Notes to Consolidated Financial Statements (unaudited)
Note 1: Basis of Presentation
Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company incorporated under the laws of the Commonwealth of Pennsylvania. The wholly owned subsidiary, Republic First Bank, does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state-chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through its offices and branch locations in Philadelphia, Montgomery, Delaware and Bucks in Pennsylvania, Camden, Burlington, Atlantic and Gloucester, New Jersey and New York County. In 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. In 2018, Oak Mortgage was merged with and into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional, and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any other period.
Note 2: Summary of Significant Accounting Policies
Risks and Uncertainties
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The coronavirus (“COVID-19”) outbreak and the public health response to contain it resulted in unprecedented economic and financial market conditions. In response to these conditions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) reduced the federal funds target range by 150 basis points to 0.00% to 0.25% as of March 2020. During the first quarter of 2022, the federal funds target range increased by 25 basis points to a range of 0.25% - 0.50% to curb inflation, with continued increases planned.
The President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) as of March 2020 to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term. In December 2020, the Economic Aid Act was signed into law, which extended certain provisions of the CARES Act and provided additional support and financial assistance for small businesses, non-profit organizations, and other entities.
In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for credit losses and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income
.
Interest Rate Lock Commitments (“IRLCs”)
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance in FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding interest rate lock commitments (“IRLCs”) are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation, or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 10: Derivatives and Risk Management Activities for further detail of IRLCs.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for credit losses for in-scope financial instruments including investments of debt securities, loans, unfunded commitments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, composition of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for credit losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for credit losses and the carrying values of other real estate owned could differ materially in the near term.
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments for their current expected credit losses (“CECL”) effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of governance and reporting processes and related internal controls; model development, documentation and validation; and the incorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (“PD/LGD”). We contracted with a third-party vendor to assist us in the application of ASU 2016-13 and utilize various methodologies such as Vintage, Cohort, and Weighted Average Remaining Maturity to estimate the allowance for credit losses.
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. The establishment of or an increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Stock-Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of March 31, 2021, the only grants outstanding 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.
On April 29, 2014, the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all awards is calculated and recognized over the vesting period of the awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. As of March 31, 2022, the maximum number of common shares issuable under the 2014 Plan was 6.5 million shares. During the three months ended March 31, 2022, 709,083 stock units were granted under the 2014 Plan with a fair value of $3.7 million.
On April 27, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of March 31, 2022, no shares have been granted under the 2021 Plan.
The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant.
During the three months ended March 31, 2022 and 2021, 833,209 options and 632,635 options vested, respectively. Expense is recognized ratably over the period required to vest. As of March 31, 2022, the intrinsic value of the 5,021,706 options outstanding was $4.3 million, while the intrinsic value of the 4,286,250 exercisable (vested) options was $3.2 million. As of March 31, 2021, the intrinsic value of the 5,672,875 options outstanding was $1.6 million, while the intrinsic value of the 3,851,635 exercisable (vested) options was $793,000. During the three months ended March 31, 2022, 224,383 options were exercised with cash received of $615,000 and 86,686 options were forfeited with a weighted average grant date fair value of $179,000. During the three months ended March 31, 2021, 13,500 options were exercised with cash received of $43,503 and 208,230 options were forfeited with a weighted average grant date fair value of $433,000.
Information regarding stock option compensation for the three months ended March 31, 2022 and 2021 is set forth below:
| | 2022 | | | 2021 | |
Stock based compensation expense recognized | | $ | 133,000 | | | $ | 436,000 | |
Number of unvested stock options | | | 735,456 | | | | 1,826,040 | |
Fair value of unvested stock options | | $ | 1,030,886 | | | $ | 3,000,864 | |
Amount remaining to be recognized as expense | | $ | 639,853 | | | $ | 2,703,509 | |
The remaining unrecognized expense amount of $639,853 will be recognized ratably as expense through December 2024.
The Company granted stock units under the 2014 Plan during the three-month period ended March 31, 2022 and 2021. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.
The following table details the Stock Units for the three months ended March 31, 2022 and 2021:
| | Three Months Ended March 31, 2022 | | | Three Months Ended March 31, 2021 | |
| | Number of Units | | | Weighted Average Grant Date Fair Value | | | Number of Units | | | Weighted Average Grant Date Fair Value | |
Beginning balance | | | 516,513 | | | $ | 3.36 | | | | - | | | $ | - | |
Granted | | | 709,083 | | | | 5.25 | | | | 520,350 | | | | 3.34 | |
Vested | | | (181,706 | ) | | | 3.45 | | | | - | | | | 3.34 | |
Forfeited | | | (22,749 | ) | | | 3.34 | | | | (4,800 | ) | | | 3.34 | |
Ending balance | | | 1,021,141 | | | $ | 4.66 | | | | 515,550 | | | $ | 3.34 | |
Information regarding stock unit compensation for the three months ended March 31, 2022 and 2021 is set forth below:
| | 2022 | | | 2021 | |
Stock based compensation expense recognized | | $ | 156,000 | | | $ | 61,000 | |
Number of unvested stock units | | | 1,021,141 | | | | 515,550 | |
Fair value of unvested stock units | | $ | 5,250,010 | | | $ | 1,721,937 | |
Amount remaining to be recognized as expense | | $ | 4,610,157 | | | $ | 1,660,937 | |
The remaining unrecognized expense amount of $4,610,157 will be recognized ratably as expense through March 2026.
Earnings per Share
Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options/units granted through the Company’s stock option plans for the three months ended March 31, 2022 and March 31, 2021.
The calculation of EPS for the three months ended March 31, 2022 and 2021 is as follows (in thousands, except per share amounts):
(dollars in thousands, except per share amounts) | | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Net income (loss) attributable to basic common shareholders | | $ | 5,253 | | | $ | 6,193 | |
| | | | | | | | |
Weighted average shares outstanding | | | 59,229 | | | | 58,860 | |
| | | | | | | | |
Net income (loss) per share – basic | | $ | 0.09 | | | $ | 0.11 | |
| | | | | | | | |
Preferred stock dividends | | $ | 866 | | | $ | 875 | |
| | | | | | | | |
Net income (loss) attributable to diluted common shareholders | | $ | 6,119 | | | $ | 7,068 | |
| | | | | | | | |
Weighted average shares outstanding (including dilutive CSEs) | | | 75,180 | | | | 75,817 | |
| | | | | | | | |
Net income (loss) per share – diluted | | $ | 0.08 | | | $ | 0.09 | |
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. Anti-dilutive options are those options with weighted average exercise prices in excess of the weighted average market value for the periods presented.
| | Three Months Ended March 31, | |
(in thousands) | | 2022 | | | 2021 | |
| | | | | | | | |
Anti-dilutive securities | | | | | | | | |
| | | | | | | | |
Share based compensation awards | | | 5,188 | | | | 5,902 | |
| | | | | | | | |
Convertible preferred stock | | | - | | | | - | |
| | | | | | | | |
Total anti-dilutive securities | | | 5,188 | | | | 5,902 | |
Recent Accounting Pronouncements
ASU 2016-13
On January 1, 2022, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) (“ASC 326”), as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13, including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020.
Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief will expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.
The Company elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020 and 2021. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period which the Company has established as a one year period. In the unprecedented circumstances surrounding the COVID-19 pandemic and the response thereto, the Company believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to further delay adoption of ASU 2016-13 to January 1, 2022. This allowed the Company to utilize the CECL standard for the entire year of adoption.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $2.2 million as of January 1, 2022 for the cumulative effect of adopting ASC 326.
The following table illustrates the impact of ASC 326.
| | January 1, 2022 | |
| | As Reported | | | | | | | Impact of | |
| | Under | | | Pre-ASC 326 | | | ASC 326 | |
(In thousands) | | ASC 326 | | | Adoption | | | Adoption | |
Assets: | | | | | | | | | | | | |
Loans | | $ | 2,514,123 | | | $ | 2,514,123 | | | $ | - | |
| | | | | | | | | | | | |
ACL on Loans: | | | | | | | | | | | | |
Commercial real estate | | $ | 5,892 | | | $ | 5,802 | | | $ | 90 | |
Construction and land development | | | 1,841 | | | | 1,544 | | | | 297 | |
Commercial and industrial | | | 2,316 | | | | 2,856 | | | | (540 | ) |
Owner occupied real estate | | | 5,207 | | | | 3,158 | | | | 2,049 | |
Consumer and other | | | 663 | | | | 629 | | | | 34 | |
Residential mortgage | | | 6,025 | | | | 4,922 | | | | 1,103 | |
Paycheck protection program | | | - | | | | - | | | | - | |
Unallocated | | | - | | | | 53 | | | | (53 | ) |
Total ACL on Loans | | $ | 21,944 | | | $ | 18,964 | | | $ | 2,980 | |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
ACL on off-balance sheet commitments | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | |
Tax effect | | $ | - | | | $ | - | | | $ | 756 | |
| | | | | | | | | | | | |
Shareholders' equity: | | $ | - | | | $ | - | | | $ | 2,224 | |
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.
