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 and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, and Gloucester Counties.
In July 2016, Republic acquired Oak Mortgage Company, LLC (“Oak Mortgage”), a residential mortgage lending organization. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida.
The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows.
All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
Note 2: Summary of Significant Accounting Policies
Risks and Uncertainties
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820,
Fair Value Measurements and Disclosures
, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
Interest Rate Lock Commitments (“IRLCs”)
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815,
Derivatives and Hedging
. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price. See Note 10 Derivatives and Risk Management Activities.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, (see “Note 7” below), and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.
In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings.
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Stock-Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of March 31, 2018, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At March 31, 2018, the maximum number of common shares issuable under the 2014 Plan was 6.0 million shares. During the three months ended March 31, 2018, 1,058,800 options were granted under the 2014 Plan with a fair value of $2,923,473.
The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant. A summary of the assumptions used in the Black-Scholes option pricing model for 2018 and 2017 are as follows:
|
|
2018
|
|
2017
|
|
Dividend yield
(1)
|
|
0.0%
|
|
0.0%
|
|
Expected volatility
|
|
28.22%
|
(2)
|
45.50% to 50.09%
|
(3)
|
Risk-free interest rate
(4)
|
|
2.38 to 2.84%
|
|
1.89% to 2.26%
|
|
Expected life
(5)
|
|
6.25 years
|
|
5.5 to 7.0 years
|
|
Assumed forfeiture rate
(6)
|
|
4.0%
|
|
6.0%
|
|
(1)
A dividend yield of 0.0% is utilized because cash dividends have never been paid.
(2)
The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to provide a basis for a reasonable estimate of fair value.
(3)
Expected volatility is based on Bloomberg’s five and one-half to seven year volatility calculation for “FRBK” stock.
(4)
The risk-free interest rate is based on the five to seven year Treasury bond.
(
5
)
The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.
(
6
)
Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period.
During the three months ended March 31, 2018 and 2017, 716,364 options and 478,374 options vested, respectively. Expense is recognized ratably over the period required to vest. At March 31, 2018, the intrinsic value of the 3,951,650 options outstanding was $11.0 million, while the intrinsic value of the 1,954,112 exercisable (vested) options was $8.1 million. At March 31, 2017, the intrinsic value of the 3,121,500 options outstanding was $10.5 million, while the intrinsic value of the 1,423,648 exercisable (vested) options was $6.7 million. During the three months ended March 31, 2018, 108,975 options were exercised with cash received of $429,972 and 4,000 options were forfeited with a weighted average grant date fair value of $10,000. During the three months ended March 31, 2017, 94,800 options were exercised with cash received of $291,981 and 9,600 options were forfeited with a weighted average grant date fair value of $44,000.
Information regarding stock based compensation for the three months ended March 31, 2018 and 2017 is set forth below:
|
|
2018
|
|
2017
|
|
Stock based compensation expense recognized
|
|
$ 521,000
|
|
$ 302,000
|
|
Number of unvested stock options
|
|
1,997,538
|
|
1,697,852
|
|
Fair value of unvested stock options
|
|
$ 5,548,196
|
|
$ 4,583,209
|
|
Amount remaining to be recognized as expense
|
|
$ 4,893,747
|
|
$ 3,935,014
|
|
The remaining unrecognized expense amount of $4,893,747 will be recognized ratably as expense through February 2022.
Earnings per Share
Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans for the three months ended March 31, 2018. CSEs consisted of dilutive stock options granted through the Company’s stock option plans and convertible securities related to trust preferred securities issued in 2008 for the three months ended March 31, 2017. The convertible securities related to trust preferred securities issued in 2008 fully converted to common stock in 2018. In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance was added back to the net income for the three months ended March 31, 2017. There was no interest expense in 2018 related to the trust preferred securities issuance. For the three months ended March 31, 2017, the effect of CSEs (convertible securities related to the trust preferred securities only) and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculations.
The calculation of EPS for the three months ended March 31, 2018 and 2017 is as follows (in thousands, except per share amounts):
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net income - basic and diluted
|
|
$
|
1,777
|
|
|
$
|
1,787
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
57,100
|
|
|
|
56,824
|
|
|
|
|
|
|
|
|
|
|
Net income per share – basic
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (including dilutive CSEs)
|
|
|
58,370
|
|
|
|
58,048
|
|
|
|
|
|
|
|
|
|
|
Net income per share – diluted
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Anti-dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation awards
|
|
|
2,681
|
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
Convertible securities
|
|
|
-
|
|
|
|
1,625
|
|
|
|
|
|
|
|
|
|
|
Total anti-dilutive securities
|
|
|
2,681
|
|
|
|
3,522
|
|
Recent Accounting Pronouncements
ASU 2014-09
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
“Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40).”
ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. In August 2015, the FASB issued ASU 2015-14,
Revenue from
Contracts with The Company (Topic 606): Deferral of the Effective Date
. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. T
he Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes interest income as well as many other revenues for financial assets and liabilities including revenue derived from loans, investment securities, and derivatives. This ASU was effective for the Company on January 1, 2018. The Company adopted this ASU on a modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. The adoption of this ASU did not have a material impact to its financial condition, results of operations, and consolidated financial statements. Refer to Note 11: Revenue Recognition for further disclosure as to the impact of Topic 606.
ASU 2016-01
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall.
The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance was effective for the Company on January 1, 2018 and was adopted using a modified retrospective approach. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (4) above, the Company measured the fair value of its loan portfolio as of March 31, 2018 using an exit price notion (see Note 7
Fair Value of Financial Instruments).
ASU 2016-02
In February 2016, the FASB issued ASU No. 2016-02,
Leases.
From the Company’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the landlord perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption. The Company does not intend to early adopt this ASU.
ASU 2016-09
In March 2016, the FASB issued ASU No. 2016-09
, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU 2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU 2016-09 was effective January 1, 2017. There was no material impact on the consolidated financial statements upon adoption.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company has been gathering the data necessary to measure expected credit losses in accordance with the guidance provided in the ASU. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.
ASU 2016-15
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230).
The ASU addresses classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance was adopted on January 1, 2018, on a retrospective basis. The adoption of 2016-15 did not result any changes in classifications in the Consolidated Statement of Cash Flows.
ASU-2017-01
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805)
. The ASU clarifies the definition of a business in ASC 805. The FASB issued the ASU in response to stakeholder feedback that the definition of a business in ASC 805 is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. Concerns about the definition of a business were among the primary issues raised in connection with the Financial Accounting Foundation’s post-implementation review report on FASB Statement No. 141(R), Business Combinations (codified in ASC 805). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. For all other entities, the ASU is effective in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The ASU must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. Unless the Company enters into a business combination, the impact of the ASU will not have a material impact on the consolidated financial statements.
ASU 2017-04
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test For Goodwill Impairment.
The ASU simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2017-04 will have on the consolidated financial statements.
ASU 2017-08
In March 2017, the FASB issued ASU 2017-08,
Premium Amortization on Purchased Callable Debt Securities,
which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company has not yet determined the impact the adoption of ASU 2017-08 will have on the consolidated financial statements.
ASU 2018-02
In February 2018, the FASB issued ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which allows for reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act described in the "Income Taxes" section below. The amount of the reclassification should include the effect of the change in the federal corporate income tax rate related to items remaining in accumulated other comprehensive income (loss). The ASU would require an entity to disclose whether it elects to reclassify stranded tax effects from accumulated other comprehensive income (loss) to retained earnings in the period of adoption and, more generally, a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income (loss). The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption of the amendments in this update is permitted for periods for which financial statements have not yet been issued or made available for issuance, including in the period the Act was enacted. The Company adopted this ASU on January 1, 2018, by recording the reclassification adjustment to its beginning retained earnings in the amount of $1.6 million. The Company utilized the portfolio approach when releasing tax effects from AOCI for its investment securities.
