We recorded provisional amounts of deferred income taxes using reasonable estimates in three areas where information necessary to complete the accounting was not available, prepared or analyzed as follows: (i) the deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under the Act which allowed for full expensing of qualified property purchased and placed in service after September 27, 2017; (ii) the deferred tax asset for temporary differences associated with accrued compensation was awaiting final determinations of amounts that were paid and deducted on the 2017 income tax returns and (iii) the deferred tax liability for temporary differences associated with equity investments in partnerships were awaiting receipt of Schedules K-1 from outside preparers, which was necessary to determine the 2017 tax impact from these investments.
In a fourth area, we made no adjustments to deferred tax assets representing future deductions for accrued compensation that were subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the annual deduction for certain compensation paid to certain team members to $1 million. There was uncertainty in applying the newly enacted rules to existing contracts, and we were seeking further clarifications before completing its analysis. We completed the calculations for the provisional items with the completion of the 2017 tax returns and completed the analysis of the Section 162(m) rules after further guidance was issued. The impact of the completed calculations to the re-measurement of the deferred taxes resulted in an immaterial change and the analysis of the 162(m) rules resulted in no adjustment.
Item 1B: | Unresolved Staff Comments |
None.
Item 2: | Description of Properties |
The CompanyWe currently has twentyhave twenty-three lease agreements that expire on various dates in the future. SixEight of the leased locations are utilized as back-office support locations, operations centers, loan production offices, training and storage facilities and the Company'sour corporate headquarters. The other fourteenfifteen leased properties are for store locations, twelveall of which are open and operating today and two which will be opened in the future.today. The spaces covered by these leases range in square footage from approximately 800 square feet to 40,000 square feet. Please see Note 11 "Commitments“Commitments and Contingencies"Contingencies” to the Consolidated Financial Statements for further information regarding the leases. In addition, the Company owns eightwe own seventeen properties utilized for store locations. SevenEleven of the stores are open and operating today, one istwo are under construction and four are scheduled to begin construction during 2017.2019. Management believes these facilities are adequate to meet the Company'sour present and immediately foreseeable needs from a real estate perspective.
Item 3: Legal Proceedings
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
Not applicable.
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 5: | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Shares of the Company'sCompany’s class of common stock are listed on the Nasdaq Global Market under the symbol "FRBK." The table below sets forth the high and low sales prices reported for the common stock on the Nasdaq Global Market for the periods indicated.“FRBK.” As of March 8, 2017,11, 2019, there were approximately 2,300 100 record holders of the Company's common stock. On March 9, 2017, the closing price of a share of common stock on The Nasdaq Stock Market LLC was $8.18.holders.
Quarter | High | Low |
2016: | | |
4th | $ 9.15 | $ 3.70 |
3rd | $ 4.52 | $ 4.00 |
2nd | $ 4.84 | $ 3.91 |
1st | $ 4.45 | $ 3.84 |
| | |
2015: | | |
4th | $ 4.67 | $ 3.53 |
3rd | $ 4.03 | $ 3.32 |
2nd | $ 3.73 | $ 3.36 |
1st | $ 3.94 | $ 3.27 |
Dividend Policy
The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends during 20172019. The Company'sCompany’s ability to pay dividends depends primarily on receipt of dividends from the Company'sCompany’s subsidiary, Republic. Dividend payments from Republic are subject to legal and regulatory limitations. The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.
| | As of or for the Years Ended December 31, | |
(dollars in thousands, except per share data) | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | | | |
INCOME STATEMENT DATA | | | | | | | | | | | | | | | |
Total interest income | | $ | 92,074 | | | $ | 70,849 | | | $ | 54,227 | | | $ | 45,436 | | | $ | 40,473 | |
Total interest expense | | | 16,170 | | | | 8,784 | | | | 6,863 | | | | 5,381 | | | | 4,644 | |
Net interest income | | | 75,904 | | | | 62,065 | | | | 47,364 | | | | 40,055 | | | | 35,829 | |
Provision for loan losses | | | 2,300 | | | | 900 | | | | 1,557 | | | | 500 | | | | 900 | |
Non-interest income | | | 20,322 | | | | 20,097 | | | | 15,312 | | | | 9,943 | | | | 8,017 | |
Non-interest expenses | | | 83,721 | | | | 75,276 | | | | 56,293 | | | | 47,091 | | | | 40,550 | |
Income before provision (benefit) for income taxes | | | 10,205 | | | | 5,986 | | | | 4,826 | | | | 2,407 | | | | 2,396 | |
Provision (benefit) for income taxes | | | 1,578 | | | | (2,919 | ) | | | (119 | ) | | | (26 | ) | | | (46 | ) |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | |
| | | | | | | | | | | | | | | | | | | | |
PER SHARE DATA | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.07 | |
Diluted earnings per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.12 | | | $ | 0.06 | | | $ | 0.07 | |
Book value per share | | $ | 4.17 | | | $ | 3.97 | | | $ | 3.79 | | | $ | 3.00 | | | $ | 2.98 | |
Tangible book value per share (1) | | $ | 4.09 | | | $ | 3.89 | | | $ | 3.70 | | | $ | 3.00 | | | $ | 2.98 | |
| | | | | | | | | | | | | | | | | | | | |
BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,753,297 | | | $ | 2,322,347 | | | $ | 1,923,931 | | | $ | 1,438,824 | | | $ | 1,214,598 | |
Total loans, net | | | 1,427,983 | | | | 1,153,679 | | | | 955,817 | | | | 866,066 | | | | 770,404 | |
Total investment securities | | | 1,088,331 | | | | 938,561 | | | | 803,604 | | | | 460,131 | | | | 254,402 | |
Total deposits | | | 2,392,867 | | | | 2,063,295 | | | | 1,677,670 | | | | 1,249,298 | | | | 1,072,230 | |
Short-term borrowings | | | 91,422 | | | | - | | | | - | | | | 47,000 | | | | - | |
Subordinated debt | | | 11,259 | | | | 21,681 | | | | 21,881 | | | | 21,857 | | | | 22,476 | |
Total shareholders’ equity | | | 245,189 | | | | 226,460 | | | | 215,053 | | | | 113,375 | | | | 112,811 | |
| | | | | | | | | | | | | | | | | | | | |
PERFORMANCE RATIOS | | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | 0.34 | % | | | 0.43 | % | | | 0.30 | % | | | 0.19 | % | | | 0.23 | % |
Return on average shareholders’ equity | | | 3.69 | % | | | 4.02 | % | | | 3.97 | % | | | 2.14 | % | | | 2.51 | % |
Net interest margin | | | 3.16 | % | | | 3.23 | % | | | 3.14 | % | | | 3.29 | % | | | 3.56 | % |
Total non-interest expenses as a percentage of average assets | | | 3.28 | % | | | 3.64 | % | | | 3.45 | % | | | 3.59 | % | | | 3.80 | % |
| | | | | | | | | | | | | | | | | | | | |
ASSET QUALITY RATIOS | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses as a percentage of loans | | | 0.60 | % | | | 0.74 | % | | | 0.95 | % | | | 0.99 | % | | | 1.48 | % |
Allowance for loan losses as a percentage of non-performing loans | | | 83.31 | % | | | 57.93 | % | | | 48.45 | % | | | 68.95 | % | | | 53.81 | % |
Non-performing loans as a percentage of total loans | | | 0.72 | % | | | 1.28 | % | | | 1.96 | % | | | 1.44 | % | | | 2.74 | % |
Non-performing assets as a percentage of total assets | | | 0.60 | % | | | 0.94 | % | | | 1.51 | % | | | 1.66 | % | | | 2.07 | % |
Net charge-offs as a percentage of average loans, net | | | 0.17 | % | | | 0.13 | % | | | 0.12 | % | | | 0.41 | % | | | 0.22 | % |
| | | | | | | | | | | | | | | | | | | | |
LIQUIDITY AND CAPITAL RATIOS | | | | | | | | | | | | | | | | | | | | |
Average equity to average assets | | | 9.16 | % | | | 10.72 | % | | | 7.63 | % | | | 8.67 | % | | | 9.12 | % |
Leverage ratio | | | 9.35 | % | | | 10.64 | % | | | 12.74 | % | | | 9.65 | % | | | 11.23 | % |
CET 1 capital to risk-weighted assets | | | 13.90 | % | | | 14.75 | % | | | 16.59 | % | | | 10.42 | % | | | - | |
Tier 1 capital to risk-weighted assets | | | 14.53 | % | | | 16.13 | % | | | 18.28 | % | | | 12.40 | % | | | 13.88 | % |
Total capital to risk-weighted assets | | | 15.03 | % | | | 16.70 | % | | | 18.99 | % | | | 13.19 | % | | | 15.10 | % |
Item 6: Selected Financial Data
| | As of or for the Years Ended December 31, | |
(dollars in thousands, except per share data) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | | | |
INCOME STATEMENT DATA | | | | | | | | | | | | | | | |
Total interest income | | $ | 54,227 | | | $ | 45,436 | | | $ | 40,473 | | | $ | 37,205 | | | $ | 38,260 | |
Total interest expense | | | 6,863 | | | | 5,381 | | | | 4,644 | | | | 4,590 | | | | 6,366 | |
Net interest income | | | 47,364 | | | | 40,055 | | | | 35,829 | | | | 32,615 | | | | 31,894 | |
Provision for loan losses | | | 1,557 | | | | 500 | | | | 900 | | | | 4,935 | | | | 1,350 | |
Non-interest income | | | 15,312 | | | | 9,943 | | | | 8,017 | | | | 9,216 | | | | 8,828 | |
Non-interest expenses | | | 56,293 | | | | 47,091 | | | | 40,550 | | | | 40,411 | | | | 35,902 | |
Income (loss) before benefit for income taxes | | | 4,826 | | | | 2,407 | | | | 2,396 | | | | (3,515 | ) | | | 3,470 | |
Benefit for income taxes | | | (119 | ) | | | (26 | ) | | | (46 | ) | | | (35 | ) | | | (144 | ) |
Net income (loss) | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | | | $ | (3,480 | ) | | $ | 3,614 | |
| | | | | | | | | | | | | | | | | | | | |
PER SHARE DATA | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.07 | | | $ | (0.13 | ) | | $ | 0.14 | |
Diluted earnings (loss) per share | | $ | 0.12 | | | $ | 0.06 | | | $ | 0.07 | | | $ | (0.13 | ) | | $ | 0.14 | |
Book value per share | | $ | 3.79 | | | $ | 3.00 | | | $ | 2.98 | | | $ | 2.42 | | | $ | 2.69 | |
Tangible book value per share | | $ | 3.70 | | | $ | 3.00 | | | $ | 2.98 | | | $ | 2.42 | | | $ | 2.69 | |
| | | | | | | | | | | | | | | | | | | | |
BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,923,931 | | | $ | 1,438,824 | | | $ | 1,214,598 | | | $ | 961,665 | | | $ | 988,658 | |
Total loans, net | | | 955,817 | | | | 866,066 | | | | 770,404 | | | | 667,048 | | | | 608,359 | |
Total investment securities | | | 803,604 | | | | 460,131 | | | | 254,402 | | | | 206,482 | | | | 193,142 | |
Total deposits | | | 1,677,670 | | | | 1,249,298 | | | | 1,072,230 | | | | 869,534 | | | | 889,201 | |
Short-term borrowings | | | - | | | | 47,000 | | | | - | | | | - | | | | - | |
Subordinated debt | | | 21,881 | | | | 21,857 | | | | 22,476 | | | | 22,476 | | | | 22,476 | |
Total shareholders' equity | | | 215,053 | | | | 113,375 | | | | 112,811 | | | | 62,899 | | | | 69,902 | |
| | | | | | | | | | | | | | | | | | | | |
PERFORMANCE RATIOS | | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | 0.30 | % | | | 0.19 | % | | | 0.23 | % | | | (0.37 | )% | | | 0.37 | % |
Return on average shareholders' equity | | | 3.97 | % | | | 2.14 | % | | | 2.51 | % | | | (5.07 | )% | | | 5.36 | % |
Net interest margin | | | 3.14 | % | | | 3.29 | % | | | 3.56 | % | | | 3.66 | % | | | 3.53 | % |
Total non-interest expenses as a percentage of average assets | | | 3.45 | % | | | 3.59 | % | | | 3.80 | % | | | 4.25 | % | | | 3.70 | % |
| | | | | | | | | | | | | | | | | | | | |
ASSET QUALITY RATIOS | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses as a percentage of loans | | | 0.95 | % | | | 0.99 | % | | | 1.48 | % | | | 1.81 | % | | | 1.54 | % |
Allowance for loan losses as a percentage of non-performing loans | | | 48.45 | % | | | 68.95 | % | | | 53.81 | % | | | 117.69 | % | | | 59.46 | % |
Non-performing loans as a percentage of total loans | | | 1.96 | % | | | 1.44 | % | | | 2.74 | % | | | 1.53 | % | | | 2.60 | % |
Non-performing assets as a percentage of total assets | | | 1.51 | % | | | 1.66 | % | | | 2.07 | % | | | 1.51 | % | | | 2.52 | % |
Net charge-offs as a percentage of average loans, net | | | 0.12 | % | | | 0.41 | % | | | 0.22 | % | | | 0.35 | % | | | 0.63 | % |
| | | | | | | | | | | | | | | | | | | | |
LIQUIDITY AND CAPITAL RATIOS | | | | | | | | | | | | | | | | | | | | |
Average equity to average assets | | | 7.63 | % | | | 8.67 | % | | | 9.12 | % | | | 7.22 | % | | | 6.95 | % |
Leverage ratio | | | 12.74 | % | | | 9.65 | % | | | 11.23 | % | | | 8.59 | % | | | 9.01 | % |
CET 1 capital to risk-weighted assets | | | 16.59 | % | | | 10.42 | % | | | - | | | | - | | | | - | |
Tier 1 capital to risk-weighted assets | | | 18.28 | % | | | 12.40 | % | | | 13.88 | % | | | 10.28 | % | | | 11.48 | % |
Total capital to risk-weighted assets | | | 18.99 | % | | | 13.19 | % | | | 15.10 | % | | | 11.53 | % | | | 12.73 | % |
(1) ANon-GAAP Disclosure
Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with Item 6 "Selected“Selected Financial Data"Data” and the consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, "Risk Factors"“Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.
Executive Summary
We continued to make great progress with "The“The Power of Red is Back"Back” growth campaign continued to deliver exceptional results in 2018. Four new stores were opened during 2018 using our distinctive glass prototype building increasing our total store count to twenty five locations. Despite the significant investments required to execute our growth and expansion campaignstrategy, we were able to demonstrate significant improvement in 2016.profitability as net income before taxes increased by 70% year over year. Loans grew 24% and deposits increased by 16%. Customer accounts grew by 29% as we continue to welcome new Fans every day.
The momentum of our expansion strategy continues to build and demonstrate positive results throughout the Metro Philadelphia market. We’ve also announced plans to begin expanding into the Metro New York market with the opening of two to four stores in Manhattan during 2019. We are successfully expanding our presenceexcited for the opportunity to bring the “Power of Red is Back” growth campaign to the many Fans waiting for us in the Philadelphia region throughNew York City.
Our expansion plans will not only focus on the addition of new stores and the development of new customer relationships. During 2016 we welcomed thousands of new customers into our stores and won them over with extraordinary service. The growth in asset, loan and deposit balances clearly demonstrates our ongoing success with this strategy. While we continue to make significant investments toStore locations, build also includes a new bank, we are very pleased with our ability to improve profitability as we move forward with our growth plan.
In 2016, we also announced the addition of Vernon W. Hill, II to the Board of Directors. He will serve as Chairman of the Company. Mr. Hill is often credited with reinventing the concept of Retail Banking as the Founder and Chairman of Commerce Bank, a $50 billion financial institution that grew to more than 450 locations primarily in the northeastern corridor of the U.S. More recently, Mr. Hill has achieved significant success with his Retail Banking concept as the Founder and Chairman of Metro Bank in the U.K. which has grown to 48 locations and over $12 billion assets in just six years. Mr. Hill has been a major investor and consultant to Republic Bank for the last several years. His appointment as Chairman reinforces ourstrong commitment to deliver exceptional service and convenience service through all delivery channels including mobile and on-line banking options. As we watch our growthcompetition shutter the doors on their branch network and expansion plan based on creating a legendary, emotional brand by turning customers into Fans.
During 2016, we also expanded our product offerings through the additionoffer declining levels of a residential mortgage lending team. In July 2016, we acquired Oak Mortgage Company. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida providing our customers with new opportunities in the residential lending market. The Oak Mortgage team is an important addition to the Republic Team which is committed to extraordinary customer service, and has provenwe see endless opportunities to be a perfect complement to the Bank's network of store locations.successfully execute our expansion plan.
