) on securities |
(411 | ) | 1,702 | 2,225 | 3,224 | |||||||||||
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Amortization of net unrealized holding losses to income during the period (pre-tax $646, $332, $1,055, and $644 respectively) |
482 | 255 | 787 | 495 | ||||||||||||
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Total other comprehensive income |
71 | 1,957 | 3,012 | 3,719 | ||||||||||||
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Total comprehensive income |
$ | 2,583 | $ | 2,338 | $ | 4,931 | $ | 4,526 | ||||||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2020 and 2019
(Dollars in thousands)
(unaudited)
|
Six Months Ended June 30, |
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2020 |
2019 |
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Cash flows from operating activities |
||||||||
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Net income |
$ | 1,919 | $ | 807 | ||||
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Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
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Provision for loan losses |
1,950 | 300 | ||||||
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Write down of other real estate owned |
- | 16 | ||||||
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Depreciation and amortization |
4,117 | 2,960 | ||||||
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Stock based compensation |
1,056 | 1,382 | ||||||
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Net (gain) loss on sale of investment securities |
(2,481 | ) | (583 | ) | ||||
|
Amortization of premiums on investment securities |
3,610 | 1,277 | ||||||
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Accretion of discounts on retained SBA loans |
(429 | ) | (703 | ) | ||||
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Fair value adjustments on SBA servicing assets |
158 | 745 | ||||||
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Proceeds from sales of SBA loans originated for sale |
15,179 | 25,099 | ||||||
|
SBA loans originated for sale |
(12,639 | ) | (20,112 | ) | ||||
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Gains on sales of SBA loans originated for sale |
(918 | ) | (1,649 | ) | ||||
|
Proceeds from sales of mortgage loans originated for sale |
148,131 | 152,784 | ||||||
|
Mortgage loans originated for sale |
(158,637 | ) | (149,557 | ) | ||||
|
Fair value adjustment for mortgage loans originated for sale |
(589 | ) | 49 | |||||
|
Gains on mortgage loans originated for sale |
(3,822 | ) | (3,968 | ) | ||||
|
Amortization of debt issuance costs |
3 | 3 | ||||||
|
Non-cash expense related to leases |
255 | 637 | ||||||
|
Increase in accrued interest receivable and other assets |
(6,190 | ) | (2,292 | ) | ||||
|
Increase (decrease) in accrued interest payable and other liabilities |
3,117 | (518 | ) | |||||
|
Net cash (used in) provided by operating activities |
(6,210 | ) | 6,677 | |||||
|
Cash flows from investing activities |
||||||||
|
Purchase of investment securities available for sale |
(16,906 | ) | (78,751 | ) | ||||
|
Proceeds from the sale of securities available for sale |
92,804 | 43,238 | ||||||
|
Proceeds from the paydown, maturity, or call of securities available for sale |
84,036 | 22,514 | ||||||
|
Proceeds from the paydown, maturity, or call of securities held to maturity |
88,476 | 42,898 | ||||||
|
Net (purchase) redemption of restricted stock |
(1,043 | ) | 624 | |||||
|
Net increase in loans |
(793,800 | ) | (72,878 | ) | ||||
|
Net proceeds from sale of other real estate owned |
586 | 401 | ||||||
|
Premises and equipment expenditures |
(8,310 | ) | (20,610 | ) | ||||
|
Net cash used in investing activities |
(554,157 | ) | (62,564 | ) | ||||
|
Cash flows from financing activities |
||||||||
|
Proceeds from exercise of stock options |
23 | 261 | ||||||
|
Increase in demand, money market and savings deposits |
657,924 | 97,286 | ||||||
|
Net (decrease) increase in time deposits |
(13,133 | ) | 37,824 | |||||
|
Net increase (repayment) in short-term borrowings |
438,478 | (22,443 | ) | |||||
|
Net cash provided by financing activities |
1,083,292 | 112,928 | ||||||
|
Net increase (decrease) in cash and cash equivalents |
522,925 | 57,041 | ||||||
|
Cash and cash equivalents, beginning of year |
168,319 | 72,473 | ||||||
|
Cash and cash equivalents, end of period |
$ | 691,244 | $ | 129,514 | ||||
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Supplemental disclosures |
||||||||
|
Interest paid |
$ | 11,734 | $ | 13,829 | ||||
|
Non-monetary transfers from loans to other real estate owned |
$ | - | $ | 600 | ||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three and Six Months Ended June 30, 2020 and 2019
(Dollars in thousands)
(unaudited)
|
Common Stock |
Additional Paid in Capital |
Accumulated Deficit |
Treasury Stock |
Stock Held by Deferred Compensation Plan |
Accumulated Other Comprehensive Loss |
Total Shareholders’ Equity |
||||||||||||||||||||||
|
Balance April 1, 2020 |
$ | 594 | $ | 272,639 | $ | (12,809 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (4,400 | ) | $ | 252,116 | ||||||||||
|
Net income |
2,512 | 2,512 | ||||||||||||||||||||||||||
|
Other comprehensive income, net of tax |
71 | 71 | ||||||||||||||||||||||||||
|
Stock based compensation |
479 | 479 | ||||||||||||||||||||||||||
|
Balance June 30, 2020 |
$ | 594 | $ | 273,118 | $ | (10,297 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (4,329 | ) | $ | 255,178 | ||||||||||
|
Balance January 1, 2020 |
$ | 594 | $ | 272,039 | $ | (12,216 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (7,341 | ) | $ | 249,168 | ||||||||||
|
Net income |
1,919 | 1,919 | ||||||||||||||||||||||||||
|
Other comprehensive income, net of tax |
3,012 | 3,012 | ||||||||||||||||||||||||||
|
Stock based compensation |
1,056 | 1,056 | ||||||||||||||||||||||||||
|
Options exercised (8,000 shares) |
- | 23 | 23 | |||||||||||||||||||||||||
|
Balance June 30, 2020 |
$ | 594 | $ | 273,118 | $ | (10,297 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (4,329 | ) | $ | 255,178 | ||||||||||
|
Balance April 1, 2019 |
$ | 593 | $ | 270,155 | $ | (8,290 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (10,165 | ) | $ | 248,385 | ||||||||||
|
Net income |
381 | 381 | ||||||||||||||||||||||||||
|
Other comprehensive income, net of tax |
1,957 | 1,957 | ||||||||||||||||||||||||||
|
Stock based compensation |
614 | 614 | ||||||||||||||||||||||||||
|
Options exercised (6,000 shares) |
1 | 20 | 21 | |||||||||||||||||||||||||
|
Balance June 30, 2019 |
$ | 594 | $ | 270,789 | $ | (7,909 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (8,208 | ) | $ | 251,358 | ||||||||||
|
Balance January 1, 2019 |
$ | 593 | $ | 269,147 | $ | (8,716 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (11,927 | ) | $ | 245,189 | ||||||||||
|
Net income |
807 | 807 | ||||||||||||||||||||||||||
|
Other comprehensive income, net of tax |
3,719 | 3,719 | ||||||||||||||||||||||||||
|
Stock based compensation |
1,382 | 1,382 | ||||||||||||||||||||||||||
|
Options exercised (53,550 shares) |
1 | 260 | 261 | |||||||||||||||||||||||||
|
Balance June 30, 2019 |
$ | 594 | $ | 270,789 | $ | (7,909 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (8,208 | ) | $ | 251,358 | ||||||||||
(See notes to consolidated financial statements)
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 six month period ended June 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.
The coronavirus ("COVID-19") outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions during the six months ended June 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 reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve (“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 recession that has begun 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. The uncertain nature of the current economic environment and the potential impact of the stimulus programs initiated by the federal government may have a significant impact on the earnings, financial condition, liquidity, and capital of the Company 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 11 Derivatives and Risk Management Activities for further detail of IRLCs.
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 June 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.
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 June 30, 2020, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the six months ended June 30, 2020, 1,205,600 options were granted under the 2014 Plan with a fair value of $1,058,853.
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) |
0.50% | to | 1.22% | 1.95% | to | 2.70% | ||||||||
|
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 a 1 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 six months ended June 30, 2020 and 2019, 907,790 shares and 808,898 shares vested, respectively. Expense is recognized ratably over the period required to vest. At June 30, 2020, the intrinsic value of the 5,997,450 options outstanding was $102,000, while the intrinsic value of the 3,403,375 exercisable (vested) options was $102,000. At June 30, 2019, the intrinsic value of the 4,979,350 options outstanding was $2.6 million, while the intrinsic value of the 2,630,585 exercisable (vested) options was $2.4 million. During the six months ended June 30, 2020, 8,000 options were exercised resulting in cash receipts of $23,000 and 179,625 options were forfeited with a weighted average grant date fair value of $340,931. During the six months ended June 30, 2019, 53,550 options were exercised resulting in cash receipts of $261,000 and 44,250 options were forfeited with a weighted average grant date fair value of $130,983.
Information regarding stock based compensation for the six months ended June 30, 2020 and 2019 is set forth below:
|
2020 |
2019 |
|||||||
|
Stock based compensation expense recognized |
$ | 1,056,000 | $ | 1,382,000 | ||||
|
Number of unvested stock options |
2,594,075 | 2,348,765 | ||||||
|
Fair value of unvested stock options |
$ | 4,900,923 | $ | 6,000,570 | ||||
|
Amount remaining to be recognized as expense |
$ | 3,578,456 | $ | 4,625,447 | ||||
The remaining unrecognized expense amount of $3,578,456 will be recognized ratably as expense through May 2024.
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 six months ended June 30, 2020 and June 30, 2019.
The calculation of EPS for the three and six months ended June 30, 2020 and 2019 is as follows (in thousands, except per share amounts):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net income - basic and diluted |
$ | 2,512 | $ | 381 | $ | 1,919 | $ | 807 | ||||||||
|
Weighted average shares outstanding |
58,851 | 58,841 | 58,849 | 58,823 | ||||||||||||
|
Net income per share – basic |
$ | 0.04 | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||||
|
Weighted average shares outstanding (including dilutive CSEs) |
58,883 | 59,401 | 58,911 | 59,501 | ||||||||||||
|
Net income per share – diluted |
$ | 0.04 | $ | 0.01 | $ | 0.03 | $ | 0.01 | ||||||||
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 June 30, |
Six Months Ended June 30, |
||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Anti-dilutive securities |
||||||||||||||||
|
Share based compensation awards |
5,965 | 4,419 | 5,936 | 4,301 | ||||||||||||
|
Total anti-dilutive securities |
5,965 | 4,419 | 5,936 | 4,301 | ||||||||||||
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.
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 adoption of this ASU may result in an increase to the Company's allowance for loan losses which will depend upon the nature and characteristics of the Company's loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. The Company expected an initial increase to the allowance for loan losses, in the range of 0% to 11% of the December 31, 2019 allowance for loan losses, or an incremental increase to the allowance for loan losses in the range of $0 up to approximately $1.0 million. When finalized, this one-time increase as a result of the adoption of ASU 2016-13 will be recorded, net of tax, as an adjustment to retained earnings effective January 1, 2020. This estimate is subject to change based on continuing refinement and validation of the model and methodologies. 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.