ASU 2018-03
In February of 2018, the FASB Issued ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10).
The ASU was issued to clarify certain aspects of ASU 2016-01 such as treatment for discontinuations and adjustments for equity securities without a readily determinable market value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. The Company adopted this ASU on January 1, 2018. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations and consolidated financial statements.
Note 3: Legal Proceedings
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
Note 4: Segment Reporting
The Company has one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as consumer loan products in the area surrounding its stores.
Note 5: Investment Securities
A summary of the amortized cost and market value of securities available for sale and securities held to maturity at March 31, 2018 and December 31, 2017 is as follows:
|
|
At March 31, 2018
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
372,976
|
|
|
$
|
2
|
|
|
$
|
(12,725
|
)
|
|
$
|
360,253
|
|
Agency mortgage-backed securities
|
|
|
71,055
|
|
|
|
1
|
|
|
|
(1,927
|
)
|
|
|
69,129
|
|
Municipal securities
|
|
|
17,182
|
|
|
|
5
|
|
|
|
(464
|
)
|
|
|
16,723
|
|
Corporate bonds
|
|
|
62,648
|
|
|
|
95
|
|
|
|
(2,661
|
)
|
|
|
60,082
|
|
Asset-backed securities
|
|
|
12,971
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
12,944
|
|
Trust preferred securities
|
|
|
725
|
|
|
|
-
|
|
|
|
(164
|
)
|
|
|
561
|
|
Total securities available for sale
|
|
$
|
537,557
|
|
|
$
|
103
|
|
|
$
|
(17,968
|
)
|
|
$
|
519,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
116,880
|
|
|
$
|
-
|
|
|
$
|
(4,816
|
)
|
|
$
|
112,064
|
|
Collateralized mortgage obligations
|
|
|
262,382
|
|
|
|
745
|
|
|
|
(7,020
|
)
|
|
|
256,107
|
|
Agency mortgage-backed securities
|
|
|
139,033
|
|
|
|
-
|
|
|
|
(5,613
|
)
|
|
|
133,420
|
|
Other securities
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Total securities held to maturity
|
|
$
|
519,295
|
|
|
$
|
745
|
|
|
$
|
(17,449
|
)
|
|
$
|
502,591
|
|
|
|
At December 31, 2017
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
327,972
|
|
|
$
|
-
|
|
|
$
|
(7,731
|
)
|
|
$
|
320,241
|
|
Agency mortgage-backed securities
|
|
|
55,664
|
|
|
|
2
|
|
|
|
(800
|
)
|
|
|
54,866
|
|
Municipal securities
|
|
|
15,142
|
|
|
|
20
|
|
|
|
(62
|
)
|
|
|
15,100
|
|
Corporate bonds
|
|
|
62,670
|
|
|
|
103
|
|
|
|
(2,491
|
)
|
|
|
60,282
|
|
Asset-backed securities
|
|
|
13,414
|
|
|
|
38
|
|
|
|
-
|
|
|
|
13,452
|
|
Trust preferred securities
|
|
|
725
|
|
|
|
-
|
|
|
|
(236
|
)
|
|
|
489
|
|
Total securities available for sale
|
|
$
|
475,587
|
|
|
$
|
163
|
|
|
$
|
(11,320
|
)
|
|
$
|
464,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
112,605
|
|
|
$
|
50
|
|
|
$
|
(2,235
|
)
|
|
$
|
110,420
|
|
Collateralized mortgage obligations
|
|
|
215,567
|
|
|
|
314
|
|
|
|
(3,970
|
)
|
|
|
211,911
|
|
Agency mortgage-backed securities
|
|
|
143,041
|
|
|
|
47
|
|
|
|
(2,620
|
)
|
|
|
140,468
|
|
Other securities
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Total securities held to maturity
|
|
$
|
472,213
|
|
|
$
|
411
|
|
|
$
|
(8,825
|
)
|
|
$
|
463,799
|
|
The following table presents investment securities by stated maturity at March 31, 2018. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in 1 year or less
|
|
$
|
2,802
|
|
|
$
|
2,799
|
|
|
$
|
-
|
|
|
$
|
-
|
|
After 1 year to 5 years
|
|
|
4,938
|
|
|
|
4,918
|
|
|
|
21,525
|
|
|
|
21,098
|
|
After 5 years to 10 years
|
|
|
80,553
|
|
|
|
77,373
|
|
|
|
96,355
|
|
|
|
91,966
|
|
After 10 years
|
|
|
5,233
|
|
|
|
5,220
|
|
|
|
-
|
|
|
|
-
|
|
Collateralized mortgage obligations
|
|
|
372,976
|
|
|
|
360,253
|
|
|
|
262,382
|
|
|
|
256,107
|
|
Agency mortgage-backed securities
|
|
|
71,055
|
|
|
|
69,129
|
|
|
|
139,033
|
|
|
|
133,420
|
|
Total
|
|
$
|
537,557
|
|
|
$
|
519,692
|
|
|
$
|
519,295
|
|
|
$
|
502,591
|
|
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 March 31, 2018 and December 31, 2017. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.
The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale.
There were no impairment charges (credit losses) on trust preferred securities for the three months ended March 31, 2018 and March 31, 2017.