Additional highlights for the year ended December 31, 20162018 include the following accomplishments:
| · | We have twenty-five convenient store locations open today. During 2018, we began our expansion into Bucks County, PA with the opening of our store in Fairless Hills. We also opened stores in Gloucester Township, Evesboro and Somers Point in New Jersey. Construction is underway on sites in Lumberton, NJ and Feasterville, PA and is expected to be completed a $100 million common stock offering duringin the fourth quarterearly part of 2016. As a result, shareholders' equity increased to $215.1 million as of December 31, 2016 compared to $113.4 million as of December 31, 2015. This capital raise will allow us to execute our aggressive expansion plan over the next several years.2019. |
| · | Expansion into New stores were opened in Washington Township and Moorestown, NJ during 2016 bringing the total store count to nineteen. We also opened a prototype store at a prime location in Wynnewood, PA where we relocated our store from nearby Ardmore. We ended the year with a store under construction in Cherry Hill, NJ whichYork City is scheduled to be completedbegin in early 2017 and ground will soon be broken on sites2019. We expect to open two to four new stores in Medford, Sicklerville and Fairless Hills. There are also several additional sitesManhattan in various stages of approval and developmentthe coming year. Leases have been signed for future store locations.the first two locations with construction about to begin. |
| · | New stores opened since the beginning of the "Power“Power of Red is Back"Back” expansion campaign in 2014 are currently growing deposits at an average rate of $38$27 million per year, while the average deposit growth for all stores over the last twelve months was approximately $23$14 million per store.year. |
| · | Total revenueDemand deposits represent the fastest growing segment of our deposit base. These deposits grew by 25% during 2016, while$315 million to $1.6 billion over the last 12 months, including growth of 18% in non-interest expenses grew at a rate of 20%.bearing demand deposit balances. |
| · | Net income increasedbefore tax grew by 103%70% to $4.9$10.2 million or $0.12 per diluted share, for the twelve months ended December 31, 20162018 compared to $2.4$6.0 million or $0.06 per diluted share, for the twelve months ended December 31, 2015. We continue2017. During 2018, we continued to open new stores and increase net incomeimprove profitability despite the additional costs associated with the growth and expansion strategy. The acquisition of Oak Mortgage has also contributed to improved earnings. |
| · | Total assets increased by $485$431 million, or 34%19%, to $1.9$2.8 billion as of December 31, 20162018 compared to $2.3 billion as of December 31, 2017. |
| · | Outstanding loans increased by $274 million, or 24%, to $1.4 billion as of December 31, 2015. |
| · | Total deposits increased by $428 million, or 34%, to $1.7 billion as of December 31, 20162018 compared to $1.2 billion as of December 31, 2015.2017. |
| · | Total loans grew $90 million, or 10%,Asset quality continues to $965 millionimprove. The ratio of non-performing assets to total assets declined to 0.60% as of December 31, 20162018 compared to $875 million at0.94% as of December 31, 2015.2017. |
| · | SBA lendingWe converted $10.6 million of outstanding trust preferred securities to 1.6 million shares of common stock during the first quarter of 2018. This conversion will result in a reduction of interest expense of approximately $0.9 million on an annual basis going forward. |
| · | Our residential mortgage division, Oak Mortgage, is serving the home financing needs of customers throughout our footprint. Oak originated more than $360 million in loans during the twelve month period ended December 31, 2018. |
| · | Meeting the needs of small business customers continued to be an important part of our lending strategy. More than $70Nearly $43 million in new SBA loans were originated during the year ended December 31, 2016. Our team2018. Republic Bank is currently ranked as the #1 SBA lender in the New Jersey and southeastern Pennsylvania market based on the dollar volume of loan originations. |
| · | Capital levels remain strong. Our Total Risk-Based Capital ratio was 18.99%15.03% and Tier I Leverage Ratio was 12.74%9.35% at December 31, 2016.2018. |
| · | Book value per common share increased to $3.79$4.17 as of December 31, 20162018 compared to $3.00 per share$3.97 as of December 31, 2015.2017. |
Non-GAAP Based Financial Measures
Our selected financial data contains a non-GAAP financial measure calculated using non-GAAP amounts. This measure is tangible book value per common share. Tangible book value per share adjusts the numerator by the amount of Goodwill and Other Intangible Assets (reduction(as a reduction of Shareholders'Shareholders’ Equity). Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of non-GAAP measures provides additional clarity when assessing our financial results and use of equity. Disclosures of this type should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
The following table provides a reconciliation of tangible book value per common share as of December 31, 2018 and December 31, 2017.
(dollars in thousands) | | December 31, 2018 | | | December 31, 2017 | |
| | | | | | |
Total shareholders’ equity | | $ | 245,189 | | | $ | 226,460 | |
Reconciling items: | | | | | | | | |
Goodwill | | | (5,011 | ) | | | (5,011 | ) |
Tangible common equity | | $ | 240,178 | | | $ | 221,449 | |
Common shares outstanding | | | 58,789,228 | | | | 56,989,764 | |
Tangible book value per common share | | $ | 4.09 | | | $ | 3.89 | |
Critical Accounting Policies, Judgments and Estimates
In reviewing and understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, carrying values of other real estate owned, other than temporary impairment of securities, fair value of financial instruments and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies related to the allowance for loan losses, other-than-temporary impairment of securities, loans receivable, mortgage loans held for sale, interest rate lock commitments, forward loan sale commitments, goodwill, other real estate owned, and deferred income taxes as being critical.
Allowance for Loan Losses - Management'sManagement’s ongoing evaluation of the adequacy of the allowance for loan losses is based on our past loan loss experience, the volume and composition of our lending, adverse situations that may affect a borrower'sborrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio. The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management, based upon its evaluation, considers adequate to absorb losses inherent in the loan portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.
The allowance consists of specific allowances for impaired loans, a general allowance on the remainder of the portfolio, and an unallocated component to account for a level of imprecision in management'smanagement’s estimation process. Although management determines the amount of each element of the allowance separately, the allowance for loan losses as a whole is available for the entire loan portfolio.
Management establishes an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price, or fair value of collateral if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. A delay or shortfall in amount of payments does not necessarily result in the loan being identified as impaired.
Management also establishes a general allowance on non-impaired loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management'smanagement’s evaluation of the collectability of the loan portfolio.
Management also evaluates classified loans, which are not impaired. We segregate these loans by category and assign qualitative factors to each loan based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. Classification of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.
The allowance is adjusted for significant factors that, in management'smanagement’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting its primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.
While management uses the best information known to it in order to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, the estimates of the allowance for loan loss have provided adequate coverage against actual losses incurred. In addition, the Pennsylvania Department of Banking and Securities and the FDIC, as an integral part of their examination processes, periodically review the allowance for loan losses. The Pennsylvania Department of Banking and Securities or the FDIC may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management'smanagement’s estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
Other-Than-Temporary Impairment of Securities - Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and our intent and ability to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term "other-than-temporary"“other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
Mortgage Banking Activities and Mortgage Loans Held for Sale -– LoansMortgage loans held for sale are originated and held until sold to permanent investors. In 2016, managementManagement elected to adopt the fair value option in accordance with FASB Accounting Standards Codification ("ASC"(“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
LoansMortgage 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. Gains and losses on loan salesChanges in fair value are recordedreflected in non-interestmortgage banking income and directin the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
Interest Rate Lock Commitments - Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and as other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price. See Note 24 Derivatives and Risk Management Activities.Activities for further detail on IRLCs.
Forward Loan Sale Commitments - Forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Goodwill - Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annuallyannually. We completed an annual impairment test for goodwill as of July 31, 2018 and between2017. Future impairment testing will be conducted as of July 31 on an annual tests when eventsbasis, unless a triggering event occurs in the interim that would suggest impairment, in which case it would be tested as of the date of the triggering event. During the twelve months ended December 31, 2018 and circumstances indicate that2017, there was no goodwill impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. A qualitative factor testrecorded. There can be performedno assurance that future impairment assessments or tests will not result in a charge to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If the results of the qualitative review indicate that it is unlikely (less than 50% probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. earnings. There was $5.0 million of goodwill at December 31, 20162018 and $0 at December 31, 2015.2017.
Other Real Estate Owned - Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Income Taxes - Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, management'smanagement’s estimates and judgments to calculate the deferred tax accounts have not required significant revision.
In evaluating our 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. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Results of Operations
For the year ended December 31, 20162018 as compared to the year ended December 31, 20152017
We reported net income of $4.9$8.6 million, or $0.12$0.15 per diluted share, for the twelve months ended December 31, 20162018 compared to net income of $2.4$8.9 million, or $0.06$0.15 per diluted share, for the twelve months ended December 31, 2015.2017. The decrease in net income of $278,000 was related to an increase in total non-interest expense and the provision for income taxes partially offset by an increase in net interest income was primarily drivenand non-interest income. Net income before tax grew by growth in interest-earning assets along with earnings70%, or $4.2 million to $10.2 million for the twelve months December 31, 2018 compared to net income before tax of $6.0 million for the residential mortgage lending team which was acquired during the third quarter of 2016.twelve months ended December 31, 2017.
Net interest income for the twelve months ended December 31, 20162018 increased $7.3$13.8 million to $47.4$75.9 million as compared to $40.1$62.1 million for the twelve months ended December 31, 2015.2017. Interest income increased $8.8$21.2 million, or 19.3%30.0%, due primarily to an increase in average loans receivable and investment securities balances. Interest expense increased $1.5$7.4 million, or 27.5%84.1%, primarily due to an increase in the cost of average deposit balances.interest-bearing liabilities and the balance of average interest-bearing liabilities. The increase in interest rates associated with the cost of interest-bearing liabilities was mainly driven by the increases in the Fed Funds rate during 2018.
We recorded a loan loss provision in the amount of $1.6$2.3 million, an increase of $1.4 million for the twelve months ended December 31, 20162018 compared to a provision of $500,000$900,000 during the twelve months ended December 31, 2015.2017. The higher provision recorded for the twelve months ended December 31, 20162018 is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The increase was driven byprimarily a result of an increase in the allowance required for loans individuallycollectively evaluated for impairment due to growth in 2016.outstanding loans during 2018.
Non-interest income increased $5.4 million$225,000 to $15.3$20.3 million during the twelve months ended December 31, 20162018 as compared to $9.9$20.1 million during the twelve months ended December 31, 20152017. The increase was primarily driven by service fees on deposit accounts, partially offset by a decrease in mortgage banking income, gains on the sale of residential mortgageSBA loans, and SBA loans, partially offset by legal settlementsloan and servicing fees recorded during the twelve months ended December 31, 2015.2017.
Non-interest expenses increased $9.2$8.4 million to $56.3$83.7 million during the twelve months ended December 31, 20162018 as compared to $47.1$75.3 million during the twelve months ended December 31, 2015.2017. The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refer to as "The“The Power of Red is Back", as well as, the addition of Oak Mortgage in 2016.Back”.
Return on average assets and average equity from continuing operations were 0.30%0.34% and 3.97%3.69%, respectively, during the twelve months ended December 31, 20162018 compared to 0.19%0.43% and 2.14%4.02%, respectively, for the twelve months ended December 31, 2015.2017.
Average Balances and Net Interest Income
Historically, our earnings have depended primarily upon Republic'sRepublic’s net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders'shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic'sRepublic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, a non-GAAP measure, using a rate of 21% in 2018 and 35% in 2016, 2015,2017 and 2014.2016.
Average Balances and Net Interest Income
| | For the Year Ended December 31, 2016 | | | For the Year Ended December 31, 2015 | | | For the Year Ended December 31, 2014 | | | For the Year Ended December 31, 2018 | | For the Year Ended December 31, 2017 | | For the Year Ended December 31, 2016 |
(dollars in thousands) | | Average Balance | | | Interest Income/ Expense | | | Yield/ Rate(1) | | | Average Balance | | | Interest Income/ Expense | | | Yield/ Rate(1) | | | Average Balance | | | Interest Income/ Expense | | | Yield/ Rate(1) | | | Average Balance | | | Interest Income/ Expense | | | Yield/ Rate(1) | | Average Balance | | | Interest Income/ Expense | | | Yield/ Rate(1) | | Average Balance | | | Interest Income/ Expense | | | Yield/ Rate(1) |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal funds sold and other interest earning assets | | $ | 92,452 | | | $ | 473 | | | | 0.51 | % | | $ | 106,876 | | | $ | 278 | | | | 0.26 | % | | $ | 75,593 | | | $ | 187 | | | | 0.25 | % | | $ | 40,931 | | | $ | 847 | | | | 2.07 | % | | $ | 48,148 | | | $ | 577 | | | | 1.20 | % | | $ | 92,452 | | | $ | 473 | | | | 0.51 | % |
Investment securities and restricted stock | | | 506,545 | | | | 12,346 | | | | 2.44 | % | | | 309,018 | | | | 7,692 | | | | 2.49 | % | | | 217,939 | | | | 5,613 | | | | 2.58 | % | | | 1,037,810 | | | | 27,316 | | | | 2.63 | % | | | 811,269 | | | | 20,466 | | | | 2.52 | % | | | 506,545 | | | | 12,346 | | | | 2.44 | % |
Loans receivable | | | 936,492 | | | | 42,304 | | | | 4.52 | % | | | 820,820 | | | | 38,072 | | | | 4.64 | % | | | 724,231 | | | | 35,052 | | | | 4.84 | % | | | 1,340,117 | | | | 64,455 | | | | 4.81 | % | | | 1,090,851 | | | | 50,687 | | | | 4.65 | % | | | 936,492 | | | | 42,304 | | | | 4.52 | % |
Total interest-earning assets | | | 1,535,489 | | | | 55,123 | | | | 3.59 | % | | | 1,236,714 | | | | 46,042 | | | | 3.72 | % | | | 1,017,763 | | | | 40,852 | | | | 4.01 | % | | | 2,418,858 | | | | 92,618 | | | | 3.83 | % | | | 1,950,268 | | | | 71,730 | | | | 3.68 | % | | | 1,535,489 | | | | 55,123 | | | | 3.59 | % |
Other assets | | | 96,902 | | | | | | | | | | | | 73,873 | | | | | | | | | | | | 49,647 | | | | | | | | | | | | 131,369 | | | | | | | | | | | | 115,770 | | | | | | | | | | | | 96,902 | | | | | | | | | |
Total assets | | $ | 1,632,391 | | | | | | | | | | | $ | 1,310,587 | | | | | | | | | | | $ | 1,067,410 | | | | | | | | | | | $ | 2,550,227 | | | | | | | | | | | $ | 2,066,038 | | | | | | | | | | | $ | 1,632,391 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand – non-interest bearing | | $ | 284,326 | | | | | | | | | | | $ | 235,810 | | | | | | | | | | | $ | 189,810 | | | | | | | | | | | $ | 488,995 | | | | | | | | | | | $ | 372,171 | | | | | | | | | | | $ | 284,326 | | | | | | | | | |
Demand – interest bearing | | | 510,745 | | | | 2,088 | | | | 0.41 | % | | | 349,055 | | | | 1,401 | | | | 0.40 | % | | | 233,693 | | | | 888 | | | | 0.38 | % | | | 918,508 | | | | 7,946 | | | | 0.87 | % | | | 687,586 | | | | 3,020 | | | | 0.44 | % | | | 510,745 | | | | 2,088 | | | | 0.41 | % |
Money market & savings | | | 586,750 | | | | 2,639 | | | | 0.45 | % | | | 508,846 | | | | 2,170 | | | | 0.43 | % | | | 439,484 | | | | 1,929 | | | | 0.44 | % | | | 697,135 | | | | 4,898 | | | | 0.70 | % | | | 629,464 | | | | 3,160 | | | | 0.50 | % | | | 586,750 | | | | 2,639 | | | | 0.45 | % |
Time deposits | | | 89,713 | | | | 942 | | | | 1.05 | % | | | 73,819 | | | | 695 | | | | 0.94 | % | | | 78,073 | | | | 719 | | | | 0.92 | % | | | 128,892 | | | | 1,588 | | | | 1.23 | % | | | 110,952 | | | | 1,238 | | | | 1.12 | % | | | 89,713 | | | | 942 | | | | 1.05 | % |
Total deposits | | | 1,471,534 | | | | 5,669 | | | | 0.39 | % | | | 1,167,530 | | | | 4,266 | | | | 0.37 | % | | | 941,060 | | | | 3,536 | | | | 0.38 | % | | | 2,233,530 | | | | 14,432 | | | | 0.65 | % | | | 1,800,173 | | | | 7,418 | | | | 0.41 | % | | | 1,471,534 | | | | 5,669 | | | | 0.39 | % |
Total interest bearing deposits | | | 1,187,208 | | | | 5,669 | | | | 0.48 | % | | | 931,720 | | | | 4,266 | | | | 0.46 | % | | | 751,250 | | | | 3,536 | | | | 0.47 | % | | | 1,744,535 | | | | 14,432 | | | | 0.83 | % | | | 1,428,002 | | | | 7,418 | | | | 0.52 | % | | | 1,187,208 | | | | 5,669 | | | | 0.48 | % |
Other borrowings | | | 27,471 | | | | 1,194 | | | | 4.35 | % | | | 22,008 | | | | 1,115 | | | | 5.07 | % | | | 21,875 | | | | 1,108 | | | | 5.07 | % | | | 73,573 | | | | 1,738 | | | | 2.36 | % | | | 35,429 | | | | 1,366 | | | | 3.86 | % | | | 27,471 | | | | 1,194 | | | | 4.35 | % |
Total interest-bearing liabilities | | | 1,214,679 | | | | 6,863 | | | | 0.57 | % | | | 953,728 | | | | 5,381 | | | | 0.56 | % | | | 773,125 | | | | 4,644 | | | | 0.60 | % | | | 1,818,108 | | | | 16,170 | | | | 0.89 | % | | | 1,463,431 | | | | 8,784 | | | | 0.60 | % | | | 1,214,679 | | | | 6,863 | | | | 0.57 | % |
Total deposits and other borrowings | | | 1,499,005 | | | | 6,863 | | | | 0.46 | % | | | 1,189,538 | | | | 5,381 | | | | 0.45 | % | | | 962,935 | | | | 4,644 | | | | 0.48 | % | | | 2,307,103 | | | | 16,170 | | | | 0.70 | % | | | 1,835,602 | | | | 8,784 | | | | 0.48 | % | | | 1,499,005 | | | | 6,863 | | | | 0.46 | % |
Non-interest bearing other liabilities | | | 8,867 | | | | | | | | | | | | 7,340 | | | | | | | | | | | | 7,084 | | | | | | | | | | | | 9,431 | | | | | | | | | | | | 8,942 | | | | | | | | | | | | 8,867 | | | | | | | | | |
Shareholders' equity | | | 124,519 | | | | | | | | | | | | 113,709 | | | | | | | | | | | | 97,391 | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 1,632,391 | | | | | | | | | | | $ | 1,310,587 | | | | | | | | | | | $ | 1,067,410 | | | | | | | | | | |
Shareholders’ equity | | | | 233,693 | | | | | | | | | | | | 221,494 | | | | | | | | | | | | 124,519 | | | | | | | | | |
Total liabilities and shareholders’ equity | | | $ | 2,550,227 | | | | | | | | | | | $ | 2,066,038 | | | | | | | | | | | $ | 1,632,391 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income(2) | | | | | | $ | 48,260 | | | | | | | | | | | $ | 40,661 | | | | | | | | | | | $ | 36,208 | | | | | | | | | | | $ | 76,448 | | | | | | | | | | | $ | 62,946 | | | | | | | | | | | $ | 48,260 | | | | | |
Net interest spread | | | | | | | | | | | 3.02 | % | | | | | | | | | | | 3.16 | % | | | | | | | | | | | 3.41 | % | | | | | | | | | | | 2.94 | % | | | | | | | | | | | 3.08 | % | | | | | | | | | | | 3.02 | % |
Net interest margin(2) | | | | | | | | | | | 3.14 | % | | | | | | | | | | | 3.29 | % | | | | | | | | | | | 3.56 | % | | | | | | | | | | | 3.16 | % | | | | | | | | | | | 3.23 | % | | | | | | | | | | | 3.14 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Yields on investments are calculated based on amortized cost.
