Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC ("Oak Mortgage") and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida.
The Company also has three unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of three 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.
2.
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Summary of Significant Accounting Policies
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Basis of Presentation
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.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company's results of operations are subject to risks and uncertainties surrounding Republic's exposure to changes in the interest rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment ("OTTI") of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Significant Group Concentrations of Credit Risk
Most of the Company's activities are with customers located within the Greater Philadelphia region. Note 3 – Investment Securities discusses the types of investment securities that the Company invests in. Note 4 – Loans Receivable discusses the types of lending that the Company engages in as well as loan concentrations. The Company does not have a significant concentration of credit risk with any one customer.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing in ninety days or less, to be cash and cash equivalents.
Restrictions on Cash and Due from Banks
Republic is required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the reserve computation periods that include December 31, 2017 and 2016 were approximately $31.2 million and $23.3 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance held by the Federal Reserve Bank of Philadelphia.
Investment Securities
Held to Maturity
– Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale –
Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Unrealized gains and losses are excluded from operations and are reported net of tax as a separate component of other comprehensive income until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold on the trade date.
Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings. Impairment charges on bank pooled trust preferred securities of $0, $7,000, and $3,000 were recognized during the years ended December 31, 2017, 2016, and 2015, respectively, as a result of estimated other-than-temporary impairment.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of December 31, 2017 and 2016. As of those dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic Community Bankers Bank ("ACBB"). The required investment in the capital stock of the FHLB is calculated based on outstanding loan balances and open credit facilities with the FHLB. Excess investments are returned to Republic on a quarterly basis.
At December 31, 2017 and December 31, 2016, the investment in FHLB stock totaled $1.8 million and $1.2 million, respectively. The increase was due primarily to a higher membership stock requirement by FHLB at December 31, 2017 which resulted in a higher required investment as of that date. At both December 31, 2017 and December 31, 2016, ACBB stock totaled $143,000.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. On July 28, 2016, 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
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 24 Derivatives and Risk Management Activities for further detail of IRLCs.
Best Efforts Forward Loan Sale Commitments
Best efforts forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Best efforts forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Mandatory Forward Loan Sales Commitments
Mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Mandatory f
orward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually as of July 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. During 2017, the Company elected to perform a Step One analysis to review goodwill for impairment. The results of the Step One analysis indicated that the carrying value of the reporting unit did not exceed its fair value and thus a Step Two analysis was not required. There was $5.0 million of goodwill at December 31, 2017 and 2016.
Loans Receivable
The loans receivable portfolio is segmented into commercial and industrial loans, commercial real estate loans, owner occupied real estate loans, construction and land development loans, consumer and other loans, and residential mortgages. Consumer loans consist of home equity loans and other consumer loans.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower's ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Commercial real estate and owner occupied real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and owner occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
Construction and land development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals originated through the Company's retail network, which are typically secured by personal property or unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater credit risk because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Residential mortgage loans are secured by one to four family dwelling units. This group consists of first mortgages and are originated at loan to value ratios of 80% or less.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of discounts related to loans purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding.
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments would represent management's estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary. The allowance for credit losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
The allowance for credit losses is an amount that represents management's estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic's control, the estimate of the allowance for credit losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are categorized as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for credit 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. These qualitative risk factors include:
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Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
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National, regional and local economic and business conditions as well as the condition of various segments.
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Nature and volume of the portfolio and terms of loans.
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Experience, ability and depth of lending management and staff.
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5)
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Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.
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6)
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Quality of the Company's loan review system, and the degree of oversight by the Company's Board of Directors.
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7)
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Existence and effect of any concentration of credit and changes in the level of such concentrations.
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8)
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Effect of external factors, such as competition and legal and regulatory requirements.
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Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment, include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower's prior payment record. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan's stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or loss are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Transfers of Financial Assets
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860
, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
. ASC 860
,
revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in 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, our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses various 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.
For more information on the SBA servicing asset including the sensitivity of the current fair value of the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 – Fair Value Measurements and Fair Values of Financial Instruments.
SBA Loans Held for Sale
Loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a Gain on the Sale of SBA loans which is categorized as non-interest income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value adjustments to the SBA servicing asset and recorded as a net amount in Loan and Servicing Fees, which is also categorized as non-interest income.
Guarantees
The Company accounts for guarantees in accordance with ASC 815
Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others
. ASC 815
requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2017 is $12.6 million and they expire as follows: $11.6 million in 2018, $773,000 in 2019, $45,000 in 2020 and $209,000 in 2024. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. There was no liability for guarantees under standby letters of credit as of December 31, 2017 and December 31, 2016.
Premises and Equipment
Premises and equipment (including land) are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to current operations as incurred, and renewals and major improvements are capitalized.
Other Real Estate Owned
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Advertising Costs
It is the Company's policy to expense advertising costs in the period in which they are incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent. The terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment.
The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.
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 December 31, 2017, 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 December 31, 2017, the maximum number of common shares issuable under the 2014 Plan was 6.0 million shares.
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 ("CSE"). CSEs consist of dilutive stock options granted through the Company's stock option plans and convertible securities related to trust preferred securities issued in 2008. In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance is added back to the net income. In 2017, 2016, and 2015, 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 years ended December 31, 2017, 2016, and 2015 is as follows:
(dollars in thousands, except per share amounts)
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2017
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2016
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2015
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Net income - basic and diluted
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$
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8,905
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$
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4,945
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$
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2,433
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Weighted average shares outstanding
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56,933
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39,281
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37,818
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Net income per share – basic
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$
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0.16
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$
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0.13
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$
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0.06
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Weighted average shares outstanding (including dilutive CSEs)
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58,250
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39,865
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38,094
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Net income per share – diluted
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$
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0.15
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$
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0.12
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$
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0.06
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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.
(in thousands)
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2017
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2016
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2015
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Anti-dilutive securities
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|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation awards
|
|
|
1,689
|
|
|
|
|
1,747
|
|
|
|
1,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible securities
|
|
|
1,625
|
|
|
|
|
1,662
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anti-dilutive securities
|
|
|
3,314
|
|
|
|
|
3,409
|
|
|
|
3,333
|
|
Comprehensive Income / (Loss)
The Company presents as a component of comprehensive income (loss) the amounts from transactions and other events, which currently are excluded from the consolidated statements of income and are recorded directly to shareholders' equity. These amounts consist of unrealized holding gains (losses) on available for sale securities and amortization of unrealized holding losses on available-for-sale securities transferred to held-to-maturity.
Trust Preferred Securities
The Company has sponsored three outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital. See Note 7 "Borrowings" for further information regarding the issuances.
Variable Interest Entities
The Company follows the guidance under ASC 810,
Consolidation
, with regard to variable interest entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity's activities, or are not exposed to the entity's losses or entitled to its residual returns ("variable interest entities"). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both.
The Company does not consolidate its subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if the Company has the right to a majority of the trusts' expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $676,000. In addition, the income received on the Company's investment in the common securities of the trusts is included in other income.
Treasury Stock
Common stock purchased for treasury is recorded at cost.
Recent Accounting Pronouncements
ASU 2014-09
In May 2014, the FASB issued 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. Accordingly, the majority of our revenues will not be affected. This ASU was effective for the Company on January 1, 2018. The Company completed its identification of all revenue streams included in its financial statements and has identified its deposit related fees and service charges to be within the scope of the standard. The Company completed its review of the related contracts and the Company's overall assessment indicates that adoption of this ASU will not materially change its current method and timing of recognizing revenue for the identified revenue streams. The Company, however, is still in the process of developing additional quantitative and qualitative disclosures that are required upon the adoption of the new revenue recognition standard. The Company adopted this ASU on January 1, 2018 on a modified retrospective approach. The adoption of this ASU did not have a material impact to its financial condition, results of operations, and consolidated financial statements.
ASU 2016-01
In January 2016, the FASB issued Accounting Standards Update ("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 did not have a material impact on its financial condition or results of operations.
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update ("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 Accounting Standards Update ("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 is effective on January 1, 2018, on a retrospective basis, with early adoption permitted. This new accounting guidance will result in some changes in classification in the Consolidated Statement of Cash Flows, which the Company does not expect will be significant, and will not have a material impact on the consolidated financial statements. Due to the current nature of the Company's operations and financial assets and liabilities in relation to the cash flow classifications impacted by the ASU, the Company has determined that the adoption of ASU 2016-15 will not have a material impact on the Company's financial statements.
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 above. 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. As of December 31, 2017, The Company has
$1.6 million
in stranded tax effects in its accumulated other comprehensive income resulting from the enactment of the Act related to net unrealized losses on its available-for-sale securities and cash flow hedges. The Company adopted this ASU on January 1, 2018, by recording the reclassification adjustment to its beginning retained earnings. The adoption of this ASU did not have a significant impact on the Company's financial condition, results of operations and consolidated financial statements.
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.
Reclassifications
Certain reclassifications have been made to 2016 and 2015 information to conform to the 2017 presentation. The reclassifications had no effect on financial condition or shareholders' equity. Included in the reclassifications are $866,000 and $280,000 of appraisal and other loan expenses from "Other operating expenses" for the years ended December 31, 2016 and 2015, respectively.
A summary of the amortized cost and market value of securities available for sale and securities held to maturity at December 31, 2017 and 2016 is as follows:
|
|
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
|
|
|
|
At December 31, 2016
|
|
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
230,252
|
|
|
$
|
145
|
|
|
$
|
(5,632
|
)
|
|
$
|
224,765
|
|
Agency mortgage-backed securities
|
|
|
37,973
|
|
|
|
32
|
|
|
|
(1,295
|
)
|
|
|
36,710
|
|
Municipal securities
|
|
|
26,825
|
|
|
|
151
|
|
|
|
(429
|
)
|
|
|
26,547
|
|
Corporate bonds
|
|
|
66,718
|
|
|
|
8
|
|
|
|
(1,978
|
)
|
|
|
64,748
|
|
Asset-backed securities
|
|
|
15,565
|
|
|
|
-
|
|
|
|
(416
|
)
|
|
|
15,149
|
|
Trust preferred securities
|
|
|
3,063
|
|
|
|
-
|
|
|
|
(1,243
|
)
|
|
|
1,820
|
|
Total securities available for sale
|
|
$
|
380,396
|
|
|
$
|
336
|
|
|
$
|
(10,993
|
)
|
|
$
|
369,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
98,538
|
|
|
$
|
8
|
|
|
$
|
(2,238
|
)
|
|
$
|
96,308
|
|
Collateralized mortgage obligations
|
|
|
202,990
|
|
|
|
793
|
|
|
|
(2,553
|
)
|
|
|
201,230
|
|
Agency mortgage-backed securities
|
|
|
129,951
|
|
|
|
1
|
|
|
|
(3,327
|
)
|
|
|
126,625
|
|
Other securities
|
|
|
1,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,020
|
|
Total securities held to maturity
|
|
$
|
432,499
|
|
|
$
|
802
|
|
|
$
|
(8,118
|
)
|
|
$
|
425,183
|
|
The following table presents investment securities by stated maturity at December 31, 2017. 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 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
|
|
$
|
1,153
|
|
|
$
|
1,156
|
|
|
$
|
-
|
|
|
$
|
-
|
|
After 1 year to 5 years
|
|
|
6,613
|
|
|
|
6,624
|
|
|
|
11,149
|
|
|
|
11,116
|
|
After 5 years to 10 years
|
|
|
79,701
|
|
|
|
76,993
|
|
|
|
102,456
|
|
|
|
100,304
|
|
After 10 years
|
|
|
4,484
|
|
|
|
4,550
|
|
|
|
-
|
|
|
|
-
|
|
Collateralized mortgage obligations
|
|
|
327,972
|
|
|
|
320,241
|
|
|
|
215,567
|
|
|
|
211,911
|
|
Agency mortgage-backed securities
|
|
|
55,664
|
|
|
|
54,866
|
|
|
|
143,041
|
|
|
|
140,468
|
|
Total
|
|
$
|
475,587
|
|
|
$
|
464,430
|
|
|
$
|
472,213
|
|
|
$
|
463,799
|
|
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
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 December 31, 2017 and December 31, 2016. 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 other-than-temporary impairment ("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.