The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at March 31, 2018 and 2017 for which a portion of OTTI, as applicable, was recognized in other comprehensive income:
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning Balance, January 1
st
|
|
$
|
274
|
|
|
$
|
937
|
|
Additional credit-related impairment loss on securities for which an
|
|
|
|
|
|
|
|
|
other-than-temporary impairment was previously recognized
|
|
|
-
|
|
|
|
-
|
|
Ending Balance, March 31
st
|
|
$
|
274
|
|
|
$
|
937
|
|
The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2018 and December 31, 2017:
|
|
At March 31, 2018
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
(dollars in thousands)
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
176,823
|
|
|
$
|
4,600
|
|
|
$
|
163,503
|
|
|
$
|
8,125
|
|
|
$
|
340,326
|
|
|
$
|
12,725
|
|
Agency mortgage-backed securities
|
|
|
47,543
|
|
|
|
946
|
|
|
|
19,691
|
|
|
|
981
|
|
|
|
67,234
|
|
|
|
1,927
|
|
Municipal securities
|
|
|
11,537
|
|
|
|
312
|
|
|
|
2,539
|
|
|
|
152
|
|
|
|
14,076
|
|
|
|
464
|
|
Corporate bonds
|
|
|
1,646
|
|
|
|
5
|
|
|
|
52,344
|
|
|
|
2,656
|
|
|
|
53,990
|
|
|
|
2,661
|
|
Asset backed securities
|
|
|
12,944
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,944
|
|
|
|
27
|
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
561
|
|
|
|
164
|
|
|
|
561
|
|
|
|
164
|
|
Total Available for Sale
|
|
$
|
250,493
|
|
|
$
|
5,890
|
|
|
$
|
238,638
|
|
|
$
|
12,078
|
|
|
$
|
489,131
|
|
|
$
|
17,968
|
|
|
At March 31, 2018
|
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
(dollars in thousands)
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
55,240
|
|
|
$
|
1,521
|
|
|
$
|
56,824
|
|
|
$
|
3,295
|
|
|
$
|
112,064
|
|
|
$
|
4,816
|
|
Collateralized mortgage obligations
|
|
|
122,102
|
|
|
|
1,879
|
|
|
|
113,696
|
|
|
|
5,141
|
|
|
|
235,798
|
|
|
|
7,020
|
|
Agency mortgage-backed securities
|
|
|
55,003
|
|
|
|
1,498
|
|
|
|
78,417
|
|
|
|
4,115
|
|
|
|
133,420
|
|
|
|
5,613
|
|
Total Held to Maturity
|
|
$
|
232,345
|
|
|
$
|
4,898
|
|
|
$
|
248,937
|
|
|
$
|
12,551
|
|
|
$
|
481,282
|
|
|
$
|
17,449
|
|
|
|
At December 31, 2017
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
(dollars in thousands)
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
150,075
|
|
|
$
|
1,565
|
|
|
$
|
170,166
|
|
|
$
|
6,166
|
|
|
$
|
320,241
|
|
|
$
|
7,731
|
|
Agency mortgage-backed securities
|
|
|
29,967
|
|
|
|
226
|
|
|
|
21,045
|
|
|
|
574
|
|
|
|
51,012
|
|
|
|
800
|
|
Municipal securities
|
|
|
5,742
|
|
|
|
27
|
|
|
|
2,656
|
|
|
|
35
|
|
|
|
8,398
|
|
|
|
62
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
52,509
|
|
|
|
2,491
|
|
|
|
52,509
|
|
|
|
2,491
|
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
489
|
|
|
|
236
|
|
|
|
489
|
|
|
|
236
|
|
Total Available for Sale
|
|
$
|
185,784
|
|
|
$
|
1,818
|
|
|
$
|
246,865
|
|
|
$
|
9,502
|
|
|
$
|
432,649
|
|
|
$
|
11,320
|
|
|
At December 31, 2017
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
(dollars in thousands)
|
Fair
Value
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
42,045
|
|
|
$
|
213
|
|
|
$
|
59,594
|
|
|
$
|
2,022
|
|
|
$
|
101,639
|
|
|
$
|
2,235
|
|
Collateralized mortgage obligations
|
|
|
56,955
|
|
|
|
767
|
|
|
|
107,986
|
|
|
|
3,203
|
|
|
|
164,941
|
|
|
|
3,970
|
|
Agency mortgage-backed securities
|
|
|
55,170
|
|
|
|
221
|
|
|
|
82,479
|
|
|
|
2,399
|
|
|
|
137,649
|
|
|
|
2,620
|
|
Total Held to Maturity
|
|
$
|
154,170
|
|
|
$
|
1,201
|
|
|
$
|
250,059
|
|
|
$
|
7,624
|
|
|
$
|
404,229
|
|
|
$
|
8,825
|
|
Unrealized losses on securities in the investment portfolio amounted to $35.4 million with a total fair value of $970.4 million as of March 31, 2018 compared to unrealized losses of $20.1 million with a total fair value of $836.9 million as of December 31, 2017. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.
The Company held fourteen U.S. Government agency securities, eighty-five collateralized mortgage obligations and twenty-nine agency mortgage-backed securities that were in an unrealized loss position at March 31, 2018. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of March 31, 2018.
All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At March 31, 2018, the investment portfolio included twenty municipal securities that were in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of credit deterioration.
At March 31, 2018, the investment portfolio included two asset-backed securities that were in an unrealized loss position. The asset-backed securities held in the investment securities portfolio consist solely of Sallie Mae bonds, collateralized by student loans which are insured by the U.S. Department of Education. Management believes the unrealized losses on these securities were driven by changes in market interest rates and not a result of credit deterioration. At March 31, 2018, 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 unrealized loss on the trust preferred security is primarily the result of the secondary market for such a security becoming inactive and is also considered temporary at this time. The following table provides additional detail on the trust preferred security held in the portfolio as of March 31, 2018.
(dollars in thousands)
|
Class /
Tranche
|
Amortized Cost
|
Fair
Value
|
Unrealized
Losses
|
Lowest
Credit
Rating
Assigned
|
Number of
Banks
Currently Performing
|
Deferrals / Defaults
as % of
Current
Balance
|
Conditional
Default
Rates for
2018 and
beyond
|
Cumulative
OTTI Life
to Date
|
TPREF Funding II
|
Class B Notes
|
$
|
725
|
$
|
561
|
$
|
(164)
|
C
|
18
|
29%
|
0.39%
|
$
|
274
|
No securities were sold during the three months ended March 31, 2018 and March 31, 2017.
Note 6: Loans Receivable and Allowance for Loan Losses
The following table sets forth the Company’s gross loans by major category as of March 31, 2018 and December 31, 2017:
(dollars in thousands)
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
467,585
|
|
|
$
|
433,304
|
|
Construction and land development
|
|
|
118,607
|
|
|
|
104,617
|
|
Commercial and industrial
|
|
|
189,420
|
|
|
|
173,343
|
|
Owner occupied real estate
|
|
|
315,418
|
|
|
|
309,838
|
|
Consumer and other
|
|
|
78,992
|
|
|
|
76,183
|
|
Residential mortgage
|
|
|
81,048
|
|
|
|
64,764
|
|
Total loans receivable
|
|
|
1,251,070
|
|
|
|
1,162,049
|
|
Deferred costs (fees)
|
|
|
(158
|
)
|
|
|
229
|
|
Allowance for loan losses
|
|
|
(6,650
|
)
|
|
|
(8,599
|
)
|
Net loans receivable
|
|
$
|
1,244,262
|
|
|
$
|
1,153,679
|
|
The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, and residential mortgages. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2018 and 2017:
(dollars in thousands)
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Commercial and
Industrial
|
|
|
Owner Occupied Real Estate
|
|
|
Consumer
and Other
|
|
|
Residential Mortgage
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance:
|
|
$
|
3,774
|
|
|
$
|
725
|
|
|
$
|
1,317
|
|
|
$
|
1,737
|
|
|
$
|
573
|
|
|
$
|
392
|
|
|
$