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 June 30, 2020 and December 31, 2019 is as follows:
| At June 30, 2020 | ||||||||||||||||
|
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
|
U.S. Government agencies |
$ | 35,312 | $ | - | $ | (216 | ) | $ | 35,096 | |||||||
|
Collateralized mortgage obligations |
224,578 | 3,986 | (508 | ) | 228,056 | |||||||||||
|
Agency mortgage-backed securities |
42,126 | 946 | - | 43,072 | ||||||||||||
|
Municipal securities |
2,637 | 28 | - | 2,665 | ||||||||||||
|
Corporate bonds |
76,295 | 292 | (3,255 | ) | 73,332 | |||||||||||
|
Total securities available for sale |
$ | 380,948 | $ | 5,252 | $ | (3,979 | ) | $ | 382,221 | |||||||
|
U.S. Government agencies |
$ | 87,958 | $ | 4,731 | $ | - | $ | 92,689 | ||||||||
|
Collateralized mortgage obligations |
350,375 | 16,827 | (23 | ) | 367,179 | |||||||||||
|
Agency mortgage-backed securities |
117,826 | 5,489 | (1 | ) | 123,314 | |||||||||||
|
Total securities held to maturity |
$ | 556,159 | $ | 27,047 | $ | (24 | ) | $ | 583,182 | |||||||
| 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 | |||||||
The following table presents investment securities by stated maturity at June 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 |
$ | 790 | $ | 792 | $ | - | $ | - | ||||||||
|
After 1 year to 5 years |
55,111 | 55,210 | 65,237 | 68,362 | ||||||||||||
|
After 5 years to 10 years |
55,343 | 52,426 | 22,721 | 24,327 | ||||||||||||
|
After 10 years |
3,000 | 2,665 | - | - | ||||||||||||
|
Collateralized mortgage obligations |
224,578 | 228,056 | 350,375 | 367,179 | ||||||||||||
|
Agency mortgage-backed securities |
42,126 | 43,072 | 117,826 | 123,314 | ||||||||||||
|
Total |
$ | 380,948 | $ | 382,221 | $ | 556,159 | $ | 583,182 | ||||||||
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 June 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 June 30, 2020 and December 31, 2019.
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 June 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 |
$ | 35,096 | $ | 216 | $ | - | $ | - | $ | 35,096 | $ | 216 | ||||||||||||
|
Collateralized mortgage obligations |
116,028 | 365 | 12,946 | 143 | 128,974 | 508 | ||||||||||||||||||
|
Agency mortgage-backed securities |
- | - | - | - | - | - | ||||||||||||||||||
|
Municipal securities |
- | - | - | - | - | - | ||||||||||||||||||
|
Corporate bonds |
- | - | 54,745 | 3,255 | 54,745 | 3,255 | ||||||||||||||||||
|
Total Available for Sale |
$ | 151,124 | $ | 581 | $ | 67,691 | $ | 3,398 | $ | 218,815 | $ | 3,979 | ||||||||||||
|
At June 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 |
8,534 | 16 | 1,032 | 7 | 9,566 | 23 | ||||||||||||||||||
|
Agency mortgage-backed securities |
6,275 | 1 | - | - | 6,275 | 1 | ||||||||||||||||||
|
Total Held to Maturity |
$ | 14,809 | $ | 17 | $ | 1,032 | $ | 7 | $ | 15,841 | $ | 24 | ||||||||||||
|
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 $4.0 million with a total fair value of $234.7 million as of June 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, twenty collateralized mortgage obligations and one agency mortgage-backed securities that were in an unrealized loss position at June 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 June 30, 2020.
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 June 30, 2020, the investment portfolio included no municipal securities that were in an unrealized loss position.
At June 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 June 30, 2020 were $65.9 million. The tax provision applicable to the net gains of $1.6 million for the three months ended June 30, 2020 amounted to $416,000. Proceeds associated with the sale of securities available for sale during the six months ended June 30, 2020 were $92.8 million. The tax provision applicable to the net gains of $2.5 million for the six months ended June 30, 2020 amounted to $629,000.
Proceeds associated with the sale of securities available for sale during the three months ended June 30, 2019 were $18.2 million. The tax provision applicable to the net gains of $261,000 for the three months ended June 30, 2019 amounted to $61,000. Proceeds associated with the sale of securities available for sale during the six months ended June 30, 2019 were $43.2 million. Gross gains of $650,000 and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $583,000 for the six months ended June 30, 2019 amounted to $135,000.
Note 6: Loans Receivable and Allowance for Loan Losses
The following table sets forth the Company’s gross loans by major category as of June 30, 2020 and December 31, 2019:
|
(dollars in thousands) |
June 30, 2020 |
December 31, 2019 |
||||||
|
Commercial real estate |
$ | 664,605 | $ | 613,631 | ||||
|
Construction and land development |
150,156 | 121,395 | ||||||
|
Commercial and industrial |
224,504 | 223,906 | ||||||
|
Owner occupied real estate |
434,422 | 424,400 | ||||||
|
Consumer and other |
101,793 | 101,320 | ||||||
|
Residential mortgage |
313,287 | 263,444 | ||||||
|
Paycheck protection program |
670,912 | - | ||||||
|
Total loans receivable |
2,559,679 | 1,748,096 | ||||||
|
Deferred (fees) costs |
(17,431 | ) | 99 | |||||
|
Allowance for loan losses |
(11,040 | ) | (9,266 | ) | ||||
|
Net loans receivable |
$ | 2,531,208 | $ | 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.
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 June 30, 2020 and 2019:
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the six months ended June 30, 2020 and 2019:
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 June 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 |
|||||||||||||||||||||||||||
|
June 30, 2020 |
||||||||||||||||||||||||||||||||||||
|
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
|
Individually evaluated for impairment |
$ | 322 | $ | - | $ | 45 | $ | 132 | $ | - | $ | - | $ | - | $ | - | $ | 499 | ||||||||||||||||||
|
Collectively evaluated for impairment |
3,410 | 952 | 1,386 | 1,863 | 675 | 2,255 | - | - | 10,541 | |||||||||||||||||||||||||||
|
Total allowance for loan losses |
$ | 3,732 | $ | 952 | $ | 1,431 | $ | 1,995 | $ | 675 | $ | 2,255 | $ | - | $ | - | $ | 11,040 | ||||||||||||||||||
|
Loans receivable: |
||||||||||||||||||||||||||||||||||||
|
Loans evaluated individually |
$ | 10,777 | $ | - | $ | 3,064 | $ | 4,015 | $ | 1,122 | $ | 835 | $ | - | $ | - | $ | 19,813 | ||||||||||||||||||
|
Loans evaluated collectively |
653,828 | 150,156 | 221,440 | 430,407 | 100,671 | 312,452 | 670,912 | - | 2,539,866 | |||||||||||||||||||||||||||
|
Total loans receivable |
$ | 664,605 | $ | 150,156 | $ | 224,504 | $ | 434,422 | $ | 101,793 | $ | 313,287 | $ | 670,912 | $ | - | $ | 2,559,679 | ||||||||||||||||||
|
(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 | ||||||||||||||||||
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 June 30, 2020 and December 31, 2019:
|
June 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 |
$ | 6,632 | $ | 6,639 | $ | - | $ | 6,186 | $ | 6,192 | $ | - | ||||||||||||
|
Construction and land development |
- | - | - | - | - | - | ||||||||||||||||||
|
Commercial and industrial |
2,355 | 2,402 | - | 2,719 | 2,989 | - | ||||||||||||||||||
|
Owner occupied real estate |
3,132 | 3,339 | - | 2,127 | 2,275 | - | ||||||||||||||||||
|
Consumer and other |
1,122 | 1,462 | - | 1,062 | 1,375 | - | ||||||||||||||||||
|
Residential mortgage |
835 | 888 | - | 768 | 768 | - | ||||||||||||||||||
|
Paycheck protection program |
- | - | - | - | - | - | ||||||||||||||||||
|
Total |
$ | 14,076 | $ | 14,730 | $ | - | $ | 12,862 | $ | 13,599 | $ | - | ||||||||||||
|
With an allowance recorded: |
||||||||||||||||||||||||
|
Commercial real estate |
$ | 4,145 | $ | 4,667 | $ | 322 | $ | 4,145 | $ | 4,667 | $ | 265 | ||||||||||||
|
Construction and land development |
- | - | - | - | - | - | ||||||||||||||||||
|
Commercial and industrial |
709 | 880 | 45 | 368 | 383 | 23 | ||||||||||||||||||
|
Owner occupied real estate |
883 | 902 | 132 | 1,507 | 1,521 | 268 | ||||||||||||||||||
|
Consumer and other |
- | - | - | - | - | - | ||||||||||||||||||
|
Residential mortgage |
- | - | - | - | - | - | ||||||||||||||||||
|
Paycheck protection program |
- | - | - | - | - | - | ||||||||||||||||||
|
Total |
$ | 5,737 | $ | 6,449 | $ | 499 | $ | 6,020 | $ | 6,571 | $ | 556 | ||||||||||||
|
Total: |
||||||||||||||||||||||||
|
Commercial real estate |
$ | 10,777 | $ | 11,306 | $ | 322 | $ | 10,331 | $ | 10,859 | $ | 265 | ||||||||||||
|
Construction and land development |
- | - | - | - | - | - | ||||||||||||||||||
|
Commercial and industrial |
3,064 | 3,282 | 45 | 3,087 | 3,372 | 23 | ||||||||||||||||||
|
Owner occupied real estate |
4,015 | 4,241 | 132 | 3,634 | 3,796 | 268 | ||||||||||||||||||
|
Consumer and other |
1,122 | 1,462 | - | 1,062 | 1,375 | - | ||||||||||||||||||
|
Residential mortgage |
835 | 888 | - | 768 | 768 | - | ||||||||||||||||||
|
Paycheck protection program |
- | - | - | - | - | - | ||||||||||||||||||
|
Total |
$ | 19,813 | $ | 21,179 | $ | 499 | $ | 18,882 | $ | 20,170 | $ | 556 | ||||||||||||
The following table presents additional information regarding the Company’s impaired loans for the three months ended June 30, 2020 and June 30, 2019:
|
Three Months Ended June 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 |
$ | 6,546 | $ | 68 | $ | 6,278 | $ | 70 | ||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
2,479 | - | 1,527 | - | ||||||||||||
|
Owner occupied real estate |
2,982 | 6 | 1,867 | 14 | ||||||||||||
|
Consumer and other |
1,149 | 5 | 917 | 6 | ||||||||||||
|
Residential mortgage |
812 | 1 | 512 | 1 | ||||||||||||
|
Paycheck protection program |
- | - | - | - | ||||||||||||
|
Total |
$ | 13,968 | $ | 80 | $ | 11,101 | $ | 91 | ||||||||
|
With an allowance recorded: |
||||||||||||||||
|
Commercial real estate |
$ | 4,147 | $ | - | $ | 4,214 | $ | - | ||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
614 | - | 842 | - | ||||||||||||
|
Owner occupied real estate |
1,191 | 10 | 860 | 6 | ||||||||||||
|
Consumer and other |
- | - | 26 | - | ||||||||||||
|
Residential mortgage |
20 | 1 | - | - | ||||||||||||
|
Paycheck protection program |
- | - | - | - | ||||||||||||
|
Total |
$ | 5,972 | $ | 11 | $ | 5,942 | $ | 6 | ||||||||
|
Total: |
||||||||||||||||
|
Commercial real estate |
$ | 10,693 | $ | 68 | $ | 10,492 | $ | 70 | ||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
3,093 | - | 2,369 | - | ||||||||||||
|
Owner occupied real estate |
4,173 | 16 | 2,727 | 20 | ||||||||||||
|
Consumer and other |
1,149 | 5 | 943 | 6 | ||||||||||||
|
Residential mortgage |
832 | 2 | 512 | 1 | ||||||||||||
|
Paycheck protection program |
- | - | - | - | ||||||||||||
|
Total |
$ | 19,940 | $ | 91 | $ | 17,043 | $ | 97 | ||||||||
The following table presents additional information regarding the Company’s impaired loans for the six months ended June 30, 2020 and June 30, 2019:
|
Six Months Ended June 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 |