Impairment charges (credit losses) on trust preferred securities for the years ended December 31, 2016 and 2015 amounted to $7,000 and $3,000, respectively. There were no impairment charges recorded during the year ended December 31, 2017.
At December 31, 2017 and 2016, investment securities in the amount of approximately $555.2 million and $380.1 million, respectively, were pledged as collateral for public deposits and certain other deposits as required by law.
The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at December 31, 2017, 2016, and 2015 for which a portion of OTTI was recognized in other comprehensive income:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, January 1
st
|
|
$
|
937
|
|
|
$
|
930
|
|
|
$
|
3,966
|
|
Additional credit-related impairment loss on securities for which an
|
|
|
|
|
|
|
|
|
|
|
|
|
other-than-temporary impairment was previously recognized
|
|
|
-
|
|
|
|
7
|
|
|
|
3
|
|
Reductions for securities sold during the period
|
|
|
(663
|
)
|
|
|
-
|
|
|
|
(3,039
|
)
|
Ending Balance, December 31
st
|
|
$
|
274
|
|
|
$
|
937
|
|
|
$
|
930
|
|
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 December 31, 2017 and 2016:
|
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
|
|
|
At December 31, 2016
|
|
|
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
|
|
$
|
192,308
|
|
|
$
|
5,380
|
|
|
$
|
7,579
|
|
|
$
|
252
|
|
|
$
|
199,887
|
|
|
$
|
5,632
|
|
Agency mortgage-backed securities
|
|
|
29,916
|
|
|
|
1,260
|
|
|
|
3,199
|
|
|
|
35
|
|
|
|
33,115
|
|
|
|
1,295
|
|
Municipal securities
|
|
|
15,414
|
|
|
|
429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,414
|
|
|
|
429
|
|
Corporate bonds
|
|
|
32,257
|
|
|
|
1,708
|
|
|
|
10,726
|
|
|
|
270
|
|
|
|
42,983
|
|
|
|
1,978
|
|
Asset backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
15,149
|
|
|
|
416
|
|
|
|
15,149
|
|
|
|
416
|
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,820
|
|
|
|
1,243
|
|
|
|
1,820
|
|
|
|
1,243
|
|
Total Available for Sale
|
|
$
|
269,895
|
|
|
$
|
8,777
|
|
|
$
|
38,473
|
|
|
$
|
2,216
|
|
|
$
|
308,368
|
|
|
$
|
10,993
|
|
|
At December 31, 2016
|
|
|
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
|
|
$
|
67,725
|
|
|
$
|
2,198
|
|
|
$
|
3,586
|
|
|
$
|
40
|
|
|
$
|
71,311
|
|
|
$
|
2,238
|
|
Collateralized mortgage obligations
|
|
|
108,974
|
|
|
|
2,469
|
|
|
|
8,572
|
|
|
|
84
|
|
|
|
117,546
|
|
|
|
2,553
|
|
Agency mortgage-backed securities
|
|
|
97,725
|
|
|
|
3,327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
97,725
|
|
|
|
3,327
|
|
Total Held to Maturity
|
|
$
|
274,424
|
|
|
$
|
7,994
|
|
|
$
|
12,158
|
|
|
$
|
124
|
|
|
$
|
286,582
|
|
|
$
|
8,118
|
|
Unrealized losses on securities in the investment portfolio amounted to $20.1 million with a total fair value of $836.9 million as of December 31, 2017 compared to unrealized losses of $19.1 million with a total fair value of $595.0 million as of December 31, 2016. 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 eleven U.S. Government agency securities, seventy-four collateralized mortgage obligations and twenty-six agency mortgage-backed securities that were in an unrealized loss position at December 31, 2017. 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 December 31, 2017.
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 December 31, 2017, the investment portfolio included twelve 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 any credit deterioration.
At December 31, 2017, no asset-backed securities 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 guaranteed by the U.S. Department of Education. At December 31, 2017, the investment portfolio included six 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 any 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 December 31, 2017.
(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
|
$
|
489
|
$
|
(236)
|
C
|
18
|
29%
|
0.42%
|
$
|
274
|
Proceeds of sales of securities available for sale in 2017 were $31.2 million. Gross gains of $652,000 and gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2017 amounted to $52,000.
Included in the 2017 sales activity were the sales of two CDO securities.
Proceeds from the sale of the CDO securities totaled $1.5 million. Gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the twelve months ended December 31, 2017 amounted to $287,000.
Management had previously stated that it did not intend to sell the CDO securities prior to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to maturity or recovery of the cost bases. This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2017, management received several inquiries regarding the availability of the CDO securities and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell two CDOs resulting in a net loss of $798,000 during 2017 which was offset by gains on sales of agency mortgage-backed securities, collateralized mortgage obligations and corporate bonds. The Bank continues to demonstrate the ability and intent to hold the remaining CDO until maturity or recovery of the cost basis, but will evaluate future opportunities to sell the remaining CDO if they arise.
The Company had proceeds from the sale of securities available for sale in 2016 of $78.6 million. Gross gains of $680,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to these gross gains in 2016 amounted to approximately $236,000.
Proceeds of sales of securities available for sale in 2015 were $11.7 million. Gross gains of $396,000 and gross losses of $288,000 were realized on these sales. The tax provision applicable to the net gains for the year ended December 31, 2015 amounted to $39,000.
The following table sets forth the Company's gross loans by major categories as of December 31, 2017 and 2016:
(dollars in thousands)
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
433,304
|
|
|
$
|
378,519
|
|
Construction and land development
|
|
|
104,617
|
|
|
|
61,453
|
|
Commercial and industrial
|
|
|
173,343
|
|
|
|
174,744
|
|
Owner occupied real estate
|
|
|
309,838
|
|
|
|
276,986
|
|
Consumer and other
|
|
|
76,183
|
|
|
|
63,660
|
|
Residential mortgage
|
|
|
64,764
|
|
|
|
9,682
|
|
Total loans receivable
|
|
|
1,162,049
|
|
|
|
965,044
|
|
Deferred costs (fees)
|
|
|
229
|
|
|
|
(72
|
)
|
Allowance for loan losses
|
|
|
(8,599
|
)
|
|
|
(9,155
|
)
|
Net loans receivable
|
|
$
|
1,153,679
|
|
|
$
|
955,817
|
|
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 remaining loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
Included in loans are loans due from directors and other related parties of $8.9 million at December 31, 2017, $7.9 million at December 31, 2016, and $8.5 million at December 31, 2015. The Board of Directors approves loans to individual directors to confirm that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with underwriting policies. The following presents the activity in amount due from directors and other related parties for the years ended December 31, 2017, 2016, and 2015.
(dollars in thousands)
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Balance at beginning of year
|
|
$
|
7,862
|
|
|
$
|
8,521
|
|
|
$
|
8,753
|
|
Additions
|
|
|
1,896
|
|
|
|
-
|
|
|
|
295
|
|
Repayments
|
|
|
(838
|
)
|
|
|
(659
|
)
|
|
|
(527
|
)
|
Balance at end of year
|
|
$
|
8,920
|
|
|
$
|
7,862
|
|
|
$
|
8,521
|
|
5. Allowances for Loan Losses
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the years ended December 31, 2017, 2016, and 2015:
(dollars in thousands)
|
|
Commercial Real Estate
|
|
|
Construction and Land Development
|
|
|
Commercial and
Industrial
|
|
|
Owner Occupied
Real Estate
|
|
|
Consumer
and Other
|
|
|
Residential Mortgage
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance:
|
|
$
|
3,254
|
|
|
$
|
557
|
|
|
$
|
2,884
|
|
|
$
|
1,382
|
|
|
$
|
588
|
|
|
$
|
58
|
|
|
$
|
432
|
|
|
$
|
9,155
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,366
|
)
|
|
|
(157
|
)
|
|
|
(53
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,576
|
)
|
Recoveries
|
|
|
54
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120
|
|
Provisions (credits)
|
|
|
466
|
|
|
|
168
|
|
|
|
(265
|
)
|
|
|
512
|
|
|
|
36
|
|
|
|
334
|
|
|
|
(351
|
)
|
|
|
900
|
|
Ending balance
|
|
$
|
3,774
|
|
|
$
|
725
|
|
|
$
|
1,317
|
|
|
$
|
1,737
|
|
|
$
|
573
|
|
|
$
|
392
|
|
|
$
|
81
|
|
|
$
|
8,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance:
|
|
$
|
2,393
|
|
|
$
|
338
|
|
|
$
|
2,932
|
|
|
$
|
2,030
|
|
|
$
|
295
|
|
|
$
|
14
|
|
|
$
|
701
|
|
|
$
|
8,703
|
|
Charge-offs
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
(143
|
)
|
|
|
(1,052
|
)
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(1,276
|
)
|
Recoveries
|
|
|
6
|
|
|
|
-
|
|
|
|
163
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
171
|
|
Provisions (credits)
|
|
|
855
|
|
|
|
279
|
|
|
|
(68
|
)
|
|
|
404
|
|
|
|
302
|
|
|
|
54
|
|
|
|
(269
|
)
|
|
|
1,557
|
|
Ending balance
|
|
$
|
3,254
|
|
|
$
|
557
|
|
|
$
|
2,884
|
|
|
$
|
1,382
|
|
|
$
|
588
|
|
|
$
|
58
|
|
|
$
|
432
|
|
|
$
|
9,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance:
|
|
$
|
6,828
|
|
|
$
|
917
|
|
|
$
|
1,579
|
|
|
$
|
1,638
|
|
|
$
|
234
|
|
|
$
|
2
|
|
|
$
|
338
|
|
|
$
|
11,536
|
|
Charge-offs
|
|
|
(2,624
|
)
|
|
|
(260
|