|
81
|
|
|
$
|
8,599
|
|
Charge-offs
|
|
|
(1,535
|
)
|
|
|
-
|
|
|
|
(151
|
)
|
|
|
(465
|
)
|
|
|
(198
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,349
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provisions (credits)
|
|
|
(336
|
)
|
|
|
26
|
|
|
|
95
|
|
|
|
420
|
|
|
|
85
|
|
|
|
116
|
|
|
|
(6
|
)
|
|
|
400
|
|
Ending balance
|
|
$
|
1,903
|
|
|
$
|
751
|
|
|
$
|
1,261
|
|
|
$
|
1,692
|
|
|
$
|
460
|
|
|
$
|
508
|
|
|
$
|
75
|
|
|
$
|
6,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance:
|
|
$
|
3,254
|
|
|
$
|
557
|
|
|
$
|
2,884
|
|
|
$
|
1,382
|
|
|
$
|
588
|
|
|
$
|
58
|
|
|
$
|
432
|
|
|
$
|
9,155
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
Recoveries
|
|
|
7
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
Provisions (credits)
|
|
|
(299
|
)
|
|
|
(11
|
)
|
|
|
(143
|
)
|
|
|
253
|
|
|
|
(11
|
)
|
|
|
72
|
|
|
|
139
|
|
|
|
-
|
|
Ending balance
|
|
$
|
2,962
|
|
|
$
|
546
|
|
|
$
|
2,770
|
|
|
$
|
1,627
|
|
|
$
|
575
|
|
|
$
|
130
|
|
|
$
|
571
|
|
|
$
|
9,181
|
|
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 March 31, 2018 and December 31, 2017:
(dollars in thousands)
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Commercial and
Industrial
|
|
|
Owner Occupied Real Estate
|
|
|
Consumer
and Other
|
|
|
Residential Mortgage
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
448
|
|
|
$
|
169
|
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
668
|
|
Collectively evaluated for impairment
|
|
|
1,903
|
|
|
|
751
|
|
|
|
813
|
|
|
|
1,523
|
|
|
|
409
|
|
|
|
508
|
|
|
|
75
|
|
|
|
5,982
|
|
Total allowance for loan losses
|
|
$
|
1,903
|
|
|
$
|
751
|
|
|
$
|
1,261
|
|
|
$
|
1,692
|
|
|
$
|
460
|
|
|
$
|
508
|
|
|
$
|
75
|
|
|
$
|
6,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans evaluated individually
|
|
$
|
13,844
|
|
|
$
|
-
|
|
|
$
|
7,091
|
|
|
$
|
3,425
|
|
|
$
|
791
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,151
|
|
Loans evaluated collectively
|
|
|
453,741
|
|
|
|
118,607
|
|
|
|
182,329
|
|
|
|
311,993
|
|
|
|
78,201
|
|
|
|
81,048
|
|
|
|
-
|
|
|
|
1,225,919
|
|
Total loans receivable
|
|
$
|
467,585
|
|
|
$
|
118,607
|
|
|
$
|
189,420
|
|
|
$
|
315,418
|
|
|
$
|
78,992
|
|
|
$
|
81,048
|
|
|
$
|
-
|
|
|
$
|
1,251,070
|
|
(dollars in thousands)
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Commercial and
Industrial
|
|
|
Owner Occupied Real Estate
|
|
|
Consumer
and Other
|
|
|
Residential Mortgage
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,964
|
|
|
$
|
-
|
|
|
$
|
374
|
|
|
$
|
235
|
|
|
$
|
217
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,790
|
|
Collectively evaluated for impairment
|
|
|
1,810
|
|
|
|
725
|
|
|
|
943
|
|
|
|
1,502
|
|
|
|
356
|
|
|
|
392
|
|
|
|
81
|
|
|
|
5,809
|
|
Total allowance for loan losses
|
|
$
|
3,774
|
|
|
$
|
725
|
|
|
$
|
1,317
|
|
|
$
|
1,737
|
|
|
$
|
573
|
|
|
$
|
392
|
|
|
$
|
81
|
|
|
$
|
8,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans evaluated individually
|
|
$
|
15,415
|
|
|
$
|
-
|
|
|
$
|
4,501
|
|
|
$
|
3,798
|
|
|
$
|
1,002
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,716
|
|
Loans evaluated collectively
|
|
|
417,889
|
|
|
|
104,617
|
|
|
|
168,842
|
|
|
|
306,040
|
|
|
|
75,181
|
|
|
|
64,764
|
|
|
|
-
|
|
|
|
1,137,333
|
|
Total loans receivable
|
|
$
|
433,304
|
|
|
$
|
104,617
|
|
|
$
|
173,343
|
|
|
$
|
309,838
|
|
|
$
|
76,183
|
|
|
$
|
64,764
|
|
|
$
|
-
|
|
|
$
|
1,162,049
|
|
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 March 31, 2018 and December 31, 2017:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
(dollars in thousands)
|
|
Recorded Investment
|
|
|
Unpaid Principal Balance
|
|
|
Related Allowance
|
|
|
Recorded Investment
|
|
|
Unpaid Principal Balance
|
|
|
Related Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
13,844
|
|
|
$
|
15,040
|
|
|
$
|
-
|
|
|
$
|
9,264
|
|
|
$
|
9,268
|
|
|
$
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
5,507
|
|
|
|
9,432
|
|
|
|
-
|
|
|
|
2,756
|
|
|
|
6,674
|
|
|
|
-
|
|
Owner occupied real estate
|
|
|
2,583
|
|
|
|
2,732
|
|
|
|
-
|
|
|
|
2,595
|
|
|
|
2,743
|
|
|
|
-
|
|
Consumer and other
|
|
|
639
|
|
|
|
976
|
|
|
|
-
|
|
|
|
655
|
|
|
|
981
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
22,573
|
|
|
$
|
28,180
|
|
|
$
|
-
|
|
|
$
|
15,270
|
|
|
$
|
19,666
|
|
|
$
|
-
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,151
|
|
|
$
|
6,165
|
|
|
$
|
1,964
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
1,584
|
|
|
|
1,599
|
|
|
|
448
|
|
|
|
1,745
|
|
|
|
1,752
|
|
|
|
374
|
|
Owner occupied real estate
|
|
|
842
|
|
|
|
849
|
|
|
|
169
|
|
|
|
1,203
|
|
|
|
1,206
|
|
|
|
235
|
|
Consumer and other
|
|
|
152
|
|
|
|
152
|
|
|
|
51
|
|
|
|
347
|
|
|
|
379
|
|
|
|
217
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
2,578
|
|
|
$
|
2,600
|
|
|
$
|
668
|
|
|
$
|
9,446
|
|
|
$
|
9,502
|
|
|
$
|
2,790
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
13,844
|
|
|
$
|
15,040
|
|
|
$
|
-
|
|
|
$
|
15,415
|
|
|
$
|
15,433
|
|
|
$
|
1,964
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
7,091
|
|
|
|
11,031
|
|
|
|
448
|
|
|
|
4,501
|
|
|
|
8,426
|
|
|
|
374
|
|
Owner occupied real estate
|
|
|
3,425
|
|
|
|
3,581
|
|
|
|
169
|
|
|
|
3,798
|
|
|
|
3,949
|
|
|
|
235
|
|
Consumer and other
|
|
|
791
|
|
|
|
1,128
|
|
|
|
51
|
|
|
|
1,002
|
|
|
|
1,360
|
|
|
|
217
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
25,151
|
|
|
$
|
30,780
|
|
|
$
|
668
|
|
|
$
|
24,716
|
|
|
$
|
29,168
|
|
|
$
|
2,790
|
|
The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2018 and 2017:
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
(dollars in thousands)
|
Average Recorded Investment
|
|
Interest
Income Recognized
|
|
Average Recorded Investment
|
|
Interest
Income Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
11,554
|
|
|
$
|
72
|
|
|
$
|
12,290
|
|
|
$
|
70
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
4,132
|
|
|
|
5
|
|
|
|
1,931
|
|
|
|
8
|
|
Owner occupied real estate
|
|
|
2,589
|
|
|
|
14
|
|
|
|
1,126
|
|
|
|
12
|
|
Consumer and other
|
|
|
647
|
|
|
|
1
|
|
|
|
752
|
|
|
|
3
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
1
|
|
Total
|
|
$
|
18,922
|
|
|
$
|
92
|
|
|
$
|
16,164
|
|
|
$
|
94
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,076
|
|
|
$
|
-
|
|
|
$
|
6,759
|
|
|
$
|
5
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
1,664
|
|
|
|
3
|
|
|
|
3,303
|
|
|
|
17
|
|
Owner occupied real estate
|
|
|
1,023
|
|
|
|
6
|
|
|
|
1,774
|
|
|
|
6
|
|
Consumer and other
|
|
|
249
|
|
|
|
1
|
|
|
|
529
|
|
|
|
4
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
6,012
|
|
|
$
|
10
|
|
|
$
|
12,365
|
|
|
$
|
32
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
14,630
|
|
|
$
|
72
|
|
|
$
|
19,049
|
|
|
$
|
75
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
5,796
|
|
|
|
8
|
|
|
|
5,234
|
|
|
|
25
|
|
Owner occupied real estate
|
|
|
3,612
|
|
|
|
20
|
|
|
|
2,900
|
|
|
|
18
|
|
Consumer and other
|
|
|
896
|
|
|
|
2
|
|
|
|
1,281
|
|
|
|
7