ASU 2021-01
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.
Note 3: Commitments and Contingencies
The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic, except as noted below.
On March 8, 2022, George E. Norcross, III, Gregory B. Braca, and Philip Norcross filed a complaint in the Court of Common Pleas of Philadelphia County (Commerce Program) against the Company and Company directors Vernon W. Hill II, Theodore J. Flocco, Jr., Brian Tierney, and Barry Spevak. The complaint seeks, among other things, declaratory and injunctive relief enjoining the Company and the individual defendants from implementing any amendments to the Company’s executive employment agreements until after the Company’s 2022 annual meeting of shareholders or taking any other actions outside the ordinary course of business, including executing or extending any related party agreements or any agreements obligating the incurrence of expenses related to the opening of new branches and the renovation of existing branches, without the affirmative vote of a majority of independent directors.
On March 29, 2022, George E. Norcross, III filed suit in the Philadelphia Court of Common Pleas to compel the Company to make available for inspection the books and records as is required under Pennsylvania law.
As of the date of this filing, Mr. Norcross has filed papers with the Court dismissing the actions without prejudice.
On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its current Interim Chief Executive Officer and director and two other current directors. The plaintiffs, the former Chairman of the Board and Chief Executive Officer of the Company and a former director of the Company, allege defamation, defamation per se and false light against the three individual defendants. The former Chairman of the Board and Chief Executive Officer also alleges a breach of his employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and (as against the individual defendants) punitive damages. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter. The Company plans to defend itself vigorously in this matter.
Note 4: Segment Reporting
The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and consumer loan products in the area surrounding its branches. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. Republic does not have loan production offices in those states.
Note 5: Investment Securities
A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities as of March 31, 2022 and December 31, 2021 is as follows:
| | March 31, 2022 | |
(dollars in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized/ Unrecognized Losses | | | Fair Value | |
Available for sale | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 23,019 | | | $ | - | | | $ | (1,483 | ) | | $ | 21,536 | |
Collateralized mortgage obligations | | | 380,816 | | | | 179 | | | | (26,654 | ) | | | 354,341 | |
Agency mortgage-backed securities | | | 532,021 | | | | 2 | | | | (36,901 | ) | | | 495,122 | |
Municipal securities | | | 23,254 | | | | 5 | | | | (1,422 | ) | | | 21,837 | |
Corporate bonds | | | 237,411 | | | | 1,922 | | | | (16,060 | ) | | | 223,273 | |
Investment securities available for sale | | $ | 1,196,521 | | | $ | 2,108 | | | $ | (82,520 | ) | | $ | 1,116,109 | |
| | | | | | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 61,072 | | | $ | - | | | $ | (1,631 | ) | | $ | 59,441 | |
Collateralized mortgage obligations | | | 402,478 | | | | 1,402 | | | | (25,300 | ) | | | 378,580 | |
Agency mortgage-backed securities | | | 1,186,306 | | | | 173 | | | | (93,089 | ) | | | 1,093,390 | |
Investment securities held to maturity | | $ | 1,649,856 | | | $ | 1,575 | | | $ | (120,020 | ) | | $ | 1,531,411 | |
| | | | | | | | | | | | | | | | |
Equity securities (1) | | | | | | | | | | | | | | $ | 7,888 | |
(1) | Equity securities consist of investments in non-cumulative preferred stock. |
| | December 31, 2021 | |
(dollars in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized/ Unrecognized Losses | | | Fair Value | |
Available for sale | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 25,671 | | | $ | - | | | $ | (743 | ) | | $ | 24,928 | |
Collateralized mortgage obligations | | | 375,570 | | | | 989 | | | | (5,010 | ) | | | 371,549 | |
Agency mortgage-backed securities | | | 446,740 | | | | 254 | | | | (5,511 | ) | | | 441,483 | |
Municipal securities | | | 6,596 | | | | 344 | | | | - | | | | 6,940 | |
Corporate bonds | | | 232,395 | | | | 1,480 | | | | (3,409 | ) | | | 230,466 | |
Investment securities available for sale | | $ | 1,086,972 | | | $ | 3,067 | | | $ | (14,673 | ) | | $ | 1,075,366 | |
| | | | | | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 66,438 | | | $ | 1,549 | | | $ | - | | | $ | 67,987 | |
Collateralized mortgage obligations | | | 400,424 | | | | 4,607 | | | | (8,803 | ) | | | 396,228 | |
Agency mortgage-backed securities | | | 1,193,430 | | | | 2,295 | | | | (12,580 | ) | | | 1,183,145 | |
Investment securities held to maturity | | $ | 1,660,292 | | | $ | 8,451 | | | $ | (21,383 | ) | | $ | 1,647,360 | |
| | | | | | | | | | | | | | | | |
Equity securities (1) | | | | | | | | | | | | | | $ | 9,173 | |
(1) | Equity securities consist of investments in non-cumulative preferred stock. |
The following table presents investment securities by stated maturity as of March 31, 2022. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.
| | Available for Sale | | | Held to Maturity | |
(dollars in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Due in 1 year or less | | $ | 39,040 | | | $ | 36,840 | | | $ | - | | | $ | - | |
After 1 year to 5 years | | | 99,830 | | | | 97,297 | | | | 61,072 | | | | 59,441 | |
After 5 years to 10 years | | | 38,619 | | | | 37,595 | | | | - | | | | - | |
After 10 years | | | 106,195 | | | | 94,914 | | | | - | | | | - | |
Collateralized mortgage obligations | | | 380,816 | | | | 354,341 | | | | 402,478 | | | | 378,580 | |
Agency mortgage-backed securities | | | 532,021 | | | | 495,122 | | | | 1,186,306 | | | | 1,093,390 | |
Total investment securities | | $ | 1,196,521 | | | $ | 1,116,109 | | | $ | 1,649,856 | | | $ | 1,531,411 | |
The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities. Equity securities consist of investments in non-cumulative preferred stock. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of March 31, 2022 or December 31, 2021. 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 adoption of CECL on 1/1/22 resulted in no impact to the HTM securities portfolio, as the Company’s entire portfolio consists of securities ultimately guaranteed by various agencies or government-sponsored enterprises and carries zero risk of nonpayment.
The Company evaluates investment securities that are in an unrealized/unrecognized loss position on a quarterly basis and more frequently when warranted in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized/unrecognized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded during the three months ended March 31, 2022 or the year ended December 31, 2021.