$ | 6,459 | $ | 138 | $ | 6,296 | $ | 140 | ||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
2,603 | 1 | 1,591 | - | ||||||||||||
|
Owner occupied real estate |
2,831 | 8 | 1,879 | 28 | ||||||||||||
|
Consumer and other |
1,177 | 7 | 841 | 8 | ||||||||||||
|
Residential mortgage |
790 | 1 | 256 | 1 | ||||||||||||
|
Paycheck protection program |
- | - | - | - | ||||||||||||
|
Total |
$ | 13,860 | $ | 155 | $ | 10,863 | $ | 177 | ||||||||
|
With an allowance recorded: |
||||||||||||||||
|
Commercial real estate |
$ | 4,146 | $ | - | $ | 4,414 | $ | - | ||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
520 | - | 1,148 | - | ||||||||||||
|
Owner occupied real estate |
1,500 | 16 | 697 | 12 | ||||||||||||
|
Consumer and other |
- | - | 51 | - | ||||||||||||
|
Residential mortgage |
40 | 1 | - | - | ||||||||||||
|
Paycheck protection program |
- | - | - | - | ||||||||||||
|
Total |
$ | 6,206 | $ | 17 | $ | 6,310 | $ | 12 | ||||||||
|
Total: |
||||||||||||||||
|
Commercial real estate |
$ | 10,605 | $ | 138 | $ | 10,710 | $ | 140 | ||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
3,123 | 1 | 2,739 | - | ||||||||||||
|
Owner occupied real estate |
4,331 | 24 | 2,576 | 40 | ||||||||||||
|
Consumer and other |
1,177 | 7 | 892 | 8 | ||||||||||||
|
Residential mortgage |
830 | 2 | 256 | 1 | ||||||||||||
|
Paycheck protection program |
- | - | - | - | ||||||||||||
|
Total |
$ | 20,066 | $ | 172 | $ | 17,173 | $ | 189 | ||||||||
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 June 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 June 30, 2020 |
||||||||||||||||||||||||||||
|
Commercial real estate |
$ | - | $ | 72 | $ | 4,581 | $ | 4,653 | $ | 659,952 | $ | 664,605 | $ | - | ||||||||||||||
|
Construction and land development |
- | - | - | - | 150,156 | 150,156 | - | |||||||||||||||||||||
|
Commercial and industrial |
- | - | 3,064 | 3,064 | 221,440 | 224,504 | - | |||||||||||||||||||||
|
Owner occupied real estate |
- | - | 3,115 | 3,115 | 431,307 | 434,422 | - | |||||||||||||||||||||
|
Consumer and other |
75 | 34 | 1,122 | 1,231 | 100,562 | 101,793 | - | |||||||||||||||||||||
|
Residential mortgage |
- | - | 835 | 835 | 312,452 | 313,287 | - | |||||||||||||||||||||
|
Paycheck protection program |
- | - | - | - | 670,912 | 670,912 | - | |||||||||||||||||||||
|
Total |
$ | 75 | $ | 106 | $ | 12,717 | $ | 12,898 | $ | 2,546,781 | $ | 2,559,679 | $ | - | ||||||||||||||
|
(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 June 30, 2020 and December 31, 2019:
|
(dollars in thousands) |
Pass |
Special Mention |
Substandard |
Doubtful |
Total |
|||||||||||||||
|
At June 30, 2020: |
||||||||||||||||||||
|
Commercial real estate |
$ | 659,841 | $ | 86 | $ | 4,678 | $ | - | $ | 664,605 | ||||||||||
|
Construction and land development |
150,156 | - | - | - | 150,156 | |||||||||||||||
|
Commercial and industrial |
221,440 | - | 3,064 | - | 224,504 | |||||||||||||||
|
Owner occupied real estate |
429,872 | 535 | 4,015 | - | 434,422 | |||||||||||||||
|
Consumer and other |
100,671 | - | 1,122 | - | 101,793 | |||||||||||||||
|
Residential mortgage |
312,452 | - | 835 | - | 313,287 | |||||||||||||||
|
Paycheck protection program |
670,912 | - | - | - | 670,912 | |||||||||||||||
|
Total |
$ | 2,545,344 | $ | 621 | $ | 13,714 | $ | - | $ | 2,559,679 | ||||||||||
|
(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 | ||||||||||
The following table shows non-accrual loans by class as of June 30, 2020 and December 31, 2019:
|
(dollars in thousands) |
June 30, 2020 |
December 31, 2019 |
||||||
|
Commercial real estate |
$ | 4,581 | $ | 4,159 | ||||
|
Construction and land development |
- | - | ||||||
|
Commercial and industrial |
3,064 | 3,087 | ||||||
|
Owner occupied real estate |
3,115 | 3,337 | ||||||
|
Consumer and other |
1,122 | 1,062 | ||||||
|
Residential mortgage |
835 | 768 | ||||||
|
Paycheck protection program |
- | - | ||||||
|
Total |
$ | 12,717 | $ | 12,413 | ||||
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $173,000 and $397,000 for the three and six months ended June 30, 2020, respectively, and $121,000 and $233,000 for the three and six months ended June 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 have granted payment deferrals to 491 customers with total outstanding balances of $444 million. Through the date of issuance, more than 58% of the customers that were granted approval for deferral of loan payments have resumed normal principal and interest payments on their outstanding loan balances in the early stages of the third quarter of 2020. Through the date of issuance, the number of customers that have continued with the deferral of loan payments has declined to 205, or 3% of the total loan customers and the related outstanding loan balances have reduced to $197 million, or 10% of the total loan balances outstanding.
The following table summarizes information with regard to outstanding troubled debt restructurings at June 30, 2020 and December 31, 2019:
|
(dollars in thousands) |
Number of Loans |
Accrual Status |
Non- Accrual Status |
Total TDRs |
||||||||||||
|
June 30, 2020 |
||||||||||||||||
|
Commercial real estate |
1 | $ | 6,099 | $ | - | $ | 6,099 | |||||||||
|
Construction and land development |
- | - | - | - | ||||||||||||
|
Commercial and industrial |
- | - | - | - | ||||||||||||
|
Owner occupied real estate |
- | - | - | - | ||||||||||||
|
Consumer and other |
- | - | - | - | ||||||||||||
|
Residential mortgage |
- | - | - | - | ||||||||||||
|
Total |
1 | $ | 6,099 | $ | - | $ | 6,099 | |||||||||
|
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 the Company’s 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 six months ended June 30, 2020 and June 30, 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 six months ended June 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 June 30, 2020 and December 31, 2019. There was no other real estate owned relating to residential real estate at June 30, 2020 and December 31, 2019.
Note 7: Short-Term Borrowings
The following is a summary of short-term borrowings by type.
|
June 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 |
$ | 438,478 | 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 June 30, 2020, the Company pledged $438.5 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $438.5 million of funds at a rate of 0.35%.
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.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 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 |
||||||||||||
|
June 30, 2020 |
||||||||||||||||
|
Assets: |
||||||||||||||||
|
U.S. Government agencies |
$ | 35,096 | $ | - | $ | 35,096 | $ | - | ||||||||
|
Collateralized mortgage obligations |
228,056 | - | 228,056 | - | ||||||||||||
|
Agency mortgage-backed securities |
43,072 | - | 43,072 | - | ||||||||||||
|
Municipal securities |
2,665 | - | 2,665 | - | ||||||||||||
|
Corporate bonds |
73,332 | - | 70,667 | 2,665 | ||||||||||||
|
Securities Available for Sale |
$ | 382,221 | $ | - | $ | 379,556 | $ | 2,665 | ||||||||
|
Mortgage Loans Held for Sale |
$ | 24,744 | $ | - | $ | 24,744 | $ | - | ||||||||
|
SBA Servicing Assets |
4,604 | - | - | 4,604 | ||||||||||||
|
Interest Rate Lock Commitments |
1,642 | - | 1,642 | - | ||||||||||||
|
Best Efforts Forward Loan Sales Commitments |
8 | - | 8 | - | ||||||||||||
|
Mandatory Forward Loan Sales Commitments |
- | - | - | - | ||||||||||||
|
Liabilities: |
||||||||||||||||
|
Interest Rate Lock Commitments |
- | - | - | - | ||||||||||||
|
Best Efforts Forward Loan Sales Commitments |
654 | - | 654 | - | ||||||||||||
|
Mandatory Forward Loan Sales Commitments |
326 | - | 326 | - | ||||||||||||
|
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 | - | ||||||||||||
The following tables present an analysis of the activity related to the SBA servicing asset balance for the three and six months ended June 30, 2020 and 2019:
|
Three Months Ended June 30, |
||||||||
|
(dollars in thousands) |
2020 |
2019 |
||||||
|
Beginning balance, April 1st |
$ | 4,644 | $ | 4,631 | ||||
|
Additions |
77 | 342 | ||||||
|
Fair value adjustments |
(117 | ) | (380 | ) | ||||
|
Ending balance, June 30th |
$ | 4,604 | $ | 4,593 | ||||
|
Six Months Ended June 30, |
||||||||
|
(dollars in thousands) |
2020 |
2019 |
||||||
|
Beginning balance, January 1st |
$ | 4,447 | $ | 4,785 | ||||
|
Additions |
315 | 553 | ||||||
|
Fair value adjustments |
(158 | ) | (745 | ) | ||||
|
Ending balance, June 30th |
$ | 4,604 | $ | 4,593 | ||||
Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $482,000 and $479,000 for the three months ended June 30, 2020 and 2019, respectively. Servicing fee income, not including fair value adjustments, totaled $912,000 and $937,000 for the six months ended June 30, 2020 and 2019, respectively. Total loans in the amount of $207.7 million at June 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 six months ended June 30, 2020 and 2019:
|
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2019 |
|||||||
| Level 3 Investments Only | ||||||||
|
(dollars in thousands) |
Corporate Bonds |
Corporate Bonds |
||||||
|
Balance, April 1st |
$ | 2,649 | $ | 3,034 | ||||
|
Unrealized gains (losses) |
16 | (35 | ) | |||||
|
Proceeds from sales |
- | - | ||||||
|
Realized losses |
- | - | ||||||
|
Balance, June 30th |
$ | 2,665 | $ | 2,999 | ||||
|
Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|||||||
| Level 3 Investments Only | ||||||||
|
(dollars in thousands) |
Corporate Bonds |
Corporate Bonds |
||||||
|
Balance, January 1st |
$ | 2,819 | $ | 3,069 | ||||
|
Unrealized gains (losses) |
(154 | ) | (70 | ) | ||||
|
Proceeds from sales |
- | - | ||||||
|
Realized losses |
- | - | ||||||
|
Balance, June 30th |
$ | 2,665 | $ | 2,999 | ||||
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 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 |
||||||||||||
|
June 30, 2020 |
||||||||||||||||
|
Impaired loans |
$ | 5,973 | $ | - | $ | - | $ | 5,973 | ||||||||
|
Other real estate owned |
- | - | - | - | ||||||||||||
|
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) |
|||||||||
|
June 30, 2020 |
|||||||||||||
|
Corporate bonds |
$ | 2,665 |
Discounted Cash Flows |
Discount Rate |
(3.59%) | ||||||||
|
|
Conditional Prepayment Rate |
(13.47%) | |||||||||||
| SBA servicing assets | $ | 4,604 | Discounted Cash Flows | ||||||||||
| Discount Rate | (10.00%) | ||||||||||||
|
Impaired loans |
$ | 5,973 |
Appraised Value of Collateral (1) |
Liquidation expenses (2) |
0% | - | 20% | (12%) | (3) | ||||
|
December 31, 2019 |
|||||||||||||
|
Corporate bonds |
$ | 2,820 |
Discounted Cash Flows |
Discount Rate |
(6.66%) | ||||||||
|
|
Conditional Prepayment Rate |
(13.53%) | |||||||||||
| SBA servicing assets | $ | 4,447 | Discounted Cash Flows | ||||||||||
| 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% | - | 20% | (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.