(2) Net interest income and net interest margin are presented on a tax equivalent basis.basis, a Non-GAAP measure. Net interest income has been increased over the financial statement amount by $544, $881, and $896 $606,in 2018, 2017, and $379 in 2016, 2015, and 2014, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.
| | Year ended December 31, 2016 vs. 2015 | | | Year ended December 31, 2015 vs. 2014 | | | Year ended December 31, 2018 vs. 2017 | | | Year ended December 31, 2017 vs. 2016 | |
| | Changes due to: | | | | | | Changes due to: | | | | | | Changes due to: | | | | | | Changes due to: | | | | |
(dollars in thousands) | | Average Volume | | | Average Rate | | | Total Change | | | Average Volume | | | Average Rate | | | Total Change | | | Average Volume | | | Average Rate | | | Total Change | | | Average Volume | | | Average Rate | | | Total Change | |
Interest earned: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Federal funds sold and other interest-earning assets | | $ | (74 | ) | | $ | 269 | | | $ | 195 | | | $ | 81 | | | $ | 10 | | | $ | 91 | | | $ | (149 | ) | | $ | 419 | | | $ | 270 | | | $ | (531 | ) | | $ | 635 | | | $ | 104 | |
Securities | | | 4,814 | | | | (160 | ) | | | 4,654 | | | | 2,267 | | | | (188 | ) | | | 2,079 | | | | 5,963 | | | | 887 | | | | 6,850 | | | | 7,687 | | | | 433 | | | | 8,120 | |
Loans | | | 5,180 | | | | (948 | ) | | | 4,232 | | | | 4,448 | | | | (1,428 | ) | | | 3,020 | | | | 11,596 | | | | 2,172 | | | | 13,768 | | | | 6,976 | | | | 1,407 | | | | 8,383 | |
Total interest-earning assets | | | 9,920 | | | | (839 | ) | | | 9,081 | | | | 6,796 | | | | (1,606 | ) | | | 5,190 | | | | 17,410 | | | | 3,478 | | | | 20,888 | | | | 14,132 | | | | 2,475 | | | | 16,607 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 661 | | | $ | 26 | | | $ | 687 | | | $ | 463 | | | $ | 50 | | | $ | 513 | | | $ | 1,998 | | | $ | 2,928 | | | $ | 4,926 | | | $ | 777 | | | $ | 155 | | | $ | 932 | |
Money market and savings | | | 348 | | | | 121 | | | | 469 | | | | 293 | | | | (52 | ) | | | 241 | | | | 516 | | | | 1,222 | | | | 1,738 | | | | 193 | | | | 328 | | | | 521 | |
Time deposits | | | 167 | | | | 80 | | | | 247 | | | | (40 | ) | | | 16 | | | | (24 | ) | | | 221 | | | | 129 | | | | 350 | | | | 237 | | | | 59 | | | | 296 | |
Total deposit interest expense | | | 1,176 | | | | 227 | | | | 1,403 | | | | 716 | | | | 14 | | | | 730 | | | | 2,735 | | | | 4,279 | | | | 7,014 | | | | 1,207 | | | | 542 | | | | 1,749 | |
Other borrowings | | | 33 | | | | 46 | | | | 79 | | | | - | | | | 7 | | | | 7 | | | | 742 | | | | (370 | ) | | | 372 | | | | 37 | | | | 135 | | | | 172 | |
Total interest expense | | | 1,209 | | | | 273 | | | | 1,482 | | | | 716 | | | | 21 | | | | 737 | | | | 3,477 | | | | 3,909 | | | | 7,386 | | | | 1,244 | | | | 677 | | | | 1,921 | |
Net interest income | | $ | 8,711 | | | $ | (1,112 | ) | | $ | 7,599 | | | $ | 6,080 | | | $ | (1,627 | ) | | $ | 4,453 | | | $ | 13,933 | | | $ | (431 | ) | | $ | 13,502 | | | $ | 12,888 | | | $ | 1,798 | | | $ | 14,686 | |
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months of 2016ended December 31, 2018 increased by $7.6$13.5 million, or 18.7%21.5%, over the same period in 2015.twelve months ended December 31, 2017. Interest income on interest-earning assets totaled $55.1$92.6 million for the twelve months of 2016,ended December 31, 2018, an increase of $9.1$20.9 million, compared to $71.7 million for the same period in 2015.twelve months ended December 31, 2017. The increase in interest income earned was primarily the result of an increase in the average balancebalances of loans receivable and investment securities that helped to offset a 12 bp decrease in the yield on loans receivable.securities. Total interest expense for the twelve months of 2016ended December 31, 2018 increased $1.5$7.4 million, or 27.5%84.1%, to $6.9$16.2 million from $5.4$8.8 million overfor the same period in 2015.twelve months ended December 31, 2017. Interest expense on deposits increased by $1.4$7.0 million, or 32.9%94.6%, for the twelve months of 2016ended December 31, 2018 versus the same period of 2015.twelve months ended December 31, 2017 due to increases in average deposit balances and higher rates. Interest expense on other borrowings increased by $79,000$372,000 for the twelve months of 2016ended December 31, 2018 compared to the same periodtwelve months ended December 31, 2017 due primarily to a $46.1 million increase in 2015.average overnight borrowings balances.
Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 3.02%2.94% during the twelve months of 2016ended December 31, 2018 versus 3.16%3.08% during the twelve months of 2015.ended December 31, 2017. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the twelve months of 2016ended December 31, 2018 and 2015,2017, the fully tax-equivalent net interest margin was 3.14%3.16% and 3.29%3.23%, respectively. The net interest margin for the year endingtwelve months ended December 31, 20162018 decreased primarily as a result of the cost of funds associated with interest-bearing liabilities rising at a decrease infaster rate than the yield earned on loans receivable.interest-earning assets.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $1.6$2.3 million, an increase of $1.4 million, for the twelve months ended December 31, 20162018 compared to a $500,000$900,000 provision for the twelve months ended December 31, 2016.2017. The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.
The provision recorded for the twelve months ended December 31, 20162018 as compared to the twelve months ended December 31, 20152017 increased primarily as a result of a single loan relationship that moved to non-accrual status during 2016. This resulted in an increase in the allowance required for loan losses individuallyloans collectively evaluated for impairment.impairment driven by an increase in loans receivable.
Non-Interest Income
Total noninterestnon-interest income for the twelve months of 2016ended December 31, 2018 increased by $5.4 million,$225,000, or 54.0%1.1%, from the same period in 2015. Mortgage banking income totaled $5.1 million during 2016 primarily due to gains on the sale of residential mortgage loans of $4.7 million originated through Oak Mortgage which was acquired by us in 2016. Gains on the sale of SBA loans totaled $5.0 million during 2016 compared to $3.1 million in the same period of 2015. We recognized gains of $656,000twelve months ended December 31, 2017. Service fees on the sale of securities during 2016 compared to gains of $108,000 on sales of securities in 2015. Service charges, fees, and other operating incomedeposit accounts totaled $4.8$5.5 million for 2016the twelve months ended December 31, 2018 which represents an increase of $602,000$1.6 million compared to 2015.the twelve months ended December 31, 2017. This increase was driven by growth in customer deposit accounts and transaction volume. In 2015, we recordedWe recognized losses of $67,000 on the sale of securities during the twelve months ended December 31, 2018, a $2.6decrease of $79,000, compared to losses of $146,000 on the sales of securities for the twelve months ended December 31, 2017. Mortgage banking income totaled $10.2 million insurance settlement which was related toand $11.2 million for the twelve months ended December 31, 2018 and 2017. The decrease of $937,000 is primarily driven by fair adjustments on loans held for sale and IRLCs. Gains on the sale of SBA loans totaled $3.1 million for the twelve months ended December 31, 2018, a claim against a corporate insurance policy originally submitted in 2010.decrease of $273,000, versus $3.4 million for the twelve months ended December 31, 2017.
Non-Interest Expenses
In 2016, noninterestNon-interest expenses increased by $9.2$8.4 million, or 19.5%11.2%, for the twelve months ended December 31, 2018, compared to 2015.the twelve months ended December 31, 2017. An explanation of changes in noninterestof non-interest expenses for certain categories is presented in the following paragraphs.
Salary expenses and employee benefits in 2016 were $28.6 million, an increase offor the twelve months ended December 31, 2018 increased by $6.1 million, or 27.2%16.1%, compared to 2015the twelve months ended December 31, 2017. The increase was primarily driven by annual merit increases along with increased staffing levels related to our aggressive growth strategy of adding and relocating stores, which we refer to as "The“The Power of Red is Back."Back”. There were nineteentwenty-five stores open as of December 31, 20162018 compared to seventeentwenty-two stores open at December 31, 2015. The addition of Oak Mortgage in July 2016 also contributed to the increase in salary and employee benefits.2017.
Occupancy related expenses increased by $1.2 million, or 23.9%, andexpense, including depreciation and amortization expense, increased by $438,000,$1.7 million, or 14.2%14.6%, in 2016for the twelve months ended December 31, 2018 compared to 2015,the twelve months ended December 31, 2017, also as a result of our continuing growth and relocationexpansion strategy.
Other real estate owned expenses totaled $2.2$1.6 million during 2016,the twelve months ended December 31, 2018, a decrease of $2.1$2.5 million, when compared to 2015the twelve months ended December 31, 2017. This decrease was primarily due to the writedown of a reductionsingle OREO property in writedowns on foreclosed assets held in other real estate owned.the amount of $2.7 million during 2017. This writedown was driven by our decision to aggressively pursue a resolution for our largest non-performing asset.
All other noninterestnon-interest expenses for the twelve months of 2016ended December 31, 2018 increased $3.5$3.1 million compared to the same period last year. This increase was mainly attributable to the addition oftwelve months ended December 31, 2017. Increases in expenses related to the residential mortgage loan operations of Oak Mortgage. Increases in data processing, automated teller machine expenses, fraud lossesprofessional fees, and regulatory assessments which were mainly associated with debit cards, charitable contributions, professional fees, transaction fees, insurance, regulatory assessment and advertising expense resulting from our growth strategy also contributed to the growth in other operating expenses.
strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterestnon-interest expenses to average assets.assets, a non-GAAP measure. For purposes of this calculation, net noninterestnon-interest expenses equal noninterestnon-interest expenses less noninterest income and nonrecurring expense.non-interest income. For the twelve month periodmonths ended December 31, 2016,2018, the ratio equaled 2.51%2.49% compared to 2.83%2.67% for the twelve month periodmonths ended December 31, 2015,2017, respectively. The declinedecrease in this ratio was mainly due to higher average assets related to our growth strategy of adding and relocating stores.in average assets.
Another productivity measure utilized by management is the operating efficiency ratio.ratio, another non-GAAP measure. This ratio expresses the relationship of noninterestnon-interest expenses to net interest income plus noninterestnon-interest income. The efficiency ratio equaled 89.8%87.0% for the twelve months of 2016,ended December 31, 2018, compared to 94.2%91.6% for the twelve months of 2015.ended December 31, 2017. The decrease for the twelve months ended December 31, 20162018 versus the twelve months ended December 31, 20152017 was due to both net interest income and noninterest income increasing at a faster rate than noninterestnon-interest expenses.
Provision (Benefit) for Income Taxes
We recorded a benefitprovision for income taxes of $119,000$1.6 million for the twelve months ended December 31, 2016,2018, an increase of $4.2 million, compared to a $26,000 benefit of $2.9 million for the twelve months ended December 31, 2015. The $119,000 benefit recorded2017. We began recognizing an increased provision for federal and state income taxes during the twelve monthsfirst quarter of 2016 was the net result of an estimated2018 after reversing our deferred tax provision in the amount of $1.2 million calculated on the net profit generatedasset valuation allowance during the period using our normal estimated tax rate, offset by an adjustment to thefourth quarter of 2017. We initially recorded a deferred tax asset valuation allowance in 2011 and continued to carry this allowance after determining that some portion of the amountdeferred tax asset balance may not be realized within its life cycle based on the weight of $1.3 million.available evidence. Adjustments to the valuation allowance resulted in the recognition of a minimal provision for income taxes in each period until its reversal in 2017. The effective tax rates for the twelve month periods ended December 31, 20162018 and 20152017 were 25%15% and 38%27%, respectively, excluding anrespectively. The effective tax rate for December 31, 2017 excluded the adjustment to the deferred tax asset valuation allowance.allowance and offsets for the impact of the new tax legislation.
We evaluate the carrying amount of itsour deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management'smanagement’s evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by a financial institutionsinstitution and theirthe ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company.us. In addition, it is also important to consider that net operating loss carryforwards ("NOLs" (“NOLs”) calculated for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
Positive evidence evaluated when considering the need for a valuation allowance included:
| · | the annual improvement in pre-tax earnings during the four year period ended December 31, 2018; |
| · | strong growth in interest-earning assets is expected to continue and is supported by the capital raise completed during the fourth quarter of 2016; |
| · | deposit growth in the stores opened since the inception of the “Power of Red is Back” growth and expansion strategy in 2014 has met or exceeded expectations; |
| · | loan growth during 2018 was greater than 20%; |
| · | the acquisition of a residential mortgage lending team (Oak Mortgage Company) completed in July 2016 continues to supplement earnings growth; |
| · | the ratio of non-performing assets to total assets along with other credit quality metrics continue to improve; and |
| · | a cumulative loss has not been recorded in recent years. |
Negative evidence evaluated when considering the need for a valuation allowance included:
| · | profitability metrics including return on average assets and return on average equity remain below industry standards; |
| · | the Bank’s net interest margin declined during 2018 as a result of the challenging interest rate environment; and |
| · | past earnings have been heavily dependent upon the success of the SBA Lending Team which has recently experienced reduced loan volumes and the recently acquired Mortgage Division which can be significantly impacted by a changing interest rate environment and other various economic factors. |
The ongoing success of our growth and expansion strategy, along with the successful integration of the mortgage company and the limited exposure remaining with current asset quality issues put us in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against our deferred tax assets. Based on the analysis of availableguidance provided in ASC 740, we believed that the positive evidence considered at December 31, 2018 and 2017 outweighed the negative evidence we determinedand that it was more likely than not that all of our deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance should be recorded as ofwas not required at December 31,, 2016 2018 and December 31, 2015.
2017.
We did assess tax planning strategies as defined under ASC 740 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes on future fixed asset purchases. We believe that these tax planning strategies are (a) prudent and feasible, (b) steps that we would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (c) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. We believe that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, has no present intention to implement such strategies.
TheOur net deferred tax asset balance before consideration of a valuation allowance was $21.4$12.3 million as ofat December 31, 2016 and $20.22018 compared to $12.7 million as ofat December 31, 2015. After assessment of all available tax planning strategies, we determined that a partial valuation allowance in the amount of $12.2 million as of December 31, 2016 and $13.7 million as of December 31, 2015 should be recorded.
2017. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. When the determination is made that a valuation allowance is no longer required, it will be reduced accordingly resulting in a corresponding increase in net income.
Net Income and Net Income per Common Share
Net income for the twelve month periodmonths ended December 31, 20162018 was $4.9$8.6 million, an increasea decrease of $2.5 million$278,000, compared to $2.4$8.9 million for the twelve month periodmonths ended December 31, 2015.2017. For the twelve month periodmonths ended December 31, 2016,2018, basic and fully-diluted net income per common share were $0.13 and $0.12, respectively,was $0.15, compared to basic and fully-diluted net income per common share of $0.06$0.16 and $0.15, respectively for the twelve month periodmonths ended December 31, 2015.2017.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve month periodsmonths ended December 31, 20162018 and 20152017 was 0.30%0.34% and 0.19%0.43%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders'stockholders’ equity. The ROE for the twelve month periodmonths ended December 31, 20162018 was 3.97%3.69%, compared to 2.14%4.02% for the twelve month periodmonths ended December 31, 2015.2017.
Results of Operations
For the year ended December 31, 20152017 as compared to the year ended December 31, 20142016
We reported net income of $2.4$8.9 million, or $0.06$0.15 per diluted share, for the twelve months ended December 31, 20152017 compared to net income of $2.4$4.9 million, or $0.07$0.12 per diluted share, for the twelve months ended December 31, 2014.2016. The $4.0 million increase in net income was primarily driven by growth in interest-earning assets along with a complete year of earnings of the residential mortgage lending team which was acquired during the third quarter of 2016, as well as, the reversal of our deferred tax asset valuation allowance.