)
|
|
|
(408
|
)
|
|
|
(133
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,425
|
)
|
Recoveries
|
|
|
4
|
|
|
|
5
|
|
|
|
49
|
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
Provisions (credits)
|
|
|
(1,815
|
)
|
|
|
(324
|
)
|
|
|
1,712
|
|
|
|
525
|
|
|
|
27
|
|
|
|
12
|
|
|
|
363
|
|
|
|
500
|
|
Ending balance
|
|
$
|
2,393
|
|
|
$
|
338
|
|
|
$
|
2,932
|
|
|
$
|
2,030
|
|
|
$
|
295
|
|
|
$
|
14
|
|
|
$
|
701
|
|
|
$
|
8,703
|
|
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 December 31, 2017 and 2016:
(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
|
|
(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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,277
|
|
|
$
|
-
|
|
|
$
|
1,624
|
|
|
$
|
274
|
|
|
$
|
293
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,468
|
|
Collectively evaluated for impairment
|
|
|
1,977
|
|
|
|
557
|
|
|
|
1,260
|
|
|
|
1,108
|
|
|
|
295
|
|
|
|
58
|
|
|
|
432
|
|
|
|
5,687
|
|
Total allowance for loan losses
|
|
$
|
3,254
|
|
|
$
|
557
|
|
|
$
|
2,884
|
|
|
$
|
1,382
|
|
|
$
|
588
|
|
|
$
|
58
|
|
|
$
|
432
|
|
|
$
|
9,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans evaluated individually
|
|
$
|
19,245
|
|
|
$
|
-
|
|
|
$
|
5,180
|
|
|
$
|
2,325
|
|
|
$
|
1,290
|
|
|
$
|
130
|
|
|
$
|
-
|
|
|
$
|
28,170
|
|
Loans evaluated collectively
|
|
|
359,274
|
|
|
|
61,453
|
|
|
|
169,564
|
|
|
|
274,661
|
|
|
|
62,370
|
|
|
|
9,552
|
|
|
|
-
|
|
|
|
936,874
|
|
Total loans receivable
|
|
$
|
378,519
|
|
|
$
|
61,453
|
|
|
$
|
174,744
|
|
|
$
|
276,986
|
|
|
$
|
63,660
|
|
|
$
|
9,682
|
|
|
$
|
-
|
|
|
$
|
965,044
|
|
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 December 31, 2017 and 2016:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
(
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
|
|
$
|
9,264
|
|
|
$
|
9,268
|
|
|
$
|
-
|
|
|
$
|
12,347
|
|
|
$
|
12,348
|
|
|
$
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,756
|
|
|
|
6,674
|
|
|
|
-
|
|
|
|
1,955
|
|
|
|
3,111
|
|
|
|
-
|
|
Owner occupied real estate
|
|
|
2,595
|
|
|
|
2,743
|
|
|
|
-
|
|
|
|
621
|
|
|
|
733
|
|
|
|
-
|
|
Consumer and other
|
|
|
655
|
|
|
|
981
|
|
|
|
-
|
|
|
|
687
|
|
|
|
976
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
130
|
|
|
|
-
|
|
Total
|
|
$
|
15,270
|
|
|
$
|
19,666
|
|
|
$
|
-
|
|
|
$
|
15,740
|
|
|
$
|
17,298
|
|
|
$
|
-
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,151
|
|
|
$
|
6,165
|
|
|
$
|
1,964
|
|
|
$
|
6,898
|
|
|
$
|
6,912
|
|
|
$
|
1,277
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
1,745
|
|
|
|
1,752
|
|
|
|
374
|
|
|
|
3,225
|
|
|
|
5,892
|
|
|
|
1,624
|
|
Owner occupied real estate
|
|
|
1,203
|
|
|
|
1,206
|
|
|
|
235
|
|
|
|
1,704
|
|
|
|
1,704
|
|
|
|
274
|
|
Consumer and other
|
|
|
347
|
|
|
|
379
|
|
|
|
217
|
|
|
|
603
|
|
|
|
627
|
|
|
|
293
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
9,446
|
|
|
$
|
9,502
|
|
|
$
|
2,790
|
|
|
$
|
12,430
|
|
|
$
|
15,135
|
|
|
$
|
3,468
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
15,415
|
|
|
$
|
15,433
|
|
|
$
|
1,964
|
|
|
$
|
19,245
|
|
|
$
|
19,260
|
|
|
$
|
1,277
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
4,501
|
|
|
|
8,426
|
|
|
|
374
|
|
|
|
5,180
|
|
|
|
9,003
|
|
|
|
1,624
|
|
Owner occupied real estate
|
|
|
3,798
|
|
|
|
3,949
|
|
|
|
235
|
|
|
|
2,325
|
|
|
|
2,437
|
|
|
|
274
|
|
Consumer and other
|
|
|
1,002
|
|
|
|
1,360
|
|
|
|
217
|
|
|
|
1,290
|
|
|
|
1,603
|
|
|
|
293
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
130
|
|
|
|
-
|
|
Total
|
|
$
|
24,716
|
|
|
$
|
29,168
|
|
|
$
|
2,790
|
|
|
$
|
28,170
|
|
|
$
|
32,433
|
|
|
$
|
3,468
|
|
The following table presents additional information regarding the Company's impaired loans for the years ended December 31, 2017, 2016, and 2015:
|
Years Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(dollars in thousands)
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
9,579
|
|
|
$
|
366
|
|
|
|
$
|
12,033
|
|
|
$
|
264
|
|
|
|
$
|
12,796
|
|
|
$
|
282
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
|
58
|
|
|
|
-
|
|
|
|
|
206
|
|
|
|
2
|
|
Commercial and industrial
|
|
|
2,270
|
|
|
|
37
|
|
|
|
|
1,828
|
|
|
|
42
|
|
|
|
|
3,225
|
|
|
|
78
|
|
Owner occupied real estate
|
|
|
1,894
|
|
|
|
58
|
|
|
|
|
642
|
|
|
|
10
|
|
|
|
|
700
|
|
|
|
6
|
|
Consumer and other
|
|
|
801
|
|
|
|
21
|
|
|
|
|
858
|
|
|
|
16
|
|
|
|
|
685
|
|
|
|
13
|
|
Residential mortgage
|
|
|
26
|
|
|
|
1
|
|
|
|
|
26
|
|
|
|
1
|
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
14,570
|
|
|
$
|
483
|
|
|
|
$
|
15,445
|
|
|
$
|
333
|
|
|
|
$
|
17,612
|
|
|
$
|
381
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,490
|
|
|
$
|
14
|
|
|
$
|
4,455
|
|
|
$
|
52
|
|
|
$
|
5,544
|
|
|
$
|
13
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
90
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,517
|
|
|
|
68
|
|
|
|
3,357
|
|
|
|
74
|
|
|
|
2,587
|
|
|
|
28
|
|
Owner occupied real estate
|
|
|
1,390
|
|
|
|
32
|
|
|
|
2,104
|
|
|
|
31
|
|
|
|
3,643
|
|
|
|
92
|
|
Consumer and other
|
|
|
420
|
|
|
|
10
|
|
|
|
322
|
|
|
|
12
|
|
|
|
59
|
|
|
|
2
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
10,817
|
|
|
$
|
124
|
|
|
$
|
10,250
|
|
|
$
|
169
|
|
|
$
|
11,923
|
|
|
$
|
135
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
16,069
|
|
|
$
|
380
|
|
|
$
|
16,488
|
|
|
$
|
316
|
|
|
$
|
18,340
|
|
|
$
|
295
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
296
|
|
|
|
2
|
|
Commercial and industrial
|
|
|
4,787
|
|
|
|
105
|
|
|
|
5,185
|
|
|
|
116
|
|
|
|
5,812
|
|
|
|
106
|
|
Owner occupied real estate
|
|
|
3,284
|
|
|
|
90
|
|
|
|
2,746
|
|
|
|
41
|
|
|
|
4,343
|
|
|
|
98
|
|
Consumer and other
|
|
|
1,221
|
|
|
|
31
|
|
|
|
1,180
|
|
|
|
28
|
|
|
|
744
|
|
|
|
15
|
|
Residential mortgage
|
|
|
26
|
|
|
|
1
|
|
|
|
26
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
25,387
|
|
|
$
|
607
|
|
|
$
|
25,695
|
|
|
$
|
502
|
|
|
$
|
29,535
|
|
|
$
|
516
|
|
The total average recorded investment on the Company's impaired loans for the years ended December 31, 2017, 2016, and 2015 were $25.4 million, $25.7 million, and $29.5 million, respectively, and the related interest income recognized for those dates was $607,000, $502,000, and $516,000, respectively.
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 December 31, 2017 and 2016:
(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
|
|
|
$
|
-
|
|
(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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
13,089
|
|
|
$
|
13,098
|
|
|
$
|
365,421
|
|
|
$
|
378,519
|
|
|
$
|
-
|
|
Construction and land
development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,453
|
|
|
|
61,453
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
568
|
|
|
|
-
|
|
|
|
3,151
|
|
|
|
3,719
|
|
|
|
171,025
|
|
|
|
174,744
|
|
|
|
-
|
|
Owner occupied real estate
|
|
|
468
|
|
|
|
-
|
|
|
|
1,718
|
|
|
|
2,186
|
|
|
|
274,800
|
|
|
|
276,986
|
|
|
|
172
|
|
Consumer and other
|
|
|
24
|
|
|
|
22
|
|
|
|
808
|
|
|
|
854
|
|
|
|
62,806
|
|
|
|
63,660
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
130
|
|
|
|
9,552
|
|
|
|
9,682
|
|
|
|
130
|
|
Total
|
|
$
|
1,060
|
|
|
$
|
31
|
|
|
$
|
18,896
|
|
|
$
|
19,987
|
|
|
$
|
945,057
|
|
|
$
|
965,044
|
|
|
$
|
302
|
|
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 our internal risk rating system as of December 31, 2017 and 2016:
(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
|
|
(dollars in thousands)
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
364,066
|
|
|
$
|
877
|
|
|
$
|
13,576
|
|
|
$
|
-
|
|
|
$
|
378,519
|
|
Construction and land
development
|
|
|
61,453
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,453
|
|
Commercial and industrial
|
|
|
168,958
|
|
|
|
606
|
|
|
|
3,751
|
|
|
|
1,429
|
|
|
|
174,744
|
|
Owner occupied real estate
|
|
|
274,150
|
|
|
|
511
|
|
|
|
2,325
|
|
|
|
-
|
|
|
|
276,986
|
|
Consumer and other
|
|
|
62,370
|
|
|
|
-
|
|
|
|
1,290
|
|
|
|
-
|
|
|
|
63,660
|
|
Residential mortgage
|
|
|
9,552
|
|
|
|
-
|
|
|
|
130
|
|
|
|
-
|
|
|
|
9,682
|
|
Total
|
|
$
|
940,549
|
|
|
$
|
1,994
|
|
|
$
|
21,072
|
|
|
$
|
1,429
|
|
|
$
|
965,044
|
|
The following table shows non-accrual loans by class as of December 31, 2017 and 2016:
(dollars in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
8,963
|
|
|
$
|
13,089
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,895
|
|
|
|
3,151
|
|
Owner occupied real estate
|
|
|
2,136
|
|
|
|
1,546
|
|
Consumer and other
|
|
|
851
|
|
|
|
808
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
14,845
|
|
|
$
|
18,594
|
|
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $590,000, $1.0 million, and $765,000, for 2017, 2016, and 2015, 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 December 31, 2017 and 2016:
(dollars in thousands)
|
|
Number
of Loans
|
|
|
Accrual
Status
|
|
|
Non-
Accrual
Status
|
|
|
Total TDRs
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
1
|
|
|
$
|
5,669
|
|
|
$
|
-
|
|
|
$
|
5,669
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2
|
|
|
|
228
|
|
|
|
349
|
|
|
|
577
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
3
|
|
|
$
|
5,897
|
|
|
$
|
349
|
|
|
$
|
6,246
|
|
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.