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 June 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 $166,000 and $249,000 for three and six months ended June 30, 2020, respectively, and $126,000 and $256,000 for the three and six months ended June 30, 2019, respectively, are included in interest and fees in the statements of income.
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 June 30, 2020 and December 31, 2019.
|
Carrying Amount |
Aggregate Unpaid Principal Balance |
Excess Carrying Amount Over Aggregate Unpaid Principal Balance |
||||||||||
|
June 30, 2020 |
$ | 24,744 | $ | 23,793 | $ | 951 | ||||||
|
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 June 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.
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 June 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) |
June 30, 2020 |
December 31, 2019 |
||||||
|
SBA Servicing Asset |
||||||||
|
Fair Value of SBA Servicing Asset |
$ | 4,604 | $ | 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) |
20.4 |
20.7 |
||||||
|
Prepayment Speed |
13.47 | % | 13.53 | % | ||||
|
Effect on fair value of a 10% increase |
$ | (160 | ) | $ | (175 | ) | ||
|
Effect on fair value of a 20% increase |
(309 | ) | (338 | ) | ||||
|
Weighted Average Discount Rate |
10.00 | % | 10.75 | % | ||||
|
Effect on fair value of a 10% increase |
$ | (148 | ) | $ | (154 | ) | ||
|
Effect on fair value of a 20% increase |
(288 | ) | (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.
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 June 30, 2020 were as follows.
|
Fair Value Measurements at June 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 |
$ | 691,244 | $ | 691,244 | $ | 691,244 | $ | - | $ | - | ||||||||||
|
Investment securities available for sale |
382,221 | 382,221 | - | 379,556 | 2,665 | |||||||||||||||
|
Investment securities held to maturity |
556,159 | 583,182 | - | 583,182 | - | |||||||||||||||
|
Restricted stock |
3,789 | 3,789 | - | 3,789 | - | |||||||||||||||
|
Loans held for sale |
26,126 | 26,205 | - | 24,744 | 1,461 | |||||||||||||||
|
Loans receivable, net |
2,531,208 | 2,513,942 | - | - | 2,513,942 | |||||||||||||||
|
SBA servicing assets |
4,604 | 4,604 | - | - | 4,604 | |||||||||||||||
|
Accrued interest receivable |
12,393 | 12,393 | - | 12,393 | - | |||||||||||||||
|
Interest rate lock commitments |
1,642 | 1,642 | - | 1,642 | - | |||||||||||||||
|
Best efforts forward loan sales commitments |
8 | 8 | - | 8 | - | |||||||||||||||
|
Mandatory forward loan sales commitments |
- | - | - | - | - | |||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||
|
Deposits |
||||||||||||||||||||
|
Demand, savings and money market |
$ | 3,433,508 | $ | 3,433,508 | $ | - | $ | 3,433,508 | $ | - | ||||||||||
|
Time |
210,446 | 211,900 | - | 211,900 | - | |||||||||||||||
|
Short-term borrowings |
438,478 | 438,478 | - | 438,478 | - | |||||||||||||||
|
Subordinated debt |
11,268 | 7,438 | - | - | 7,438 | |||||||||||||||
|
Accrued interest payable |
1,403 | 1,403 | - | 1,403 | - | |||||||||||||||
|
Interest rate lock commitments |
- | - | - | - | - | |||||||||||||||
|
Best efforts forward loan sales commitments |
654 | 654 | - | 654 | - | |||||||||||||||
|
Mandatory forward loan sales commitments |
326 | 326 | - | 326 | - | |||||||||||||||
|
Off-Balance Sheet Data |
||||||||||||||||||||
|
Commitments to extend credit |
- | - | - | - | - | |||||||||||||||
|
Standby letters-of-credit |
- | - | - | - | - | |||||||||||||||
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 |
- | - | - | - | - | |||||||||||||||
Note 9: 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 six months ended June 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 |
4,077 | - | 4,077 | |||||||||
|
Amounts reclassified from accumulated other comprehensive income to net income (2) |
(1,852 | ) | 787 | (1,065 | ) | |||||||
|
Net current-period other comprehensive income |
2,225 | 787 | 3,012 | |||||||||
|
Total change in accumulated other comprehensive income |
2,225 | 787 | 3,012 | |||||||||
|
Balance June 30, 2020 |
$ | 950 | $ | (5,279 | ) | $ | (4,329 | ) | ||||
|
Balance January 1, 2019 |
$ | (4,736 | ) | $ | (7,191 | ) | $ | (11,927 | ) | |||
|
Unrealized gain on securities |
3,672 | - | 3,672 | |||||||||
|
Amounts reclassified from accumulated other comprehensive income to net income (2) |
(448 | ) | 495 | 47 | ||||||||
|
Net current-period other comprehensive income |
3,224 | 495 | 3,719 | |||||||||
|
Total change in accumulated other comprehensive income |
3,224 | 495 | 3,719 | |||||||||
|
Balance June 30, 2019 |
$ | (1,512 | ) | $ | (6,696 | ) | $ | (8,208 | ) | |||
|
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 |
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 Income. |
Note 10: 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 June 30, |
||||||||
|
(dollars in thousands) |
2020 |
2019 |
||||||
|
Balance, April 1st |
$ | 5,011 | $ | 5,011 | ||||
|
Additions/Adjustments |
- | - | ||||||
|
Amortization |
- | - | ||||||
|
Balance, June 30th |
$ | 5,011 | $ | 5,011 | ||||
|
Amortization Period (in years) |
Indefinite |
Indefinite |
||||||
|
Six Months Ended June 30, |
||||||||
|
(dollars in thousands) |
2020 |
2019 |
||||||
|
Balance, January 1st |
$ | 5,011 | $ | 5,011 | ||||
|
Additions/Adjustments |
- | - | ||||||
|
Amortization |
- | - | ||||||
|
Balance, June 30th |
$ | 5,011 | $ | 5,011 | ||||
|
Amortization Period (in years) |
Indefinite |
Indefinite |
||||||
The Company completed an annual impairment test for goodwill as of July 31, 2019. Future impairment testing will continue to be conducted as of July 31 on an annual basis, unless a triggering event occurs in the interim that would suggest impairment, in which case it would be tested as of the date of the triggering event. In the first quarter of 2020, management determined that one or more triggering events had occurred as a result of the effects that the COVID-19 pandemic had on the national and global economy. An Interim Period Quantitative Goodwill Impairment Test was performed as of March 31, 2020. As a result of the continuing impact of the COVID-19 pandemic in the second quarter of 2020, 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 another Interim Period Quantitative Goodwill Impairment Test as of June 30, 2020. Management completed its review of goodwill and concluded that it was more likely than not that the fair value of goodwill exceeded its carrying value at June 30, 2020. Accordingly goodwill was not considered impaired at June 30, 2020.
The COVID-19 pandemic may cause a further and sustained decline in the Company’s stock price or another triggering event that could, under certain circumstances, cause management to perform a new goodwill impairment test and could result in an impairment charge in the future. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded against earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Note 11: 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 six months ended June 30, 2020 and the six months ended June 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 June 30, 2020 and December 31, 2019 (in thousands):
|
June 30, 2020 |
Balance Sheet Presentation |
Fair Value |
Notional Amount |
||||||
|
Asset derivatives: |
|||||||||
|
IRLCs |
Other Assets |
$ | 1,642 | $ | 56,340 | ||||
|
Best efforts forward loan sales commitments |
Other Assets |
8 | 1,875 | ||||||
|
Mandatory forward loan sales commitments |
Other Assets |
- | - | ||||||
|
Liability derivatives: |
|||||||||
|
IRLCs |
Other Liabilities |
$ | - | $ | - | ||||
|
Best efforts forward loan sales commitments |
Other Liabilities |
654 | 54,465 | ||||||
|
Mandatory forward loan sales commitments |
Other Liabilities |
326 | 23,612 | ||||||
|
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 | ||||||
The following tables summarize the amounts recorded in Republic’s statement of income for derivative instruments not designated as hedging instruments for the three and six months ended June 30, 2020 and 2019 (in thousands):
|
Income Statement Presentation |
Three Months Ended June 30, 2020 Gain/(Loss) |
Six Months Ended June 30, 2020 Gain/(Loss) |
|||||||
|
Asset derivatives: |
|||||||||
|
IRLCs |
Mortgage banking income |
$ | 1,114 | $ | 1,280 | ||||
|
Best efforts forward loan sales commitments |
Mortgage banking income |
(1,049 | ) | 4 | |||||
|
Mandatory forward loan sales commitments |
Mortgage banking income |
(271 | ) | (2 | ) | ||||
|
Liability derivatives: |
|||||||||
|
IRLCs |
Mortgage banking income |
$ | 718 | $ | - | ||||
|
Best efforts forward loan sales commitments |
Mortgage banking income |
(596 | ) | (521 | ) | ||||
|
Mandatory forward loan sales commitments |
Mortgage banking income |
(297 | ) | (243 | ) | ||||
|
Income Statement Presentation |
Three Months Ended June 30, 2019 Gain/(Loss) |
Six Months Ended June 30, 2019 Gain/(Loss) |
|||||||
|
Asset derivatives: |
|||||||||
|
IRLCs |
Mortgage banking income |
$ | (66 | ) | $ | 297 | |||
|
Best efforts forward loan sales commitments |
Mortgage banking income |
15 | 12 | ||||||
|
Mandatory forward loan sales commitments |
Mortgage banking income |
- | (10 | ) | |||||
|
Liability derivatives: |
|||||||||
|
IRLCs |
Mortgage banking income |
$ | - | $ | - | ||||
|
Best efforts forward loan sales commitments |
Mortgage banking income |
85 | (69 | ) | |||||
|
Mandatory forward loan sales commitments |
Mortgage banking income |
(39 | ) | 3 | |||||
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 12: Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 “Revenue 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.
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, 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, 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 six months ended June 30, 2020 and 2019.
|
Three Months Ended June 30, |
||||||||
|
(dollars in thousands) |
2020 |
2019 |
||||||
|
Non-interest income |
||||||||
|
In-scope of Topic 606 |
||||||||
|
Service charges on deposit accounts |
$ | 2,328 | $ | 1,848 | ||||
|
Other non-interest income |
34 | 50 | ||||||
|
Non-interest income (in-scope of Topic 606) |
2,362 | 1,898 | ||||||
|
Non-interest income (out-of-scope of Topic 606) |
6,062 | 5,128 | ||||||
|
Total non-interest income |
$ | 8,424 | $ | 7,026 | ||||
|
Six Months Ended June 30, |
||||||||
|
(dollars in thousands) |
2020 |
2019 |
||||||
|
Non-interest income |
||||||||
|
In-scope of Topic 606 |
||||||||
|
Service charges on deposit accounts |
$ | 4,392 | $ | 3,460 | ||||
|
Other non-interest income |
96 | 129 | ||||||
|
Non-interest income (in-scope of Topic 606) |
4,488 | 3,589 | ||||||
|
Non-interest income (out-of-scope of Topic 606) |
10,481 | 8,382 | ||||||
|
Total non-interest income |
$ | 14,969 | $ | 11,971 | ||||
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 June 30, 2020 and December 31, 2019, the Company did not have any significant contract balances.