Net interest income for the twelve months ended December 31, 20152017 increased $4.2$14.7 million to $40.1$62.1 million as compared to $35.8$47.4 million for the twelve months ended December 31, 2014.2016. Interest income increased $5.0$16.6 million, or 12.3%30.7%, due primarily to an increase in average loans receivable and investment securities balances. Interest expense increased $737,000$1.9 million, or 15.9%28.0%, primarily due to an increase in average deposit balances.
We recorded a loan loss provision in the amount of $500,000$900,000 for the twelve months ended December 31, 20152017 compared to a provision of $900,000$1.6 million during the twelve months ended December 31, 2014.2016. The lower$700,000 decrease in the provision recorded for the twelve months ended December 31, 20152017 was driven by a decrease in the reserveallowance required for loans individually evaluated for impairment in 2015.2017 as a result of improvement in asset quality.
Non-interest income increased $1.9$4.8 million to $9.9$20.1 million during the twelve months ended December 31, 20152017 as compared to $8.0$15.3 million during the twelve months ended December 31, 20142016. The $4.8 million increase was primarily driven by mortgage banking income and service fees on deposit accounts, partially offset by a $2.6 million insurance settlementreduction in gains on the sale of SBA loans and losses on the sale of investment securities recorded in 2015 which was related to a bond claim against a corporate insurance policy originally submitted in 2010.during the twelve months ended December 31, 2017.
Non-interest expenses increased $6.5$19.0 million to $47.1$75.3 million during the twelve months ended December 31, 20152017 as compared to $40.6$56.3 million during the twelve months ended December 31, 2014.2016. The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refersrefer to as "The“The Power of Red is Back." In addition, we made a decision in 2015 to aggressively pursue a potential sale of our largest OREO asset resulting in a write-down of approximately $2.2 million.Back”.
Return on average assets and average equity from continuing operations were 0.19%0.43% and 2.14%4.02%, respectively, during the twelve months ended December 31, 20152017 compared to 0.23%0.30% and 2.51%3.97%, respectively, for the twelve months ended December 31, 2014.2016.
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months of 2015ended December 31, 2017, increased by $4.5$14.7 million, or 12.3%30.4%, over the same period in 2014.twelve months ended December 31, 2016. Interest income on interest-earning assets totaled $46.0$71.7 million for the twelve months of 2015,ended December 31, 2017; an increase of $5.2$16.6 million, compared to the same period in 2014.twelve months ended December 31, 2016. The increase in interest income earned was primarily the result of an increase in the average balancebalances of loans receivable and investment securities that helped to offset a 20 bp decrease in the yield onand loans receivable. Total interest expense for the twelve months of 2015ended December 31, 2017 increased $737,000,$1.9 million, or 15.9%28.0%, to $5.4$8.8 million from $4.6$6.9 million overcompared to the same period in 2014.twelve months ended December 31, 2016 driven by a combination of higher volumes and higher rates. Interest expense on deposits increased by $730,000,$1.7 million, or 20.6%30.9%, for the twelve months of 2015ended December 31, 2017 versus the same period of 2014.twelve months ended December 31, 2016. Interest expense on other borrowings increased by $7,000$172,000 for the twelve months of 2015ended December 31, 2017 compared to the same period in 2014.twelve months ended December 31, 2016
Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 3.16%3.08% during the twelve months of 2015ended December 31, 2017 versus 3.41%3.02% during the twelve months of 2014.ended December 31, 2016. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the twelve months of 2015ended December 31, 2017 and 2014,2016, the fully tax-equivalent net interest margin was 3.29%3.23% and 3.56%3.14%, respectively. The net interest margin for the year endingtwelve months ended December 31, 2015 decreased2017 increased primarily as a result of a decreasean increase in the yieldyields on loans receivable.
receivable and investment securities.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $500,000$900,000 for the twelve months ended December 31, 20152017, a decrease of $700,000, compared to a $900,000$1.6 million provision for the twelve months ended December 31, 2014.2016. The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.
The provision recorded for the twelve months ended December 31, 20152017 as compared to the twelve months ended December 31, 20142016 decreased due to an improvement in asset quality, which resulted inprimarily as a reductionresult of a decrease in the allowance for loan losses required for loans individually evaluated for impairment driven by a reduction in 2015.impaired loans.
Non-Interest Income
Total noninterestnon-interest income for the twelve months of 2015ended December 31, 2017 increased by $1.9$4.8 million, or 24.0%31.2%, fromcompared to the same period in 2014. We recorded a $2.6twelve months ended December 31, 2016. Mortgage banking income totaled $11.2 million insurance settlement in 2015 which was related to a claim against a corporate insurance policy originally submitted in 2010. Loan advisory and servicing fees increased by $774 thousand in 2015$5.1 for the twelve months ended December 31, 2017 and 2016 primarily due to higher servicing fee income on SBA loans. Service fees on deposit accounts increased by $496,000 in 2015 compared to 2014 due to the growth in the number of customer accounts and deposit balances. We recognized gains of $108,000 on the sale of investment securitiesresidential mortgage loans originated through Oak Mortgage. Oak Mortgage was acquired during 2015 compared to gainsthe third quarter of $458,000 on the sale2016. The $6.1 million increase was a result of investment securities in 2014.a complete year of recognized income during 2017. Gains recognized on the sale of SBA loans were $3.1totaled $3.4 million, a decrease of $1.6 million, for the twelve months ended December 31, 2017 versus $5.0 million for the twelve months ended December 31, 2016. We recognized losses of $146,000 on the sale of securities during the twelve months ended December 31, 2017, a decrease of 2015$802,000, compared to $4.7gains of $656,000 on sales of securities for the twelve months ended December 31, 2016. Service charges, fees, and other operating income totaled $5.7 million for the twelve months ended December 31, 2017 which represents an increase of $1.1 million compared to the twelve months ended December 31, 2016. This increase was driven by growth in the same period of 2014 primarily due to a decrease in the volume of loans originatedcustomer deposit accounts and sold in 2015.transaction volume.
Non-Interest Expenses
In 2015, noninterestNon-interest expenses increased by $6.5$19.0 million for the twelve months ended December 31, 2017, or 16.1%33.7%, compared to 2014.the twelve months ended December 31, 2016. An explanation of changes in noninterestnon-interest expenses for certain categories is presented in the following paragraphs.
Salary expenses and employee benefits in 2015for the twelve months ended December 31, 2017 were $22.5$38.0 million, an increase of $2.4$9.4 million, or 11.9%32.7%, compared to 2014the twelve months ended December 31, 2016. The increase was primarily driven by annual merit increases along with increased staffing levels related to our aggressive growth strategy of adding and relocating stores, which we refer to as "The“The Power of Red is Back."” There were twenty-two stores open as of December 31, 2017 compared to nineteen stores open at December 31, 2016. In addition, we recorded a full year of salary expenses and employee benefits for Oak Mortgage in 2017.
Occupancy related expenses increased by $1.4$1.0 million, or 20.8%17.0%, in 2015and depreciation and amortization expense increased by $1.1 million, or 31.3%, for the twelve months ended December 31, 2017 compared to 2014,the twelve months ended December 31 2016, also as a result of theour growth and relocation strategy. Three new stores were opened during 2015strategy and two additional sites were under construction at year end.the addition of Oak Mortgage.
Other real estate owned expenses totaled $4.2$4.1 million during 2015,the twelve months ended December 31, 2017, an increase of $2.4$1.9 million, when compared to 2014the twelve months ended December 31, 2016 primarily due to higher writedowns on foreclosed assets held in other real estate owned. Athe writedown of $2.2a single OREO property in the amount of $2.7 million during 2017. This writedown was recorded against the largest asset held in other real estate owned during 2015 as a result ofdriven by our decision to aggressively pursue a potential saleresolution for our largest non-performing asset which resulted in the execution of this asset.an agreement of sale.
In addition, minor increases in data processing,All other operatingnon-interest expenses regulatory assessments, insurance, other taxes, and advertising for the twelve months of 2015 versusended December 31, 2017 increased $5.6 million compared to the same period last year were offset by minor decreasestwelve months ended December 31, 2016. Increases in legal expenses related to residential mortgage operations, data processing, advertising, transactions fees, and professional fees.fees resulting from our growth strategy contributed to the growth in these operating expenses.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterestnon-interest expenses to average assets. For purposes of this calculation, net noninterestnon-interest expenses equal noninterestnon-interest expenses less noninterest income and nonrecurring expense.non-interest income. For the twelve month periodmonths ended December 31, 2015,2017, the ratio equaled 2.83%2.67% compared to 3.05%2.51% for the twelve month periodmonths ended December 31, 2014, respectively, reflecting higher average assets 2016, respectively. The increase in this ratio was mainly duerelated to our growth strategy.
39strategy of adding and relocating stores and the addition of a residential mortgage lending team.
Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterestnon-interest expenses to net interest income plus noninterestnon-interest income. The efficiency ratio equaled 94.2%91.6% for the twelve months of 2015,ended December 31, 2017, compared to 92.5%89.8% for the twelve months of 2014.ended December 31, 2016. The increase for the twelve months ended December 31, 20152017 versus the twelve months ended December 31, 20142016 was due to an increase in total noninterest expenses.expenses increasing at a faster rate than both net interest income and noninterest income.
Provision (Benefit) for Income Taxes
We recorded a benefit for income taxes of $26,000$2.9 million for the twelve months ended December 31, 2015,2017, an increase of $2.8 million, compared to a $46,000 benefit of $119,000 for the twelve months ended December 31, 2014. The $26,000 benefit recorded during the twelve months of 2015 was the net result of an estimated tax provision in the amount of $911,000 calculated on the net profit generated during the period using2016. We reversed our normal estimated tax rate, offset by an adjustment to the deferred tax asset valuation allowance during the fourth quarter of 2017 resulting in the amount$2.9 million benefit for income taxes during the period. The benefit for income taxes also takes into consideration the impact of $937,000. the new corporate tax rate under the Tax Cuts and Jobs Act signed into law on December 22, 2017.
The effective tax rates for the twelve month periods ended December 31, 20152017 and 20142016 were 38%27% and 26%25%, respectively, excluding anthe adjustment to the deferred tax asset valuation allowance.allowance and offsets for the impact of the new tax legislation.
We evaluate the carrying amount of itsour deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management'smanagement’s evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by a financial institutionsinstitution and theirthe ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company.us. In addition, it is also important to consider that net operating loss carryforwards ("NOLs" (“NOLs”) calculated for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.
When calculating an estimatePositive evidence evaluated when considering the need for a valuation allowance we assessedincluded:
| · | the annual improvement in earnings during the three year period ended December 31, 2017; |
| · | strong growth in interest-earning assets is expected to continue and is supported by the capital raise completed during the fourth quarter of 2016; |
| · | deposit growth in each of the stores opened since the inception of the “Power of Red is Back” growth and expansion strategy in 2014 has met or exceeded expectations; |
| · | loan growth during 2017 was greater than 20%; |
| · | the acquisition of a residential mortgage lending team (Oak Mortgage Company) completed in July 2016 continues to supplement earnings growth; |
| · | two of our largest non-performing assets have been resolved in 2017; and |
| · | a cumulative loss has not been recorded in recent years. |
Negative evidence evaluated when considering the possible sourcesneed for a valuation allowance included:
| · | profitability metrics including return on average assets and return on average equity remain below industry standards; and |
| · | past earnings have been heavily dependent upon the success of the SBA Lending Team which has recently experienced reduced loan volumes and the recently acquired Mortgage Division which can be significantly impacted by a changing interest rate environment and other various economic factors. |
The ongoing success of taxable income available under tax lawour growth and expansion strategy, along with the successful integration of the mortgage company and the limited exposure remaining with current asset quality issues put us in a position to realize a tax benefit for deductible temporary differences and carry forwards as defined in ASC 740. We did not userely on projections of future taxable income exclusive of reversing temporary timing differences and carryforwards, aswhen evaluating the need for a factor in the analysis. We will exclude future taxable income as a factor until we can show consistent and sustainable profitability.valuation allowance against its deferred tax assets. Based on the analysis of availableguidance provided in ASC 740, we believed that the positive andevidence considered at December 31, 2017 outweighed the negative evidence we determinedand that it was more likely than not that all of our deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance should be recorded as of December 31, 2015 andwas not required at December 31, 2014.
2017 and a $10.6 million benefit for income taxes was recorded in the fourth quarter of 2017 to reflect the reversal of the valuation allowance.
We did assess tax planning strategies as defined under ASC 740 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes on future fixed asset purchases. We believe that these tax planning strategies are (a) prudent and feasible, (b) steps that we would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (c) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. We believe that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, has no present intention to implement such strategies.
TheOur net deferred tax asset balance before the consideration of a valuation allowance decreased to $12.7 million at December 31, 2017 compared to $21.4 million at December 31, 2016. This decrease was $20.2primarily driven by the impact of the 2017 Tax Cuts and Jobs Act. It included a reduction in the corporate income tax rate from 35% to 21%. Our deferred tax asset balances have historically been calculated using a federal tax rate of 35%. As a result of the change in the tax rate, the value of our existing deferred tax assets permanently decreased by $7.7 million at December 31, 2017. Therefore, a charge was recorded to income tax expense in the fourth quarter of 2017 to reflect the reduction in value.
The $10.6 million tax benefit recognized when reversing the deferred tax asset valuation allowance offset the $7.7 million charge related to the change in the corporate tax rate resulting in a net tax benefit and increase in net income of $2.9 million during 2017.
The $12.7 million net deferred tax asset as of December 31, 2017 is comprised of $5.4 million currently recognizable through net operating loss carryforwards and $7.3 million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. Our largest future reversal relates to its unrealized losses on securities available for sale, which totaled $2.6 million as of December 31, 2015 and $19.6 million as of December 31, 2014. After assessment of all available tax planning strategies, we determined that a partial valuation allowance in the amount of $13.7 million as of December 31, 2015 and $14.7 million as of December 31, 2014 should be recorded.
2017. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. When the determination is made to include projections of future taxable income as a factor in recovering the deferred tax asset, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.
Net Income and Net Income per Common Share
Net income for the twelve month periodsmonths ended December 31, 2015 and 20142017 was $2.4 million. For$8.9 million, an increase of $4.0 million compared to $4.9 million for the twelve month period ended December 31, 2015,2016. For the twelve months ended December 31, 2017, basic and fully-diluted net income per common share was $0.06were $0.16 and $0.15, respectively, compared to basic and fully-diluted net income per common share of $0.07$0.13 and $0.12, respectively for the twelve month periodmonths ended December 31, 2014.2016.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve month periodsmonths ended December 31, 20152017 and 20142016 was 0.19%0.43% and 0.23%0.30%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders'stockholders’ equity. The ROE for the twelve month periodmonths ended December 31, 20152017 was 2.14%4.02%, compared to 2.51%3.97% for the twelve month periodmonths ended December 31, 2014.
2016.
Financial Condition
December 31, 20162018 compared to December 31, 20152017
Total assets increased by $485.1$431.0 million to $1.9$2.8 billion at December 31, 2016,2017, compared to $1.4$2.3 billion at December 31, 2015.2017.
Cash and Cash Equivalents
Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories increased by $7.4$10.5 million to $34.6$72.5 million at December 31, 2016,2018, from $27.1$61.9 million at December 31, 2015.2017.
Loans Held for Sale
Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration ("SBA"(“SBA”) which we usually originate with the intention of selling in the future and residential mortgage loans, originated by Republic's subsidiary, Oak Mortgage, which we also intend to sell in the future. Total SBA loans held for sale were $4.2$5.4 million at December 31, 20162018, an increase of $3.1 million, compared to $3.7$2.3 million at December 31, 2015.2017. Residential mortgage loans held for sale totaled $23.9$20.9 million at December 31, 2016.2018, a decrease of $22.5 million, versus $43.4 million at December 31, 2017. Loans held for sale, as a percentage of our total assets, were less than 1.5%1.0% at December 31, 2016.2018.
Loans Receivable
The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $27.0$34.4 million at December 31, 2016.2018. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit. There were no loans in excess of the legal lending limit at December 31, 2016. An $18.02017. A $22.9 million threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal monitoring guideline. There were no such relationshipsRelationships in excess of $18.0$22.9 million at December 31, 2016.2018 amounted to $52.0 million.
Loans increased $90.2$274.3 million, or 10%24%, to $965.0 million$1.4 billion at December 31, 2016,2018, versus $874.8 million$1.2 billion at December 31, 2015.2017. This growth was the result of an increase in loan demand in the owner occupied real estate, commercial real estate, consumer, construction and development, and residentialall loan categories driven by the successful execution of our relationship banking strategy which focuses on customer service.
Investment Securities
Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), municipal securities, corporate bonds, and asset-backed securities (ABS), and pooled trust preferred securities (CDO). Available-for-sale securities totaled $369.7$321.0 million at December 31, 2016,2018 as compared to $284.8$464.4 million at December 31, 2015.2017. The increase$143.4 million decrease was primarily due to the purchasetransfer of $230.1 million of available-for-sale securities to held-to-maturity and sales and paydowns of securities totaling $207.5$55.2 million partially offset by sales and pay downsthe purchase of securities totaling $115.6$149.2 million during 2016.2018. At December 31, 2016,2018, the portfolio had a net unrealized loss of $10.7$5.7 million compared to a net unrealized loss of $4.0$11.2 million at December 31, 2015.2017. The change$5.5 million decrease in valuethe unrealized loss of the investment portfolio was driven by an increasea decrease in market interest rates which drove a decreasean increase in value of the securities held in our portfolio during 2016.
2018.
Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMO'sCMO’s and MBS's.MBS’s. The fair value of securities held-to-maturity totaled $425.2$747.3 million and $171.8$463.8 million at December 31, 20162018 and December 31, 2015,2017, respectively. The $283.5 million increase was primarily due to the transfer of $230.1 million of available-for-sale securities to held-to-maturity and the purchase of $294.2securities totaling $123.3 million of held-to-maturity securities partially offset by pay downs of securities held in the portfoliototaling $33.2$63.6 million by during 2016.the year ended December 31, 2018.