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. This commercial and industrial loan has been and continues to be an accruing loan.
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 owner occupied loan has been and continues to be an accruing 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.
There were no loan modifications made during the twelve months ended December 31, 2016 that met the criteria of a TDR.
After a loan is determined to be a TDR, we continue to track its performance under the most recent restructured terms. There were no TDR that subsequently defaulted during the years ended December 31, 2017 and 2016, respectively.
There were no residential mortgages in the process of foreclosure as of December 31, 2017 and December 31, 2016, respectively. Other real estate owned relating to residential real estate was $42,000 and $126,000 at December 31, 2017 and 2016, respectively.
6. Other Real Estate Owned
Other real estate owned consists of properties acquired as a result of foreclosures or deeds in-lieu-of foreclosure. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. As of December 31, 2017 the balance of OREO is comprised of six commercial, construction, and residential properties.
The following table presents a reconciliation of other real estate owned for the years ended December 31, 2017, 2016, and 2015:
(dollars in thousands)
|
|
December 31
,
2017
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Beginning Balance, January 1
st
|
|
$
|
10,174
|
|
|
$
|
11,313
|
|
|
|
3,715
|
|
Additions
|
|
|
291
|
|
|
|
616
|
|
|
|
11,459
|
|
Valuation adjustments
|
|
|
(3,000
|
)
|
|
|
(355
|
)
|
|
|
(3,069
|
)
|
Dispositions
|
|
|
(499
|
)
|
|
|
(1,400
|
)
|
|
|
(792
|
)
|
Ending Balance
|
|
$
|
6,966
|
|
|
$
|
10,174
|
|
|
|
11,313
|
|
7.
Premises and Equipment
A summary of premises and equipment is as follows:
(dollars in thousands)
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
12,711
|
|
|
$
|
10,170
|
|
Buildings
|
|
|
40,519
|
|
|
|
25,693
|
|
Leasehold improvements
|
|
|
20,477
|
|
|
|
20,236
|
|
Furniture, fixtures and equipment
|
|
|
18,521
|
|
|
|
15,006
|
|
Construction in progress
|
|
|
4,961
|
|
|
|
3,734
|
|
|
|
|
97,189
|
|
|
|
74,839
|
|
Less accumulated depreciation
|
|
|
(22,242
|
)
|
|
|
(17,799
|
)
|
Net premises and equipment
|
|
$
|
74,947
|
|
|
$
|
57,040
|
|
Depreciation expense on premises and equipment amounted to approximately $4.6 million, $3.5 million, and $3.1 million in 2017, 2016, and 2015, respectively. The construction in progress balance of $5.0 million mainly represents costs incurred for the selection and development of future store locations. Of this balance, $2.9 million represents land purchased and land deposits for five future store locations. Contractual constrution commitments related to future store locations were $8.5 million as of December 31, 2017.
Republic has a line of credit with the Federal Home Loan Bank ("FHLB") of Pittsburgh with a maximum borrowing capacity of $576.5 million as of December 31, 2017. As of December 31, 2017 and 2016, there were no fixed term or overnight advances against this line of credit. As of December 31, 2017, FHLB had issued a letter of credit, on Republic's behalf, totaling $75.0 million against its available credit line, primarily to be used as collateral for public deposits. There were no fixed term advances outstanding at any month-end during 2017 and 2016. At December 31, 2017, $814.9 million of loans collateralized the overnight advance and the letter of credit. The maximum amount of overnight borrowings outstanding at any month-end was $82.9 million in 2017 and $48.8 million in 2016.
Republic also has a line of credit in the amount of $10.0 million available for the purchase of federal funds through another correspondent bank. At December 31, 2017 and 2016, Republic had no amount outstanding against this line. There were no overnight advances on this line at any month end in 2017 and 2016.
Subordinated debt and corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation:
The Company has sponsored three outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in an amount up to 25% of total Tier 1 capital.
In December 2006, Republic Capital Trust II ("Trust II") issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to the Company. Trust II purchased $6.2 million of junior subordinated debentures of the Company due 2037, and the Company used the proceeds to call the securities of Republic Capital Trust I ("Trust I"). The debentures supporting Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month Libor. The Company may call the securities on any interest payment date after five years without a prepayment penalty.
On June 28, 2007, the Company caused Republic Capital Trust III ("Trust III"), through a pooled offering, to issue $5.0 million of trust preferred securities to investors and $0.2 million common securities to the Company. Trust III purchased $5.2 million of junior subordinated debentures of the Company due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month Libor. The Company has the ability to call the securities on any interest payment date without a prepayment penalty.
On June 10, 2008, the Company caused Republic First Bancorp Capital Trust IV ("Trust IV") to issue $10.8 million of convertible trust preferred securities as part of the Company's strategic capital plan. The securities were purchased by various investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp and, since December 5, 2016, chairman of the Company. This investor group also included a family trust of Harry D. Madonna, president and chief executive officer of Republic First Bancorp, Inc, and Theodore J. Flocco, Jr., who, since the investment, has been elected to the Company's Board of Directors and serves as the Chairman of the Audit Committee. Trust IV also issued $0.3 million of common securities to the Company. Trust IV purchased $11.1 million of junior subordinated debentures due 2038, which pay interest at an annual rate of 8.0% and are callable after the fifth year under certain terms and conditions. The trust preferred securities of Trust IV are convertible into approximately 1.7 million shares of common stock of the Company, based on a conversion price of $6.50 per share of Company common stock, and at December 31, 2017 were fully convertible. One independent director converted $240,000 of trust preferred securities into 37,000 shares of common stock in 2017.
Deferred issuance costs included in subordinated debt were $555,000 and $595,000 at December 31, 2017 and December 31, 2016, respectively. Amortization of deferred issuance costs were $29,000, $24,000, and $24,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
On January 31, 2018, the Company notified the existing holders of Trust IV securities of its intent to fully redeem these securities in accordance with the Optional Redemption terms included in the Indenture Agreement. The securities will be redeemed on March 31, 2018 at a price equal to the outstanding principal amount, plus accrued interest. The holders have the option to convert these securities into shares of the Company's common stock at any time until the end of the last business day preceding the redemption date.
The following is a breakdown, by contractual maturities of the Company's certificates of deposit for the years 2018 through 2022.
(dollars in thousands)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
54,454
|
|
|
$
|
37,143
|
|
|
$
|
23,369
|
|
|
$
|
974
|
|
|
$
|
797
|
|
|
$
|
-
|
|
|
$
|
116,737
|
|
Certificates of deposit of $250,000 or more totaled $57.5 million and $42.5 million at December 31, 2017 and 2016, respectively.
Deposits of related parties totaled $107.1 million and $120.2 million at December 31, 2017 and 2016, respectively.
The benefit for income taxes for the years ended December 31, 2017, 2016, and 2015 consists of the following:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,137
|
|
|
$
|
261
|
|
|
$
|
58
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(5,056
|
)
|
|
|
(380
|
)
|
|
|
(84
|
)
|
Total benefit for income taxes
|
|
$
|
(2,919
|
)
|
|
$
|
(119
|
)
|
|
$
|
(26
|
)
|
The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of 35.0% for the years ended December 31, 2017, 2016, and 2015.
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Tax provision computed at statutory rate
|
|
$
|
2,095
|
|
|
$
|
1,689
|
|
|
$
|
843
|
|
Tax exempt interest
|
|
|
(573
|
)
|
|
|
(582
|
)
|
|
|
(394
|
)
|
Effect of change in tax rate
|
|
|
7,661
|
|
|
|
-
|
|
|
|
-
|
|
Deferred tax asset valuation allowance adjustment
|
|
|
(12,214
|
)
|
|
|
(1,508
|
)
|
|
|
(937
|
)
|
Other
|
|
|
112
|
|
|
|
282
|
|
|
|
462
|
|
Total benefit for income taxes
|
|
$
|
(2,919
|
)
|
|
$
|
(119
|
)
|
|
$
|
(26
|
)
|
The significant components of the Company's net deferred tax asset as of December 31, 2017 and 2016 are as follows:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
2,047
|
|
|
$
|
3,288
|
|
Deferred compensation
|
|
|
557
|
|
|
|
824
|
|
Unrealized losses on securities available for sale
|
|
|
2,789
|
|
|
|
4,087
|
|
Realized losses in other than temporary impairment charge
|
|
|
65
|
|
|
|
336
|
|
Foreclosed real estate write-downs
|
|
|
1,468
|
|
|
|
2,377
|
|
Interest income on non-accrual loans
|
|
|
525
|
|
|
|
1,425
|
|
Net operating loss carryforward
|
|
|
5,549
|
|
|
|
8,896
|
|
Other
|
|
|
1,266
|
|
|
|
2,001
|
|
Total deferred tax assets
|
|
|
14,266
|
|
|
|
23,234
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
998
|
|
|
|
1,313
|
|
Other
|
|
|
553
|
|
|
|
528
|
|
Total deferred tax liabilities
|
|
|
1,551
|
|
|
|
1,841
|
|
Net deferred tax asset before valuation allowance
|
|
|
12,715
|
|
|
|
21,393
|
|
Less: valuation allowance
|
|
|
-
|
|
|
|
(12,214
|
)
|
Net deferred tax asset
|
|
$
|
12,715
|
|
|
$
|
9,179
|
|
The Company's net deferred tax asset before the consideration of a valuation allowance decreased to $12.7 million at December 31, 2017 compared to $21.4 million at December 31, 2016. This decrease was primarily driven by the impact of the "Tax Cuts and Jobs Act" which was signed into law in December 2017. It included a reduction in the corporate income tax rate from 35% to 21%. The Company's deferred tax asset balances have historically been calculated using a federal tax rate of 35%. As a result of the change in the tax rate, the value of the Company's existing deferred tax assets permanently decreased by $7.7 million to $12.7 million at December 31, 2017. Therefore, a charge of $7.7 million was recorded to income tax expense in the fourth quarter of 2017 to reflect the reduction in value.
The $12.7 million net deferred tax asset as of December 31, 2017 is comprised of $5.5 million currently recognizable through net operating loss carryforwards ("NOLs") and $7.2 million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. The Company's largest future reversal relates to its unrealized losses on securities available for sale, which totaled $2.8 million as of December 31, 2017.