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 13: 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 June 30, 2020, the Company had forty operating lease agreements, which include operating leases for eighteen branch locations, seven offices that are used for general office space, and fifteen operating leases for equipment. Two of the real property operating leases did not include one or 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 forty 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 19.7 years as of June 30, 2020
At June 30, 2019, the Company had thirty-six operating lease agreements, which include operating leases for seventeen branch stores, eight offices that are used for general office space, and eleven operating leases for equipment. All of the real property operating leases 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-six operating leases have maturity dates ranging from December 2019 to December 2058 most of which includes 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 19.2 years as of June 30, 2019.
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 3.58% and 3.58% as of June 30, 2020 and 2019, respectively.
The following tables presents operating lease costs net of sublease income for the three and six months ended June 30, 2020 and 2019.
|
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2019 |
|||||||
|
(dollars in thousands) |
||||||||
|
Operating lease cost |
$ | 1,917 | $ | 1,664 | ||||
|
Sublease income |
- | (80 | ) | |||||
|
Total lease cost |
$ | 1,917 | $ | 1,584 | ||||
|
Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|||||||
|
(dollars in thousands) |
||||||||
|
Operating lease cost |
$ | 3,834 | $ | 3,030 | ||||
|
Sublease income |
- | (161 | ) | |||||
|
Total lease cost |
$ | 3,834 | $ | 2,869 | ||||
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 June 30, 2020 and 2019.
|
June 30, 2020 |
June 30, 2019 |
|||||||
|
(dollars in thousands) |
||||||||
|
Operating lease payments due: |
||||||||
|
Within one year |
$ | 6,675 | $ | 6,644 | ||||
|
One to three years |
11,571 | 12,143 | ||||||
|
Three to five years |
10,110 | 10,212 | ||||||
|
More than five years |
72,394 | 73,262 | ||||||
|
Total undiscounted cash flows |
100,750 | 102,261 | ||||||
|
Discount on cash flows |
(31,704 | ) | (31,724 | ) | ||||
|
Total operating lease liability obligations |
$ | 69,046 | $ | 70,537 | ||||
The following tables presents cash and non-cash activities for the three and six months ended June 30, 2020 and 2019.
|
Three Months Ended June 30, 2020 |
Three Months Ended June 30, 2019 |
|||||||
|
(dollars in thousands) |
||||||||
|
Cash paid for amounts included in the measurement of lease liabilities |
||||||||
|
Operating cash flows from operating leases |
$ | 1,835 | $ | 1,046 | ||||
|
Non-cash investing and financing activities |
||||||||
|
Additions to Operating leases – right of use asset |
||||||||
|
New operating lease liability obligation |
$ | 49 | $ | 13,971 | ||||
|
Six Months Ended June 30, 2020 |
Six Months Ended June 30, 2019 |
|||||||
|
(dollars in thousands) |
||||||||
|
Cash paid for amounts included in the measurement of lease liabilities |
||||||||
|
Operating cash flows from operating leases |
$ | 3,579 | $ | 2,049 | ||||
|
Non-cash investing and financing activities |
||||||||
|
Additions to Operating leases – right of use asset |
||||||||
|
New operating lease liability obligation |
$ | 189 | $ | 72,356 | ||||
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 Report for the quarter ended March 31, 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.
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.
As of June 30, 2020, we serve our customers through 30 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 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. |
|
● |
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. |
|
● |
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 June 30, 2020, we processed and obtained SBA approval for more than 4,800 PPP loan applications resulting in approximately $671 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.
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 June 30, 2020 we have:
|
● |
Put procedures 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. |
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. 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. Approximately $176 million, or 40%, of the deferral requests were for deferment of principal balances only. The remaining deferrals include requests to defer both principal and interest payments. We have executed loan modifications and initiated payment deferrals for all customers that had an immediate need for assistance. Through the date of issuance, more than 58% of the customers that were granted approval for deferral of loan payments have resumed normal principal and interest payments on their outstanding loan balances. Total deferrals were reduced to 205 customers with total outstanding balances of $197 million, or 10% of total loans outstanding. 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 the Bank, 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 $1.1 billion to $4.4 billion at June 30, 2020, compared to $3.3 billion at December 31, 2019.
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 $522.9 million to $691.2 million at June 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 June 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 $1.4 million at June 30, 2020 as compared to $3.0 million at December 31, 2019. Residential mortgage loans held for sale were $24.7 million at June 30, 2020 compared to $10.3 million at December 31, 2019. Loans held for sale, as a percentage of total Company assets, were less than 1% at June 30, 2020.
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 June 30, 2020. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit.
Loans increased $792.3 million, or 46%, to $2.5 billion at June 30, 2020, versus $1.7 billion at December 31, 2019. This growth was primarily the result of $670.9 million in PPP loans that were funded by Republic during the second quarter of 2020. 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 $382.2 million at June 30, 2020, compared to $539.0 million at December 31, 2019. The decrease was primarily due to the sale of securities totaling $92.8 million and the paydown, maturity, or call, of securities totaling $84.0 million partially offset by the purchase of securities totaling $16.9 million during the first six months of 2020. At June 30, 2020, the portfolio had a net unrealized gain of $1.3 million 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 six 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 $583.2 million and $653.1 million at June 30, 2020 and December 31, 2019, respectively. The decrease was primarily due to the paydown, maturity, or call of securities totaling $88.5 million partially offset by an increase of $18.8 million in the value of securities held in the portfolio during the first six 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 six 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 June 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”).
At June 30, 2020 and December 31, 2019, the investment in FHLB of Pittsburgh capital stock totaled $3.6 million and $2.6 million, respectively. At both June 30, 2020 and December 31, 2019, ACBB capital stock totaled $143,000. Both the FHLB and ACBB issued dividend payments during the first six months of 2020.
Premises and Equipment
The balance of premises and equipment increased to $121.1 million at June 30, 2020 from $117.0 million at December 31, 2019. The increase was primarily due to premises and equipment expenditures of $8.3 million less depreciation and amortization expenses of $4.1 million during the first six months of 2020. A new store was opened in Northfield, NJ in January 2020 bringing the total store count to thirty. Construction is ongoing on a site in Bensalem, PA which is scheduled to be completed in 2020. 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 June 30, 2020 and $1.7 million at December 31, 2019. The decrease was due to sale of one property totaling $586,000 during the six months ended June 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 June 30, 2020 and December 31, 2019, the balance of operating leases – right-of-use asset was $64.7 million and $64.8 million, respectively.
Goodwill
Goodwill amounted to $5.0 million at both June 30, 2020 and December 31, 2019. We completed an annual impairment test for goodwill as of July 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. In the first quarter of 2020, management determined that one or more triggering events had occurred as a result of the effects that the COVID-19 pandemic had on the national and global economy. An Interim Period Quantitative Goodwill Impairment Test was performed as of March 31, 2020. As a result of the continuing impact of the COVID-19 pandemic in the second quarter of 2020, 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 another Interim Period Quantitative Goodwill Impairment Test as of June 30, 2020. Management completed its review of goodwill and concluded that it was more likely than not that the fair value of goodwill exceeded its carrying value at June 30, 2020. Accordingly goodwill was not considered impaired at June 30, 2020. During the year ended December 31, 2019, there was also no goodwill impairment recorded.
COVID 19 may cause a further and sustained decline in the Company’s stock price or another triggering event that could, under certain circumstances, cause management to perform a new goodwill impairment test and could result in an impairment charge in the future. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded against earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. As of July 31, 2019, the fair value of the Reporting Unit exceeded its carrying value by 20%. In the current analysis as of June 30, 2020, the fair value of the Reporting Unit exceeded its carrying value by 8%. The determination of the fair value of the Reporting Unit incorporates assumptions that marketplace participants would use in their estimates of fair value of the Reporting Unit in a change of control transaction, as prescribed by ASC Topic 820.
To arrive at a conclusion of fair value, we utilize both the Income and Market Approach and then apply weighting factors to each result. Weighting factors represent our best business judgment of the weightings a market participant would utilize in arriving at a fair value for the Reporting Unit. In performing our analyses, we also made numerous assumptions with respect to industry performance, business, economic and market conditions and various other matters, many of which cannot be predicted and are beyond our control. With respect to financial projections, projections reflect the best currently available estimates and judgments as to the expected future financial performance of the Reporting Unit.
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 $644.8 million to $3.6 billion at June 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 June 30, 2020, we had short-term borrowings totaling $438.5 million compared to $0 at December 31, 2019. The source of the $438.5 million in short-term borrowings at June 30, 2020 was the PPPLF for the purpose of funding PPP loans.
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 June 30, 2020 and December 31, 2019, the balance of the operating lease liability obligation was $69.0 million and $68.9 million, respectively.
Shareholders’ Equity
Total shareholders’ equity increased $6.0 million to $255.2 million at June 30, 2020 compared to $249.2 million at December 31, 2019. The increase during the first six months of 2020 was primarily due to a $3.0 million decrease in accumulated other comprehensive losses associated with an increase in the market value of the investment securities portfolio, net income of $1.9 million and stock based compensation of $1.1 million. 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.
Results of Operations
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
We reported net income of $2.5 million, or $0.04 per diluted share, for the three months ended June 30, 2020, compared to net income of $381,000 or $0.01 per diluted share, for the three months ended June 30, 2019. The increase in earnings year over year was primarily driven by participation in the PPP loan program, gains on the sale of investment securities, and cost control measures implemented by management. We have begun to recognize the origination fees associated with the PPP loan program as interest income during the second quarter of 2020. The gains on investment securities was driven by a decrease in interest rates which increased market values in the Company’s bond portfolio. The net interest margin decreased to 2.55% for the three month period ended June 30, 2020 compared to 2.94% for the three month period ended June 30, 2019. We experienced margin compression through 2019 as a result of the flattening of the yield curve. 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 second 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.
Net interest income was $22.4 million for the three month period ended June 30, 2020 compared to $19.4 million for the three months ended June 30, 2019. Interest income increased $3.1 million, or 15.7%, primarily due to an increase in average loans receivable balances related to participation in the PPP loan program. Interest expense decreased $1.4 million, or 21.0%, primarily due to a decrease in the average rate paid on deposit balances. The net interest margin decreased by 39 basis points to 2.55% during the second quarter of 2020 compared to 2.94% during the second quarter of 2019. Compression in the net interest margin was driven by a more rapid decrease in the yield on interest earning assets compared to our cost of funds.
We recorded a provision for loan losses of $1.0 million for the three months ended June 30, 2020 compared to no provision for the three months ended June 30, 2019. This 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 the Bank 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 June 30, 2020.
Non-interest income increased by $1.4 million to $8.4 million during the three months ended June 30, 2020 compared to $7.0 million during the three months ended June 30, 2019. The increase during the three months ended June 30, 2020 was primarily due to gains on the sale of investment securities, higher service fees on deposit accounts which is driven by growth in deposit balances and an increase in the number of accounts and mortgage banking income driven by mortgage loan originations, partially offset by a decrease in gains on sale of SBA loans. The gains on the sale of investment securities is related to a decrease in interest rates which drove increased market values in the Company’s bond portfolio.
Non-interest expenses increased $753 thousand to $26.7 million during the three months ended June 30, 2020 compared to $25.9 million during the three months ended June 30, 2019. This increase was primarily driven by occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refer to as “The Power of Red is Back”. 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. Cost control measures implemented by management have had a positive effect in limiting expense growth for the third consecutive quarter.