ASC 320 “Investments – Debt Securities” requires an entity to determine how to classify a security at the time of acquisition. The appropriateness of the original classification should be reassessed at each reporting period. The transfer of investment securities from available-for-sale to held-to maturity category during the quarter ended December 31, 2018 was completed after an extensive analysis of the characteristics of all securities held in the portfolio, in addition to a review of our liquidity position under multiple scenarios including varying interest rate environments. Twenty-three of the twenty-five securities transferred from available-to-sale to held-to-maturity were collateralized mortgage obligations. Thirteen securities transferred were GNMA collateralized mortgage obligations which are backed by the full faith and credit of the U.S. government. The remaining ten collateralized mortgage obligations were issued by FNMA or FHLMC. Bonds issued by GNMA receive favorable risk rating when calculating regulatory risk-based capital ratios. In addition, GNMA, FNMA, AND FHLMC securities are often pledged as collateral as required to hold certain government deposits and are accepted as collateral as a result of the high quality and low-risk nature of these bonds. The other two securities transferred from available-for sale to held-to-maturity were FNMA agency mortgage backed securities.
After completion of these analyses and consideration of the factors mentioned above, management determined that it had the intent and ability to hold specific securities until maturity and it was appropriate to transfer them to the held-to-maturity category during the fourth quarter of 2018.
The fair value of the securities transferred to the held-to-maturity category was $230.1 million. The book value of the securities on the date of transfer was $239.5 million. The unrealized holding gain or loss on each individual security calculated at the time of transfer was reported as a component of shareholders’ equity in the accumulated other comprehensive income account and will be amortized as an adjustment to yield over the remaining life of each security.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, is carried at cost as of December 31, 20162018 and December 31, 2015.2017. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh ("FHLB"(“FHLB”) and Atlantic Community Bankers Bank ("ACBB"(“ACBB”).
At December 31, 20162018 and December 31, 2015,2017, the investment in FHLB stock totaled $1.2$5.6 million and $2.9$1.8 million, respectively. The decrease$3.8 million increase was due to a short-term borrowing from FHLB at December 31, 2015 which resulted in a higher required investment as of that date. in FHLB stock during 2018. At both December 31, 20162018 and December 31, 2015,2017, ACBB stock totaled $143,000.
Other Real Estate Owned
The balance of other real estate owned decreased to $10.2$6.2 million at December 31, 20162018 from $11.3$7.0 million at December 31, 2015,2017. The decrease was primarily due to the writedowns and sales totaling $1.4$1.1 million offset by additions in the current year.amount of $315,000.
Goodwill
Goodwill resulting from the acquisition of Oak Mortgage in July 2016 amounted to $5.0 million at both December 31, 2016. There2018 and December 31, 2017. We completed an annual impairment test for goodwill as of July 31, 2018 and 2017. Future impairment testing will be conducted as of July 31 on an annual basis, unless a triggering event occurs in the interim that would suggest impairment, in which case it would be tested as of the date of the triggering event. During the year ended December 31, 2018 and 2017, there was no goodwill recordedimpairment recorded. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Premises and Equipment
The balance of premises and equipment increased to $87.7 million at December 31, 2015.2018 from $74.9 million at December 31, 2017. The $12.7 million increase was primarily due to premises and equipment expenditures of $18.2 million less depreciation and amortization expenses of $5.4 million. New stores were opened in Gloucester Township, Evesboro, and Somers Point in New Jersey and Fairless Hills in Pennsylvania during 2018. The Bala Cynwyd store was closed in 2018 bringing the total store count to twenty-five. We ended the year with stores under construction in Lumberton in NJ and Feasterville in PA which are scheduled to be completed in early 2019.
Deposits
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic'sRepublic’s major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
Total deposits increased by $428.4$329.6 million to $1.7$2.4 billion at December 31, 2016,2018, from $1.2$2.1 billion at December 31, 2015.2017. The increase was the result of growth across all deposit categories, led by a significant risegrowth in demand deposit balances.balances and time deposits. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction. We are also in the midst of an aggressive expansion and relocation plan which we refer to as "The Power of Red is Back". Over the last three years, we have opened nine new store locations and have several more in various stages of construction and development. This strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon the more volatile sources of funding found in brokered and public fund certificates of deposit.
We are also in the midst of an aggressive expansion plan which we refer to as “The Power of Red is Back”. During 2018, we opened new stores in Gloucester Township, Evesboro, and Somers Point in NJ and Fairless Hills in PA and have several more in various stages of construction and development for 2019 including expansion into the New York market with two to four stores expected in Manhattan.
Short-term BorrowingsShareholders’ Equity
As of December 31, 2016, there were no short-term borrowings from FHLB comparedTotal shareholders’ equity increased $18.7 million to $47.0$245.2 million at December 31, 2015. The decrease in borrowings was the result of a temporary outflow of deposits at the end of the year in 2015, which returned in the early part of 2016.
Shareholders' Equity
Total shareholders' equity increased $101.7 million2018 compared to $215.1$226.5 million at December 31, 2016, compared2017. The increase was primarily due to $113.4the conversion of outstanding trust preferred securities in the first quarter of 2018. $10.1 million atof trust preferred securities were converted into 1.6 million shares of common stock. The change in shareholders’ equity was also driven by net income of $8.6 million recognized during 2018 and stock option exercises of $670,000, partially offset by a $2.8 million increase in accumulated other comprehensive losses associated with a decrease in the market value of the investment securities portfolio during the year ended December 31, 2015. We completed a capital raise in the amount of $100 million through a registered direct offering of our common stock in a private placement offering in December 2016.2018.
Investment Securities Portfolio
Republic'sRepublic’s investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest rate risk. The securities portfolio consists primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), corporate bonds, municipal securities, asset-backed securities (ABS), pooled trust preferred securities (CDO), and U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds. Our ALCO committee monitors and reviews all security purchases.
A summary of investment securities available-for-sale and investment securities held-to-maturity at December 31, 2016, 2015,2018, 2017, and 20142016 is as follows:
| | At December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
Available for sale | | | | | | | | | |
Collateralized mortgage obligations | | $ | 230,252 | | | $ | 180,795 | | | $ | 98,626 | |
Agency mortgage-backed securities | | | 37,973 | | | | 10,073 | | | | 13,271 | |
Municipal securities | | | 26,825 | | | | 22,814 | | | | 15,784 | |
Corporate bonds | | | 66,718 | | | | 54,294 | | | | 33,840 | |
Asset-backed securities | | | 15,565 | | | | 17,631 | | | | 18,353 | |
Trust preferred securities | | | 3,063 | | | | 3,070 | | | | 5,261 | |
Other securities | | | - | | | | 115 | | | | 115 | |
Total amortized cost of securities | | $ | 380,396 | | | $ | 288,792 | | | $ | 185,250 | |
| | | | | | | | | | | | |
Total fair value of investment securities | | $ | 369,739 | | | $ | 284,795 | | | $ | 185,379 | |
| | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | |
U.S. Government agencies | | $ | 98,538 | | | $ | 17,067 | | | $ | 1 | |
Collateralized mortgage obligations | | | 202,990 | | | | 146,458 | | | | 67,845 | |
Agency mortgage-backed securities | | | 129,951 | | | | 7,732 | | | | - | |
Other securities | | | 1,020 | | | | 1,020 | | | | 20 | |
Total amortized cost of securities | | $ | 432,499 | | | $ | 172,277 | | | $ | 67,866 | |
| | | | | | | | | | | | |
Total fair value of investment securities | | $ | 425,183 | | | $ | 171,845 | | | $ | 68,253 | |
| | At December 31, | |
(dollars in thousands) | | 2018 | | | 2017 | | | 2016 | |
Available for sale | | | | | | | | | |
Collateralized mortgage obligations | | $ | 197,812 | | | $ | 327,972 | | | $ | 230,252 | |
Agency mortgage-backed securities | | | 39,105 | | | | 55,664 | | | | 37,973 | |
Municipal securities | | | 20,807 | | | | 15,142 | | | | 26,825 | |
Corporate bonds | | | 62,583 | | | | 62,670 | | | | 66,718 | |
Asset-backed securities | | | 6,433 | | | | 13,414 | | | | 15,565 | |
Trust preferred securities | | | - | | | | 725 | | | | 3,063 | |
Total amortized cost of securities | | $ | 326,740 | | | $ | 475,587 | | | $ | 380,396 | |
| | | | | | | | | | | | |
Total fair value of investment securities | | $ | 321,014 | | | $ | 464,430 | | | $ | 369,739 | |
| | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | |
U.S. Government agencies | | $ | 107,390 | | | $ | 112,605 | | | $ | 98,538 | |
Collateralized mortgage obligations | | | 500,690 | | | | 215,567 | | | | 202,990 | |
Agency mortgage-backed securities | | | 153,483 | | | | 143,041 | | | | 129,951 | |
Other securities | | | - | | | | 1,000 | | | | 1,020 | |
Total amortized cost of securities | | $ | 761,563 | | | $ | 472,213 | | | $ | 432,499 | |
| | | | | | | | | | | | |
Total fair value of investment securities | | $ | 747,323 | | | $ | 463,799 | | | $ | 425,183 | |
The strong growth in deposit balances during 2016, 2015, and 2014 has resulted in a corresponding increase in interest earning assets. A capital raise in the amount of $100 million completed in December 2016 also contributed to the growth of interest earning assets during the current year. The total amortized cost of the investment securities portfolio has grown to $1.1 billion at December 31, 2018 compared to $947.8 million at December 31, 2017 and $812.9 million at December 31, 2016 compared to $461.1 million at December 31, 2015 and $253.1 million at December 31, 2014.2016. Investment securities represented 42%39% of total assets at December 31, 20162018 and 32%40% of total assets at December 31, 2015.2017. We evaluate our investment securities portfolio on a continual basis in light of the interest rate environment and changing market conditions and when appropriate, take necessary actions to improve and enhance our overall positioning. We consider the portfolio to be well structured and of high quality. At December 31, 2016, 86%2018, 93% of the portfolio consisted of U.S. government agency securities which were rated Aaa /AA+ by the major credit rating agencies.
The investment securities portfolio includes securities classified as both available for sale and held to maturity. During 20162018 and 2015,2017, we designated a portion of our securities portfolio as held to maturity based our intent and ability to hold those securities until they mature.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates rise and increases when interest rates fall. In addition, the fair value generally decreases when credit spreads widen and increases when credit spreads tighten. Net unrealized losses in the total investment securities portfolio increased to $18.0$20.0 million at December 31, 20162018 compared to net unrealized losses of $4.4$19.6 million at December 31, 20152017 as a result of a rise in interest rates in 2016.2018. The comparable amounts for the securities classified as available for sale were unrealized losses of $10.7$5.7 million at December 31, 20162018 and unrealized gainslosses of $4.0$11.2 million at December 31, 2015.2017. The decrease in unrealized losses is related to the transfer of twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale to the held-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of the securities.
No single issuer of securities (excluding government agencies) in the portfolio exceeded more than 10% of shareholders'shareholders’ equity at December 31, 2016. No single issuer of securities (excluding government agencies) in the portfolio exceeded more than 10% of shareholders' equity at2018 and December 31, 2015 with the exception of corporate bonds issued by Goldman Sachs and Morgan Stanley. The Goldman Sachs bonds had a book value of $18.0 million and a market value of $17.9 million. The Morgan Stanley bonds had a book value of $15.0 million and a market value of $15.1 million at December 31, 2015.2017.
At December 31, 2016,2018, the investment portfolio included forty-sixtwenty-eight municipal securities with a total market value of $26.5$20.6 million. These securities are reviewed quarterly for impairment. ResearchEach bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, we periodically conduct our own independent review on each issuer is completed to assessensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey where forty-twotwenty-six municipal securities had a market value of $24.8$19.9 million. As of December 31, 2016,2018, management found no evidence of other than temporary impairment ("OTTI"(“OTTI”) on any of the municipal securities held in the investment securities portfolio.
At December 31, 2016,2018, the portfolio included twoone asset-backed securitiessecurity with a total market value of $15.1 million, the majority$6.3 million. The asset-backed security consist solely of Sallie Mae bonds, collateralized by student loans which (97%) isare guaranteed by the U.S. Dept.Department of Education, which were in an unrealized loss position. Management believes the unrealized losses on these securities were driven by market interest rates and not a result of any credit deterioration.
At December 31, 2016, the portfolio also included three pooled trust preferred securities (CDOs) with a market value of $1.8 million. The unrealized loss for the CDOs was due to the secondary market for such securities becoming inactive and is considered temporary.
During 2016, we sold noProceeds associated with the sale of securities available for sale in 2018 were $6.4 million. Gross losses of $67,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2018 amounted to $18,000. Included in the 2018 sales activity was the sale of one CDO securities. During 2015, we sold four CDO securities.security. Proceeds from the sale of the CDO securitiessecurity totaled $2.0 million.$660,000. Gross gains of $70,000 and gross losses of $288,000$66,000 were realized on these sales. The tax provisionbenefit applicable to the net losses for the twelve months ended December 31, 20152018 amounted to $78,000.$17,000. Management had previously stated that it did not intend to sell the CDO securities prior to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to maturity or recovery of the cost bases. This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2015,2018, management received several inquiries regarding the availability of the remaining CDO securitiessecurity and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell the fourremaining CDO security resulting in a net loss of $66,000 during 2018.
Proceeds associated with the sale of securities available for sale in 2017 were $31.2 million. Gross gains of $652,000 and gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2017 amounted to $52,000. Included in the 2017 sales activity were the sales of two CDO securities. Proceeds from the sale of the CDO securities totaled $1.5 million. Gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the twelve months ended December 31, 2017 amounted to $287,000. As a result of the increased activity and the level of bids received, management elected to sell two CDOs resulting in a net loss of $218,000$798,000 during 20152017 which was offset by gains on sales of agency mortgage-backed securities, and corporate bonds. The Bank continues to demonstrate the ability and intent to hold the remaining CDOs until maturity or recovery of the cost bases, but will evaluate future opportunities to sell the remaining CDOs if they arise.
During 2016, we sold eight collateralized mortgage obligations two agency mortgage-backedand corporate bonds.
We had proceeds from the sale of securities and one corporate bond. Proceedsavailable for sale in 2016 of sales totaled $78.6 million. Gross gains of $680,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to thethese gross gains in 2016 amounted to $244,000. During 2015, we also sold twenty-nine agency mortgage-backed securities and two corporate bonds. Proceeds of sales totaled $9.7 million. Gross gains of $326,000 were realized on these sales. The tax provision applicable to the gross gains amounted to $117,000.approximately $236,000.
The following table presents the maturity distribution and weighted average yield by holding type and year of maturity of our investment securities portfolio at December 31, 2016.2018. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date.
| | December 31, 2016 | | | December 31, 2018 | |
| | Within One Year | | | One to Five Years | | | Five to Ten Years | | | Past Ten Years | | | Total | | | Within One Year | | | One to Five Years | | | Five to Ten Years | | | Past Ten Years | | | Total | |
(dollars in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Fair value | | | Cost | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Fair value | | | Amortized Cost | | | Yield | |
Available for Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | 224,765 | | | $ | 230,252 | | | | 2.09 | % | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | - | | | | - | | | $ | 196,259 | | | $ | 197,812 | | | | 3.02% |
|
Agency mortgage-backed securities | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 36,710 | | | | 37,973 | | | | 2.18 | % | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 38,499 | | | | 39,105 | | | | 2.84% |
|
Municipal securities | | | 1,002 | | | | 4.17 | % | | | 4,453 | | | | 2.55 | % | | | 18,748 | | | | 2.86 | % | | | 2,344 | | | | 2.54 | % | | | 26,547 | | | | 26,825 | | | | 2.83 | % | | | 791 | | | | 4.13% |
| | | 3,892 | | | | 2.45% |
| | | 13,786 | | | | 2.80% |
| | | 2,170 | | | | 2.66% |
| | | 20,639 | | | | 20,807 | | | | 2.77% |
|
Corporate bonds | | | - | | | | - | | | | 8,671 | | | | 3.38 | % | | | 34,237 | | | | 3.53 | % | | | 21,840 | | | | 4.24 | % | | | 64,748 | | | | 66,718 | | | | 3.73 | % | | | 1,584 | | | | 2.80% |
| | | 3,016 | | | | 3.53% |
| | | 51,605 | | | | 3.28% |
| | | 3,069 | | | | 4.21% |
| | | 59,274 | | | | 62,583 | | | | 3.32% |
|
Asset-backed securities | | | - | | | | - | | | | 6,367 | | | | 1.90 | % | | | 8,782 | | | | 2.58 | % | | | - | | | | - | | | | 15,149 | | | | 15,565 | | | | 2.29 | % | | | - | | | | - | | | | - | | | | - |
| | | 6,343 | | | | 4.19% |
| | | - | | | | -- |
| | | 6,343 | | | | 6,433 | | | | 4.19% |
|
Trust Preferred securities | | | - | | | | - | | | | - | | | | - | | | | 1,820 | | | | 3.29 | % | | | - | | | | - | | | | 1,820 | | | | 3,063 | | | | 3.29 | % | |
Total AFS securities | | $ | 1,002 | | | | 4.17 | % | | $ | 19,491 | | | | 2.71 | % | | $ | 63,587 | | | | 3.19 | % | | $ | 24,184 | | | | 4.08 | % | | $ | 369,739 | | | $ | 380,396 | | | | 2.44 | % | | $ | 2,375 | | | | 3.24% |
| | $ | 6,908 | | | | 2.92% |
| | $ | 71,734 | | | | 3.26% |
| | $ | 5,239 | | | | 3.57% |
| | $ | 321,014 | | | $ | 326,740 | | | | 3.06% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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Held to Maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
U.S. Government Agencies | | $ | - | | | | - | | | $ | 3,586 | | | | 2.08 | % | | $ | 92,722 | | | | 2.37 | % | | $ | - | | | | - | | | $ | 96,308 | | | $ | 98,538 | | | | 2.36 | % | | $ | - | | | | - | | | $ | 13,937 | | | | 2.54% |
| | $ | 89,681 | | | | 2.42% |
| | $ | - | | | | - | | | $ | 103,618 | | | $ | 107,390 | | | | 2.44% |
|
Collateralized mortgage obligations | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 201,230 | | | | 202,990 | | | | 2.18 | % | | | - | | | | - | | | | - | | | | - |
| | | - | | | | - |
| | | - | | | | - | | | | 495,467 | | | | 500,690 | | | | 2.65% |
|
Agency mortgage-backed securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 126,625 | | | | 129,951 | | | | 2.41 | % | | | - | | | | - | | | | - | | | | - |
| | | - | | | | - |
| | | - | | | | - | | | | 148,238 | | | | 153,483 | | | | 2.59% |
|
Other securities | | | - | | | | - | | | | 1,020 | | | | 2.21 | % | | | - | | | | - | | | | - | | | | - | | | | 1,020 | | | | 1,020 | | | | 2.21 | % | |
Total HTM securities | | $ | - | | | | - | | | $ | 4,606 | | | | 2.11 | % | | $ | 92,722 | | | | 2.37 | % | | $ | - | | | | - | | | $ | 425,183 | | | $ | 432,499 | | | | 2.29 | % | | $ | - | | | | - | | | $ | 13,937 | | | | 2.54% |
| | $ | 89,681 | | | | 2.42% |
| | $ | - | | | | - | | | $ | 747,323 | | | $ | 761,563 | | | | 2.61% |
|
Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of our 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 we could have realized in a sale 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.