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
1
|
|
Total
|
|
$
|
24,934
|
|
|
$
|
102
|
|
|
$
|
28,529
|
|
|
$
|
126
|
|
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 March 31, 2018 and December 31, 2017:
(dollars in thousands)
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
Greater
than 90
Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans Receivable
|
|
|
Loans Receivable >
90 Days and Accruing
|
|
At March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
129
|
|
|
$
|
-
|
|
|
$
|
7,426
|
|
|
$
|
7,555
|
|
|
$
|
460,030
|
|
|
$
|
467,585
|
|
|
$
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118,607
|
|
|
|
118,607
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
14
|
|
|
|
-
|
|
|
|
3,897
|
|
|
|
3,911
|
|
|
|
185,509
|
|
|
|
189,420
|
|
|
|
-
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
2,018
|
|
|
|
2,018
|
|
|
|
313,400
|
|
|
|
315,418
|
|
|
|
-
|
|
Consumer and other
|
|
|
20
|
|
|
|
-
|
|
|
|
791
|
|
|
|
811
|
|
|
|
78,181
|
|
|
|
78,992
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,048
|
|
|
|
81,048
|
|
|
|
-
|
|
Total
|
|
$
|
163
|
|
|
$
|
-
|
|
|
$
|
14,132
|
|
|
$
|
14,295
|
|
|
$
|
1,236,775
|
|
|
$
|
1,251,070
|
|
|
$
|
-
|
|
(dollars in thousands)
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
Greater
than 90
Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Loans Receivable
|
|
|
Loans Receivable >
90 Days and Accruing
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,963
|
|
|
$
|
8,963
|
|
|
$
|
424,341
|
|
|
$
|
433,304
|
|
|
$
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,617
|
|
|
|
104,617
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
969
|
|
|
|
-
|
|
|
|
2,895
|
|
|
|
3,864
|
|
|
|
169,479
|
|
|
|
173,343
|
|
|
|
-
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
2,136
|
|
|
|
2,136
|
|
|
|
307,702
|
|
|
|
309,838
|
|
|
|
-
|
|
Consumer and other
|
|
|
144
|
|
|
|
-
|
|
|
|
851
|
|
|
|
995
|
|
|
|
75,188
|
|
|
|
76,183
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,764
|
|
|
|
64,764
|
|
|
|
-
|
|
Total
|
|
$
|
1,113
|
|
|
$
|
-
|
|
|
$
|
14,845
|
|
|
$
|
15,958
|
|
|
$
|
1,146,091
|
|
|
$
|
1,162,049
|
|
|
$
|
-
|
|
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2018 and December 31, 2017:
(dollars in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
At March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
459,211
|
|
|
$
|
948
|
|
|
$
|
7,426
|
|
|
$
|
-
|
|
|
$
|
467,585
|
|
Construction and land development
|
|
|
118,607
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118,607
|
|
Commercial and industrial
|
|
|
182,196
|
|
|
|
133
|
|
|
|
6,811
|
|
|
|
280
|
|
|
|
189,420
|
|
Owner occupied real estate
|
|
|
310,621
|
|
|
|
1,372
|
|
|
|
3,425
|
|
|
|
-
|
|
|
|
315,418
|
|
Consumer and other
|
|
|
78,201
|
|
|
|
-
|
|
|
|
791
|
|
|
|
-
|
|
|
|
78,992
|
|
Residential mortgage
|
|
|
80,922
|
|
|
|
126
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,048
|
|
Total
|
|
$
|
1,229,758
|
|
|
$
|
2,579
|
|
|
$
|
18,453
|
|
|
$
|
280
|
|
|
$
|
1,251,070
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
At December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
423,382
|
|
|
$
|
959
|
|
|
$
|
8,963
|
|
|
$
|
-
|
|
|
$
|
433,304
|
|
Construction and land development
|
|
|
104,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,617
|
|
Commercial and industrial
|
|
|
168,702
|
|
|
|
140
|
|
|
|
4,221
|
|
|
|
280
|
|
|
|
173,343
|
|
Owner occupied real estate
|
|
|
306,040
|
|
|
|
-
|
|
|
|
3,798
|
|
|
|
-
|
|
|
|
309,838
|
|
Consumer and other
|
|
|
75,181
|
|
|
|
-
|
|
|
|
1,002
|
|
|
|
-
|
|
|
|
76,183
|
|
Residential mortgage
|
|
|
64,637
|
|
|
|
127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,764
|
|
Total
|
|
$
|
1,142,559
|
|
|
$
|
1,226
|
|
|
$
|
17,984
|
|
|
$
|
280
|
|
|
$
|
1,162,049
|
|
The following table shows non-accrual loans by class as of March 31, 2018 and December 31, 2017:
(dollars in thousands)
|
|
March 31,
2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
7,426
|
|
|
$
|
8,963
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
3,897
|
|
|
|
2,895
|
|
Owner occupied real estate
|
|
|
2,018
|
|
|
|
2,136
|
|
Consumer and other
|
|
|
791
|
|
|
|
851
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
14,132
|
|
|
$
|
14,845
|
|
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $179,000 and $276,000 for the three months ended March 31, 2018 and 2017, 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.
The following table summarizes information with regard to outstanding troubled debt restructurings at March 31, 2018 and December 31, 2017:
(dollars in thousands)
|
|
Number
of Loans
|
|
|
Accrual
Status
|
|
|
Non-
Accrual
Status
|
|
|
Total
TDRs
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1
|
|
|
$
|
6,418
|
|
|
$
|
-
|
|
|
$
|
6,418
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
3
|
|
|
|
-
|
|
|
|
1,524
|
|
|
|
1,524
|
|
Owner occupied real estate
|
|
|
1
|
|
|
|
-
|
|
|
|
242
|
|
|
|
242
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
5
|
|
|
$
|
6,418
|
|
|
$
|
1,766
|
|
|
$
|
8,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1
|
|
|
$
|
6,452
|
|
|
$
|
-
|
|
|
$
|
6,452
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
3
|
|
|
|
1,175
|
|
|
|
349
|
|
|
|
1,524
|
|
Owner occupied real estate
|
|
|
1
|
|
|
|
242
|
|
|
|
-
|
|
|
|
242
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
5
|
|
|
$
|
7,869
|
|
|
$
|
349
|
|
|
$
|
8,218
|
|
All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into our estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.
There were no loan modifications made during the three months ended March 31, 2018 that met the criteria of a TDR.
The Company modified one commercial and industrial loan during the twelve month period ended December 31, 2017. In accordance with the modified terms of the commercial and industrial loan, the principal balance of $975,000 was converted from a line of credit to a term loan with a five year maturity.
The Company modified one owner occupied real estate loan during the twelve month period ended December 31, 2017. In accordance with the modified terms of the owner occupied loan of $245,000, certain concessions have been granted, including a reduction in the interest rate and an extension of the maturity date of the loan.
The Company modified one commercial real estate loan in the amount of $6.5 million during the twelve month period ended December 31, 2017 that met the criteria of a TDR. This loan was transferred to non-accrual status during the second quarter of 2015 as a result of delinquency caused by tenant vacancies. The Company restructured the loan based on new leases obtained by the borrower. In accordance with the modified terms of the loan, certain concessions have been granted, including a reduction in the interest rate. In addition, the principal was increased by $421,000. As a result of current payments for six consecutive months, the loan was returned to accrual status in the third quarter of 2017.