We recorded a provision for income taxes in the amount of $675,000 during the three months ended June 30, 2020 compared to $105,000 provision for income taxes during the three months ended June 30, 2019.
Return on average assets and average equity from continuing operations was 0.26% and 3.98%, respectively, during the three months ended June 30, 2020 compared to 0.05% and 0.61%, respectively, for the three months ended June 30, 2019.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
We reported net income of $1.9 million, or $0.03 per diluted share, for the six months ended June 30, 2020 compared to net income of $807,000, or $0.01 per diluted share, for the six months ended June 30, 2019. The increase in earnings year over year was primarily driven by participation in the PPP loan program, gains on the sale of investment securities, and cost control measures implemented by management. We have begun to recognize the origination fees associated with the PPP loan program as interest income during the six months ended June 30, 2020. The gains on investment securities was driven by a decrease in interest rates which increased market values in the Company’s bond portfolio. The net interest margin decreased to 2.64% for the six month period ended June 30, 2020 compared to 2.97% for the six month period ended June 30, 2019. This decrease was a result of the challenging nature of the interest rate environment driven by a flat and, at times, an inverted yield curve as well as actions by the Federal Reserve in the first quarter of 2020 and PPP lending in the second quarter of 2020.
Net interest income for the six months ended June 30, 2020 was $43.2 million as compared to $38.5 million for the six months ended June 30, 2019. Interest income increased $3.4 million, or 6.5%, primarily due to an increase in average loans receivable balances related to participation in the PPP loan program. Interest expense decreased $1.3 million, or 9.7%, primarily due to a decrease in the average rate paid on deposit balances. The net interest margin decreased by 33 basis points to 2.64% during six months ended June 30, 2020 compared to 2.97% during the six months ended June 30, 2019. Compression in the net interest margin was driven by a more rapid decrease in the yield on interest earning assets compared to our cost of funds.
We recorded a provision for loan losses of $2.0 million for the six months ended June 30, 2020 compared to a provision for loan losses of $300,000 for the six months ended June 30, 2019. This 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 the Bank 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 six months ended June 30, 2020.
Non-interest income increased $3.0 million to $15.0 million during the six months ended June 30, 2020 compared to $12.0 million during the six months ended June 30, 2019. The increase during the six months ended June 30, 2020 was primarily due to increases in gain on the sales of investment securities, service fees on deposit accounts, mortgage banking income, and loan and servicing fees. The gains on the sale of investment securities is related to a decrease in rates which increased bond sale values.
Non-interest expenses increased $4.8 million to $53.9 million during the six months ended June 30, 2019 as compared to $49.2 million during the six months ended June 30, 2019. This increase was primarily driven by higher occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refer to as “The Power of Red is Back”. 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. Cost control measures implemented by management have had a positive effect in limiting expense growth.
We recorded a provision for income taxes in the amount of $345,000 during the six months ended June 30, 2020 compared to a $197,000 provision for income taxes during the six months ended June 30, 2019.
Return on average assets and average equity from continuing operations were 0.11% and 1.53%, respectively, during the six months ended June 30, 2020 compared to 0.06% and 0.66%, respectively, for the six months ended June 30, 2019.
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 June 30, 2020 |
For the three months ended June 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 |
$ | 198,345 | $ | 50 | 0.10 |
% |
$ | 85,920 | $ | 518 | 2.42 |
% |
||||||||||||
|
Investment securities and restricted stock (2) |
1,033,560 | 5,077 | 1.96 |
% |
1,067,185 | 7,184 | 2.69 |
% |
||||||||||||||||
|
Loans receivable (2) |
2,335,500 | 22,884 | 3.94 |
% |
1,509,177 | 18,681 | 4.96 |
% |
||||||||||||||||
|
Total interest-earning assets |
3,567,405 | 28,011 | 3.16 |
% |
2,662,282 | 26,383 | 3.97 |
% |
||||||||||||||||
|
Other assets |
266,178 | 217,685 | ||||||||||||||||||||||
|
Total assets |
$ | 3,833,583 | $ | 2,879,967 | ||||||||||||||||||||
|
Interest-earning liabilities: |
||||||||||||||||||||||||
|
Demand – non-interest bearing |
$ | 984,771 | $ | 525,336 | ||||||||||||||||||||
|
Demand – interest bearing |
1,397,790 | 2,856 | 0.82 |
% |
1,144,783 | 4,206 | 1.47 |
% |
||||||||||||||||
|
Money market & savings |
858,782 | 1,431 | 0.67 |
% |
697,279 | 1,628 | 0.94 |
% |
||||||||||||||||
|
Time deposits |
208,838 | 1,033 | 1.99 |
% |
176,750 | 861 | 1.95 |
% |
||||||||||||||||
|
Total deposits |
3,450,181 | 5,320 | 0.62 |
% |
2,544,148 | 6,695 | 1.06 |
% |
||||||||||||||||
|
Total interest-bearing deposits |
2,465,410 | 5,320 | 0.87 |
% |
2,018,812 | 6,695 | 1.33 |
% |
||||||||||||||||
|
Other borrowings |
45,474 | 112 | 0.99 |
% |
19,864 | 179 | 3.61 |
% |
||||||||||||||||
|
Total interest-bearing liabilities |
2,510,884 | 5,432 | 0.87 |
% |
2,038,676 | 6,874 | 1.35 |
% |
||||||||||||||||
|
Total deposits and other borrowings |
3,495,655 | 5,432 | 0.62 |
% |
2,564,012 | 6,874 | 1.08 |
% |
||||||||||||||||
|
Non-interest bearing other liabilities |
83,884 | 66,780 | ||||||||||||||||||||||
|
Shareholders’ equity |
254,044 | 249,175 | ||||||||||||||||||||||
|
Total liabilities and shareholders’ equity |
$ | 3,833,583 | $ | 2,879,967 | ||||||||||||||||||||
| Net interest income (2) | $ | 22,579 | $ | 19,509 | ||||||||||||||||||||
| Net interest spread | 2.29 | % | 2.62 | % | ||||||||||||||||||||
| Net interest margin (2) | 2.55 | % | 2.94 | % | ||||||||||||||||||||
(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 $158 and $138 for the three months ended June 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.
Average Balances and Net Interest Income
|
For the six months ended June 30, 2020 |
For the six months ended June 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 |
$ | 139,842 | $ | 339 | 0.49 |
% |
$ | 70,729 | $ | 854 | 2.43 |
% |
||||||||||||
|
Investment securities and restricted stock (2) |
1,095,032 | 11,903 | 2.17 |
% |
1,076,496 | 14,604 | 2.71 |
% |
||||||||||||||||
|
Loans receivable (2) |
2,071,941 | 43,203 | 4.19 |
% |
1,489,020 | 36,592 | 4.96 |
% |
||||||||||||||||
|
Total interest-earning assets |
3,306,815 | 55,445 | 3.37 |
% |
2,636,245 | 52,050 | 3.98 |
% |
||||||||||||||||
|
Other assets |
263,504 | 204,344 | ||||||||||||||||||||||
|
Total assets |
$ | 3,570,319 | $ | 2,840,589 | ||||||||||||||||||||
|
Interest-earning liabilities: |
||||||||||||||||||||||||
|
Demand – non-interest bearing |
$ | 814,686 | $ | 518,790 | ||||||||||||||||||||
|
Demand – interest bearing |
1,367,718 | 6,277 | 0.92 |
% |
1,129,356 | 8,144 | 1.45 |
% |
||||||||||||||||
|
Money market & savings |
805,646 | 3,214 | 0.80 |
% |
686,453 | 3,080 | 0.90 |
% |
||||||||||||||||
|
Time deposits |
217,512 | 2,254 | 2.08 |
% |
165,354 | 1,485 | 1.81 |
% |
||||||||||||||||
|
Total deposits |
3,205,562 | 11,745 | 0.74 |
% |
2,499,953 | 12,709 | 1.03 |
% |
||||||||||||||||
|
Total interest-bearing deposits |
2,390,876 | 11,745 | 0.99 |
% |
1,981,163 | 12,709 | 1.29 |
% |
||||||||||||||||
|
Other borrowings |
28,713 | 216 | 1.51 |
% |
33,341 | 544 | 3.29 |
% |
||||||||||||||||
|
Total interest-bearing liabilities |
2,419,589 | 11,961 | 0.99 |
% |
2,014,504 | 13,253 | 1.33 |
% |
||||||||||||||||
|
Total deposits and other borrowings |
3,234,275 | 11,961 | 0.74 |
% |
2,533,294 | 13,253 | 1.05 |
% |
||||||||||||||||
|
Non-interest bearing other liabilities |
84,050 | 59,505 | ||||||||||||||||||||||
|
Shareholders’ equity |
251,994 | 247,790 | ||||||||||||||||||||||
|
Total liabilities and shareholders’ equity |
$ | 3,570,319 | $ | 2,840,589 | ||||||||||||||||||||
|
Net interest income (2) |
$ | 43,484 | $ | 38,797 | ||||||||||||||||||||
|
Net interest spread |
2.38 |
% |
2.65 |
% |
||||||||||||||||||||
|
Net interest margin (2) |
2.64 |
% |
2.97 |
% |
||||||||||||||||||||
(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 $303 and $286 for the six months ended June 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.
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 periods indicated. 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. Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure.
|
For the three months ended June 30, 2020 vs. 2019 |
For the six months ended June 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 |
$ | 76 | $ | (544 | ) | $ | (468 | ) | $ | 168 | $ | (683 | ) | $ | (515 | ) | ||||||||
|
Securities |
(216 | ) | (1,891 | ) | (2,107 | ) | 201 | (2,902 | ) | (2,701 | ) | |||||||||||||
|
Loans |
8,311 | (4,108 | ) | 4,203 | 11,944 | (5,333 | ) | 6,611 | ||||||||||||||||
|
Total interest-earning assets |
8,171 | (6,543 | ) | 1,628 | 12,313 | (8,918 | ) | 3,395 | ||||||||||||||||
|
Interest expense: |
||||||||||||||||||||||||
|
Deposits |
||||||||||||||||||||||||
|
Interest-bearing demand deposits |
509 | (1,859 | ) | (1,350 | ) | 1,082 | (2,949 | ) | (1,867 | ) | ||||||||||||||
|
Money market and savings |
296 | (493 | ) | (197 | ) | 497 | (363 | ) | 134 | |||||||||||||||
|
Time deposits |
144 | 27 | 171 | 535 | 233 | 768 | ||||||||||||||||||
|
Total deposit interest expense |
949 | (2,325 | ) | (1,376 | ) | 2,114 | (3,079 | ) | (965 | ) | ||||||||||||||
|
Other borrowings |
161 | (227 | ) | (66 | ) | (8 | ) | (319 | ) | (327 | ) | |||||||||||||
|
Total interest expense |
1,110 | (2,552 | ) | (1,442 | ) | 2,106 | (3,398 | ) | (1,292 | ) | ||||||||||||||
|
Net interest income |
$ | 7,061 | $ | (3,991 | ) | $ | 3,070 | $ | 10,207 | $ | (5,520 | ) | $ | 4,687 | ||||||||||
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 June 30, 2020 increased $3.1 million, or 16%, over the same period in 2019. Interest income on interest-earning assets totaled $28.0 million for the three months ended June 30, 2020, an increase of $1.6 million, compared to $26.4 million for the three months ended June 30, 2019. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable related to participation in the PPP loan program. Total interest expense for the three months ended June 30, 2020 decreased by $1.4 million, or 21%, over the same period in 2019. Interest expense on deposits decreased by $1.4 million, or 21%, for the three months ended June 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 $67,000 for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 due primarily 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 six months ended June 30, 2020 increased $4.7 million, or 12%, over the same period in 2019. Interest income on interest-earning assets totaled $55.4 million for the six months ended June 30, 2020, an increase of $3.4 million, compared to $52.1 million for the six months ended June 30, 2019. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable related to participation in the PPP loan program. Total interest expense for the six months ended June 30, 2020 decreased by $1.3 million, or 10%, for the same period in 2019. Interest expense on deposits decreased by $964 thousand, or 8%, for the six months ended June 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 $328,000 for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 due primarily to a decrease in the average rate on overnight borrowings balances.