The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in ASC 740, in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management's evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, the Company believes it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company. In addition, it is also important to consider that NOLs for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years, for NOLs created prior to January 1, 2018. The Company has a federal NOL in the amount of $24.4 million which will begin to expire after December 31, 2030 through December 31, 2031 if not utilized prior to that date. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
Positive evidence evaluated when considering the need for a valuation allowance included:
|
·
|
the annual improvement in earnings during the three year period ended December 31, 2017
|
|
·
|
continued growth in interest-earning assets is expected and supported by the capital raise completed during the fourth quarter of 2016;
|
|
·
|
deposit growth in each of the stores opened since the inception of the growth and expansion strategy in 2014 has met or exceeded expectations;
|
|
·
|
loan growth during 2017 was greater than 20%;
|
|
·
|
the acquisition of a residential mortgage lending team (Oak Mortgage Company) completed in July 2016 continues to supplement earnings growth;
|
|
·
|
two of the Company's largest non-performing assets have been resolved in 2017; and
|
|
·
|
a cumulative loss has not been recorded in recent years.
|
Negative evidence evaluated when considering the need for a valuation allowance included:
|
·
|
profitability metrics for return on assets and return on equity remain below industry standards; and
|
|
·
|
past earnings have been heavily dependent upon the success of the SBA Lending Team which has recently experienced reduced loan volumes and the recently acquired Mortgage Division which can be significantly impacted by a changing interest rate environment and other various economic factors.
|
The ongoing success of the Company's growth and expansion strategy, along with the successful integration of the mortgage company and the limited exposure remaining with current asset quality issues put the Company in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against its deferred tax assets. Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive evidence considered at December 31, 2017 outweighed the negative evidence and that it was more likely than not that all of the Company's deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2017 and a $10.6 million benefit for income taxes was recorded in the fourth quarter of 2017 to reflect the reversal of the valuation allowance.
The net deferred tax asset balance before consideration of a valuation allowance was $12.7 million as of December 31, 2017 and $21.4 million as of December 31, 2016. The Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of $12.2 million as of December 31, 2016.
The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The Company has not identified any uncertain tax position as of December 31, 2017. No interest or penalties have been recorded for the years ended December 31, 2017, 2016, and 2015. The Internal Revenue Service has completed its audits of the Company's federal tax returns for all tax years through December 31, 2013. The Pennsylvania Department of Revenue is not currently conducting any income tax audits. The Company's federal income tax returns filed subsequent to 2014 remain subject to examination by the Internal Revenue Service.
11.
|
Financial Instruments with Off-Balance Sheet Risk
|
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $264.3 million and $215.9 million and standby letters of credit of approximately $12.6 million and $5.7 million at December 31, 2017 and 2016, respectively. Commitments often expire without being drawn upon. Of the $264.3 million of commitments to extend credit at December 31, 2017, substantially all were variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of liability as of December 31, 2017 and 2016 for guarantees under standby letters of credit issued is not material.
12.
|
Commitments and Contingencies
|
Lease Arrangements
As of December 31, 2017, the Company had entered into non-cancelable leases expiring on various dates through May 31, 2037. Certain leases include escalation clauses that will require increasing cash payments over the term of the lease. The leases are accounted for as operating leases. The minimum annual rental payments required under these leases are as follows (dollars in thousands):
|
Year Ended
|
|
Amount
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
3,735
|
|
|
|
2019
|
|
|
3,540
|
|
|
|
2020
|
|
|
3,464
|
|
|
|
2021
|
|
|
2,219
|
|
|
|
2022
|
|
|
2,104
|
|
|
|
Thereafter
|
|
|
15,441
|
|
|
|
Total
|
|
$
|
30,503
|
|
|
The Company incurred rent expense of $4.0 million, $3.4 million, and $2.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Other
The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
Dividend payments by Republic to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code") and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, Republic would be limited to $34.5 million of dividends plus an additional amount equal to its net profit for 2018, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios.
State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by Republic. Federal banking agencies impose four minimum capital requirements on the Company's risk-based capital ratios based on total capital, Tier 1 capital, CET 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit; quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks.
The following table presents the Company's and Republic's capital regulatory ratios at December 31, 2017 and 2016:
(dollars in thousands)
|
|
Actual
|
|
Minimum Capital
Adequacy
|
|
Minimum Capital
Adequacy with
Capital Buffer
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
At December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
187,732
|
|
|
|
12.57
|
%
|
|
|
$
|
119,446
|
|
|
|
8.00
|
%
|
|
$
|
138,109
|
|
|
|
9.25
|
%
|
|
$
|
149,307
|
|
|
|
10.00
|
%
|
Company
|
|
|
249,510
|
|
|
|
16.70
|
%
|
|
|
|
119,521
|
|
|
|
8.00
|
%
|
|
|
138,197
|
|
|
|
9.25
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
179,133
|
|
|
|
12.00
|
%
|
|
|
|
89,584
|
|
|
|
6.00
|
%
|
|
|
108,248
|
|
|
|
7.25
|
%
|
|
|
119,446
|
|
|
|
8.00
|
%
|
Company
|
|
|
240,911
|
|
|
|
16.13
|
%
|
|
|
|
89,641
|
|
|
|
6.00
|
%
|
|
|
108,316
|
|
|
|
7.25
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
179,133
|
|
|
|
12.00
|
%
|
|
|
|
67,188
|
|
|
|
4.50
|
%
|
|
|
85,852
|
|
|
|
5.75
|
%
|
|
|
97,050
|
|
|
|
6.50
|
%
|
Company
|
|
|
220,433
|
|
|
|
14.75
|
%
|
|
|
|
67,231
|
|
|
|
4.50
|
%
|
|
|
85,906
|
|
|
|
5.75
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
179,133
|
|
|
|
7.91
|
%
|
|
|
|
90,531
|
|
|
|
4.00
|
%
|
|
|
90,531
|
|
|
|
4.00
|
%
|
|
|
113,164
|
|
|
|
5.00
|
%
|
Company
|
|
|
240,911
|
|
|
|
10.64
|
%
|
|
|
|
90,586
|
|
|
|
4.00
|
%
|
|
|
90,586
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
179,057
|
|
|
|
13.93
|
%
|
|
|
$
|
102,811
|
|
|
|
8.00
|
%
|
|
$
|
110,843
|
|
|
|
8.625
|
%
|
|
$
|
128,514
|
|
|
|
10.00
|
%
|
Company
|
|
|
245,043
|
|
|
|
18.99
|
%
|
|
|
|
103,226
|
|
|
|
8.00
|
%
|
|
|
111,290
|
|
|
|
8.625
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
169,902
|
|
|
|
13.22
|
%
|
|
|
|
77,108
|
|
|
|
6.00
|
%
|
|
|
85,140
|
|
|
|
6.625
|
%
|
|
|
102,811
|
|
|
|
8.00
|
%
|
Company
|
|
|
235,888
|
|
|
|
18.28
|
%
|
|
|
|
77,419
|
|
|
|
6.00
|
%
|
|
|
85,484
|
|
|
|
6.625
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
169,902
|
|
|
|
13.22
|
%
|
|
|
|
57,831
|
|
|
|
4.50
|
%
|
|
|
65,863
|
|
|
|
5.125
|
%
|
|
|
83,534
|
|
|
|
6.50
|
%
|
Company
|
|
|
214,088
|
|
|
|
16.59
|
%
|
|
|
|
58,064
|
|
|
|
4.50
|
%
|
|
|
66,129
|
|
|
|
5.125
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
169,902
|
|
|
|
9.20
|
%
|
|
|
|
73,843
|
|
|
|
4.00
|
%
|
|
|
73,843
|
|
|
|
4.00
|
%
|
|
|
92,304
|
|
|
|
5.00
|
%
|
Company
|
|
|
235,888
|
|
|
|
12.74
|
%
|
|
|
|
74,073
|
|
|
|
4.00
|
%
|
|
|
74,073
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Management believes that Republic met, as of December 31, 2017, all capital adequacy requirements to which it is subject. As of December 31, 2017 and 2016, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification that management believes have changed Republic's category.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under the Federal Reserve's rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity Tier 1 capital, began on January 1, 2016 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity Tier 1 capital began on January 1, 2015 and will be phased-in over a three-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).
The following table shows the required capital ratios with the conversation buffer over the phase-in period.
|
|
Basel III Community Banks
Minimum Capital Ratio Requirements
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (CET1)
|
|
|
5.125
|
%
|
|
|
5.750
|
%
|
|
|
6.375
|
%
|
|
|
7.000
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
6.625
|
%
|
|
|
7.250
|
%
|
|
|
7.875
|
%
|
|
|
8.500
|
%
|
Total capital (to risk-weighted assets)
|
|
|
8.625
|
%
|
|
|
9.250
|
%
|
|
|
9.875
|
%
|
|
|
10.500
|
%
|
The Company believes that, as of December 31, 2017, all capital adequacy requirements are met under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.
Defined Contribution Plan
The Company has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Company limited to 4% of total salary. The total expense charged to Republic, and included in salaries and employee benefits relating to the plan, was $927,000 in 2017, $627,000 in 2016, and $546,000 in 2015.
Directors' and Officers' Plans
The Company has agreements that provide for an annuity payment upon the retirement or death of certain directors and officers, ranging from $15,000 to $25,000 per year for ten years. The agreements were modified for most participants in 2001, to establish a minimum age of 65 to qualify for the payments. All participants are fully vested. The accrued benefits under the plan amounted to $1.2 million at December 31, 2017 and $1.3 million 2016, which is included in other liabilities. The expense for the years ended December 31, 2017, 2016, and 2015, totaled $24,000, $31,000, and $34,000, respectively, which is included in salaries and employee benefits. The Company funded the plan through the purchase of certain life insurance contracts. The aggregate cash surrender value of these contracts (owned by the Company) was $2.4 million at December 31, 2017 and 2016 and is included in other assets.
The Company maintains a deferred compensation plan for the benefit of certain officers and directors. The plan permits certain participants to make elective contributions to their accounts, subject to applicable provisions of the Internal Revenue Code. In addition, the Company may make discretionary contributions to participant accounts. Company contributions are subject to vesting, and generally vest three years after the end of the plan year to which the contribution applies, subject to acceleration of vesting upon certain changes in control (as defined in the plan) and to forfeiture upon termination for cause (as defined in the plan). Participant accounts are adjusted to reflect contributions and distributions, and income, gains, losses, and expenses as if the accounts had been invested in permitted investments selected by the participants, including Company common stock. The plan provides for distributions upon retirement and, subject to applicable limitations under the Internal Revenue Code, limited hardship withdrawals. As of December 31, 2017 and 2016, $1.2 million and $974,000, respectively, in benefits had vested and the accrued benefits are included in other liabilities.
Expense recognized for the deferred compensation plan for 2017, 2016, and 2015 was $28,000, $88,000 and $15,000, respectively, and is included in salaries and employee benefits. Although the plan is an unfunded plan, and does not require the Company to segregate any assets, the Company has purchased shares of Company common stock in anticipation of its obligation to pay benefits under the plan. Such shares are classified in the financial statements as stock held by deferred compensation plan. No purchases were made in 2017, 2016, and 2015. As of December 31, 2017, approximately 25,437 shares of Company common stock were classified as stock held by deferred compensation plan.