After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were three TDRs that subsequently defaulted during the three months ended March 31, 2018. There were no TDRs that subsequently defaulted during the year ended December 31, 2017.
There were no residential mortgages in the process of foreclosure as of March 31, 2018 and December 31, 2017. Other real estate owned relating to residential real estate was $42,000 at March 31, 2018 and December 31, 2017.
Note 7: 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 March 31, 2018 and December 31, 2017 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
360,253
|
|
|
$
|
-
|
|
|
$
|
360,253
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
69,129
|
|
|
|
-
|
|
|
|
69,129
|
|
|
|
-
|
|
Municipal securities
|
|
|
16,723
|
|
|
|
-
|
|
|
|
16,723
|
|
|
|
-
|
|
Corporate bonds
|
|
|
60,082
|
|
|
|
-
|
|
|
|
56,992
|
|
|
|
3,090
|
|
Asset-backed securities
|
|
|
12,944
|
|
|
|
-
|
|
|
|
12,944
|
|
|
|
-
|
|
Trust Preferred Securities
|
|
|
561
|
|
|
|
-
|
|
|
|
-
|
|
|
|
561
|
|
Securities Available for Sale
|
|
$
|
519,692
|
|
|
$
|
-
|
|
|
$
|
516,041
|
|
|
$
|
3,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Held for Sale
|
|
$
|
19,685
|
|
|
$
|
-
|
|
|
$
|
19,685
|
|
|
$
|
-
|
|
SBA Servicing Assets
|
|
|
5,059
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,059
|
|
Interest Rate Lock Commitments
|
|
|
634
|
|
|
|
-
|
|
|
|
634
|
|
|
|
-
|
|
Best Efforts Forward Loan Sales Commitments
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Mandatory Forward Loan Sales Commitments
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitments
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Best Efforts Forward Loan Sales Commitments
|
|
|
228
|
|
|
|
-
|
|
|
|
228
|
|
|
|
-
|
|
Mandatory Forward Loan Sales Commitments
|
|
|
148
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
320,241
|
|
|
$
|
-
|
|
|
$
|
320,241
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
54,866
|
|
|
|
-
|
|
|
|
54,866
|
|
|
|
-
|
|
Municipal securities
|
|
|
15,100
|
|
|
|
-
|
|
|
|
15,100
|
|
|
|
-
|
|
Corporate bonds
|
|
|
60,282
|
|
|
|
-
|
|
|
|
57,196
|
|
|
|
3,086
|
|
Asset-backed securities
|
|
|
13,452
|
|
|
|
-
|
|
|
|
13,452
|
|
|
|
-
|
|
Trust Preferred Securities
|
|
|
489
|
|
|
|
-
|
|
|
|
-
|
|
|
|
489
|
|
Securities Available for Sale
|
|
$
|
464,430
|
|
|
$
|
-
|
|
|
$
|
460,855
|
|
|
$
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Held for Sale
|
|
$
|
43,375
|
|
|
$
|
-
|
|
|
$
|
43,375
|
|
|
$
|
-
|
|
SBA Servicing Assets
|
|
|
5,243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,243
|
|
Interest Rate Lock Commitments
|
|
|
363
|
|
|
|
-
|
|
|
|
363
|
|
|
|
-
|
|
Best Efforts Forward Loan Sales Commitments
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Mandatory Forward Loan Sales Commitments
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitments
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Best Efforts Forward Loan Sales Commitments
|
|
|
93
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
Mandatory Forward Loan Sales Commitments
|
|
|
195
|
|
|
|
-
|
|
|
|
195
|
|
|
|
-
|
|
The following table presents an analysis of the activity in the SBA servicing assets for the three months ended March 31, 2018 and 2017
:
|
|
Three Months Ended March 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning balance, January 1st
|
|
$
|
5,243
|
|
|
$
|
5,352
|
|
Additions
|
|
|
320
|
|
|
|
211
|
|
Fair value adjustments
|
|
|
(504
|
)
|
|
|
(265
|
)
|
Ending balance, March 31
st
|
|
$
|
5,059
|
|
|
$
|
5,298
|
|
Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $493,000 and $433,000 for the three months ended March 31, 2018 and 2017, respectively. Total loans in the amount of $206.5 million at March 31, 2018 and $204.9 million at December 31, 2017 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 months ended March 31, 2018 and 2017:
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
Level 3 Investments Only
(dollars in thousands)
|
|
Trust
Preferred Securities
|
|
|
Corporate
Bonds
|
|
|
Trust
Preferred Securities
|
|
|
Corporate
Bonds
|
|
Balance, January 1
st
|
|
$
|
489
|
|
|
$
|
3,086
|
|
|
$
|
1,820
|
|
|
$
|
2,971
|
|
Unrealized gains
|
|
|
72
|
|
|
|
4
|
|
|
|
141
|
|
|
|
53
|
|
Paydowns
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Realized gains
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment charges on Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, March 31
st
|
|
$
|
561
|
|
|
$
|
3,090
|
|
|
$
|
1,961
|
|
|
$
|
3,024
|
|
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2018 and December 31, 2017 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
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,527
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,527
|
|
Other real estate owned
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,322
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,322
|
|
Other real estate owned
|
|
|
5,727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,727
|
|
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)
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
3,090
|
|
Discounted
Cash Flows
|
|
Discount Rate
|
|
(6.77%)
|
|
|
|
|
|
|
|
|
|
|
Trust preferred security
|
|
$
|
561
|
|
Discounted
Cash Flows
|
|
Discount Rate
|
|
(7.74%)
|
|
|
|
|
|
|
|
|
|
|
SBA servicing assets
|
|
$
|
5,059
|
|
Discounted
Cash Flows
|
|
Conditional
Prepayment Rate
Discount Rate
|
|
(9.33%)
(10.75%)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,527
|
|
Appraised Value of Collateral (1)
|
|
Liquidation expenses (2)
|
|
10% - 30% (12%) (3)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
3,086
|
|
Discounted
Cash Flows
|
|
Discount Rate
|
|
(5.99%)
|
|
|
|
|
|
|
|
|
|
|
Trust preferred security
|
|
$
|
489
|
|
Discounted
Cash Flows
|
|
Discount Rate
|
|
(8.33%)
|
|
|
|
|
|
|
|
|
|
|
SBA servicing assets
|
|
$
|
5,243
|
|
Discounted
Cash Flows
|
|
Conditional
Prepayment Rate
Discount Rate
|
|
(7.85%)
(10.50%)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,322
|
|
Appraised Value of Collateral (1)
|
|
Liquidation expenses (2)
|
|
10% - 21% (14%) (3)
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
5,727
|
|
Appraised Value of Collateral (1)
Sales Price
|
|
Liquidation expenses (2)
Liquidation expenses (2)
|
|
(22%) (3)
4% - 7% (7%) (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 presentedas 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
March 31, 2018 and December 31, 2017.
Cash and Cash Equivalents (Carried at Cost)
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.
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. 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. The Level 3 investment securities classified as available for sale are comprised of a single trust preferred security and a single corporate bond.
The trust preferred security is a pool of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations (“CDOs”) which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically.
T
he secondary market for this security has become inactive, and therefore this security is classified as a Level 3 security. The fair value analysis does not reflect or represent the actual terms or prices at which any party could purchase the security. There is currently a limited secondary market for the security and there can be no assurance that any secondary market for the security will expand.
An independent, third party pricing service is used to estimate the current fair market value of the CDO held in the investment securities portfolio. The calculations used to determine fair value are based on the attributes of the trust preferred security, the financial condition of the issuers of the trust preferred security, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of the security and its specific collateral as of March 31, 2018 and December 31, 2017. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and SNL Financial. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes prepayment speed assumptions, discount rates, default rates, and loss severity percentages.