We follow 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'sasset’s or liability'sliability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities'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'smanagement’s best estimate is used. Management'sManagement’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
The types of instruments valued based on matrix pricing in active markets include all of our U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, we do 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'smanagement’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. TheThere was one Level 3 investment securitiessecurity classified as available for sale are comprised of various issues of trust preferred securities andavailable-for-sale at December 31, 2018. This security is a single corporate bond.
The trust preferred securities are poolssecurity is a pool of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations ("CDOs"(“CDOs”) which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically. The secondary market for these securities hasthis security had become inactive, and therefore these securities arethe security was classified as a Level 3 securities.security. The fair value analysis doesdid not reflect or represent the actual terms or prices at which any party could purchase the securities. There is currently a limited secondary market for the securities and there can be no assurance that any secondary market for the securities will expand.security. The trust preferred security was sold in 2018.
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 year ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
| | Year Ended December 31, 2016 | | | Year Ended December 31, 2015 | | | Year Ended December 31, 2014 | | | Year Ended December 31, 2018 | | | Year Ended December 31, 2017 | | | Year Ended December 31, 2016 | |
Level 3 Investments Only (dollars in thousands) | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | |
Balance, January 1, | | $ | 1,883 | | | $ | 2,834 | | | $ | 3,193 | | | $ | 3,005 | | | $ | 2,850 | | | $ | 3,006 | | | $ | 489 | | | $ | 3,086 | | | $ | 1,820 | | | $ | 2,971 | | | $ | 1,883 | | | $ | 2,834 | |
Security transferred to Level 3 measurement | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Unrealized gains (losses) | | | (56 | ) | | | 137 | | | | 882 | | | | (171 | ) | | | 360 | | | | (1 | ) | | | 237 | | | | (17 | ) | | | 1,006 | | | | 115 | | | | (56 | ) | | | 137 | |
Paydowns | | | - | | | | - | | | | (19 | ) | | | - | | | | (10 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Proceeds from sales | | | - | | | | - | | | | (1,952 | ) | | | - | | | | - | | | | - | | | | (660 | ) | | | - | | | | (1,539 | ) | | | - | | | | - | | | | - | |
Realized losses | | | - | | | | - | | | | (218 | ) | | | - | | | | - | | | | - | | | | (66 | ) | | | - | | | | (798 | ) | | | - | | | | - | | | | - | |
Impairment charges on Level 3 | | | (7 | ) | | | - | | | | (3 | ) | | | - | | | | (7 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7 | ) | | | - | |
Balance, December 31, | | $ | 1,820 | | | $ | 2,971 | | | $ | 1,883 | | | $ | 2,834 | | | $ | 3,193 | | | $ | 3,005 | | | $ | - | | | $ | 3,069 | | | $ | 489 | | | $ | 3,086 | | | $ | 1,820 | | | $ | 2,971 | |
An independent, third party pricing service iswas used to estimate the current fair market value of eachthe CDO previously held in the investment securities portfolio. The calculations used to determine fair value arewere based on the attributes of the trust preferred securities,security, the financial condition of the issuers of the trust preferred securities,security, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of eachthe security and its specific collateral as of December 31, 20162017 and December 31, 2015.2016. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and SNL Financial. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss severity percentages.
The fair market valuation for eachthe CDO was determined based on discounted cash flow analyses. The cash flows arewere primarily dependent on the estimated speeds at which the trust preferred securities aresecurity was expected to prepay, the estimated rates at which the trust preferred securities aresecurity were expected to defer payments, the estimated rates at which the trust preferred securities aresecurity were expected to default, and the severity of the related losses on securities that do default. the security.
Increases (decreases) in actual or expected issuer defaults tendtended to decrease (increase) the fair value of our senior and mezzanine tranches of CDOs. The values of our mezzanine tranches of CDOs arewere also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of our holdings arewere not quantifiably estimable.
Also included inThe remaining Level 3 investment securitiessecurity classified as available for sale is a corporate bond transferred from Level 2 in 2010 that is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer'sissuer’s financial statements. The issuer is a "well capitalized"“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.
Loan Portfolio
Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic'sRepublic’s commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic'sRepublic’s legal lending limit of approximately $27.0$34.4 million at December 31, 2016.2018. Management has established an internal monitoring guideline for loan relationships in the amount of $18.0$22.9 million which approximates 10% of capital and reserves. Individual customers may have several loans often secured by different collateral. The aggregate total of relationships in excess of $22.9 million at December 31, 2018 amounted to $52.0 million. There were no such relationshipsloans in excess of the legal lending limit or the internal monitoring guideline of $18.0 million at December 31, 2016.2018.
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and the surrounding suburbs, including southern New Jersey. In addition, we have loans to customers whose assets and businesses are concentrated in real estate. Repayment of our loans is in part dependent upon general economic conditions affecting our market place and specific industries.industries in which our customers operate. We evaluate each customer'scustomer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management'smanagement’s credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties.
At December 31, 2016,2018, we had loan concentrations exceeding 10% of total loans for credits extended to lessors of nonresidential real estate in the aggregate amount of $201.0$311.0 million, which represented 20.8%21.6% of gross loans receivable, private households in the aggregate amount of $243.8 million which represented 17.0% of gross loans receivable, and lessors of residential real estate in the aggregate amount of $128.8$158.7 million, which represented 13.3%11.0% of gross loans receivable. Loan concentrations are considered to exist when amounts are loaned to multiple numbers of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. At December 31, 2016,2018, we had no foreign loans outstanding.
The following table sets forth gross loans by major categories for the periods indicated:
| | At December 31, | | | At December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 378,519 | | | $ | 349,726 | | | $ | 379,259 | | | $ | 342,794 | | | $ | 335,561 | | | $ | 515,738 | | | $ | 433,304 | | | $ | 378,519 | | | $ | 349,726 | | | $ | 379,259 | |
Construction and land development | | | 61,453 | | | | 46,547 | | | | 29,861 | | | | 23,977 | | | | 26,659 | | | | 121,042 | | | | 104,617 | | | | 61,453 | | | | 46,547 | | | | 29,861 | |
Commercial and industrial | | | 174,744 | | | | 181,850 | | | | 145,113 | | | | 118,209 | | | | 103,768 | | | | 200,423 | | | | 173,343 | | | | 174,744 | | | | 181,850 | | | | 145,113 | |
Owner occupied real estate | | | 276,986 | | | | 246,398 | | | | 188,025 | | | | 160,229 | | | | 126,242 | | | | 367,895 | | | | 309,838 | | | | 276,986 | | | | 246,398 | | | | 188,025 | |
Consumer and other | | | 63,660 | | | | 48,126 | | | | 39,713 | | | | 31,981 | | | | 23,449 | | | | 91,152 | | | | 76,183 | | | | 63,660 | | | | 48,126 | | | | 39,713 | |
Residential mortgage | | | 9,682 | | | | 2,380 | | | | 408 | | | | 2,359 | | | | 2,442 | | | | 140,364 | | | | 64,764 | | | | 9,682 | | | | 2,380 | | | | 408 | |
Total loans | | $ | 965,044 | | | $ | 875,027 | | | $ | 782,379 | | | $ | 679,549 | | | $ | 618,121 | | | $ | 1,436,614 | | | $ | 1,162,049 | | | $ | 965,044 | | | $ | 875,027 | | | $ | 782,379 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred loan fees | | | 72 | | | | 258 | | | | 439 | | | | 238 | | | | 220 | | |
Deferred loan costs (fees) | | | | (16 | ) | | | 229 | | | | (72 | ) | | | (258 | ) | | | (439 | ) |
Total loans, net of deferred loan fees | | $ | 964,972 | | | $ | 874,769 | | | $ | 781,940 | | | $ | 679,311 | | | $ | 617,901 | | | $ | 1,436,598 | | | $ | 1,162,278 | | | $ | 964,972 | | | $ | 874,769 | | | $ | 781,940 | |
Total loans, net of deferred loan fees, increased $90.2$274.3 million, or 10%24%, to $965.0 million$1.4 billion at December 31, 2016,2018, versus $874.8 million$1.2 billion at December 31, 2015.2017. This growth was the result of an increase in loan demand in the owner occupied real estate, commercial real estate, consumer, construction and development, and residential mortgageacross all loan categories driven by the successful execution of our relationship banking strategy which focuses on customer service.
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated, which are due in: (i) one year or less, (ii) more than one year through five years, and (iii) over five years, is shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.
(dollars in thousands) | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Total | | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Total | |
Fixed rate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 year or less | | $ | 66,932 | | | $ | 11,278 | | | $ | 16,002 | | | $ | 21,075 | | | $ | 348 | | | $ | - | | | $ | 115,635 | | | $ | 29,186 | | | $ | 6,821 | | | $ | 18,835 | | | $ | 16,452 | | | $ | 288 | | | $ | - | | | $ | 71,582 | |
1-5 years | | | 212,487 | | | | 3,216 | | | | 49,329 | | | | 116,465 | | | | 449 | | | | - | | | | 381,946 | | | | 328,568 | | | | 19,079 | | | | 53,350 | | | | 160,487 | | | | 1,294 | | | | - | | | | 562,778 | |
After 5 years | | | 67,197 | | | | 2,475 | | | | 34,752 | | | | 68,322 | | | | 9,658 | | | | 9,682 | | | | 192,086 | | | | 134,039 | | | | 10,353 | | | | 62,562 | | | | 113,484 | | | | 15,957 | | | | 138,160 | | | | 474,555 | |
Total fixed rate | | | 346,616 | | | | 16,969 | | | | 100,083 | | | | 205,862 | | | | 10,455 | | | | 9,682 | | | | 689,667 | | | | 491,793 | | | | 36,253 | | | | 134,747 | | | | 290,423 | | | | 17,539 | | | | 138,160 | | | | 1,108,915 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustable rate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 year or less | | $ | 12,623 | | | $ | 6,712 | | | $ | 42,830 | | | $ | 5,585 | | | $ | 683 | | | $ | - | | | $ | 68,433 | | | $ | 6,429 | | | $ | 20,216 | | | $ | 49,940 | | | $ | 12,866 | | | $ | 575 | | | $ | - | | | $ | 90,026 | |
1-5 years | | | 17,269 | | | | 26,570 | | | | 20,602 | | | | 7,276 | | | | 3,566 | | | | - | | | | 75,283 | | | | 16,863 | | | | 51,003 | | | | 9,256 | | | | 813 | | | | 5,490 | | | | - | | | | 83,425 | |
After 5 years | | | 2,011 | | | | 11,202 | | | | 11,229 | | | | 58,263 | | | | 48,956 | | | | - | | | | 131,661 | | | | 653 | | | | 13,570 | | | | 6,480 | | | | 63,793 | | | | 67,548 | | | | 2,204 | | | | 154,248 | |
Total adjustable rate | | | 31,903 | | | | 44,484 | | | | 74,661 | | | | 71,124 | | | | 53,205 | | | | - | | | | 275,377 | | | | 23,945 | | | | 84,789 | | | | 65,676 | | | | 77,472 | | | | 73,613 | | | | 2,204 | | | | 327,699 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 378,519 | | | $ | 61,453 | | | $ | 174,744 | | | $ | 276,986 | | | $ | 63,660 | | | $ | 9,682 | | | $ | 965,044 | | | $ | 515,738 | | | $ | 121,042 | | | $ | 200,423 | | | $ | 367,895 | | | $ | 91,152 | | | $ | 140,364 | | | $ | 1,436,614 | |
In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount, and at interest rates prevailing at the date of renewal. At December 31, 2016, 71.5%2018, 77.2% of total loans were fixed rate compared to 71.9%73.6% at December 31, 2015.
2017.
Credit Quality
Republic'sRepublic’s written lending policies require specific underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee consisting of senior management and certain members of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment of principal and/or interest in full is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual, any collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
The following summary shows information concerning loan delinquency and non-performing assets at the dates indicated:
| | At December 31, | | | | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Loans accruing, but past due 90 days or more | | $ | 302 | | | $ | - | | | $ | - | | | $ | - | | | $ | 202 | |
Non-accrual loans: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 13,089 | | | | 5,913 | | | | 13,979 | | | | 1,104 | | | | 7,987 | |
Construction and land development | | | - | | | | 117 | | | | 377 | | | | 1,618 | | | | 1,342 | |
Commercial and industrial | | | 3,151 | | | | 3,156 | | | | 4,349 | | | | 6,837 | | | | 4,693 | |
Owner occupied real estate | | | 1,546 | | | | 2,894 | | | | 2,306 | | | | 205 | | | | 968 | |
Consumer and other | | | 808 | | | | 542 | | | | 429 | | | | 656 | | | | 856 | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | - | |
Total non-accrual loans | | | 18,594 | | | | 12,622 | | | | 21,440 | | | | 10,420 | | | | 15,846 | |
Total non-performing loans(1) | | | 18,896 | | | | 12,622 | | | | 21,440 | | | | 10,420 | | | | 16,048 | |
Other real estate owned | | | 10,174 | | | | 11,313 | | | | 3,715 | | | | 4,059 | | | | 8,912 | |
Total non-performing assets(1) | | $ | 29,070 | | | $ | 23,935 | | | $ | 25,155 | | | $ | 14,479 | | | $ | 24,960 | |
| | | | | | | | | | | | | | | | | | | | |
Non-performing loans as a percentage of total loans, net of unearned income(1) | | | 1.96 | % | | | 1.44 | % | | | 2.74 | % | | | 1.53 | % | | | 2.60 | % |
Non-performing assets as a percentage of total assets | | | 1.51 | % | | | 1.66 | % | | | 2.07 | % | | | 1.51 | % | | | 2.52 | % |
(1) Non-performing loans are comprised of (i) loans that are on non-accrual basis and (ii) accruing loans that are 90 days or more past due. Non-performing assets are composed of non-performing loans and other real estate owned.
| | At December 31, | |
(dollars in thousands) | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Loans accruing, but past due 90 days or more | | $ | - | | | $ | - | | | $ | 302 | | | $ | - | | | $ | - | |
Non-accrual loans: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 4,631 | | | | 8,963 | | | | 13,089 | | | | 5,913 | | | | 13,979 | |
Construction and land development | | | - | | | | - | | | | - | | | | 117 | | | | 377 | |
Commercial and industrial | | | 3,661 | | | | 2,895 | | | | 3,151 | | | | 3,156 | | | | 4,349 | |
Owner occupied real estate | | | 1,188 | | | | 2,136 | | | | 1,546 | | | | 2,894 | | | | 2,306 | |
Consumer and other | | | 861 | | | | 851 | | | | 808 | | | | 542 | | | | 429 | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | - | |
Total non-accrual loans | | | 10,341 | | | | 14,845 | | | | 18,594 | | | | 12,622 | | | | 21,440 | |
Total non-performing loans(1) | | | 10,341 | | | | 14,845 | | | | 18,896 | | | | 12,622 | | | | 21,440 | |
Other real estate owned | | | 6,223 | | | | 6,966 | | | | 10,174 | | | | 11,313 | | | | 3,715 | |
Total non-performing assets(1) | | $ | 16,564 | | | $ | 21,811 | | | $ | 29,070 | | | $ | 23,935 | | | $ | 25,155 | |
| | | | | | | | | | | | | | | | | | | | |
Non-performing loans as a percentage of total loans, net of unearned income(1) | | | 0.72% |
| | | 1.28% |
| | | 1.96% |
| | | 1.44% |
| | | 2.74% |
|
Non-performing assets as a percentage of total assets | | | 0.60% |
| | | 0.94% |
| | | 1.51% |
| | | 1.66% |
| | | 2.07% |
|
| | | | | | | | | | | | | | | | | | | | |
(1) Non-performing loans are comprised of (i) loans that are on non-accrual basis and (ii) accruing loans that are 90 days or more past due. Non-performing assets are composed of non-performing loans and other real estate owned. |
Problem loans can consist of loans that are performing, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At December 31, 2016,2018, all identified problem loans included in the preceding table are internally classified and have been evaluated for a specific reserve allocation in the allowance for loan losses (see discussion on "Allowance“Allowance for Loan Losses"Losses”).