15. Fair Value Measurements and Fair Values 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 December 31, 2017 and December 31, 2016 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
$
|
224,765
|
|
|
$
|
-
|
|
|
$
|
224,765
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
36,710
|
|
|
|
-
|
|
|
|
36,710
|
|
|
|
-
|
|
Municipal securities
|
|
|
26,547
|
|
|
|
-
|
|
|
|
26,547
|
|
|
|
-
|
|
Corporate bonds
|
|
|
64,748
|
|
|
|
-
|
|
|
|
61,777
|
|
|
|
2,971
|
|
Asset-backed securities
|
|
|
15,149
|
|
|
|
-
|
|
|
|
15,149
|
|
|
|
-
|
|
Trust Preferred Securities
|
|
|
1,820
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,820
|
|
Securities Available for Sale
|
|
$
|
369,739
|
|
|
$
|
-
|
|
|
$
|
364,948
|
|
|
$
|
4,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Held for Sale
|
|
$
|
23,911
|
|
|
$
|
-
|
|
|
$
|
23,911
|
|
|
$
|
-
|
|
SBA Servicing Assets
|
|
|
5,352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,352
|
|
Interest Rate Lock Commitments
|
|
|
439
|
|
|
|
-
|
|
|
|
439
|
|
|
|
-
|
|
Best Efforts Forward Loan Sales Commitments
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
Mandatory Forward Loan Sales Commitments
|
|
|
229
|
|
|
|
-
|
|
|
|
229
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitments
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
Best Efforts Forward Loan Sales Commitments
|
|
|
125
|
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
Mandatory Forward Loan Sales Commitments
|
|
|
38
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2017, 2016, and 2015:
(dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Beginning balance, January 1
st
|
|
$
|
5,352
|
|
|
$
|
4,886
|
|
|
|
4,099
|
|
Additions
|
|
|
1,078
|
|
|
|
1,541
|
|
|
|
801
|
|
Fair value adjustments
|
|
|
(1,187
|
)
|
|
|
(1,075
|
)
|
|
|
(14
|
)
|
Ending balance, December 31
st
|
|
$
|
5,243
|
|
|
$
|
5,352
|
|
|
|
4,886
|
|
Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $1.8 million, $1.8 million, and $1.7 million for the years ended December 31, 2017, 2016, and 2015, respectively. Total loans in the amount of $204.9 million at December 31, 2017 and $191.0 million at December 31, 2016 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 years ended December 31, 2017, 2016, and 2015:
|
|
Year Ended
December 31, 2017
|
|
|
Year Ended
December 31, 2016
|
|
|
Year Ended
December 31, 2015
|
|
Level 3 Investments Only
(dollars in thousands)
|
|
Trust
Preferred Securities
|
|
|
Corporate
Bonds
|
|
|
Trust
Preferred Securities
|
|
|
Corporate
Bonds
|
|
|
Trust
Preferred Securities
|
|
|
Corporate
Bonds
|
|
Balance, January 1,
|
|
$
|
1,820
|
|
|
$
|
2,971
|
|
|
$
|
1,883
|
|
|
$
|
2,834
|
|
|
$
|
3,193
|
|
|
$
|
3,005
|
|
Security transferred to Level 3 measurement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrealized (losses) gains
|
|
|
1,006
|
|
|
|
115
|
|
|
|
(56
|
)
|
|
|
137
|
|
|
|
882
|
|
|
|
(171
|
)
|
Paydowns
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
Proceeds from sales
|
|
|
(1,539
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,952
|
)
|
|
|
-
|
|
Realized losses
|
|
|
(798
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(218
|
)
|
|
|
-
|
|
Impairment charges on Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
Balance, December 31,
|
|
$
|
489
|
|
|
$
|
3,086
|
|
|
$
|
1,820
|
|
|
$
|
2,971
|
|
|
$
|
1,883
|
|
|
$
|
2,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2017 and 2016, respectively, 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
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,322
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,322
|
|
Other real estate owned
|
|
|
5,727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
9,110
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,110
|
|
Other real estate owned
|
|
|
8,563
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,563
|
|
The table below presents additional quantitative information about Level 3 assets measured at fair value (dollars in thousands):
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
Asset Description
|
|
Fair Value
|
|
Valuation
Technique
|
|
Unobservable Input
|
|
Range (WeightedAverage)
|
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)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,971
|
|
Discounted
Cash Flows
|
|
Discount Rate
|
|
(4.68%)
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
1,820
|
|
Discounted
Cash Flows
|
|
Discount Rate
|
|
8.85% - 9.35% (9.08%)
|
|
|
|
|
|
|
|
|
|
|
SBA servicing assets
|
|
$
|
5,352
|
|
Discounted
Cash Flows
|
|
Conditional
Prepayment Rate
Discount Rate
|
|
(6.12%)
(10.00%)
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
9,110
|
|
Appraised Value of Collateral (1)
Sales Price
|
|
Liquidation expenses (2)
Liquidation expenses (2)
|
|
7% - 20% (11%) (3)
(7%) (3)
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
8,563
|
|
Appraised Value of Collateral (1)
Sales Price
|
|
Liquidation expenses (2)
Liquidation expenses (2)
|
|
5% - 76% (17%) (3)
7% - 8% (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 presented as a percent of the appraised value.
|
The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company's actual sales of other real estate owned which are assessed annually.
Fair Value Assumptions
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at December 31, 2017 and December 31, 2016:
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 December 31, 2017 and December 31, 2016. 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 loan 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 trust preferred security is expected to prepay, the estimated rates at which the trust preferred security is expected to defer payments, the estimated rates at which the trust preferred security is expected to default, and the severity of the losses on the security that does 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 transferred from Level 2 in 2010 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 at December 31, 2017 and December 31, 2016.
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. In 2016, 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. All mortgage loans held for sale originated subsequent to the election date are carried at fair value. All loans held for sale originated prior to the election date were sold prior to December 31, 2016. Interest income on loans held for sale, totaled $976,000 and $283,000 for the twelve months ended December 31, 2017 and December 31, 2016, respectively, are included in interest and fees in the statements of income.
The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of December 31, 2017 and December 31, 2016 (dollars in thousands):
|
|
Carrying
Amount
|
|
|
Aggregate Unpaid Principal Balance
|
|
|
Excess Carrying Amount Over Aggregate Unpaid Principal Balance
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
43,375
|
|
|
$
|
42,046
|
|
|
$
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
23,911
|
|
|
$
|
23,428
|
|
|
$
|
483
|
|
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 December 31, 2017 and December 31, 2016.
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.
Loans Receivable (Carried at Cost)
The fair values of loans receivable, excluding all nonaccrual loans and accruing loans deemed impaired with specific loan allowances, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value 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 December 31, 2017 and December 31, 2016, 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 December 31, 2017 and December 31, 2016, 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)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
SBA Servicing Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of SBA Servicing Asset
|
|
$
|
5,243
|
|
|
$
|
5,352
|
|
|
|
|
|
|
|
|
|
|
Composition of SBA Loans Serviced for Others
|
|
|
|
|
|
|
|
|
Fixed-rate SBA loans
|
|
|
2
|
%
|
|
|
0
|
%
|
Adjustable-rate SBA loans
|
|
|
98
|
%
|
|
|
100
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Term
|
|
20.5 years
|
|
21.1 years
|
|
|
|
|
|
|
|
|
|
Prepayment Speed
|
|
|
7.85
|
%
|
|
|
6.12
|
%
|
Effect on fair value of a 10% increase
|
|
$
|
(171
|
)
|
|
$
|
(161
|
)
|
Effect on fair value of a 20% increase
|
|
|
(333
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
10.50
|
%
|
|
|
10.00
|
%
|
Effect on fair value of a 10% increase
|
|
$
|
(211
|
)
|
|
$
|
(226
|
)
|
Effect on fair value of a 20% increase
|
|
|
(407
|
)
|
|
|
(435
|
)
|
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.
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 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The estimated fair values of the Company's financial instruments at December 31, 2016 were as follows:
|
|
Fair Value Measurements at December 31, 2016
|
|
(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
|
|
$
|
34,554
|
|
|
$
|
34,554
|
|
|
$
|
34,554
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Investment securities available for sale
|
|
|
369,739
|
|
|
|
369,739
|
|
|
|
-
|
|
|
|
364,948
|
|
|
|
4,791
|
|
Investment securities held to maturity
|
|
|
432,499
|
|
|
|
425,183
|
|
|
|
-
|
|
|
|
425,183
|
|
|
|
-
|
|
Restricted stock
|
|
|
1,366
|
|
|
|
1,366
|
|
|
|
-
|
|
|
|
1,366
|
|
|
|
-
|
|
Loans held for sale
|
|
|
28,065
|
|
|
|
28,267
|
|
|
|
-
|
|
|
|
23,911
|
|
|
|
4,356
|
|
Loans receivable, net
|
|
|
955,817
|
|
|
|
937,944
|
|
|
|
-
|
|
|
|
-
|
|
|
|
937,944
|
|
SBA servicing assets
|
|
|
5,352
|
|
|
|
5,352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,352
|
|
Accrued interest receivable
|
|
|
5,497
|
|
|
|
5,497
|
|
|
|
-
|
|
|
|
5,497
|
|
|
|
-
|
|
Interest rate lock commitments
|
|
|
439
|
|
|
|
439
|
|
|
|
-
|
|
|
|
439
|
|
|
|
-
|
|
Best efforts forward loan sales
commitments
|
|
|
103
|
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
Mandatory forward loan sales
commitments
|
|
|
229
|
|
|
|
229
|
|
|
|
-
|
|
|
|
229
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market
|
|
$
|
1,566,506
|
|
|
$
|
1,566,506
|
|
|
$
|
-
|
|
|
$
|
1,566,506
|
|
|
$
|
-
|
|
Time
|
|
|
111,164
|
|
|
|
110,988
|
|
|
|
-
|
|
|
|
110,988
|
|
|
|
-
|
|
Subordinated debt
|
|
|
21,881
|
|
|
|
16,286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,286
|
|
Accrued interest payable
|
|
|
444
|
|
|
|
444
|
|
|
|
-
|
|
|
|
444
|
|
|
|
-
|
|
Interest rate lock commitments
|
|
|
55
|
|
|
|
55
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
Best efforts forward loan sales
commitments
|
|
|
125
|
|
|
|
125
|
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
Mandatory forward loan sales
commitments
|
|
|
38
|
|
|
|
38
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Standby letters-of-credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
16. 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 December 31, 2017, 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 December 31, 2017, the maximum number of common shares issuable under the 2014 Plan was 6.0 million shares. During the twelve months ended December 31, 2017, 916,000 options were granted under the 2014 Plan with a fair value of $3,228,972.