The fair market valuation for the CDO was determined based on discounted cash flow analyses. The cash flows are primarily dependent on the estimated speeds at which the underlying trust preferred securities are expected to prepay, the estimated rates at which the trust preferred securities are expected to defer payments, the estimated rates at which the trust preferred securities are expected to default, and the severity of the losses on the securities that default.
Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of senior and mezzanine tranches of CDOs. The value of the Company’s mezzanine tranches of the CDO is also affected by expected future interest rates. However, due to the structure of the security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of the Company’s holdings are not quantifiably estimable.
Also included in Level 3 investment securities classified as available for sale is a corporate bond that 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.
SBA Loans Held For Sale (Carried at Lower of Cost or Fair Value)
The fair values of SBA loans held for sale is determined, when possible, using quoted secondary-market prices and are classified within Level 3 of the fair value hierarchy. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the three months ended March 31, 2018 and the year ended December 31, 2017.
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 $294,000 for three months ended March 31, 2018 and $129,000 for the three months ended March 31, 2017, 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 March 31, 2018 and December 31, 2017 (dollars in thousands):
|
|
Carrying
Amount
|
|
|
Aggregate Unpaid Principal Balance
|
|
|
Excess Carrying
Amount Over
Aggregate Unpaid Principal Balance
|
|
March 31, 2018
|
|
$
|
19,685
|
|
|
$
|
19,019
|
|
|
$
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
43,375
|
|
|
$
|
42,046
|
|
|
$
|
1,329
|
|
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 March 31, 2018 and December 31, 2017.
Interest Rate Lock Commitments (“IRLC”)
The fair value of Republic’s IRLC instruments are based upon the underlying loans measured at fair value on a recurring basis and the probability of such commitments being exercised. Due to observable market data inputs used by Republic, 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. At March 31, 2018 and December 31, 2017, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.
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’s 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 March 31, 2018 and December 31, 2017, 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)
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
SBA Servicing Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of SBA Servicing Asset
|
|
$
|
5,059
|
|
|
$
|
5,243
|
|
|
|
|
|
|
|
|
|
|
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
|
|
20.4 years
|
|
20.5 years
|
|
|
|
|
|
|
|
|
|
Prepayment Speed
|
|
|
9.33
|
%
|
|
|
7.85
|
%
|
Effect on fair value of a 10% increase
|
|
$
|
(173
|
)
|
|
$
|
(171
|
)
|
Effect on fair value of a 20% increase
|
|
|
(337
|
)
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
10.75
|
%
|
|
|
10.50
|
%
|
Effect on fair value of a 10% increase
|
|
$
|
(195
|
)
|
|
$
|
(211
|
)
|
Effect on fair value of a 20% increase
|
|
|
(376
|
)
|
|
|
(407
|
)
|
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.
Restricted Stock (Carried at Cost)
The carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities. Restricted stock is classified within Level 2 of the fair value hierarchy.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amounts of accrued interest receivable and accrued interest payable approximates fair value and are classified within Level 2 of the fair value hierarchy.
Deposit Liabilities (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Short-term Borrowings (Carried at Cost)
Due to their short-term nature, the carrying amounts of short-term borrowings, which include overnight borrowings, approximate their fair value. Short-term borrowings are classified within Level 2 of the fair value hierarchy.
Subordinated Debt (Carried at Cost)
Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Due to the significant judgment involved in developing the spreads used to value the subordinated debt, it is classified within Level 3 of the fair value hierarchy.
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 March 31, 2018 were as follows:
|
|
Fair Value Measurements at March 31, 2018
|
|
(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
|
|
$
|
31,069
|
|
|
$
|
31,069
|
|
|
$
|
31,069
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investment securities available for sale
|
|
|
519,692
|
|
|
|
519,692
|
|
|
|
-
|
|
|
|
516,041
|
|
|
|
3,651
|
|
Investment securities held to maturity
|
|
|
519,295
|
|
|
|
502,591
|
|
|
|
-
|
|
|
|
502,591
|
|
|
|
-
|
|
Restricted stock
|
|
|
5,435
|
|
|
|
5,435
|
|
|
|
-
|
|
|
|
5,435
|
|
|
|
-
|
|
Loans held for sale
|
|
|
25,653
|
|
|
|
26,069
|
|
|
|
-
|
|
|
|
19,685
|
|
|
|
6,384
|
|
Loans receivable, net
|
|
|
1,244,262
|
|
|
|
1,209,861
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,209,861
|
|
SBA servicing assets
|
|
|
5,059
|
|
|
|
5,059
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,059
|
|
Accrued interest receivable
|
|
|
7,756
|
|
|
|
7,756
|
|
|
|
-
|
|
|
|
7,756
|
|
|
|
-
|
|
Interest rate lock commitments
|
|
|
634
|
|
|
|
634
|
|
|
|
-
|
|
|
|
634
|
|
|
|
-
|
|
Best efforts forward loan sales commitments
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Mandatory forward loan sales commitments
|
|
|
9
|
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market
|
|
$
|
1,994,372
|
|
|
$
|
1,994,372
|
|
|
$
|
-
|
|
|
$
|
1,994,372
|
|
|
$
|
-
|
|
Time
|
|
|
129,079
|
|
|
|
127,491
|
|
|
|
-
|
|
|
|
127,491
|
|
|
|
-
|
|
Short-term borrowings
|
|
|
93,915
|
|
|
|
93,915
|
|
|
|
-
|
|
|
|
93,915
|
|
|
|
-
|
|
Subordinated debt
|
|
|
11,254
|
|
|
|
8,514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,514
|
|
Accrued interest payable
|
|
|
339
|
|
|
|
339
|
|
|
|
-
|
|
|
|
339
|
|
|
|
-
|
|
Interest rate lock commitments
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Best efforts forward loan sales commitments
|
|
|
228
|
|
|
|
228
|
|
|
|
-
|
|
|
|
228
|
|
|
|
-
|
|
Mandatory forward loan sales commitments
|
|
|
148
|
|
|
|
148
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017 were as follows:
|
|
Fair Value Measurements at December 31, 2017
|
|
(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
|
|
$
|
61,942
|
|
|
$
|
61,942
|
|
|
$
|
61,942
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investment securities available for sale
|
|
|
464,430
|
|
|
|
464,430
|
|
|
|
-
|
|
|
|
460,855
|
|
|
|
3,575
|
|
Investment securities held to maturity
|
|
|
472,213
|
|
|
|
463,799
|
|
|
|
-
|
|
|
|
463,799
|
|
|
|
-
|
|
Restricted stock
|
|
|
1,918
|
|
|
|
1,918
|
|
|
|
-
|
|
|
|
1,918
|
|
|
|
-
|
|
Loans held for sale
|
|
|
45,700
|
|
|
|
45,714
|
|
|
|
-
|
|
|
|
43,375
|
|
|
|
2,339
|
|
Loans receivable, net
|
|
|
1,153,679
|
|
|
|
1,120,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,120,305
|
|
SBA servicing assets
|
|
|
5,243
|
|
|
|
5,243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,243
|
|
Accrued interest receivable
|
|
|
7,009
|
|
|
|
7,009
|
|
|
|
-
|
|
|
|
7,009
|
|
|
|
-
|
|
Interest rate lock commitments
|
|
|
363
|
|
|
|
363
|
|
|
|
-
|
|
|
|
363
|
|
|
|
-
|
|
Best efforts forward loan sales commitments
|
|
|
5
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Mandatory forward loan sales commitments
|
|
|
19
|
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market
|
|
$
|
1,946,558
|
|
|
$
|
1,946,558
|
|
|
$
|
-
|
|
|
$
|
1,946,558
|
|
|
$
|
-
|
|
Time
|
|
|
116,737
|
|
|
|
115,673
|
|
|
|
-
|
|
|
|
115,673
|
|
|
|
-
|
|
Subordinated debt
|
|
|
21,681
|
|
|
|
18,458
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,458
|
|
Accrued interest payable
|
|
|
293
|
|
|
|
293
|
|
|
|
-
|
|
|
|
293
|
|
|
|
-
|
|
Interest rate lock commitments
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Best efforts forward loan sales commitments
|
|
|
93
|
|
|
|
93
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
Mandatory forward loan sales commitments
|
|
|
195
|
|
|
|
195
|
|
|
|
-
|
|
|
|
195
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby letters-of-credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Note 8: 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 three months ended March 31, 2018 and 2017, and the year ended December 31, 2017.