The following tables show the fair value and gross unrealized/unrecognized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized/unrecognized loss position as of March 31, 2022 and December 31, 2021:
| | March 31, 2022 | |
| | 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 | | $ | - | | | $ | - | | | $ | 21,536 | | | $ | 1,483 | | | $ | 21,536 | | | $ | 1,483 | |
Collateralized mortgage obligations | | | 269,544 | | | | 19,278 | | | | 65,184 | | | | 7,376 | | | | 334,728 | | | | 26,654 | |
Agency mortgage-backed securities | | | 355,359 | | | | 26,272 | | | | 113,299 | | | | 10,629 | | | | 468,658 | | | | 36,901 | |
Municipal securities | | | 14,139 | | | | 1,422 | | | | - | | | | - | | | | 14,139 | | | | 1,422 | |
Corporate bonds | | | 141,967 | | | | 10,828 | | | | 66,205 | | | | 5,232 | | | | 208,172 | | | | 16,060 | |
Investment Securities Available for Sale | | $ | 781,009 | | | $ | 57,800 | | | $ | 266,224 | | | $ | 24,720 | | | $ | 1,047,233 | | | $ | 82,520 | |
| | March 31, 2022 | |
| | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | | Fair Value | | | Unrecognized Losses | | | Fair Value | | | Unrecognized Losses | | | Fair Value | | | Unrecognized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 59,441 | | | $ | 1,631 | | | $ | - | | | $ | - | | | $ | 59,441 | | | $ | 1,631 | |
Collateralized mortgage obligations | | | 134,697 | | | | 10,137 | | | | 180,892 | | | | 15,163 | | | | 315,589 | | | | 25,300 | |
Agency mortgage-backed securities | | | 887,058 | | | | 73,969 | | | | 147,840 | | | | 19,120 | | | | 1,034,898 | | | | 93,089 | |
Investment Securities Held to Maturity | | $ | 1,081,196 | | | $ | 85,737 | | | $ | 328,732 | | | $ | 34,283 | | | $ | 1,409,928 | | | $ | 120,020 | |
| | December 31, 2021 | |
| | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | - | | | $ | - | | | $ | 24,928 | | | $ | 743 | | | $ | 24,928 | | | $ | 743 | |
Collateralized mortgage obligations | | | 188,416 | | | | 2,982 | | | | 57,708 | | | | 2,028 | | | | 246,124 | | | | 5,010 | |
Agency mortgage-backed securities | | | 365,859 | | | | 4,896 | | | | 39,928 | | | | 615 | | | | 405,787 | | | | 5,511 | |
Municipal securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Corporate bonds | | | 154,436 | | | | 2,281 | | | | 33,351 | | | | 1,128 | | | | 187,787 | | | | 3,409 | |
Investment Securities Available for Sale | | $ | 708,711 | | | $ | 10,159 | | | $ | 155,915 | | | $ | 4,514 | | | $ | 864,626 | | | $ | 14,673 | |
| | December 31, 2021 | |
| | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | | Fair Value | | | Unrecognized Losses | | | Fair Value | | | Unrecognized Losses | | | Fair Value | | | Unrecognized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Collateralized mortgage obligations | | | 183,376 | | | | 6,719 | | | | 81,994 | | | | 2,084 | | | | 265,370 | | | | 8,803 | |
Agency mortgage-backed securities | | | 899,231 | | | | 10,815 | | | | 61,756 | | | | 1,765 | | | | 960,987 | | | | 12,580 | |
Investment Securities Held to Maturity | | $ | 1,082,607 | | | $ | 17,534 | | | $ | 143,750 | | | $ | 3,849 | | | $ | 1,226,357 | | | $ | 21,383 | |
Unrealized/unrecognized losses on securities in the investment portfolio amounted to $202.5 million with a total fair value of $2.5 billion as of March 31, 2022 compared to unrealized/unrecognized losses of $36.1 million with a total fair value of $2.1 billion as of December 31, 2021. The Company believes the unrealized/unrecognized losses presented in the tables above are primarily related to market interest rates or limited trading activity in a particular type of security rather than the underlying credit quality of the issuers. The Company does not currently intend to sell or believe it will be required to sell securities in an unrealized/unrecognized loss position prior to maturity or recovery of the amortized cost bases.
The Company held seventeen U.S. Government agency securities, 78 collateralized mortgage obligations and 98 agency mortgage-backed securities that were in an unrealized/unrecognized loss position as of March 31, 2022. 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 losses related to credit factors on any of these securities and believes the unrealized/unrecognized losses are due to fluctuations in fair values resulting from changes in market interest rates as of March 31, 2022.
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 New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. As of March 31, 2022, the investment portfolio included six municipal securities that were in an unrealized loss position.
As of March 31, 2022, the investment portfolio included seventeen corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. Seven of the seventeen corporate bonds are issued by four of the largest U.S. financial institutions. Each financial institution is well capitalized.
There were no proceeds from the sale of securities during the three months ended March 31, 2022 or the three months ended March 31, 2021.
Note 6: Loans Receivable and Allowance for Credit Losses
The following table sets forth the Company’s gross loans by major category as of March 31, 2022 and December 31, 2021:
(dollars in thousands) | | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | |
Commercial real estate | | $ | 771,549 | | | $ | 780,311 | |
Construction and land development | | | 234,217 | | | | 216,008 | |
Commercial and industrial | | | 289,547 | | | | 252,376 | |
Owner occupied real estate | | | 534,710 | | | | 526,570 | |
Consumer and other | | | 78,374 | | | | 83,487 | |
Residential mortgage | | | 590,337 | | | | 536,332 | |
Paycheck protection program | | | 63,334 | | | | 119,039 | |
Total loans receivable | | | 2,562,068 | | | | 2,514,123 | |
Deferred costs (fees) | | | (4,901 | ) | | | (6,758 | ) |
Allowance for credit losses | | | (22,514 | ) | | | (18,964 | ) |
Net loans receivable | | $ | 2,534,653 | | | $ | 2,488,401 | |
The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for credit 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. Paycheck Protection Program (“PPP”) loans are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2022 and December 31, 2021:
(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 | |
March 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 479 | | | $ | - | | | $ | 4,493 | | | $ | 4,972 | | | $ | 766,577 | | | $ | 771,549 | | | $ | - | |
Construction and land development | | | - | | | | 762 | | | | - | | | | 762 | | | | 233,455 | | | | 234,217 | | | | - | |
Commercial and industrial | | | 248 | | | | - | | | | 2,468 | | | | 2,716 | | | | 286,831 | | | | 289,547 | | | | - | |
Owner occupied real estate | | | 1,606 | | | | - | | | | 3,710 | | | | 5,316 | | | | 529,394 | | | | 534,710 | | | | - | |
Consumer and other | | | 1,227 | | | | 2 | | | | 1,052 | | | | 2,281 | | | | 76,093 | | | | 78,374 | | | | 2 | |
Residential mortgage | | | 3,917 | | | | 2,048 | | | | 701 | | | | 6,666 | | | | 583,671 | | | | 590,337 | | | | - | |
Paycheck protection program | | | 111 | | | | 13 | | | | - | | | | 124 | | | | 63,210 | | | | 63,334 | | | | - | |
Total | | $ | 7,588 | | | $ | 2,825 | | | $ | 12,424 | | | $ | 22,837 | | | $ | 2,539,231 | | | $ | 2,562,068 | | | $ | 2 | |
(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 | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | - | | | $ | - | | | $ | 4,493 | | | $ | 4,493 | | | $ | 775,818 | | | $ | 780,311 | | | $ | - | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | 216,008 | | | | 216,008 | | | | - | |
Commercial and industrial | | | - | | | | - | | | | 2,558 | | | | 2,558 | | | | 249,818 | | | | 252,376 | | | | - | |
Owner occupied real estate | | | - | | | | 4,139 | | | | 3,714 | | | | 7,853 | | | | 518,717 | | | | 526,570 | | | | - | |
Consumer and other | | | 92 | | | | 20 | | | | 1,080 | | | | 1,192 | | | | 82,295 | | | | 83,487 | | | | 5 | |
Residential mortgage | | | 3,165 | | | | - | | | | 701 | | | | 3,866 | | | | 532,466 | | | | 536,332 | | | | - | |
Paycheck protection program | | | 1,594 | | | | 547 | | | | 318 | | | | 2,459 | | | | 116,580 | | | | 119,039 | | | | 318 | |
Total | | $ | 4,851 | | | $ | 4,706 | | | $ | 12,864 | | | $ | 22,421 | | | $ | 2,491,702 | | | $ | 2,514,123 | | | $ | 323 | |
Credit Quality Indicators:
The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information, and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy. The Company uses the following regulatory definitions for criticized and classified risk ratings:
Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions, and values.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2022:
(dollar in thousands) | | | | | | | | | | | | | | | | | 2017 and | | | | | | | |
March 31, 2022 | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | Prior | | | Revolving | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 31,018 | | | $ | 196,776 | | | $ | 114,902 | | | $ | 113,200 | | | $ | 80,853 | | | $ | 217,072 | | | $ | 13,235 | | | $ | 767,056 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,493 | | | | - | | | | 4,493 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Commercial Real Estate | | $ | 31,018 | | | $ | 196,776 | | | $ | 114,902 | | | $ | 113,200 | | | $ | 80,853 | | | $ | 221,565 | | | $ | 13,235 | | | $ | 771,549 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction & Land Development | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 5,614 | | | $ | 90,869 | | | $ | 88,507 | | | $ | 30,107 | | | $ | 5,759 | | | $ | 10,612 | | | $ | 2,749 | | | $ | 234,217 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Construction | | $ | 5,614 | | | $ | 90,869 | | | $ | 88,507 | | | $ | 30,107 | | | $ | 5,759 | | | $ | 10,612 | | | $ | 2,749 | | | $ | 234,217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial & Industrial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 60,485 | | | $ | 42,017 | | | $ | 18,914 | | | $ | 13,478 | | | $ | 14,689 | | | $ | 23,893 | | | $ | 113,603 | | | $ | 287,079 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | 2,161 | | | | 307 | | | | - | | | | 2,468 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Commercial & Industrial | | $ | 60,485 | | | $ | 42,017 | | | $ | 18,914 | | | $ | 13,478 | | | $ | 16,850 | | | $ | 24,200 | | | $ | 113,603 | | | $ | 289,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Owner Occupied Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 18,542 | | | $ | 96,030 | | | $ | 86,695 | | | $ | 53,524 | | | $ | 80,910 | | | $ | 178,196 | | | $ | 11,001 | | | $ | 524,898 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 234 | | | | - | | | | 234 | |
Substandard | | | - | | | | - | | | | - | | | | 4,135 | | | | - | | | | 5,443 | | | | - | | | | 9,578 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Owner Occupied | | $ | 18,542 | | | $ | 96,030 | | | $ | 86,695 | | | $ | 57,659 | | | $ | 80,910 | | | $ | 183,873 | | | $ | 11,001 | | | $ | 534,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer & Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 505 | | | $ | 2,018 | | | $ | 1,773 | | | $ | 2,138 | | | $ | 1,463 | | | $ | 4,296 | | | $ | 65,129 | | | $ | 77,322 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | 117 | | | | 24 | | | | 911 | | | | 1,052 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Consumer & Other | | $ | 505 | | | $ | 2,018 | | | $ | 1,773 | | | $ | 2,138 | | | $ | 1,580 | | | $ | 4,320 | | | $ | 66,040 | | | $ | 78,374 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 63,644 | | | $ | 212,617 | | | $ | 172,253 | | | $ | 91,259 | | | $ | 17,278 | | | $ | 32,585 | | | $ | - | | | $ | 589,636 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | 701 | | | | - | | | | 701 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Residential Mortgage | | $ | 63,644 | | | $ | 212,617 | | | $ | 172,253 | | | $ | 91,259 | | | $ | 17,278 | | | $ | 33,286 | | | $ | - | | | $ | 590,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Paycheck Protection Program | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | - | | | $ | 58,718 | | | $ | 4,616 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 63,334 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Paycheck Protection | | $ | - | | | $ | 58,718 | | | $ | 4,616 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 63,334 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 179,808 | | | $ | 699,045 | | | $ | 487,660 | | | $ | 303,706 | | | $ | 200,952 | | | $ | 466,654 | | | $ | 205,717 | | | $ | 2,543,542 | |
Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 234 | | | | - | | | | 234 | |
Substandard | | | - | | | | - | | | | - | | | | 4,135 | | | | 2,278 | | | | 10,968 | | | | 911 | | | | 18,292 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Loans | | $ | 179,808 | | | $ | 699,045 | | | $ | 487,660 | | | $ | 307,841 | | | $ | 203,230 | | | $ | 477,856 | | | $ | 206,628 | | | $ | 2,562,068 | |
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2021:
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
December 31, 2021: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 775,818 | | | $ | - | | | $ | 4,493 | | | $ | - | | | $ | 780,311 | |
Construction and land development | | | 216,008 | | | | - | | | | - | | | | - | | | | 216,008 | |
Commercial and industrial | | | 249,818 | | | | - | | | | 2,558 | | | | - | | | | 252,376 | |
Owner occupied real estate | | | 516,741 | | | | 236 | | | | 9,593 | | | | - | | | | 526,570 | |
Consumer and other | | | 82,412 | | | | - | | | | 1,075 | | | | - | | | | 83,487 | |
Residential mortgage | | | 535,631 | | | | - | | | | 701 | | | | - | | | | 536,332 | |
Paycheck protection program | | | 119,039 | | | | - | | | | - | | | | - | | | | 119,039 | |
Total | | $ | 2,495,467 | | | $ | 236 | | | $ | 18,420 | | | $ | - | | | $ | 2,514,123 | |
The following table shows non-accrual loans by class as of March 31, 2022 and December 31, 2021:
(dollars in thousands) | | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | |
Commercial real estate | | $ | 4,493 | | | $ | 4,493 | |
Construction and land development | | | - | | | | - | |
Commercial and industrial | | | 2,468 | | | | 2,558 | |
Owner occupied real estate | | | 3,710 | | | | 3,714 | |
Consumer and other | | | 1,050 | | | | 1,075 | |
Residential mortgage | | | 701 | | | | 701 | |
Paycheck protection program | | | - | | | | - | |
Total | | $ | 12,422 | | | $ | 12,541 | |
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $185,000 and $189,000 for the three months ended March 31, 2022 and 2021, respectively.
The following tables provide a summary of the allowance for credit losses and balance of loans receivable by loan class and by impairment method as of March 31, 2022 and December 31, 2021:
(dollars in thousands) | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Paycheck Protection Program | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 915 | | | $ | - | | | $ | 2,268 | | | $ | 323 | | | $ | 103 | | | $ | - | | | $ | - | | | $ | - | | | $ | 3,609 | |
Collectively evaluated for impairment | | | 4,455 | | | | 1,268 | | | | 1,177 | | | | 4,461 | | | | 815 | | | | 6,729 | | | | - | | | | - | | | | 18,905 | |
Total allowance for credit losses | | $ | 5,370 | | | $ | 1,268 | | | $ | 3,445 | | | $ | 4,784 | | | $ | 918 | | | $ | 6,729 | | | $ | - | | | $ | - | | | $ | 22,514 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans evaluated individually | | $ | 4,493 | | | $ | - | | | $ | 2,467 | | | $ | 9,578 | | | $ | 1,053 | | | $ | 701 | | | $ | - | | | $ | - | | | $ | 18,292 | |
Loans evaluated collectively | | | 767,056 | | | | 234,217 | | | | 287,080 | | | | 525,132 | | | | 77,321 | | | | 589,636 | | | | 63,334 | | | | - | | | | 2,543,776 | |
Total loans receivable | | $ | 771,549 | | | $ | 234,217 | | | $ | 289,547 | | | $ | 534,710 | | | $ | 78,374 | | | $ | 590,337 | | | $ | 63,334 | | | $ | - | | | $ | 2,562,068 | |
(dollars in thousands) | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Paycheck Protection Program | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 992 | | | $ | - | | | $ | 1,169 | | | $ | 582 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 2,743 | |
Collectively evaluated for impairment | | | 4,810 | | | | 1,544 | | | | 1,687 | | | | 2,576 | | | | 629 | | | | 4,922 | | | | - | | | | 53 | | | | 16,221 | |
Total allowance for loan losses | | $ | 5,802 | | | $ | 1,544 | | | $ | 2,856 | | | $ | 3,158 | | | $ | 629 | | | $ | 4,922 | | | $ | - | | | $ | 53 | | | $ | 18,964 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans evaluated individually | | $ | 4,493 | | | $ | - | | | $ | 2,558 | | | $ | 9,593 | | | $ | 1,075 | | | $ | 701 | | | $ | - | | | $ | - | | | $ | 18,420 | |
Loans evaluated collectively | | | 775,818 | | | | 216,008 | | | | 249,818 | | | | 516,977 | | | | 82,412 | | | | 535,631 | | | | 119,039 | | | | - | | | | 2,495,703 | |
Total loans receivable | | $ | 780,311 | | | $ | 216,008 | | | $ | 252,376 | | | $ | 526,570 | | | $ | 83,487 | | | $ | 536,332 | | | $ | 119,039 | | | $ | - | | | $ | 2,514,123 | |
Impaired loans – Impaired loans disclosures presented below as of December 31, 2021 and for the three months ended March 31, 2021, represent requirements prior to the adoption of CECL on January 1, 2022.