The Company utilized 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 2017, 2016, and 2015 is as follows:
|
|
2017
|
|
2016
|
|
2015
|
Dividend yield
(1)
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected volatility
(2)
|
|
44.00% to 50.09%
|
|
46.38% to 52.54%
|
|
53.78% to 56.00%
|
Risk-free interest rate
(3)
|
|
1.89% to 2.30%
|
|
1.23% to 1.82%
|
|
1.49% to 2.00%
|
Expected life
(4)
|
|
5.5 to 7.0 years
|
|
5.5 to 7.0 years
|
|
5.5 to 7.0 years
|
Assumed forfeiture rate
(5)
|
|
6.0%
|
|
10.0%
|
|
19.0%
|
(1)
|
A dividend yield of 0.0% is utilized because cash dividends have never been paid.
|
(2)
|
Expected volatility is based on Bloomberg's five and one-half to seven year volatility calculation for "FRBK" stock.
|
(3)
|
The risk-free interest rate is based on the five to seven year Treasury bond.
|
(4)
|
The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior
.
|
(5)
|
Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period.
|
During 2017, 529,624 options vested as compared to 519,050 options in 2016 and 349,062 options in 2015. Expense is recognized ratably over the period required to vest. At December 31, 2017, the intrinsic value of the 3,005,825 options outstanding was $10.4 million, while the intrinsic value of the 1,346,723 exercisable (vested) options was $6.6 million. During 2017, 45,100 options were forfeited with a weighted average grant date fair value of $159,000.
Information regarding stock based compensation for the years ended December 31, 2017, 2016, and 2015 is set forth below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Stock based compensation expense recognized
|
|
$
|
1,842,000
|
|
|
$
|
759,000
|
|
|
$
|
600,000
|
|
Number of unvested stock options
|
|
|
1,659,102
|
|
|
|
1,283,226
|
|
|
|
1,173,276
|
|
Fair value of unvested stock options
|
|
$
|
4,587,565
|
|
|
$
|
2,184,773
|
|
|
$
|
1,906,691
|
|
Amount remaining to be recognized as expense
|
|
$
|
2,508,314
|
|
|
$
|
1,104,424
|
|
|
$
|
873,714
|
|
The remaining amount of $2.5 million will be recognized ratably as expense through November 2021.
A summary of stock option activity under the Plan as of December 31, 2017, 2016, and 2015 is as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
2,332,900
|
|
|
$
|
3.70
|
|
|
|
1,947,725
|
|
|
$
|
3.56
|
|
|
|
1,495,899
|
|
|
$
|
3.59
|
|
Granted
|
|
|
916,000
|
|
|
|
8.03
|
|
|
|
661,750
|
|
|
|
4.06
|
|
|
|
505,200
|
|
|
|
3.55
|
|
Exercised
|
|
|
(197,975
|
)
|
|
|
3.26
|
|
|
|
(226,275
|
)
|
|
|
3.21
|
|
|
|
(21,500
|
)
|
|
|
3.01
|
|
Forfeited
|
|
|
(45,100
|
)
|
|
|
7.95
|
|
|
|
(50,300
|
)
|
|
|
5.21
|
|
|
|
(31,874
|
)
|
|
|
5.13
|
|
Outstanding, end of year
|
|
|
3,005,825
|
|
|
$
|
4.98
|
|
|
|
2,332,900
|
|
|
$
|
3.70
|
|
|
|
1,947,725
|
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
|
1,346,723
|
|
|
$
|
3.55
|
|
|
|
1,049,674
|
|
|
$
|
3.70
|
|
|
|
772,949
|
|
|
$
|
4.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year
|
|
|
|
|
|
$
|
3.75
|
|
|
|
|
|
|
$
|
1.80
|
|
|
|
|
|
|
$
|
1.89
|
|
A summary of stock option exercises and related proceeds during the years end December 31, 2017, 2016, and 2015 is as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercised
|
|
|
197,975
|
|
|
|
226,275
|
|
|
|
21,500
|
|
Cash received
|
|
$
|
646,263
|
|
|
$
|
726,157
|
|
|
$
|
64,624
|
|
Intrinsic value
|
|
$
|
991,957
|
|
|
$
|
739,699
|
|
|
$
|
26,532
|
|
Tax benefit
|
|
$
|
81,589
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table summarizes information about options outstanding at December 31, 2017:
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining Contractual Life
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.55 to $3.53
|
|
|
559,075
|
|
|
|
4.5
|
|
|
$
|
2.53
|
|
|
|
546,075
|
|
|
$
|
2.50
|
|
$3.55 to $3.95
|
|
|
757,150
|
|
|
|
6.5
|
|
|
|
3.62
|
|
|
|
404,112
|
|
|
|
3.64
|
|
$3.99 to $7.85
|
|
|
761,600
|
|
|
|
6.9
|
|
|
|
4.43
|
|
|
|
376,536
|
|
|
|
4.73
|
|
$8.00 to $9.50
|
|
|
928,000
|
|
|
|
9.0
|
|
|
|
8.03
|
|
|
|
20,000
|
|
|
|
8.00
|
|
|
|
|
3,005,825
|
|
|
|
|
|
|
$
|
4.98
|
|
|
|
1,346,723
|
|
|
$
|
3.55
|
|
A roll-forward of non-vested options during the year ended December 31, 2017 is as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
|
|
|
Nonvested, beginning of year
|
|
|
1,283,226
|
|
|
$
|
1.70
|
|
|
Granted
|
|
|
916,000
|
|
|
|
3.75
|
|
|
Vested
|
|
|
(529,624
|
)
|
|
|
1.76
|
|
|
Forfeited
|
|
|
(10,500
|
)
|
|
|
2.51
|
|
|
Nonvested, end of year
|
|
|
1,659,102
|
|
|
$
|
2.77
|
|
|
17. Segment Reporting
The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. We do not have loan production offices in those states.
18. Transactions with Affiliates and Related Parties
The Company made payments to related parties in the amount of $653,000 during 2017, and $1.0 million during 2016 and 2015. The disbursements made during 2017, 2016, and 2015 include $361,000, $450,000, and $415,000, respectively, in fees for marketing, graphic design, architectural and project management services paid to InterArch, a company owned by the spouse of Vernon W. Hill, II. Mr. Hill is the Chairman of the Company, and beneficially owns 8.1% of the common shares currently outstanding. The Company paid $172,000, $194,000 and $144,000 during 2017, 2016, and 2015 to Glassboro Properties, LLC related to a land lease agreement for its Glassboro store. Mr. Hill has an ownership interest in Glassboro Properties LLC, a commercial real estate firm. The Company paid $7,000 during 2015 to SDI Commercial Real Estate LLC for reimbursement of costs related to site development as part of the Company's growth and expansion strategy. Mr. Hill has an ownership interest in SDI Commercial Real Estate LLC, a commercial real estate firm. Prior to his appointment as Chairman in December 2016, Mr. Hill acted as a consultant for the Company and was paid $250,000 annually for his services.
The Company paid $120,000 during 2017, 2016 and 2015 to Brian Communications for public relations services in addition to reimbursements for out-of-pocket expenses and other reimbursable costs. Brian Tierney, a member of the Board of Directors, is the CEO of Brian Communications, a strategic communications agency.
19. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. (Parent Company) should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements.
Balance Sheet
|
|
December 31, 2017 and 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
60,309
|
|
|
$
|
61,011
|
|
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding junior obligations of the corporation
|
|
|
676
|
|
|
|
676
|
|
Investment in subsidiaries
|
|
|
181,256
|
|
|
|
170,868
|
|
Other assets
|
|
|
5,931
|
|
|
|
4,589
|
|
Total Assets
|
|
$
|
248,172
|
|
|
$
|
237,144
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
31
|
|
|
$
|
210
|
|
Corporation-obligated mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation
|
|
|
21,681
|
|
|
|
21,881
|
|
Total Liabilities
|
|
|
21,712
|
|
|
|
22,091
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
226,460
|
|
|
|
215,053
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
248,172
|
|
|
$
|
237,144
|
|
Statements of Income, Comprehensive Income (Loss), and Changes in Shareholders' Equity
|
|
For the years ended December 31, 2017, 2016, and 2015
|
|
(Dollars in thousands)
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
37
|
|
|
$
|
35
|
|
|
$
|
34
|
|
Total income
|
|
|
37
|
|
|
|
35
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred interest expense
|
|
|
1,225
|
|
|
|
1,160
|
|
|
|
1,114
|
|
Other expenses
|
|
|
1,424
|
|
|
|
717
|
|
|
|
572
|
|
Total expenses
|
|
|
2,649
|
|
|
|
1,877
|
|
|
|
1,686
|
|
Net loss before taxes
|
|
|
(2,612
|
)
|
|
|
(1,842
|
)
|
|
|
(1,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
|
(914
|
)
|
|
|
(645
|
)
|
|
|
(578
|
)
|
Loss before undistributed income of subsidiaries
|
|
|
(1,698
|
)
|
|
|
(1,197
|
)
|
|
|
(1,074
|
)
|
Equity in undistributed income of subsidiaries
|
|
|
10,603
|
|
|
|
6,142
|
|
|
|
3,507
|
|
Net income
|
|
$
|
8,905
|
|
|
$
|
4,945
|
|
|
$
|
2,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,905
|
|
|
$
|
4,945
|
|
|
$
|
2,433
|
|
Total other comprehensive loss
|
|
|
(215
|
)
|
|
|
(4,129
|
)
|
|
|
(2,533
|
)
|
Total comprehensive income (loss)
|
|
$
|
8,690
|
|
|
$
|
816
|
|
|
$
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity, beginning of year
|
|
$
|
215,053
|
|
|
$
|
113,375
|
|
|
$
|
112,811
|
|
Shares issued under common stock offering
|
|
|
-
|
|
|
|
99,175
|
|
|
|
-
|
|
Stock based compensation
|
|
|
1,842
|
|
|
|
759
|
|
|
|
600
|
|
Stock options issued in acquisition
|
|
|
-
|
|
|
|
202
|
|
|
|
-
|
|
Exercise of stock options
|
|
|
646
|
|
|
|
726
|
|
|
|
64
|
|
Conversion of subordinated debt to common shares
|
|
|
229
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
8,905
|
|
|
|
4,945
|
|
|
|
2,433
|
|
Total other comprehensive loss
|
|
|
(215
|
)
|
|
|
(4,129
|
)
|
|
|
(2,533
|
)
|
Shareholders' equity, end of year
|
|
$
|
226,460
|
|
|
$
|
215,053
|
|
|
$
|
113,375
|
|
Statements of Cash Flows
|
For the years ended December 31, 2017, 2016, and 2016
|
(Dollars in thousands)
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,905
|
|
|
$
|
4,945
|
|
|
$
|
2,433
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
1,842
|
|
|
|
961
|
|
|
|
600
|
|
Amortization of debt issuance costs
|
|
|
29
|
|
|
|
24
|
|
|
|
24
|
|
Increase in other assets
|
|
|
(1,342
|
)
|
|
|
(716
|
)
|
|
|
(636
|
)
|
Net (decrease) increase in other liabilities
|
|
|
(179
|
)
|
|
|
190
|
|
|
|
2
|
|
Equity in undistributed income of subsidiaries
|
|
|
(10,603
|
)
|
|
|
(6,142
|
)
|
|
|
(3,507
|
)
|
Net cash used in operating activities
|
|
|
(1,348
|
)
|
|
|
(738
|
)
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
|
-
|
|
|
|
(40,203
|
)
|
|
|
(6,400
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(40,203
|
)
|
|
|
(6,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from stock offering
|
|
|
-
|
|
|
|
99,175
|
|
|
|
-
|
|
Exercise of stock options
|
|
|
646
|
|
|
|
726
|
|
|
|
64
|
|
Net cash provided by financing activities
|
|
|
646
|
|
|
|
99,901
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
(702
|
)
|
|
|
58,960
|
|
|
|
(7,420
|
)
|
Cash, beginning of period
|
|
|
61,011
|
|
|
|
2,051
|
|
|
|
9,471
|
|
Cash, end of period
|
|
$
|
60,309
|
|
|
$
|
61,011
|
|
|
$
|
2,051
|
|
20. Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the Company for each of the quarters ended during 2017 and 2016.