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 2.29% during the three months ended June 30, 2020 compared to 2.62% during the three months ended June 30, 2019 and was 2.38% during the six months ended June 30, 2020 compared to 2.65% during six months ended June 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 June 30, 2020 and June 30, 2019, the fully tax-equivalent net interest margin was 2.55% and 2.94%, respectively. The decrease in the net interest margin 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 PPP lending in the second quarter of 2020. For the six months ended June 30, 2020 and June 30, 2019, the fully tax-equivalent net interest margin was 2.64% and 2.97%, respectively. The decrease in the net interest margin was again the 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 PPP lending in the second quarter of 2020.
Provision for Loan Losses
We recorded a $1.0 million provision for loan losses for the three months ended June 30, 2020 as compared to no provision for the three months ended June 30, 2019. We recorded a $2.0 million provision for loan losses for the six months ended June 30, 2020 as compared to $300,000 for the six months ended June 30, 2019. During the three and six months ended June 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 the Bank 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 six months ended June 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 June 30, 2020 increased $1.4 million, or 20%, compared to the three months ended June 30, 2019. We recognized gains of $1.6 million on the sale of investment securities during the three months ended June 30, 2020 compared to gains of $261,000 during the same period in 2019. Service fees on deposit accounts totaled $2.3 million for the three months ended June 30, 2020 which represents an increase of $480,000 over the same period in 2019. This increase was due to the growth in the number of customer accounts and transaction volume. Mortgage banking income totaled $3.4 million during the three months ended June 30, 2020, an increase of $358,000, compared to $3.0 million during the three months ended June 30, 2019. The increase in mortgage banking income is related to higher loan volume partially driven by refinancing activity brought on by the lower interest rate environment in 2020 as compared to the same period in 2019. Loan and servicing fees totaled $764,000 for the three months ended June 30, 2020 which represents an increase of $75,000 from the same period in 2019.
Total non-interest income for the six months ended June 30, 2020 increased $3.0 million, or 25%, compared to the six months ended June 30, 2019. We recognized gains of $2.5 million on the sale of investment securities during the six months ended June 30, 2020 compared to gains of $583,000 during the same period in 2019. Service fees on deposit accounts totaled $4.4 million for the six months ended June 30, 2020 which represents an increase of $932,000 over the same period in 2019. This increase was due to the growth in the number of customer accounts and transaction volume. Mortgage banking income totaled $5.8 million during the six months ended June 30, 2020, an increase of $596,000 compared to $5.3 million during the six months ended June 30, 2019 and is related to higher loan volume partially driven by refinancing activity brought on by the lower interest rate environment in 2020 as compared to the same period in 2019. Loan and servicing fees totaled $1.2 million for the six months ended June 30, 2020 which represents an increase of $336,000 from the same period in 2019.
Non-Interest Expenses
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Non-interest expenses increased $753,000, or 3%, to $26.7 million for the three months ended June 30, 2020 compared to $25.9 million for the three months ended June 30, 2019. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.
Salaries and employee benefits decreased by $528,000, or 4%, for the three months ended June 30, 2020 compared to the same period in 2019 primarily as a result of a decline in medical and dental expenses. In addition, we have put in place cost control initiatives which have had a positive effect on salary and benefit costs. There were thirty stores open as of June 30, 2020 compared to twenty-seven stores at June 30, 2019.
Occupancy expense, including depreciation and amortization expenses, increased by $1.3 million, or 32%, for the three months ended June 30, 2020 compared to the same period last year, as a result of our continuing growth and relocation strategy.
Other real estate expenses totaled $75,000 during the three months ended June 30, 2020, a decrease of $442,000, or 86%, 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 $390,000, or 5%, for the three months ended June 30, 2020 compared to the same period last year. Increases in data processing, debit card processing, insurance, and professional fees and other expenses contributed to the growth in other operating expenses which were mainly associated with our growth strategy. Cost control measures implemented by management have had a positive effect in limiting expense growth.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Non-interest expenses increased $4.8 million, or 10%, to $53.9 million for the six months ended June 30, 2020 compared to $49.2 million for the six months end June 30, 2019. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.
Salaries and employee benefits increased by $494,000, or 2%, for the six months ended June 30, 2020 compared to the same period in 2019 as a result of our growth and expansion. There were thirty stores open as of June 30, 2020 compared to twenty-seven stores at June 30, 2019. However, cost control initiatives put in place by management have partially offset increases in this line item.
Occupancy expense, including depreciation and amortization expenses, increased by $2.6 million, or 32%, for the six months ended June 30, 2020 compared to the same period last year, as a result of our continuing growth and relocation strategy.
Other real estate expenses totaled $357,000 during the six months ended June 30, 2020, a decrease of $497,000, or 58%, 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 $2.1 million, or 15%, for the six months ended June 30, 2020 compared to the same period last year. Increases in data processing, debit card processing, professional fees, and insurance, and other expenses contributed to the growth in other operating expenses which were mainly associated with our growth strategy. Cost control measures implemented by management have had a positive effect in limiting expense growth.
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 June 30, 2020, this ratio was 1.91% compared to 2.63% for the three months ended June 30, 2019. For the six months ended June 30, 2020, the ratio was 2.19% compared to 2.64% for the six months ended June 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 June 30, 2020, the operating efficiency ratio was 86.4% compared to 98.2% for the three months ended June 30, 2019. The efficiency ratio was 92.8% for the six months ended June 30, 2020 compared to 97.4% for the six months ended June 30, 2019. The decrease for the three and six months ended June 30, 2020 versus June 30, 2019 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.
Provision for Federal Income Taxes
We recorded a provision for income taxes in the amount of $675,000 for the three months ended June 30, 2020, compared to a $105,000 provision for income taxes for the three months ended June 30, 2019. For the six months ended June 30, 2020, we recorded a provision for income taxes of $345,000 compared to a provision for income taxes of $197,000 for the six months ended June 30, 2019. The effective tax rates for the three months ended June 30, 2020 and 2019 were 21% and 22%, respectively. For the six months ended June 30, 2020 and 2019, the effective tax rates were 15% and 20%, respectively.
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 Financial Accounting Standards Board (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.
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 June 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 $11.4 million as of June 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 and Net Income per Common Share
Net income for the three months ended June 30, 2020 was $2.5 million, an increase of $2.1 million, compared to $381,000 recorded for the three months ended June 30, 2019. The increase in earnings year over year was primarily driven by a 15.7% increase in net interest income. The net interest margin decreased to 2.55% for the three month period ended June 30, 2020 compared to 2.94% for the three month period ended June 30, 2019. The decrease in the net interest margin 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 PPP lending in the second quarter of 2020.
Net income for the six months ended June 30, 2020 was $1.9 million, an increase of $1.1 million, compared to $807,000 recorded for the six months ended June 30, 2019. The increase in earnings year over year was primarily driven by a 12.1% increase in net interest income. In addition, the net interest margin decreased to 2.64% for the six month period ended June 30, 2020 compared to 2.97% for the six month period ended June 30, 2019. The decrease in the net interest margin was again the 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 PPP lending in the second quarter of 2020.
For the three month periods ended June 30, 2020 and June 30, 2019, basic and fully-diluted net income per common share was $0.04 and $0.01. For the six month periods ended June 30, 2020 and June 30, 2019, basic and fully-diluted net income per common share was $0.03 and $0.01.
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 June 30, 2020 was 0.26%, compared to 0.05% for the three months ended June 30, 2019. The ROA for the six months ended June 30, 2020 and 2019 was 0.11% and 0.06%, 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 3.98% for the three months ended June 30, 2020, compared to 0.61% for the three months ended June 30, 2019. The ROE for the six months ended June 30, 2020 and 2019 was 1.53% and 0.66%, respectively.
Commitments, Contingencies and Concentrations
Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately $358.7 million and $329.9 million, and standby letters of credit of approximately $18.9 million and $17.2 million, at June 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 $377.6 million of commitments to extend credit at June 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 June 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 June 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.
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 June 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 June 30, 2020: |
||||||||||||||||||||||||||||||||
|
Total risk-based capital |
||||||||||||||||||||||||||||||||
|
Republic |
$ | 257,208 | 11.57 |
% |
$ | 177,807 | 8.00 |
% |
$ | 233,372 | 10.50 |
% |
$ | 222,259 | 10.00 |
% |
||||||||||||||||
|
Company |
267,314 | 12.00 |
% |
178,154 | 8.00 |
% |
233,827 | 10.50 |
% |
- | - |
% |
||||||||||||||||||||
|
Tier 1 risk-based capital |
||||||||||||||||||||||||||||||||
|
Republic |
246,168 | 11.08 |
% |
133,356 | 6.00 |
% |
188,920 | 8.50 |
% |
177,807 | 8.00 |
% |
||||||||||||||||||||
|
Company |
256,274 | 11.51 |
% |
133,616 | 6.00 |
% |
189,289 | 8.50 |
% |
- | - |
% |
||||||||||||||||||||
|
CET 1 risk-based capital |
||||||||||||||||||||||||||||||||
|
Republic |
246,168 | 11.08 |
% |
100,017 | 4.50 |
% |
155,581 | 7.00 |
% |
144,468 | 6.50 |
% |
||||||||||||||||||||
|
Company |
245,274 | 11.01 |
% |
100,212 | 4.50 |
% |
155,885 | 7.00 |
% |
- | - |
% |
||||||||||||||||||||
|
Tier 1 leveraged capital |
||||||||||||||||||||||||||||||||
|
Republic |
251,455 | 7.29 |
% |
135,090 | 4.00 |
% |
135,090 | 4.00 |
% |
168,862 | 5.00 |
% |
||||||||||||||||||||
|
Company |
255,177 | 7.58 |
% |
135,271 | 4.00 |
% |
135,271 | 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 in 2020. 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.
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 $691.2 million at June 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 June 30, 2020, Republic estimated that more than $95.0 million of loans would mature or repay in the six-month period ending December 31, 2020. 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 June 30, 2020, we had outstanding commitments (including unused lines of credit and letters of credit) of $377.6 million. Certificates of deposit scheduled to mature in one year totaled $179.8 million at June 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 of Pittsburgh. Our maximum borrowing capacity with the FHLB was $1.0 billion at June 30, 2020. At June 30, 2020 and December 31, 2019, we had no outstanding term borrowings. At June 30, 2020, we had outstanding PPPLF borrowings of $438.5 million. The outstanding PPPLF borrowings of $438.5 million were repaid on July 1, 2020. We had no outstanding overnight borrowings at December 31, 2019. As of June 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 June 30, 2020 and December 31, 2019.
Investment Securities Portfolio
At June 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 $382.2 million and $539.0 million as of June 30, 2020 and December 31, 2019, respectively. At June 30, 2020, securities classified as available for sale had a net unrealized gain of $1.3 million and a net unrealized loss of $1.7 million at December 31, 2019.