|
|
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, 2018
|
|
$
|
(7,150
|
)
|
|
$
|
(359
|
)
|
|
$
|
(7,509
|
)
|
Reclassification due to the adoption of
ASU 2018-02
|
|
|
(1,562
|
)
|
|
|
(78
|
)
|
|
|
(1,640
|
)
|
Unrealized loss on securities
|
|
|
(5,239
|
)
|
|
|
-
|
|
|
|
(5,239
|
)
|
Amounts reclassified from accumulated other comprehensive income to net income (2)
|
|
|
-
|
|
|
|
31
|
|
|
|
31
|
|
Net current-period other comprehensive income (loss)
|
|
|
(5,239
|
)
|
|
|
31
|
|
|
|
(5,208
|
)
|
Balance March 31, 2018
|
|
$
|
(13,951
|
)
|
|
$
|
(406
|
)
|
|
$
|
(14,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2017
|
|
$
|
(6,831
|
)
|
|
$
|
(463
|
)
|
|
$
|
(7,294
|
)
|
Unrealized gain on securities
|
|
|
623
|
|
|
|
-
|
|
|
|
623
|
|
Amounts reclassified from accumulated other comprehensive income to net income (2)
|
|
|
-
|
|
|
|
27
|
|
|
|
27
|
|
Net current-period other comprehensive income
|
|
|
623
|
|
|
|
27
|
|
|
|
650
|
|
Balance March 31, 2017
|
|
$
|
(6,208
|
)
|
|
$
|
(436
|
)
|
|
$
|
(6,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2017
|
|
$
|
(6,831
|
)
|
|
$
|
(463
|
)
|
|
$
|
(7,294
|
)
|
Unrealized loss on securities
|
|
|
(413
|
)
|
|
|
-
|
|
|
|
(413
|
)
|
Amounts reclassified from accumulated other comprehensive income to net income (2)
|
|
|
94
|
|
|
|
104
|
|
|
|
198
|
|
Net current-period other comprehensive income (loss)
|
|
|
(319
|
)
|
|
|
104
|
|
|
|
(215
|
)
|
Balance December 31, 2017
|
|
$
|
(7,150
|
)
|
|
$
|
(359
|
)
|
|
$
|
(7,509
|
)
|
|
(1)
|
All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.
|
|
(2)
|
Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Operations.
|
Note 9: Goodwill and Other Intangibles
The Company completed an annual impairment test for goodwill as of July 31, 2017. Future impairment testing will be conducted each July 31, 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. During the three months ended March 31, 2018 and 2017, there was no goodwill impairment recorded. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
The Company’s goodwill and intangible assets related to the acquisition of Oak Mortgage in July 2016 is detailed below:
(dollars in thousands)
|
|
Balance
December 31,
2017
|
|
|
Additions/
Adjustments
|
|
|
Amortization
|
|
|
Balance
March 31,
2018
|
|
|
Amortization
Period (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
5,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,011
|
|
|
Indefinite
|
(dollars in thousands)
|
|
Balance
December 31,
2016
|
|
|
Additions/
Adjustments
|
|
|
Amortization
|
|
|
Balance
March 31,
2017
|
|
|
Amortization
Period (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
5,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,011
|
|
|
Indefinite
|
Non-compete agreements
|
|
|
61
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
35
|
|
|
|
1
|
Total
|
|
$
|
5,072
|
|
|
$
|
-
|
|
|
$
|
(26
|
)
|
|
$
|
5,046
|
|
|
|
|
Note 10: 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 three months ended March 31, 2018 and the three months ended March 31, 2017. The following table summarizes the amounts recorded in Republic’s statement of financial condition for derivatives not designated as hedging instruments as of March 31, 2018 and December 31, 2017 (in thousands):
March 31, 2018
|
Balance Sheet
Presentation
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Other Assets
|
|
$
|
634
|
|
|
$
|
25,566
|
|
Best efforts forward loan sales commitments
|
Other Assets
|
|
|
5
|
|
|
|
615
|
|
Mandatory forward loan sales commitments
|
Other Assets
|
|
|
9
|
|
|
|
2,647
|
|
|
|
|
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Other Liabilities
|
|
$
|
1
|
|
|
$
|
412
|
|
Best efforts forward loan sales commitments
|
Other Liabilities
|
|
|
228
|
|
|
|
25,363
|
|
Mandatory forward loan sales commitments
|
Other Liabilities
|
|
|
148
|
|
|
|
16,276
|
|
December 31, 2017
|
Balance Sheet
Presentation
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Other Assets
|
|
$
|
363
|
|
|
$
|
16,366
|
|
Best efforts forward loan sales commitments
|
Other Assets
|
|
|
5
|
|
|
|
1,807
|
|
Mandatory forward loan sales commitments
|
Other Assets
|
|
|
19
|
|
|
|
4,566
|
|
|
|
|
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Other Liabilities
|
|
$
|
1
|
|
|
$
|
424
|
|
Best efforts forward loan sales commitments
|
Other Liabilities
|
|
|
93
|
|
|
|
14,983
|
|
Mandatory forward loan sales commitments
|
Other Liabilities
|
|
|
195
|
|
|
|
36,223
|
|
The following table summarizes the amounts recorded in Republic’s statement of income for derivative instruments not designated as hedging instruments for the three months ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, 2018
|
Income Statement
Presentation
|
|
Gain/(Loss)
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Mortgage banking income
|
|
$
|
271
|
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
-
|
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
(10
|
)
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Mortgage banking income
|
|
$
|
-
|
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
(135
|
)
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
47
|
|
Three Months Ended March 31, 2017
|
Income Statement
Presentation
|
|
Gain/(Loss)
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Mortgage banking income
|
|
$
|
392
|
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
(100
|
)
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
(221
|
)
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
Mortgage banking income
|
|
$
|
48
|
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
(145
|
)
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
(87
|
)
|
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 11: 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 securities. 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 table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2018 and 2017.
|
|
Three Months Ended
March 31,
|
|
(dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Non-interest income
|
|
|
|
|
|
|
In-scope of Topic 606
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
1,175
|
|
|
$
|
846
|
|
Other non-interest income
|
|
|
35
|
|
|
|
46
|
|
Non-interest income (in-scope of Topic 606)
|
|
|
1,210
|
|
|
|
892
|
|
Non-interest income (out-of-scope of Topic 606)
|
|
|
3,325
|
|
|
|
3,446
|
|
Total non-interest income
|
|
$
|
4,535
|
|
|
$
|
4,338
|
|
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 March 31, 2018 and December 31, 2017, 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.