Summary of Selected Quarterly Consolidated Financial Data
|
|
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
December 31
st
|
|
|
September 30
th
|
|
|
June 30
th
|
|
|
March 31
st
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
19,409
|
|
|
$
|
17,922
|
|
|
$
|
17,331
|
|
|
$
|
16,187
|
|
Interest expense
|
|
|
2,542
|
|
|
|
2,210
|
|
|
|
2,064
|
|
|
|
1,968
|
|
Net interest income
|
|
|
16,867
|
|
|
|
15,712
|
|
|
|
15,267
|
|
|
|
14,219
|
|
Provision for loan losses
|
|
|
400
|
|
|
|
-
|
|
|
|
500
|
|
|
|
-
|
|
Non-interest income
|
|
|
5,012
|
|
|
|
5,778
|
|
|
|
4,969
|
|
|
|
4,338
|
|
Non-interest expense
|
|
|
21,622
|
|
|
|
19,165
|
|
|
|
17,685
|
|
|
|
16,804
|
|
Provision (benefit) for income taxes
|
|
|
(2,881
|
)
|
|
|
4
|
|
|
|
(8
|
)
|
|
|
(34
|
)
|
Net income
|
|
$
|
2,738
|
|
|
$
|
2,321
|
|
|
$
|
2,059
|
|
|
$
|
1,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
14,636
|
|
|
$
|
13,620
|
|
|
$
|
13,209
|
|
|
$
|
12,762
|
|
Interest expense
|
|
|
1,946
|
|
|
|
1,834
|
|
|
|
1,612
|
|
|
|
1,471
|
|
Net interest income
|
|
|
12,690
|
|
|
|
11,786
|
|
|
|
11,597
|
|
|
|
11,291
|
|
Provision for loan losses
|
|
|
-
|
|
|
|
607
|
|
|
|
650
|
|
|
|
300
|
|
Non-interest income
|
|
|
4,727
|
|
|
|
5,142
|
|
|
|
3,031
|
|
|
|
2,412
|
|
Non-interest expense
|
|
|
15,970
|
|
|
|
15,013
|
|
|
|
12,967
|
|
|
|
12,343
|
|
Benefit for income taxes
|
|
|
(50
|
)
|
|
|
(32
|
)
|
|
|
(12
|
)
|
|
|
(25
|
)
|
Net income
|
|
$
|
1,497
|
|
|
$
|
1,340
|
|
|
$
|
1,023
|
|
|
$
|
1,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
(1)
|
Quarterly net income per share does not add to full year net income per share due to rounding.
|
21. Changes in Accumulated Other Comprehensive Income (Loss) By Component
(1)
The following table presents the changes in accumulated other comprehensive loss by component, net of taxes, for the years ended December 31, 2017, 2016, and 2015.
|
|
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, 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2016
|
|
$
|
(2,562
|
)
|
|
$
|
(603
|
)
|
|
$
|
(3,165
|
)
|
Unrealized loss on securities
|
|
|
(3,853
|
)
|
|
|
-
|
|
|
|
(3,853
|
)
|
Amounts reclassified from accumulated other comprehensive income to net income (2)
|
|
|
(416
|
)
|
|
|
140
|
|
|
|
(276
|
)
|
Net current-period other comprehensive income (loss)
|
|
|
(4,269
|
)
|
|
|
140
|
|
|
|
(4,129
|
)
|
Balance December 31, 2016
|
|
$
|
(6,831
|
)
|
|
$
|
(463
|
)
|
|
$
|
(7,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2015
|
|
$
|
82
|
|
|
$
|
(714
|
)
|
|
$
|
(632
|
)
|
Unrealized loss on securities
|
|
|
(2,577
|
)
|
|
|
-
|
|
|
|
(2,577
|
)
|
Amounts reclassified from accumulated other comprehensive income to net income (2)
|
|
|
(67
|
)
|
|
|
111
|
|
|
|
44
|
|
Net current-period other comprehensive income (loss)
|
|
|
(2,644
|
)
|
|
|
111
|
|
|
|
(2,533
|
)
|
Balance December 31, 2015
|
|
$
|
(2,562
|
)
|
|
$
|
(603
|
)
|
|
$
|
(3,165
|
)
|
(1)
|
All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.
|
(2)
|
Reclassification amounts are reported as gains/losses on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Income.
|
22. Business Combination
Oak Mortgage Company, LLC
On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC ("Oak Mortgage") and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. The aggregate cash purchase price paid to the Sellers for their limited liability company interests at closing was $7.1 million, $1.0 million of which was deposited in an escrow account to be disbursed one year from closing subject to adjustment for any covered indemnity claims under the Purchase Agreement. Escrow funds were disbursed in the third quarter of 2017. The purchase price was considered final as of December 31, 2017.
In connection with the Oak Mortgage acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, the subsequent adjustments to estimates, the final valuation of the fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, and the resulting goodwill recorded (in thousands):
Consideration paid:
|
|
Original
Estimates
|
|
|
Adjustments to Estimates
|
|
|
Final
Valuation
|
|
Cash
|
|
$
|
7,136
|
|
|
$
|
-
|
|
|
$
|
7,136
|
|
Equity instruments
|
|
|
202
|
|
|
|
-
|
|
|
|
202
|
|
Deferred additional purchase price
|
|
|
500
|
|
|
|
-
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of consideration
|
|
$
|
7,838
|
|
|
$
|
-
|
|
|
$
|
7,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,223
|
|
|
$
|
-
|
|
|
$
|
1,223
|
|
Loans held for sale
|
|
|
20,871
|
|
|
|
-
|
|
|
|
20,871
|
|
Loans receivable
|
|
|
1,132
|
|
|
|
-
|
|
|
|
1,132
|
|
Premises and equipment
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
Derivative assets
|
|
|
1,508
|
|
|
|
-
|
|
|
|
1,508
|
|
Intangible assets – non compete agreements
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
Other assets
|
|
|
125
|
|
|
|
-
|
|
|
|
125
|
|
Total assets
|
|
|
25,066
|
|
|
|
-
|
|
|
|
25,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse lines of credit
|
|
|
19,666
|
|
|
|
-
|
|
|
|
19,666
|
|
Derivative liabilities
|
|
|
412
|
|
|
|
-
|
|
|
|
412
|
|
Other liabilities
|
|
|
2,042
|
|
|
|
119
|
|
|
|
2,161
|
|
Total liabilities
|
|
|
22,120
|
|
|
|
119
|
|
|
|
22,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
2,946
|
|
|
|
(119
|
)
|
|
|
2,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill resulting from acquisition of Oak Mortgage
|
|
$
|
4,892
|
|
|
$
|
119
|
|
|
$
|
5,011
|
|
As of December 31, 2016, the estimates of fair values of the assets acquired and liabilities assumed in the acquisition of Oak Mortgage were finalized.
On an unaudited pro forma basis for the year ended December 31, 2016, the Company would have reported total revenues of $69.4 million and net income of $6.1 million. The pro forma information does not necessarily reflect the results of operations that would have occurred had Oak Mortgage been acquired by the Company at the beginning of 2016. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.
23: 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. There was no goodwill impairment recorded during 2017. 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,
2016
|
|
|
Additions/
Adjustments
|
|
|
Amortization
|
|
|
Balance
December 31,
2017
|
|
|
Amortization
Period (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
5,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,011
|
|
|
Indefinite
|
|
Non-compete agreements
|
|
|
61
|
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
-
|
|
|
|
1
|
|
Total
|
|
$
|
5,072
|
|
|
$
|
-
|
|
|
$
|
(61
|
)
|
|
$
|
5,011
|
|
|
|
|
|
(dollars in thousands)
|
|
Balance
December 31,
2015
|
|
|
Additions/
Adjustments
|
|
|
Amortization
|
|
|
Balance
December 31,
2016
|
|
|
Amortization
Period (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
5,011
|
|
|
$
|
-
|
|
|
$
|
5,011
|
|
|
Indefinite
|
|
Non-compete agreements
|
|
|
-
|
|
|
|
104
|
|
|
|
(43
|
)
|
|
|
61
|
|
|
|
1
|
|
Total
|
|
$
|
-
|
|
|
$
|
5,115
|
|
|
$
|
(43
|
)
|
|
$
|
5,072
|
|
|
|
|
|
24: 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 twelve months ended December 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 December 31, 2017 and December 31, 2016 (in thousands):
December 31, 2017
|
Balance Sheet
Presentation
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLC's
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLC's
|
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
|
|
December 31, 2016
|
Balance Sheet
Presentation
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLC's
|
Other Assets
|
|
$
|
439
|
|
|
$
|
20,792
|
|
Best efforts forward loan sales commitments
|
Other Assets
|
|
|
103
|
|
|
|
8,586
|
|
Mandatory forward loan sales commitments
|
Other Assets
|
|
|
229
|
|
|
|
18,373
|
|
|
|
|
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLC's
|
Other Liabilities
|
|
$
|
55
|
|
|
$
|
6,757
|
|
Best efforts forward loan sales commitments
|
Other Liabilities
|
|
|
125
|
|
|
|
18,963
|
|
Mandatory forward loan sales commitments
|
Other Liabilities
|
|
|
38
|
|
|
|
5,024
|
|
The following table summarizes the amounts recorded in Republic's statement of income for derivative instruments not designated as hedging instruments for the twelve months ended December 31, 2017 and December 31, 2016 (in thousands):
Twelve Months Ended December 31, 2017
|
Income Statement
Presentation
|
|
Gain/(Loss)
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
IRLC's
|
Mortgage banking income
|
|
$
|
(76
|
)
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
(98
|
)
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
(210
|
)
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
IRLC's
|
Mortgage banking income
|
|
$
|
54
|
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
32
|
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
(157
|
)
|
Twelve Months Ended December 31, 2016
|
Income Statement
Presentation
|
|
Gain/(Loss)
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
IRLC's
|
Mortgage banking income
|
|
$
|
(1,042
|
)
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
77
|
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
229
|
|
|
|
|
|
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
IRLC's
|
Mortgage banking income
|
|
$
|
(32
|
)
|
Best efforts forward loan sales commitments
|
Mortgage banking income
|
|
|
264
|
|
Mandatory forward loan sales commitments
|
Mortgage banking income
|
|
|
(38
|
)
|
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.
|
Tel:
215-564-1900
Fax:
215-564-3940
www.bdo.com
|
Ten Penn Center
1801 Market Street, Suite 1700
Philadelphia, PA 19103
|
Shareholders and Board of Directors
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on Internal Control over Financial Reporting
We have audited Republic First Bancorp, Inc.'s (the "Company's") internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria
.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated March 13, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Philadelphia, Pennsylvania
March 13, 2018