The following table summarizes information regarding impaired loans by loan portfolio class as of December 31, 2021:
| | December 31, 2021 | |
(dollars in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | |
With no related allowance recorded: | | | | | | | | | | | | |
Commercial real estate | | $ | 479 | | | $ | 691 | | | $ | - | |
Construction and land development | | | - | | | | - | | | | - | |
Commercial and industrial | | | 80 | | | | 81 | | | | - | |
Owner occupied real estate | | | 2,080 | | | | 2,080 | | | | - | |
Consumer and other | | | 1,075 | | | | 1,422 | | | | - | |
Residential mortgage | | | 701 | | | | 768 | | | | - | |
Paycheck protection program | | | - | | | | - | | | | - | |
Total | | $ | 4,415 | | | $ | 5,042 | | | $ | - | |
| | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | |
Commercial real estate | | $ | 4,014 | | | $ | 4,536 | | | $ | 992 | |
Construction and land development | | | - | | | | - | | | | - | |
Commercial and industrial | | | 2,478 | | | | 2,616 | | | | 1,169 | |
Owner occupied real estate | | | 7,513 | | | | 7,532 | | | | 582 | |
Consumer and other | | | - | | | | - | | | | - | |
Residential mortgage | | | - | | | | - | | | | - | |
Paycheck protection program | | | - | | | | - | | | | - | |
Total | | $ | 14,005 | | | $ | 14,684 | | | $ | 2,743 | |
| | | | | | | | | | | | |
Total: | | | | | | | | | | | | |
Commercial real estate | | $ | 4,493 | | | $ | 5,227 | | | $ | 992 | |
Construction and land development | | | - | | | | - | | | | - | |
Commercial and industrial | | | 2,558 | | | | 2,697 | | | | 1,169 | |
Owner occupied real estate | | | 9,593 | | | | 9,612 | | | | 582 | |
Consumer and other | | | 1,075 | | | | 1,422 | | | | - | |
Residential mortgage | | | 701 | | | | 768 | | | | - | |
Paycheck protection program | | | - | | | | - | | | | - | |
Total | | $ | 18,420 | | | $ | 19,726 | | | $ | 2,743 | |
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2022:
(dollars in thousands) | | Real Estate | | | Business Asset | | | Total | |
Commercial real estate | | $ | 4,493 | | | $ | - | | | $ | 4,493 | |
Construction and land development | | | - | | | | - | | | | - | |
Commercial and industrial | | | 306 | | | | 2,162 | | | | 2,468 | |
Owner occupied real estate | | | 9,578 | | | | - | | | | 9,578 | |
Consumer and other | | | 1,052 | | | | - | | | | 1,052 | |
Residential mortgage | | | 701 | | | | - | | | | 701 | |
Paycheck protection program | | | - | | | | - | | | | - | |
Total | | $ | 16,130 | | | $ | 2,162 | | | $ | 18,292 | |
The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2021:
| | Three Months Ended | |
| | March 31, 2021 | |
| | | |
(dollars in thousands) | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | |
Commercial real estate | | $ | 6,005 | | | $ | 70 | |
Construction and land development | | | - | | | | - | |
Commercial and industrial | | | 2,300 | | | | - | |
Owner occupied real estate | | | 2,827 | | | | 22 | |
Consumer and other | | | 1,195 | | | | 9 | |
Residential mortgage | | | 833 | | | | 6 | |
Paycheck protection program | | | - | | | | - | |
Total | | $ | 13,160 | | | $ | 107 | |
| | | | | | | | |
With an allowance recorded | | | | | | | | |
Commercial real estate | | $ | 4,015 | | | $ | - | |
Construction and land development | | | - | | | | - | |
Commercial and industrial | | | 670 | | | | - | |
Owner occupied real estate | | | 1,073 | | | | - | |
Consumer and other | | | - | | | | - | |
Residential mortgage | | | - | | | | - | |
Paycheck protection program | | | - | | | | - | |
Total | | $ | 5,758 | | | $ | - | |
| | | | | | | | |
Total | | | | | | | | |
Commercial real estate | | $ | 10,020 | | | $ | 70 | |
Construction and land development | | | - | | | | - | |
Commercial and industrial | | | 2,970 | | | | - | |
Owner occupied real estate | | | 3,900 | | | | 22 | |
Consumer and other | | | 1,195 | | | | 9 | |
Residential mortgage | | | 833 | | | | 6 | |
Paycheck protection program | | | - | | | | - | |
Total | | $ | 18,918 | | | $ | 107 | |
The following table details activity in the allowance for credit losses on loans for the three months ended March 31, 2022. The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. Results for the periods beginning after January 1, 2022 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The transition adjustment includes an increase in the allowance of $3.0 million. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | Three Months Ended March 31, 2022 | |
(Dollars in thousands) | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Paycheck Protection Program | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance January 1, 2022: | | $ | 5,802 | | | $ | 1,544 | | | $ | 2,856 | | | $ | 3,158 | | | $ | 629 | | | $ | 4,922 | | | $ | - | | | $ | 53 | | | $ | 18,964 | |
Day 1 effect of CECL | | | 90 | | | | 297 | | | | (540 | ) | | | 2,049 | | | | 34 | | | | 1,103 | | | | - | | | | (53 | ) | | | 2,980 | |
Charge-offs | | | - | | | | - | | | | - | | | | - | | | | (67 | ) | | | - | | | | - | | | | - | | | | (67 | ) |
Recoveries | | | - | | | | - | | | | 10 | | | | 7 | | | | - | | | | - | | | | - | | | | - | | | | 17 | |
Provisions | | | (522 | ) | | | (573 | ) | | | 1,119 | | | | (430 | ) | | | 322 | | | | 704 | | | | - | | | | - | | | | 620 | |
Ending balance March 31, 2022: | | $ | 5,370 | | | $ | 1,268 | | | $ | 3,445 | | | $ | 4,784 | | | $ | 918 | | | $ | 6,729 | | | $ | - | | | $ | - | | | $ | 22,514 | |
The following table provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2021:
(dollars in thousands) | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Paycheck Protection Program | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance January 1, 2021: | | $ | 4,394 | | | $ | 948 | | | $ | 1,367 | | | $ | 2,374 | | | $ | 723 | | | $ | 3,025 | | | $ | - | | | $ | 144 | | | $ | 12,975 | |
Charge-offs | | | - | | | | - | | | | - | | | | - | | | | (34 | ) | | | - | | | | - | | | | - | | | | (34 | ) |
Recoveries | | | - | | | | - | | | | 104 | | | | 43 | | | | 3 | | | | - | | | | - | | | | - | | | | 150 | |
Provisions | | | 1,246 | | | | 133 | | | | 265 | | | | 12 | | | | 53 | | | | 931 | | | | - | | | | 360 | | | | 3,000 | |
Ending balance March 31, 2021 | | $ | 5,640 | | | $ | 1,081 | | | $ | 1,736 | | | $ | 2,429 | | | $ | 745 | | | $ | 3,956 | | | $ | - | | | $ | 504 | | | $ | 16,091 | |
Troubled Debt Restructurings
A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.
Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of (i) December 30, 2020 or (ii) 60 days after the President declares a termination of the COVID-19 national emergency were not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law, which extended the period to suspend the requirements under TDR accounting guidance to the earlier of (i) January 1, 2022 or (ii) 60 days after the President declared a termination of the national emergency related to the COVID-19 pandemic. As of March 31, 2022 and December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the COVID pandemic have resumed contractual payments. All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for credit losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into the Company’s estimate of the allowance for credit losses. The level of any subsequent defaults will likely be affected by future economic conditions.
There were no loan modifications made during the three months ended March 31, 2022 or 2021 that met the criteria of a TDR.
After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three months ended March 31, 2022 or the year ended December 31, 2021. The last remaining TDR on the Company’s books was paid off in full during 2021.
There was one residential mortgage in the process of foreclosure as of March 31, 2022 and December 31, 2021. There was no other real estate owned relating to residential real estate as of March 31, 2022 and December 31, 2021.