Non-performing assets increaseddecreased by $5.1$5.2 million, or 21%24%, to $29.1$16.6 million at December 31, 2016,2018, compared to $23.9$21.8 million at December 31, 2015. This increase2017. The decrease in non-performing loans was primarily due to transfersdriven by payments of $9.8$3.7 million from performing to non-performing assets during 2016,and charge-offs of which $7.3$2.4 million was due to a single loan relationship, partially offset by a combination$1.9 million in additions to non-performing loans. The reduction in other real estate owned was the result of advances, loan paydowns,various write-downs, charge-offs, OREO sales, loan charge-offs, and OREO writedowns totaling $4.7 million.transfers during the year.
The following summary shows the impact on interest income of non-accrual loans, subsequent to being placed on non-accrual for the periods indicated:
| | For the Year Ended December 31, | | | For the Year Ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Interest income that would have been recorded had the loans been in accordance with their original terms | | $ | 1,024 | | | $ | 765 | | | $ | 980 | | | $ | 488 | | | $ | 699 | | | $ | 498 | | | $ | 590 | | | $ | 1,024 | | | $ | 765 | | | $ | 980 | |
Interest income included in net income | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish an allowance against loan losses on a quarterly basis. When an increase in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan losses consists of three components. The first component is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310 Receivables. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310-10 ("(“non-impaired loans"loans”). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450 Contingencies. The third component is an unallocated allowance to account for a level of imprecision in management'smanagement’s estimation process.
We evaluate loans for impairment and potential charge-off on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary repayment source. If the primary repayment source is determined to be insufficient and unlikely to repay the debt, we then look to the secondary repayment sources. Secondary sources are conservatively reviewed for liquidation values. Updated appraisals and financial data are obtained to substantiate current values. If the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs associated with the resolution of thea troubled loan, an estimate of the deficient amount will be calculated and a specific allocation of loan loss reserve is recorded.
Factors considered in the calculation of the allowance for non-impaired loans include several qualitative and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan balances, changes in risk composition and underwriting standards, experience and ability of management, and general economic conditions along with other external factors. Historical loss experience is analyzed by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below.
The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators.regulators on a regular basis. Our primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding the adequacy and the methodology employed in their determination.
A detailed analysis of our allowance for loan losses for the years ended December 31, 2018, 2017, 2016, 2015, 2014, 2013, and 20122014 is as follows:
| | For the Year Ended December 31, | |
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 8,703 | | | $ | 11,536 | | | $ | 12,263 | | | $ | 9,542 | | | $ | 12,050 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | - | | | | 2,624 | | | | 364 | | | | 1,291 | | | | 1,582 | |
Construction and land development | | | 60 | | | | 260 | | | | 303 | | | | 60 | | | | 1,004 | |
Commercial and industrial | | | 143 | | | | 408 | | | | 1,185 | | | | 611 | | | | 1,304 | |
Owner occupied real estate | | | 1,052 | | | | 133 | | | | 150 | | | | 320 | | | | - | |
Consumer and other | | | 11 | | | | - | | | | 10 | | | | 75 | | | | 102 | |
Residential mortgage | | | 10 | | | | - | | | | - | | | | - | | | | - | |
Total charge-offs | | | 1,276 | | | | 3,425 | | | | 2,012 | | | | 2,357 | | | | 3,992 | |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 6 | | | | 4 | | | | 5 | | | | 54 | | | | - | |
Construction and land development | | | - | | | | 5 | | | | 214 | | | | - | | | | 105 | |
Commercial and industrial | | | 163 | | | | 49 | | | | 166 | | | | 63 | | | | - | |
Owner occupied real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer and other | | | 2 | | | | 34 | | | | - | | | | 26 | | | | 29 | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | - | |
Total recoveries | | | 171 | | | | 92 | | | | 385 | | | | 143 | | | | 134 | |
Net charge-offs | | | 1,105 | | | | 3,333 | | | | 1,627 | | | | 2,214 | | | | 3,858 | |
Provision for loan losses | | | 1,557 | | | | 500 | | | | 900 | | | | 4,935 | | | | 1,350 | |
Balance at end of period | | $ | 9,155 | | | $ | 8,703 | | | $ | 11,536 | | | $ | 12,263 | | | $ | 9,542 | |
| | | | | | | | | | | | | | | | | | | | |
Average loans outstanding(1) | | $ | 936,492 | | | $ | 820,820 | | | $ | 724,231 | | | $ | 640,233 | | | $ | 609,943 | |
| | | For the Year Ended December 31, | |
(dollars in thousands) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | | | | |
Balance at beginning of period | | | $ | 8,599 | | | $ | 9,155 | | | $ | 8,703 | | | $ | 11,536 | | | $ | 12,263 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | | 1,603 | | | | - | | | | - | | | | 2,624 | | | | 364 | |
Construction and land development | | | | - | | | | - | | | | 60 | | | | 260 | | | | 303 | |
Commercial and industrial | | | | 151 | | | | 1,366 | | | | 143 | | | | 408 | | | | 1,185 | |
Owner occupied real estate | | | | 465 | | | | 157 | | | | 1,052 | | | | 133 | | | | 150 | |
Consumer and other | | | | 219 | | | | 53 | | | | 11 | | | | - | | | | 10 | |
Residential mortgage | | | | - | | | | - | | | | 10 | | | | - | | | | - | |
Total charge-offs | | | | 2,438 | | | | 1,576 | | | | 1,276 | | | | 3,425 | | | | 2,012 | |
Recoveries: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | | 50 | | | | 54 | | | | 6 | | | | 4 | | | | 5 | |
Construction and land development | | | | - | | | | - | | | | - | | | | 5 | | | | 214 | |
Commercial and industrial | | | | 81 | | | | 64 | | | | 163 | | | | 49 | | | | 166 | |
Owner occupied real estate | | | | 20 | | | | - | | | | - | | | | - | | | | - | |
Consumer and other | | | | 3 | | | | 2 | | | | 2 | | | | 34 | | | | - | |
Residential mortgage | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total recoveries | | | | 154 | | | | 120 | | | | 171 | | | | 92 | | | | 385 | |
Net charge-offs | | | | 2,284 | | | | 1,456 | | | | 1,105 | | | | 3,333 | | | | 1,627 | |
Provision for loan losses | | | | 2,300 | | | | 900 | | | | 1,557 | | | | 500 | | | | 900 | |
Balance at end of period | | | $ | 8,615 | | | $ | 8,599 | | | $ | 9,155 | | | $ | 8,703 | | | $ | 11,536 | |
| | | | | | | | | | | | | | | | | | | | | |
Average loans outstanding(1) | | | $ | 1,340,117 | | | $ | 1,090,851 | | | $ | 936,492 | | | $ | 820,820 | | | $ | 724,231 | |
| | | | | | | | | | | | | | | | | | | | | |
As a percent of average loans:(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net charge-offs | | | 0.12 | % | | | 0.41 | % | | | 0.22 | % | | | 0.35 | % | | | 0.63 | % | | | 0.17% |
| | | 0.13% |
| | | 0.12% |
| | | 0.41% |
| | | 0.22% |
|
Provision for loan losses | | | 0.17 | % | | | 0.06 | % | | | 0.12 | % | | | 0.77 | % | | | 0.22 | % | | | 0.17% |
| | | 0.08% |
| | | 0.17% |
| | | 0.06% |
| | | 0.12% |
|
Allowance for loan losses | | | 0.98 | % | | | 1.06 | % | | | 1.59 | % | | | 1.92 | % | | | 1.56 | % | | | 0.64% |
| | | 0.79% |
| | | 0.98% |
| | | 1.06% |
| | | 1.59% |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
|
Allowance for loan losses to: | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
|
Total loans, net of unearned income | | | 0.95 | % | | | 0.99 | % | | | 1.48 | % | | | 1.81 | % | | | 1.54 | % | | | 0.60% |
| | | 0.74% |
| | | 0.95% |
| | | 0.99% |
| | | 1.48% |
|
Total non-performing loans | | | 48.45 | % | | | 68.95 | % | | | 53.81 | % | | | 117.69 | % | | | 59.46 | % | | | 83.31% |
| | | 57.93% |
| | | 48.45% |
| | | 68.95% |
| | | 53.81% |
|
(1) Includes non-accruing loans.
The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. We recorded a loan loss provision in the amount of $1.6$2.3 million in 20162018 compared to a $500,000$900,000 provision in 2015.2017. The increase in the provision during 2018 was driven by growth in outstanding loan balances resulting in an increased allowance for loans collectively evaluated for impairment. Non-performing loans increaseddecreased by $6.3$4.5 million, or 50%30%, to $18.9$10.3 million at December 31, 2016,2018, compared to $12.6$14.8 million at December 31, 2015.2017. Impaired loans also increaseddecreased to $28.2$18.0 million at December 31, 20162018 from $22.1$24.7 million at December 31, 2015. An increase2017. A decrease in the allowance required for loans collectivelyindividually evaluated for impairment driven by a reduction in impaired loans was more than offset by an increase driven by growth in the loan portfolio was offset by a reduction associated with an improvement in the factor used for historical loss experience during 2016.2018.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 83.3% at December 31, 2018 as compared to 57.9% at December 31, 2017 and 48.4% at December 31, 2016 as compared to 69.0% at December 31, 2015 and 53.8% at December 31, 2014.2016. The increase in the coverage ratio during 2018 was mainly driven by the decrease in non-performing loans during the year. All loans individually evaluated for impairment are adequately secured with collateral and/or specific reserves. Coverage is considered adequate by management as of December 31, 2016.2018.
Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that it determines is adequate to absorb inherent losses in the loan portfolio. The Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the management team. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the allowance for loan losses. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses.
We evaluate loans for impairment and potential charge-offs on a quarterly basis. Any loan rated as substandard or lower will have a collateral evaluation analysis completed in accordance with the guidance under generally accepted accounting principles (GAAP) on impaired loans to determine if a deficiency exists. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance from all potential sources. When a loan is determined to be uncollectible it is charged-off against the allowance for loan losses. Unsecured commercial loans and all consumer loans are charged-off immediately upon reaching the 90-day delinquency mark unless they are well secured and in the process of collection. The timing on charge-offs of all other loan types is subjective and will be recognized when management determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or guarantors, will not be sufficient and that repayment is unlikely. A full or partial charge-off is recognized equal to the amount of the estimated deficiency calculation.
Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised collateral values and deteriorating financial condition of borrowers and guarantors are factors considered when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a borrower'sborrower’s financial condition is also assessed when considering a charge-off.
Partial charge-offs of non-performing and impaired loans can significantly reduce the coverage ratio and other credit loss statistics due to the fact that the balance of the allowance for loan losses will be reduced while still carrying the remainder of a non-performing loan balance in the impaired loan category. The amount of non-performing loans for which there were partial charge-offs during the year amounted to $2.4$3.3 million at December 31, 20162018 compared to $3.4$1.4 million at December 31, 2015.2017. This decreaseincrease was primarily driven by charge-offs related to a single loan payoffs during 2016. relationship in 2018.
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the twelve months ended December 31, 2016,2018, there have been no changes made to this policy.
We have an existing loan review program, which monitors the loan portfolio on an ongoing basis. A loan review officer who reviews both the loan portfolio and overall adequacy of the allowance for loan losses conducts this loan review on a quarterly basis and reports directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In management'smanagement’s opinion, the allowance for loan losses was appropriate at December 31, 2016.2018. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required.
Management is unable to determine in which loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is based on management'smanagement’s evaluation of historical charge-off experience and adjusted for several qualitative factors. The entire allowance for loan losses is available to absorb loan losses in any loan category.
The allocation of the allowance for loan losses for the past five years is as follows:
| | At December 31, | | | At December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
(dollars in thousands) | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | | | Amount | | | % of Loans | |
Commercial real estate | | $ | 3,254 | | | | 39.2 | % | | $ | 2,393 | | | | 40.0 | % | | $ | 6,828 | | | | 48.5 | % | | $ | 6,454 | | | | 50.4 | % | | $ | 3,979 | | | | 54.3 | % | | $ | 2,462 | | | | 35.9% |
| | $ | 3,774 | | | | 37.3% |
| | $ | 3,254 | | | | 39.2% |
| | $ | 2,393 | | | | 40.0% |
| | $ | 6,828 | | | | 48.5% |
|
Construction and land development | | | 557 | | | | 6.4 | % | | | 338 | | | | 5.3 | % | | | 917 | | | | 3.8 | % | | | 1,948 | | | | 3.5 | % | | | 1,273 | | | | 4.3 | % | | | 777 | | | | 8.4% |
| | | 725 | | | | 9.0% |
| | | 557 | | | | 6.4% |
| | | 338 | | | | 5.3% |
| | | 917 | | | | 3.8% |
|
Commercial and industrial | | | 2,884 | | | | 18.1 | % | | | 2,932 | | | | 20.8 | % | | | 1,579 | | | | 18.5 | % | | | 2,309 | | | | 17.4 | % | | | 1,880 | | | | 16.8 | % | | | 1,754 | | | | 14.0% |
| | | 1,317 | | | | 14.9% |
| | | 2,884 | | | | 18.1% |
| | | 2,932 | | | | 20.8% |
| | | 1,579 | | | | 18.5% |
|
Owner occupied real estate | | | 1,382 | | | | 28.7 | % | | | 2,030 | | | | 28.1 | % | | | 1,638 | | | | 24.0 | % | | | 985 | | | | 23.6 | % | | | 1,967 | | | | 20.4 | % | | | 2,033 | | | | 25.6% |
| | | 1,737 | | | | 26.7% |
| | | 1,382 | | | | 28.7% |
| | | 2,030 | | | | 28.1% |
| | | 1,638 | | | | 24.0% |
|
Consumer and other | | | 588 | | | | 6.6 | % | | | 295 | | | | 5.5 | % | | | 234 | | | | 5.1 | % | | | 225 | | | | 4.7 | % | | | 234 | | | | 3.8 | % | | | 577 | | | | 6.3% |
| | | 573 | | | | 6.5% |
| | | 588 | | | | 6.6% |
| | | 295 | | | | 5.5% |
| | | 234 | | | | 5.1% |
|
Residential mortgage | | | 58 | | | | 1.0 | % | | | 14 | | | | 0.3 | % | | | 2 | | | | 0.1 | % | | | 14 | | | | 0.4 | % | | | 17 | | | | 0.4 | % | | | 894 | | | | 9.8% |
| | | 392 | | | | 5.6% |
| | | 58 | | | | 1.0% |
| | | 14 | | | | 0.3% |
| | | 2 | | | | 0.1% |
|
Unallocated | | | 432 | | | | - | | | | 701 | | | | - | | | | 338 | | | | - | | | | 328 | | | | - | | | | 192 | | | | - | | | | 118 | | | | - |
| | | 81 | | | | - |
| | | 432 | | | | - |
| | | 701 | | | | - |
| | | 338 | | | | - |
|
Total allowance for loan losses | | $ | 9,155 | | | | 100 | % | | $ | 8,703 | | | | 100 | % | | $ | 11,536 | | | | 100 | % | | $ | 12,263 | | | | 100 | % | | $ | 9,542 | | | | 100 | % | | $ | 8,615 | | | | 100% |
| | $ | 8,599 | | | | 100% |
| | $ | 9,155 | | | | 100% |
| | $ | 8,703 | | | | 100% |
| | $ | 11,536 | | | | 100% |
|
The allowance for loan losses is an amount that represents management'smanagement’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for loan losses is dependent, to a great extent, on the general economy and other conditions that may be beyond our control, the estimate of the allowance for loan losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers the remainder of the portfolio and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management'smanagement’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers'borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
| 1. | Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices. |
| 2. | National, regional and local economic and business conditions as well as the condition of various segments. |
| 3. | Nature and volume of the portfolio and terms of loans. |
| 4. | Experience, ability and depth of lending management and staff. |
| 5. | Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications. |
| 6. | Quality of our loan review system, and the degree of oversight by our Board of Directors. |
| 7. | Existence and effect of any concentration of credit and changes in the level of such concentrations. |
| 8. | Effect of external factors, such as competition and legal and regulatory requirements. |
Each factor is assigned a value to reflect improving, stable or declining conditions based on management'smanagement’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
We also provide specific reserves for impaired loans to the extent the estimated realizable value of the underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Also, we estimate and recognize reserve allocations on loans classifiedidentified as "internally“internally classified accruing loans"loans” based upon any factor that might impact loss estimates. Those factors include but are not limited to the impact of economic conditions on the borrower and management'smanagement’s potential alternative strategies for loan or collateral disposition. An unallocated allowance is established for losses that have not been identified through the formulaic and other specific components of the allowance as described above. Management has identified several factors that impact credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of macro and micro economic conditions, industry and geographic loan concentrations, changes in the composition of the loan portfolio, changes in underwriting processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light of management'smanagement’s conclusions as to the overall adequacy of underlying collateral and other factors.
The majority of our loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. We attempt to evaluate larger loans individually, on the basis of our loan review process, which scrutinizes loans on a selective basis and other available information. Even if all commercial purpose loans could be reviewed, information on potential problems might not be available. Our portfolio of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. At December 31, 2016, loans made for commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer and other, and residential mortgage purposes, respectively, amounted to $378.5 million, $61.5 million, $174.7 million, $277.0 million, $63.7 million, and $9.7 million.
A loan is considered impaired, in accordance with ASC 310, when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans, but also include internally classified accruing loans. As of December 31, 2016,2018, management identified a total of threefive troubled debt restructurings in the loan portfolio in the amount of $6.2$7.8 million. FourFive troubled debt restructurings in the amount of $8.8$8.2 million were identified as of December 31, 2015.
2017.