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 June 30, 2020. Individual customers may have several loans often secured by different collateral.
During the second quarter of 2020 we participated in the PPP loan program which had a significant effect on outstanding loan balances as of June 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 4,800 loan applications which resulted in an increase in $671 million in outstanding loans at June 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 $22 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, $17 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.
The following table shows information concerning loan delinquency and non-performing assets as of the dates indicated (dollars in thousands):
|
June 30, 2020 |
December 31, 2019 |
|||||||
|
Loans accruing, but past due 90 days or more |
$ | - | $ | - | ||||
|
Non-accrual loans |
12,717 | 12,413 | ||||||
|
Total non-performing loans |
12,717 | 12,413 | ||||||
|
Other real estate owned |
1,144 | 1,730 | ||||||
|
Total non-performing assets |
$ | 13,861 | $ | 14,143 | ||||
|
Non-performing loans as a percentage of total loans, net of unearned income |
0.50 | % | 0.71 | % | ||||
|
Non-performing assets as a percentage of total assets |
0.31 | % | 0.42 | % | ||||
Non-performing asset balances decreased by $282,000 to $13.9 million as of June 30, 2020 from $14.1 million at December 31, 2019. Non-accrual loans increased $304,000 to $12.7 million at June 30, 2020, from $12.4 million at December 31, 2019. There were no loans accruing, but past due 90 days or more at both June 30, 2020 and December 31, 2019. At June 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 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 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 June 30, 2020 and December 31, 2019.
|
(dollars in thousands) |
June 30, |
December 31, |
||||||
|
2020 |
2019 |
|||||||
|
30 to 59 days past due |
$ | 75 | $ | 112 | ||||
|
60 to 89 days past due |
106 | 1,823 | ||||||
|
Total loans 30 to 89 days past due |
$ | 181 | $ | 1,935 | ||||
Loans with payments 30 to 89 days past due decreased to $181,000 at June 30, 2020. Payment deferrals were granted to customers in the second quarter of 2020 that made requests and had an immediate for assistance. Through the date of issuance, more than 58% of the customers that were granted approval for deferral of loan payments have resumed normal principal and interest payments on their outstanding loan balances.
Other Real Estate Owned
The balance of other real estate owned was $1.1 million at June 30, 2020 and $1.7 million at December 31, 2019. The following table presents a reconciliation of other real estate owned for the six months ended June 30, 2020 and the year ended December 31, 2019:
|
(dollars in thousands) |
June 30, 2020 |
December 31, 2019 |
||||||
|
Beginning Balance, January 1st |
$ | 1,730 | $ | 6,223 | ||||
|
Additions |
- | 1,225 | ||||||
|
Valuation adjustments |
- | (646 | ) | |||||
|
Dispositions |
(586 | ) | (5,072 | ) | ||||
|
Ending Balance |
$ | 1,144 | $ | 1,730 | ||||
At June 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 six months ended June 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 U.S. 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 the Bank is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio.
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 six months ended June 30, 2020 and 2019, and the twelve months ended December 31, 2019 is as follows:
|
(dollars in thousands) |
For the six months ended June 30, 2020 |
For the twelve months ended December 31, 2019 |
For the six months ended June 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 |
51 | 1,356 | 930 | |||||||||
|
Owner occupied real estate |
48 | - | 75 | |||||||||
|
Consumer and other |
65 | 126 | 13 | |||||||||
|
Residential mortgage |
50 | - | - | |||||||||
|
Paycheck protection program |
- | - | - | |||||||||
|
Total charge-offs |
214 | 1,482 | 1,018 | |||||||||
|
Recoveries: |
||||||||||||
|
Commercial real estate |
- | - | - | |||||||||
|
Construction and land development |
2 | - | - | |||||||||
|
Commercial and industrial |
27 | 217 | 154 | |||||||||
|
Owner occupied real estate |
1 | 2 | - | |||||||||
|
Consumer and other |
8 | 9 | 5 | |||||||||
|
Residential mortgage |
- | - | - | |||||||||
|
Paycheck protection program |
- | - | - | |||||||||
|
Total recoveries |
38 | 228 | 159 | |||||||||
|
Net charge-offs/(recoveries) |
176 | 1,254 | 859 | |||||||||
|
Provision for loan losses |
1,950 | 1,905 | 300 | |||||||||
|
Balance at end of period |
$ | 11,040 | 9,266 | $ | 8,056 | |||||||
|
Average loans outstanding(1) |
$ | 2,071,941 | 1,544,904 | $ | 1,489,020 | |||||||
|
As a percent of average loans:(1) |
||||||||||||
|
Net charge-offs (annualized) |
0.02 | % | 0.08 | % | 0.12 | % | ||||||
|
Provision for loan losses (annualized) |
0.19 | % | 0.12 | % | 0.02 | % | ||||||
|
Allowance for loan losses |
0.53 | % | 0.60 | % | 0.54 | % | ||||||
|
Allowance for loan losses to: |
||||||||||||
|
Total loans, net of unearned income |
0.43 | % | 0.53 | % | 0.53 | % | ||||||
|
Total non-performing loans |
86.81 | % | 74.65 | % | 86.42 | % | ||||||
(1)Includes non-accruing loans.
We recorded a provision for loan losses of $1.0 million for the three month period ended June 30, 2020 and $2.0 million for the six months ended June 30, 2020. We recorded no provision for loan losses for the three month period ended June 30, 2019 and $300,000 for the six months ended June 30, 2019. During the first six months of 2020, there was 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 the Bank is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio, partially offset by a decrease in the allowance required for loans individually evaluated for impairment.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 86.8% at June 30, 2020, compared to 74.7% at December 31, 2019 and 86.4% at June 30, 2019. Total non-performing loans were $12.7 million, $12.4 million, and $9.3 million at June 30, 2020, December 31, 2019 and June 30, 2019, respectively. The increase in the coverage ratio at June 30, 2020 compared to December 31, 2019 was a result of the provision for loan losses for the six months ended June 30, 2020.
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 $4.4 million at June 30, 2020 and $3.6 million December 31, 2019.
The following table provides additional analysis of partially charged-off loans.
|
(dollars in thousands) |
June 30, 2020 |
December 31, 2019 |
||||||
|
Total nonperforming loans |
$ | 12,717 | $ | 12,413 | ||||
|
Nonperforming and impaired loans with partial charge-offs |
4,364 | 3,642 | ||||||
|
Ratio of nonperforming loans with partial charge-offs to total loans |
0.17 |
% |
0.21 |
% |
||||
|
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans |
34.32 |
% |
29.34 |
% |
||||
|
Coverage ratio net of nonperforming loans with partial charge-offs |
252.98 |
% |
254.42 |
% |
||||
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the six month period ended June 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.
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 June 30, 2020 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 June 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.
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 factor included in Part II, Item 1A. Risk Factors in the Company’s Form 10-Q for the quarter ended March 31, 2020. The risk factors set forth below supplements the risk factor section in our Form 10-K for the year ended December 31, 2019 and Form 10-Q for the quarter ended March 31, 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.
The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we have put in place for our employees. Federal Reserve actions to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect our net interest income and margins, and our profitability. The continued closures of many businesses and the institution of social distancing, shelter in place and stay home orders in the states and communities we serve, have reduced business activity and financial transactions. While certain of these restrictions have been eased and workplaces in the communities we serve are beginning to reopen, the pace of reopening is measured, and these government policies and directives are subject to change as the effects and spread of the COVID-19 pandemic continue to evolve. It is unclear whether any COVID-19 pandemic-related businesses losses that we or our customers may suffer will be recovered by existing insurance policies. Changes in customer behavior due to worsening business and economic conditions or legislative or regulatory initiatives may impact the demand for our products and services, which could adversely affect our revenue, increase the recognition of credit losses in our loan portfolios and increase our allowance for credit losses. The measures we have taken to aid our customers, including short-term loan payment deferments, may be insufficient to help our customers who have been negatively impacted by the economic fallout from the COVID-19 pandemic. Loans that are currently in deferral status may become nonperforming loans. Because of adverse economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. While the COVID-19 pandemic negatively impacted our results of operations for the first half of 2020, the extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions we may take as may be required by government authorities or that we determine is in the best interests of our employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.
Our participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) may expose us to certain additional risks, including risks relating to alleged noncompliance with PPP rules and regulations, which could have a material adverse impact on the Company's business, financial condition and results of operations.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020, included a $349 billion loan program administered through the SBA referred to as the PPP. Additional funding was provided for the PPP on April 24, 2020. Under the PPP, small businesses and other entities and individuals were permitted to apply for loans from existing SBA lenders and other approved lenders. We are a participating lender under the PPP, and, as of June 30, 2020, had processed and received SBA approval for more than 4,800 loan applications resulting in approximately $671 million in loans. There is some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which may expose us to compliance risks relating to the PPP. Several large banks have been subject to litigation regarding the process and procedures used by them in processing applications for PPP loans. We may be exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding PPP loans, regarding our procedures used in processing PPP loan applications. If any such litigation is filed against us and is not resolved favorably, it may result in financial liability or adversely affect our reputation. We may also have credit risk on PPP loans if a determination is later made by the SBA that a deficiency exists in the manner in which a particular loan was originated, funded, or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced, the SBA may deny its liability under the guaranty relating to the loan, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.
The loss of our Chairman could hurt our operations and our ability to implement our business strategy.
The Chairman of the Board of Directors, Vernon W. Hill, II, has been instrumental in developing and executing our unique, customer-oriented business strategy. Mr. Hill has served as Chairman since December 2016 and has been an investor in, and consultant to, the Company since 2008. The loss of Mr. Hill could have a material adverse effect on us, as he is central to our ability to compete effectively and implement our business strategy. Mr. Hill and the Company are parties to an agreement, dated as of March 9, 2017, that outlines the terms of Mr. Hill’s engagement as Chairman of the Board of Directors. The agreement has an initial five-year term and contains certain non-competition provisions. The agreement does not guarantee that we will be able to retain Mr. Hill for the duration of, or beyond the end of, the agreement’s term.
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.
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. | ||
|
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 |
Furnished herewith |
|||
|
32.2 |
Furnished herewith |
|||
|
101 |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL; (i) Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019, (v) Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019, and (vi) Notes to Consolidated Financial Statements. | |||
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104 |
The cover page of Republic First Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (contained in Exhibit 101) |
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.
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REPUBLIC FIRST BANCORP, INC. |
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Date: August 10, 2020 |
By: |
/s/ Harry D. Madonna |
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Harry D. Madonna |
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President and Chief Executive Officer (principal executive officer) |
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Date: August 10, 2020 |
By: |
/s/ Frank A. Cavallaro |
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Frank A. Cavallaro |
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Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |
Exhibit 31.1
REPUBLIC FIRST BANCORP, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Harry D. Madonna, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 of Republic First Bancorp, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: August 10, 2020 |
/s/ Harry D. Madonna |
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President and Chief Executive Officer |
Exhibit 31.2
REPUBLIC FIRST BANCORP, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Frank A. Cavallaro, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 of Republic First Bancorp, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: August 10, 2020 |
/s/ Frank A. Cavallaro |
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Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission by Republic First Bancorp, Inc. (the "Company") on the date hereof (the "Report"), I, Harry D. Madonna, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
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Date: August 10, 2020 |
/s/ Harry D. Madonna |
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President and Chief Executive Officer |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission by Republic First Bancorp, Inc. (the "Company") on the date hereof (the "Report"), I, Frank A. Cavallaro, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
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Date: August 10, 2020 |
/s/ Frank A. Cavallaro |
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Executive Vice President and Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.