Note 7: Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
The Company follows the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of March 31, 2022 and December 31, 2021 were as follows:
(dollars in thousands) | | Total | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | |
| | | | | | | | | | | | | | | | |
March 31, 2022 | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 21,536 | | | $ | - | | | $ | 21,536 | | | $ | - | |
Collateralized mortgage obligations | | | 354,341 | | | | - | | | | 354,341 | | | | - | |
Agency mortgage-backed securities | | | 495,122 | | | | - | | | | 495,122 | | | | - | |
Municipal securities | | | 21,837 | | | | - | | | | 21,837 | | | | - | |
Corporate bonds | | | 223,273 | | | | - | | | | 220,609 | | | | 2,664 | |
Investment securities available for sale | | $ | 1,116,109 | | | | | | | $ | 1,113,445 | | | $ | 2,664 | |
Equity securities | | | 7,888 | | | | 7,888 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Mortgage Loans Held for Sale | | $ | 4,653 | | | $ | - | | | $ | 4,653 | | | $ | - | |
SBA Servicing Assets | | | 4,568 | | | | - | | | | - | | | | 4,568 | |
Interest Rate Lock Commitments | | | 107 | | | | - | | | | 107 | | | | - | |
Best Efforts Forward Loan Sales Commitments | | | 74 | | | | - | | | | 74 | | | | - | |
Mandatory Forward Loan Sales Commitments | | | 54 | | | | - | | | | 54 | | | | - | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest Rate Lock Commitments | | | 9 | | | | - | | | | 9 | | | | - | |
Best Efforts Forward Loan Sales Commitments | | | 7 | | | | - | | | | 7 | | | | - | |
Mandatory Forward Loan Sales Commitments | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 24,928 | | | $ | - | | | $ | 24,928 | | | $ | - | |
Collateralized mortgage obligations | | | 371,549 | | | | - | | | | 371,549 | | | | - | |
Agency mortgage-backed securities | | | 441,483 | | | | - | | | | 441,483 | | | | - | |
Municipal securities | | | 6,940 | | | | - | | | | 6,940 | | | | - | |
Corporate bonds | | | 230,466 | | | | - | | | | 227,841 | | | | 2,625 | |
Investment securities available for sale | | $ | 1,075,366 | | | | | | | $ | 1,072,741 | | | $ | 2,625 | |
Equity securities | | | 9,173 | | | | 9,173 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Mortgage Loans Held for Sale | | $ | 8,538 | | | $ | - | | | $ | 8,538 | | | $ | - | |
SBA Servicing Assets | | | 4,705 | | | | - | | | | - | | | | 4,705 | |
Interest Rate Lock Commitments | | | 378 | | | | - | | | | 378 | | | | - | |
Best Efforts Forward Loan Sales Commitments | | | 5 | | | | - | | | | 5 | | | | - | |
Mandatory Forward Loan Sales Commitments | | | 5 | | | | - | | | | 5 | | | | - | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest Rate Lock Commitments | | | - | | | | - | | | | - | | | | - | |
Best Efforts Forward Loan Sales Commitments | | | 96 | | | | - | | | | 96 | | | | - | |
Mandatory Forward Loan Sales Commitments | | | 44 | | | | - | | | | 44 | | | | - | |
The following table presents an analysis of the activity in the SBA servicing assets for the three months ended March 31, 2022 and 2021:
| | Three Months Ended March 31, | |
(dollars in thousands) | | 2022 | | | 2021 | |
| | | | | | | | |
Beginning balance, January 1st | | $ | 4,705 | | | $ | 4,626 | |
Additions | | | 111 | | | | 178 | |
Fair value adjustments | | | (248 | ) | | | (187 | ) |
Ending balance, March 31st | | $ | 4,568 | | | $ | 4,617 | |
Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $539,000 and $482,000 for the three months ended March 31, 2022 and 2021, respectively. Total loans in the amount of $204.7 million as of March 31, 2022 and $218.9 million on December 31, 2021 were serviced for others.
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2022 and 2021:
| | 2022 | | | 2021 | |
Level 3 Investments Only | | Corporate | | | Corporate | |
(dollars in thousands) | | Bonds | | | Bonds | |
Balance, January 1st | | $ | 2,625 | | | $ | 2,631 | |
Unrealized gains (losses) | | | 39 | | | | (11 | ) |
Paydowns | | | - | | | | - | |
Proceeds from sales | | | - | | | | - | |
Realized gains | | | - | | | | - | |
Impairment charges on Level 3 | | | - | | | | - | |
Balance, March 31st | | $ | 2,664 | | | $ | 2,620 | |
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used as of March 31, 2022 and December 31, 2021 were as follows:
(dollars in thousands) | | Total | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | |
March 31, 2022 | | | | | | | | | | | | | | | | |
Individually evaluated loans | | $ | 5,186 | | | $ | - | | | $ | - | | | $ | 5,186 | |
Other real estate owned | | | 360 | | | | - | | | | - | | | | 360 | |
| | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | |
Impaired loans | | $ | 11,664 | | | $ | - | | | $ | - | | | $ | 11,664 | |
Other real estate owned | | | 360 | | | | - | | | | - | | | | 360 | |
The table below presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis (dollars in thousands):
| | Quantitative Information about Level 3 Fair Value Measurements | |
Asset Description | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | |
March 31, 2022 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate bonds | | $ | 2,664 | | Discounted Cash Flows | | Discount Rate | | | (4.00%) | | | |
| | | | | | | | | | | | | |
SBA servicing assets | | $ | 4,568 | | Discounted Cash Flows | | Conditional Prepayment Rate | | | (14.65%) | | | |
| | | | | | | Discount Rate | | | (10.00%) | | | |
| | | | | | | | | | | | | |
Individually evaluated loans | | $ | 5,186 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | 13% | - | 27% | (16%) | (3) |
| | | | | | | | | | | | | |
| | | | | Sales Price | | Liquidation expenses (2) | | | (14%) | | | (3) |
| | | | | | | | | | | | | |
Other real estate owned | | $ | 360 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | | (19%) | | | (3) |
| | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate bonds | | $ | 2,625 | | Discounted Cash Flows | | Discount Rate | | | (3.42%) | | | |
| | | | | | | | | | | | | |
SBA servicing assets | | $ | 4,705 | | Discounted Cash Flows | | Conditional Prepayment Rate | | | (13.93%) | | | |
| | | | | | | Discount Rate | | | (10.00%) | | | |
| | | | | | | | | | | | | |
Impaired loans | | $ | 11,664 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | 11% | - | 27% | (16%) | (3) |
| | | | | | | | | | | | | |
| | | | | Sales Price | | Liquidation expenses (2) | | | (12%) | | | (3) |
| | | | | | | | | | | | | |
| | | | | Estimated Value of Insurance Proceeds (4) | | | | | | | | |
| | | | | | | | | | | | | |
Other real estate owned | | $ | 360 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | | (19%) | | | (3) |
| | | | | | | | | | | | | |
| | | | | Sales Price | | Liquidation expenses (2) | | | (13%) | | | (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. |
(4) | The valuation technique is determined based on estimated insurance proceeds and litigation. |
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 as of March 31, 2022 and December 31, 2021.
Investment Securities
The fair value of investment 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 investment 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 fair value of equity securities (carried at fair value) is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1).
The types of instruments valued based on matrix pricing in active markets include all the Company’s U.S. government and agency securities, corporate bonds, and municipal obligations held in the investment securities portfolio. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Republic has one Level 3 investment classified as available for sale which is a single corporate bond.
The corporate bond included in Level 3 was transferred from Level 2 in 2010 and is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.
Mortgage Loans Held for Sale (Carried at Fair Value)
The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to reflect their economic value more accurately. Interest income on loans held for sale, which totaled $120,000 for three months ended March 31, 2022 and $281,000 for the three months ended March 31, 2021, are included in interest and fees in the statements of operations.
The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of March 31, 2022 and December 31, 2021 (dollars in thousands):
| | Carrying Amount | | | Aggregate Unpaid Principal Balance | | | Excess Carrying Amount Over Aggregate Unpaid Principal Balance | |
March 31, 2022 | | $ | 4,653 | | | $ | 4,592 | | | $ | 61 | |
| | | | | | | | | | | | |
December 31, 2021 | | $ | 8,538 | | | $ | 8,241 | | | $ | 297 | |
Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of operations in mortgage banking income. As of March 31, 2022, Republic had no mortgage loans held for sale recorded at fair value that was 90 or more days past due and on non-accrual. 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 as of December 31, 2021.
Interest Rate Lock Commitments (“IRLC”)
The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan. The Company also considers pull-through as it determines the fair value of IRLCs. Factors that affect pull-through rates include the origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.
Best Efforts Forward Loan Sales Commitments
Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best-efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.
Mandatory Forward Loan Sales Commitments
Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Republic, best efforts mandatory loan sales commitments are classified within Level 2 of the valuation hierarchy.
Impaired Loans (Carried at Lower of Cost or Fair Value)
Impaired loans are those that the Company has measured impairment based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows or it is calculated based on discounted collateral values if the loans are collateral dependent.
Other Real Estate Owned (Carried at Lower of Cost or Fair Value)
These assets are carried at the lower of cost or fair value. Fair value is determined through valuations periodically performed by third-party appraisers, and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties below the initial cost basis are recorded through a valuation expense. As of March 31, 2022 and December 31, 2021, 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 is then calculated utilizing the Company’s market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. As of March 31, 2022 and December 31, 2021, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are included in the accompanying table.
(dollars in thousands) | | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | |
SBA Servicing Asset | | | | | | | | |
| | | | | | | | |
Fair Value of SBA Servicing Asset | | $ | 4,568 | | | $ | 4,705 | |
| | | | | | | | |
Composition of SBA Loans Serviced for Others | | | | | | | | |
Fixed-rate SBA loans | | | 4 | % | | | 4 | % |
Adjustable-rate SBA loans | | | 96 | % | | | 96 | % |
Total | | | 100 | % | | | 100 | % |
| | | | | | | | |
Weighted Average Remaining Term (in years) | | 19.6 | | | 19.6 | |
| | | | | | | | |
Prepayment Speed | | | 14.65 | % | | | 13.93 | % |
Effect on fair value of a 10% increase | | $ | (195 | ) | | $ | (204 | ) |
Effect on fair value of a 20% increase | | | (375 | ) | | | (393 | ) |
| | | | | | | | |
Weighted Average Discount Rate | | | 10.00 | % | | | 10.00 | % |
Effect on fair value of a 10% increase | | $ | (141 | ) | | $ | (148 | ) |
Effect on fair value of a 20% increase | | | (273 | ) | | | (288 | ) |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.
Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Company’s financial instruments as of March 31, 2022 were as follows.
| | Fair Value Measurements as of March 31, 2022 | |
(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 | | $ | 101,457 | | | $ | 101,457 | | | $ | 101,457 | | | $ | - | | | $ | - | |
Investment securities available for sale | | | 1,116,109 | | | | 1,116,109 | | | | - | | | | 1,113,445 | | | | 2,664 | |
Investment securities held to maturity | | | 1,649,856 | | | | 1,531,411 | | | | - | | | | 1,531,411 | | | | - | |
Equity securities | | | 7,888 | | | | 7,888 | | | | 7,888 | | | | - | | | | - | |
Restricted stock | | | 3,135 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Loans held for sale | | | 9,141 | | | | 9,141 | | | | - | | | | 4,653 | | | | 4,488 | |
Loans receivable, net | | | 2,534,653 | | | | 2,524,523 | | | | - | | | | - | | | | 2,524,523 | |
SBA servicing assets | | | 4,568 | | | | 4,568 | | | | - | | | | - | | | | 4,568 | |
Accrued interest receivable | | | 16,014 | | | | 16,014 | | | | - | | | | 16,014 | | | | - | |
Interest rate lock commitments | | | 107 | | | | 107 | | | | - | | | | 107 | | | | - | |
Best efforts forward loan sales commitments | | | 74 | | | | 74 | | | | - | | | | 74 | | | | - | |
Mandatory forward loan sales commitments | | | 54 | | | | 54 | | | | - | | | | 54 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market | | $ | 5,120,143 | | | $ | 5,120,143 | | | $ | - | | | $ | 5,120,143 | | | $ | - | |
Time | | | 190,093 | | | | 188,732 | | | | - | | | | 188,732 | | | | - | |
Subordinated debt | | | 11,279 | | | | 8,955 | | | | - | | | | - | | | | 8,955 | |
Accrued interest payable | | | 563 | | | | 563 | | | | - | | | | 563 | | | | - | |
Interest rate lock commitments | | | 9 | | | | 9 | | | | - | | | | 9 | | | | - | |
Best efforts forward loan sales commitments | | | 7 | | | | 7 | | | | - | | | | 7 | | | | - | |
Mandatory forward loan sales commitments | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Off-Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | | - | | | | - | | | | - | |
Standby letters-of-credit | | | - | | | | - | | | | - | | | | - | | | | - | |
The estimated fair values of the Company’s financial instruments as of December 31, 2021 were as follows:
| | Fair Value Measurements as of December 31, 2021 | |
(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 | | $ | 118,884 | | | $ | 118,884 | | | $ | 118,884 | | | $ | - | | | $ | - | |
Investment securities available for sale | | | 1,075,366 | | | | 1,075,366 | | | | - | | | | 1,072,741 | | | | 2,625 | |
Investment securities held to maturity | | | 1,660,292 | | | | 1,647,360 | | | | - | | | | 1,647,360 | | | | - | |
Equity securities | | | 9,173 | | | | 9,173 | | | | 9,173 | | | | - | | | | - | |
Restricted stock | | | 3,510 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Loans held for sale | | | 13,762 | | | | 13,762 | | | | - | | | | 8,538 | | | | 5,224 | |
Loans receivable, net | | | 2,488,401 | | | | 2,475,944 | | | | - | | | | - | | | | 2,475,944 | |
SBA servicing assets | | | 4,705 | | | | 4,705 | | | | - | | | | - | | | | 4,705 | |
Accrued interest receivable | | | 15,073 | | | | 15,073 | | | | - | | | | 15,073 | | | | - | |
Interest rate lock commitments | | | 378 | | | | 378 | | | | - | | | | 378 | | | | - | |
Best efforts forward loan sales commitments | | | 5 | | | | 5 | | | | - | | | | 5 | | | | - | |
Mandatory forward loan sales commitments | | | 5 | | | | 5 | | | | - | | | | 5 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market | | $ | 4,993,235 | | | $ | 4,993,235 | | | $ | - | | | $ | 4,993,235 | | | $ | - | |
Time | | | 197,945 | | | | 197,764 | | | | - | | | | 197,764 | | | | - | |
Subordinated debt | | | 11,278 | | | | 8,644 | | | | - | | | | - | | | | 8,644 | |
Accrued interest payable | | | 550 | | | | 550 | | | | - | | | | 550 | | | | - | |
Interest rate lock commitments | | | - | | | | - | | | | - | | | | - | | | | - | |
Best efforts forward loan sales commitments | | | 96 | | | | 96 | | | | - | | | | 96 | | | | - | |
Mandatory forward loan sales commitments | | | 44 | | | | 44 | | | | - | | | | 44 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Off-Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | | - | | | | - | | | | - | |
Standby letters-of-credit | | | - | | | | - | | | | - | | | | - | | | | - | |
Note 8: Changes in Accumulated Other Comprehensive Income (Loss) By Component (1)
The following table presents the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2022 and 2021, and the year ended December 31, 2021.
|
|
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, 2022 |
|
$ |
(8,662 |
) |
|
$ |
(2,012 |
) |
|
$ |
(10,674 |
) |
Unrealized loss on securities |
|
|
(51,352 |
) |
|
|
- |
|
|
|
(51,352 |
) |
Amounts reclassified from accumulated other comprehensive income to net income (2) |
|
|
- |
|
|
|
190 |
|
|
|
190 |
|
Net current-period other comprehensive income |
|
|
(51,352 |
) |
|
|
190 |
|
|
|
(51,162 |
) |
Total change in accumulated other comprehensive income |
|
|
(51,352 |
) |
|
|
190 |
|
|
|
(51,162 |
) |
Balance March 31, 2022 |
|
$ |
(60,014 |
) |
|
$ |
(1,822 |
) |
|
$ |
(61,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2021 |
|
$ |
985 |
|
|
$ |
(3,814 |
) |
|
$ |
(2,829 |
) |
Unrealized gain on securities |
|
|
(7,098 |
) |
|
|
- |
|
|
|
(7,098 |
) |
Amounts reclassified from accumulated other comprehensive income to net income (2) |
|
|
- |
|
|
|
628 |
|
|
|
628 |
|
Net current-period other comprehensive income |
|
|
(7,098 |
) |
|
|
628 |
|
|
|
(6,470 |
) |
Total change in accumulated other comprehensive income |
|
|
(7,098 |
) |
|
|
628 |
|
|
|
(6,470 |
) |
Balance March 31, 2021 |
|
$ |
(6,113 |
) |
|
$ |
(3,186 |
) |
|
$ |
(9,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2021 |
|
$ |
985 |
|
|
$ |
(3,814 |
) |
|
$ |
(2,829 |
) |
Unrealized gain on securities |
|
|
(9,646 |
) |
|
|
- |
|
|
|
(9,646 |
) |
Amounts reclassified from accumulated other comprehensive income to net income (2) |
|
|
(1 |
) |
|
|
1,802 |
|
|
|
1,801 |
|
Net current-period other comprehensive income |
|
|
(9,647 |
) |
|
|
1,802 |
|
|
|
(7,845 |
) |
Total change in accumulated other comprehensive income |
|
|
(9,647 |
) |
|
|
1,802 |
|
|
|
(7,845 |
) |
Balance December 31, 2021 |
|
$ |
(8,662 |
) |
|
$ |
(2,012 |
) |
|
$ |
(10,674 |
) |
|
(1) |
All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income. |
|
(2) |
Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Income. |
Note 9 – Shareholders’ Equity
On August 26, 2020, the Company issued 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $25.00 per share. The Company received net proceeds of $48.3 million from the offering, after deducting offering costs. The Company will pay dividends on the Series A Preferred Stock when and if declared by its Board of Directors or an authorized committee thereof. If declared, dividends will be due and payable at a rate of 7.00% per annum, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year. During the three-month periods ended March 31, 2022 and 2021, $866,000 and $875,000 were declared and paid on preferred stock, respectively.
Holders of shares of Series A Preferred Stock may convert such shares into shares of the Company’s common stock at a conversion price of $3.00 per share of our common stock, subject to adjustment upon certain events. At any time after August 26, 2025, the Company may cause the outstanding shares of Series A Preferred Stock to convert into shares of common stock if the price of the common stock exceeds 125% of the Conversion Price then applicable to the Series A Preferred Stock for at least 20 trading days in a period of 30 consecutive trading days. During the three month period ending March 31, 2022, 529,000 preferred shares were converted to 4,408,324 common shares.
Note 10: Derivatives and Risk Management Activities
Republic did not have any derivative instruments designated as hedging instruments, or subject to master netting and collateral agreements for the three months ended March 31, 2022 and 2021. The following table summarizes the amounts recorded in Republic’s statement of financial condition for derivatives not designated as hedging instruments as of March 31, 2022 and December 31, 2021 (in thousands):
March 31, 2022 | Balance Sheet Presentation | | Fair Value | | | Notional Amount | |
| | | | | | | | | |
Asset derivatives: | | | | | | | | | |
| | | | | | | | | |
IRLC’s | Other Assets | | $ | 107 | | | $ | 7,853 | |
Best efforts forward loan sales commitments | Other Assets | | | 74 | | | | 7,248 | |
Mandatory forward loan sales commitments | Other Assets | | | 54 | | | | 3,836 | |
| | | | | | | | | |
Liability derivatives: | | | | | | | | | |
| | | | | | | | | |
IRLC’s | Other Liabilities | | $ | 9 | | | $ | 1,279 | |
Best efforts forward loan sales commitments | Other Liabilities | | | 7 | | | | 1,884 | |
Mandatory forward loan sales commitments | Other Liabilities | | | - | | | | - | |
December 31, 2021 | Balance Sheet Presentation | | Fair Value | | | Notional Amount | |
| | | | | | | | | |
Asset derivatives: | | | | | | | | | |
| | | | | | | | | |
IRLC’s | Other Assets | | $ | 378 | | | $ | 14,419 | |
Best efforts forward loan sales commitments | Other Assets | | | 5 | | | | 3,222 | |
Mandatory forward loan sales commitments | Other Assets | | | 5 | | | | 1,667 | |
| | | | | | | | | |
Liability derivatives: | | | | | | | | | |
| | | | | | | | | |
IRLC’s | Other Liabilities | | $ | - | | | $ | - | |
Best efforts forward loan sales commitments | Other Liabilities | | | 96 | | | | 11,197 | |
Mandatory forward loan sales commitments | Other Liabilities | | | 44 | | | | 6,460 | |
36
The following table summarizes the amounts recorded in Republic’s statement of income for derivative instruments not designated as hedging instruments for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended March 31, 2022 | Income Statement Presentation | | Gain/(Loss) | |
| | | | | |
Asset derivatives: | | | | | |
| | | | | |
IRLCs | Mortgage banking income | | $ | (271 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | 69 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | 49 | |
| | | | | |
Liability derivatives: | | | | | |
| | | | | |
IRLCs | Mortgage banking income | | $ | (9 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | 89 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | 44 | |
Three Months Ended March 31, 2021 | Income Statement Presentation | | Gain/(Loss) | |
| | | | | |
Asset derivatives: | | | | | |
| | | | | |
IRLCs | Mortgage banking income | | $ | (734 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | 237 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | 386 | |
| | | | | |
Liability derivatives: | | | | | |
| | | | | |
IRLCs | Mortgage banking income | | $ | (14 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | 434 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | 761 | |
The fair value of Republic’s IRLCs, best efforts forward loan sales commitments, and mandatory forward loan sales commitments are based upon the estimated value of the underlying mortgage loan (determined consistent with “Loans Held for Sale”), adjusted for (1) estimated costs to complete and originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price.
Note 11: Revenue from Contracts with Customers
The following table presents non-interest income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, “Revenue from Contracts with Customers”, for the three months ended March 31, 2022 and 2021.
|
|
Three Months Ended March 31, |
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
Non-interest income |
|
|
|
|
|
|
|
|
In-scope of Topic 606 |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
3,467 |
|
|
$ |
3,960 |
|
Other non-interest income |
|
|
(1,257 |
) |
|
|
317 |
|
Non-interest income (in-scope of Topic 606) |
|
|
2,210 |
|
|
|
4,277 |
|
Non-interest income (out-of-scope of Topic 606) |
|
|
2,137 |
|
|
|
5,998 |
|
Total non-interest income |
|
$ |
4,347 |
|
|
$ |
10,275 |
|
Note 12: Leases
We have operating lease agreements for certain land, buildings, and equipment. In some instances, a lease may contain renewal options to extend the term of the lease. We do not have any short-term leases in the calculation of the right-of-use assets and lease liability obligations. The most significant assumption related to the Company’s lease application of ASC 842 was the discount rate assumption. Since most of the lease agreements do not provide an implicit interest rate, the discount rate used in determining the operating lease liability obligation for each individual lease was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease term.
As of March 31, 2022, the Company had 45 operating lease agreements, which include operating leases for 21 branch locations, seven offices that are used for general office space, and seventeen operating leases for equipment. Two of the real property operating leases did not include one or more options to extend the lease term. Eight of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The 45 operating leases have maturity dates ranging from July 2022 to August 2059 most of which include options for multiple five- and ten-year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 8.7 years as of March 31, 2022. The weighted average operating lease discount rate was 3.36% as of March 31, 2022.
As of March 31, 2021, the Company had 42 operating lease agreements, which include operating leases for 20 branch locations, seven offices that are used for general office space, and fifteen operating leases for equipment. Two of the real property operating leases did not include one or more options to extend the lease term. Eight of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The 42 operating leases have maturity dates ranging from August 2021 to August 2059 most of which include options for multiple five- and ten-year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 19.2 years as of March 31, 2021. The weighted average operating lease discount rate was 3.34% as of March 31, 2021.
The following table presents operating lease costs net of sublease income for the three months ended March 31, 2022 and 2021.
|
|
Three Months Ended March 31, 2022 |
|
|
Three Months Ended March 31, 2021 |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
Operating lease cost |
|
$ |
2,166 |
|
|
$ |
2,137 |
|
Sublease income |
|
|
- |
|
|
|
- |
|
Total lease cost |
|
$ |
2,166 |
|
|
$ |
2,137 |
|
The following table presents a maturity analysis of total operating lease liability obligations and reconciliation of the undiscounted cash flows to total operating lease liability obligations for the three months ended March 31, 2022 and 2021.
|
|
Three Months Ended March 31, 2022 |
|
|
Three Months Ended March 31, 2021 |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
Operating lease payments due: |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
6,332 |
|
|
$ |
8,153 |
|
One to three years |
|
|
15,413 |
|
|
|
15,481 |
|
Three to five years |
|
|
14,169 |
|
|
|
15,207 |
|
More than five years |
|
|
80,794 |
|
|
|
83,223 |
|
Total undiscounted cash flows |
|
|
116,708 |
|
|
|
122,064 |
|
Discount on cash flows |
|
|
(33,884 |
) |
|
|
(35,980 |
) |
Total operating lease liability obligations |
|
$ |
82,824 |
|
|
$ |
86,084 |
|
The following table presents cash and non-cash activities for the three months ended March 31, 2022 and 2021.
|
|
Three Months Ended March 31, 2022 |
|
|
Three Months Ended March 31, 2021 |
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
1,940 |
|
|
$ |
2,029 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Additions to Operating leases – right of use asset |
|
|
|
|
|
|
|
|
New operating lease liability obligation |
|
$ |
2,337 |
|
|
$ |
8,114 |
|