The following table presents our impaired loans at December 31, 2016, 2015,2018, 2017, and 2014:2016:
(dollars in thousands) | | December 31, | | | December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Impaired loans without a valuation allowance | | $ | 15,740 | | | $ | 15,497 | | | $ | 16,742 | | | $ | 10,602 | | | $ | 15,270 | | | $ | 15,740 | |
Impaired loans with a valuation allowance | | | 12,430 | | | | 6,632 | | | | 18,902 | | | | 7,428 | | | | 9,446 | | | | 12,430 | |
Total impaired loans | | $ | 28,170 | | | $ | 22,129 | | | $ | 35,644 | | | $ | 18,030 | | | $ | 24,716 | | | $ | 28,170 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Valuation allowance related to impaired loans | | $ | 3,468 | | | $ | 2,238 | | | $ | 5,130 | | | $ | 1,473 | | | $ | 2,790 | | | $ | 3,468 | |
Total nonaccrual loans | | | 18,594 | | | | 12,622 | | | | 21,440 | | | | 10,341 | | | | 14,845 | | | | 18,594 | |
Total loans past-due ninety days or more and | | | | | | | | | | | | | |
still accruing | | | 302 | | | | - | | | | - | | |
Total loans past-due ninety days or more and still accruing | | | | - | | | | - | | | | 302 | |
The recorded investment in loans that are impaired in accordance with ASC 310 totaled $28.2 million, $22.1 million, and $35.6 million at December 31, 2016, 2015, and 2014, respectively. The amounts of related valuation allowances were $3.5 million, $2.2 million, and $5.1 million, respectively at those dates. For the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, the average recorded investment in impaired loans was approximately $25.7$22.8 million, $29.5$25.4 million, and $33.0$25.7 million, respectively. Republic earned $502,000, $516,000,$451,000, $607,000, and $614,000$502,000 of interest income on impaired loans (internally classified accruing loans) in 2016, 2015,2018, 2017, and 2014,2016, respectively. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.
Total impaired loans increaseddecreased by $6.0$6.7 million, or 27%, during the year ended December 31, 2016.2018. This increasedecrease was primarily driven by a single non-performing loan relationshippaydowns and charge-offs in the amount of $7.3 million that was classified as impaired in the second quarter of 2016.2018. The valuation allowance related to impaired loans increaseddecreased to $3.5$1.5 million at December 31, 20162018 compared to $2.2$2.8 million at December 31, 2015.2017. At December 31, 20162018 and 2015,2017, internally classified accruing loans totaled approximately $9.6$7.7 million and $9.5$9.9 million, respectively.
The following table presents our 30 to 89 days past due loans at December 31, 2016, 2015,2018, 2017, and 2014: 2016:
(dollars in thousands) | | | December 31, | | | December 31, | |
| | | 2016 | | | | 2015 | | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
30 to 59 days past due | | $ | 1,060 | | | $ | 2,878 | | | $ | 1,681 | | | $ | 1,135 | | | $ | 1,113 | | | $ | 1,060 | |
60 to 89 days past due | | | 31 | | | | 9,315 | | | | 14,062 | | | | 1,574 | | | | - | | | | 31 | |
Total loans 30 to 89 days past due | | $ | 1,091 | | | $ | 12,193 | | | $ | 15,743 | | | $ | 2,709 | | | $ | 1,113 | | | $ | 1,091 | |
The decrease in loan balances 30 to 59 days past due was the result of delinquency in one lending relationship at December 31, 2015 in the amount of $1.1 million that moved to current status at December 31, 2016 and two lending relationships at December 31, 2015 in the amount of $774,000 that moved to nonaccrual status at December 31, 2016. The decrease in loan balances 60 to 89 days past due was the result of delinquency in one lending relationship at December 31, 2015 in the amount of $7.3 million that moved to non-accrual status in 2016. Management has engaged in active discussions with all delinquent relationships to address delinquencies and is confident that acceptable resolutions will be achieved in the near term.
Deposits
Total deposits at December 31, 20162018 were $1.7$2.4 billion, an increase of $428.4$329.6 million or 34.3%16% from total deposits of $1.2$2.1 billion at December 31, 2015.2017. Total deposits by account type at December 31, 2016, 2015,2018, 2017, and 20142016 are as follows:
(dollars in thousands) | | At December 31, | |
| | 2016 | | | 2015 | | | 2014 | |
Demand deposits, non-interest bearing | | $ | 324,912 | | | $ | 243,695 | | | $ | 224,245 | |
Demand deposits, interest bearing | | | 605,950 | | | | 381,499 | | | | 283,768 | |
Money market & savings deposits | | | 635,644 | | | | 556,526 | | | | 488,848 | |
Time deposits | | | 111,164 | | | | 67,578 | | | | 75,369 | |
Total deposits | | $ | 1,677,670 | | | $ | 1,249,298 | | | $ | 1,072,230 | |
(dollars in thousands) | | At December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Demand deposits, non-interest bearing | | $ | 519,056 | | | $ | 438,500 | | | $ | 324,912 | |
Demand deposits, interest bearing | | | 1,042,561 | | | | 807,736 | | | | 605,950 | |
Money market & savings deposits | | | 676,993 | | | | 700,322 | | | | 635,644 | |
Time deposits | | | 154,257 | | | | 116,737 | | | | 111,164 | |
Total deposits | | $ | 2,392,867 | | | $ | 2,063,295 | | | $ | 1,677,670 | |
In general, Republic pays higher interest rates on time deposits compared to other deposit categories. Republic'sRepublic’s various deposit liabilities may fluctuate from period-to-period, reflecting customer behavior and strategies to optimize net interest income. The increase in total deposits to $1.7$2.4 billion at December 31, 20162018 from $1.2$2.1 billion at December 31, 20152017 was primarily the result of a $305.7$315.4 million increase in demand deposits and a $79.1 million increase in money market and savings deposits, which reflects the success of our strategy based on a high level of customer service and satisfaction, which drives the gathering of low-cost core deposits. This strategy has also allowed us to eliminate our dependence on the more volatile source of funding in brokered and internet based certificates of deposit.
The average balances and weighted average rates of Republic'sRepublic’s deposits for the last three years are as follows:
| | For the Years Ended December 31, | | | | For the Years Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | | 2018 | | | 2017 | | | 2016 | |
(dollars in thousands) | | Average Balance | | | Rate | | | Average Balance | | | Rate | | | Average Balance | | | Rate | | | | Average Balance | | | Rate | | | Average Balance | | | Rate | | | Average Balance | | | Rate | |
Demand deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest bearing | | $ | 284,326 | | | | | | $ | 235,810 | | | | | | $ | 189,810 | | | | | | | $ | 488,995 | | | | | | $ | 372,171 | | | | | | $ | 284,326 | | | | |
Interest bearing | | | 510,745 | | | | 0.41 | % | | | 349,055 | | | | 0.40 | % | | | 233,693 | | | | 0.38 | % | | | | 918,508 | | | | 0.87 | % | | | 687,586 | | | | 0.44 | % | | | 510,745 | | | | 0.41 | % |
Money market & savings deposits | | | 586,750 | | | | 0.45 | % | | | 508,846 | | | | 0.43 | % | | | 439,484 | | | | 0.44 | % | | | | 697,135 | | | | 0.70 | % | | | 629,464 | | | | 0.50 | % | | | 586,750 | | | | 0.45 | % |
Time deposits | | | 89,713 | | | | 1.05 | % | | | 73,819 | | | | 0.94 | % | | | 78,073 | | | | 0.92 | % | | | | 128,892 | | | | 1.23 | % | | | 110,952 | | | | 1.12 | % | | | 89,713 | | | | 1.05 | % |
Total deposits | | $ | 1,471,534 | | | | 0.39 | % | | $ | 1,167,530 | | | | 0.37 | % | | $ | 941,060 | | | | 0.38 | % | | | $ | 2,233,530 | | | | 0.65 | % | | $ | 1,800,173 | | | | 0.41 | % | | $ | 1,471,534 | | | | 0.39 | % |
The remaining maturity of certificates of deposit for $100,000 or more as of December 31, 20162018 is as follows:
(dollars in thousands) | | | | | | |
Maturity: | | | | | | |
3 months or less | | $ | 11,190 | | | $ | 22,220 | |
3 to 6 months | | | 4,234 | | | | 27,180 | |
6 to 12 months | | | 22,788 | | | | 22,924 | |
Over 12 months | | | 36,131 | | | | 51,826 | |
Total | | $ | 74,343 | | | $ | 124,150 | |
The following is a summary of the remaining maturity of time deposits, which includes certificates of deposits of $100,000 or more, as of December 31, 2016:2018:
(dollars in thousands) | | | |
Maturity: | | | |
2017 | | $ | 65,247 | |
2018 | | | 21,554 | |
2019 | | | 1,605 | |
2020 | | | 21,793 | |
2021 | | | 965 | |
Thereafter | | | - | |
Total | | $ | 111,164 | |
(dollars in thousands) | | | |
Maturity: | | | |
2019 | | $ | 94,022 | |
2020 | | | 57,138 | |
2021 | | | 1,135 | |
2022 | | | 958 | |
2023 | | | 1,004 | |
Thereafter | | | - | |
Total | | $ | 154,257 | |
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. We use the same underwriting standards and policies in making credit commitments as we do for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $215.9$286.4 million and $165.1$264.3 million and standby letters of credit of approximately $5.7$13.9 million and $5.2$12.6 million at December 31, 20162018 and 2015,2017, respectively. Commitments often expire without being drawn upon. The $215.9$286.4 million of commitments to extend credit at December 31, 2016,2018, substantially all were variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer'scustomer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management'smanagement’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management'smanagement’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Contractual Obligations and Other Commitments
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2016:2018:
(dollars in thousands) | | Total | | | Less than One Year | | | One to Three Years | | | Three to Five Years | | | After Five Years | |
Minimum annual rentals or non-cancellable operating leases | | $ | 51,673 | | | $ | 4,124 | | | $ | 7,007 | | | $ | 4,506 | | | $ | 36,036 | |
Branch construction commitments | | | 8,000 | | | | 8,000 | | | | - | | | | - | | | | - | |
Remaining contractual maturities of time deposits | | | 154,257 | | | | 94,022 | | | | 58,273 | | | | 1,962 | | | | - | |
Subordinated debt | | | 11,381 | | | | 40 | | | | - | | | | - | | | | 11,341 | |
Director and Officer retirement plan obligations | | | 1,146 | | | | 672 | | | | 111 | | | | 104 | | | | 259 | |
Loan commitments | | | 286,369 | | | | 103,212 | | | | 60,726 | | | | 32,780 | | | | 89,651 | |
Standby letters of credit | | | 13,910 | | | | 12,548 | | | | 1,362 | | | | - | | | | - | |
Total | | $ | 526,736 | | | $ | 222,618 | | | $ | 127,479 | | | $ | 39,352 | | | $ | 137,287 | |
(dollars in thousands) | | Total | | | Less than One Year | | | One to Three Years | | | Three to Five Years | | | After Five Years | |
Minimum annual rentals or non-cancellable operating leases | | $ | 30,500 | | | $ | 3,581 | | | $ | 6,755 | | | $ | 5,281 | | | $ | 14,883 | |
Remaining contractual maturities of time deposits | | | 111,552 | | | | 65,635 | | | | 23,159 | | | | 22,758 | | | | - | |
Subordinated debt | | | 22,501 | | | | 25 | | | | - | | | | - | | | | 22,476 | |
Director and Officer retirement plan obligations | | | 1,320 | | | | 622 | | | | 224 | | | | 164 | | | | 310 | |
Loan commitments | | | 215,868 | | | | 81,802 | | | | 32,548 | | | | 30,487 | | | | 71,031 | |
Standby letters of credit | | | 5,683 | | | | 5,248 | | | | 435 | | | | - | | | | - | |
Total | | $ | 387,424 | | | $ | 156,913 | | | $ | 63,121 | | | $ | 58,690 | | | $ | 108,700 | |
As of December 31, 2016,2018, we had entered into non-cancelable lease agreements for our main office and operations center, twelvefifteen current retail branch facilities, fourfive loan offices, one pending retail branch facility,training center, and one training centerstorage facility expiring on various dates through November 30, 2036.December 31, 2038. The leases are accounted for as operating leases. The minimum rental payments required under these leases are $30.5$51.7 million through the year 2036.2058.
We have retirement plan agreements with certain directors and officers. At December 31, 2016,2018, the accrued benefits under the plan were approximately $1.3$1.1 million, with a minimum age of 65 established to qualify for the payments.
Interest Rate Risk Management
We attempt to manage our assets and liabilities in a manner that optimizes net interest income in a range of interest rate environments. Management uses an "interest“interest sensitivity gap" ("GAP"gap” (“GAP”) analysis and simulation models to monitor behavior of its interest sensitive assets and liabilities. A GAP analysis is the difference between interest-sensitive assets and interest-sensitive liabilities. Adjustments to the mix of assets and liabilities are made periodically in an effort to provide steady growth in net interest income.
Management presently believes that the effect of any future reduction in interest rates, reflected in lower yielding assets, could be detrimental since we may not have the immediate ability to commensurately decrease rates on interest bearing liabilities, primarily time deposits, other borrowings and certain transaction accounts. An increase in interest rates could have a negative effect due to a possible lag in the re-pricing of core deposits not taken into account in the static GAP analysis. Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. We attempt to optimize net interest income while managing period-to-period fluctuations therein. We typically define interest-sensitive assets and interest-sensitive liabilities as those that re-price within one year or less. Generally, we limit long-term fixed rate assets and liabilities in our efforts to manage interest rate risk.
A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities re-pricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets re-pricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse. Static GAP analysis describes interest rate sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income as changes in interest rates do not impact all categories of assets and liabilities equally or simultaneously. Interest rate sensitivity analysis also requires assumptions about re-pricing certain categories of assets and liabilities. For purposes of interest rate sensitivity analysis, assets and liabilities are stated at their contractual maturity, estimated likely call date, or earliest re-pricing opportunity. Mortgage-backed securities and amortizing loans are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. Savings, money market and interest-bearing demand accounts do not have a stated maturity or re-pricing term and can be withdrawn or re-priced at any time. Management estimates the re-pricing characteristics of these accounts based upon decay rates and run off projections obtained in a deposit study performed by an independent third party, along with management'smanagement’s estimates of when rates would have to be increased to retain balances in response to competition. Such estimates are necessarily arbitrary and wholly judgmental. As a result of the run off projections, these deposits are not considered to re-price simultaneously and, accordingly, a portion of the deposits are moved into time brackets exceeding one year. However, management may choose not to re-price liabilities proportionally to changes in market interest rates, for competitive or other reasons.
Shortcomings, inherent in a simplified and static GAP analysis, may result in an institution with a negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Furthermore, re-pricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayments and other cash flows could also deviate significantly from those assumed in calculating GAP in the manner presented in the table on the following page.
The following tables present a summary of our GAP analysis at December 31, 2016.2018. Amounts shown in the table include both estimated maturities and instruments scheduled to re-price, including prime based loans. For purposes of these tables, we have used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally, certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage-backed securities. The interest rate on a portion of the CDOs is variable and adjusts quarterly.
Interest Rate Sensitivity Gap | |
As of December 31, 2016 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 0 – 90 Days | | | 91-180 Days | | | 181-365 Days | | | 1-2 Years | | | 2-3 Years | | | 3-4 Years | | | 4-5 Years | | | More than 5 Years | | | Financial Statement Total | | | Fair Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitive assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities and other interest-bearing balances | | $ | 36,283 | | | $ | 22,397 | | | $ | 42,061 | | | $ | 78,557 | | | $ | 69,877 | | | $ | 65,169 | | | $ | 57,035 | | | $ | 446,949 | | | $ | 818,328 | | | $ | 811,012 | |
Average interest rate | | | 2.36 | % | | | 2.46 | % | | | 2.42 | % | | | 2.43 | % | | | 2.45 | % | | | 2.39 | % | | | 2.57 | % | | | 2.71 | % | | | 2.59 | % | | | | |
Loans receivable | | | 314,024 | | | | 35,223 | | | | 77,788 | | | | 112,391 | | | | 87,943 | | | | 131,432 | | | | 120,075 | | | | 114,161 | | | | 993,037 | | | | 975,164 | |
Average interest rate | | | 5.07 | % | | | 4.23 | % | | | 3.34 | % | | | 4.32 | % | | | 4.25 | % | | | 4.13 | % | | | 4.19 | % | | | 3.64 | % | | | 4.35 | % | | | | |
Total | | $ | 350,307 | | | $ | 57,620 | | | $ | 119,849 | | | $ | 190,948 | | | $ | 157,820 | | | $ | 196,601 | | | $ | 177,110 | | | $ | 561,110 | | | $ | 1,811,365 | | | $ | 1,786,176 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative totals | | $ | 350,307 | | | $ | 407,927 | | | $ | 527,776 | | | $ | 718,724 | | | $ | 876,544 | | | $ | 1,073,145 | | | $ | 1,250,255 | | | $ | 1,811,365 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitive liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand interest bearing(1) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 605,950 | | | $ | 605,950 | | | $ | 605,950 | |
Average interest rate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 0.41 | % | | | 0.41 | % | | | | |
Savings accounts(1) | | | 278 | | | | 278 | | | | 556 | | | | 302 | | | | 91 | | | | 30 | | | | - | | | | 182,789 | | | | 184,324 | | | | 184,324 | |
Average interest rate | | | 0.48 | % | | | 0.48 | % | | | 0.48 | % | | | 0.48 | % | | | 0.48 | % | | | 0.48 | % | | | - | | | | 0.44 | % | | | 0.44 | % | | | | |
Money market accounts(1) | | | 2,937 | | | | 2,937 | | | | 5,874 | | | | 7,999 | | | | 6,273 | | | | 15,833 | | | | 18,995 | | | | 390,472 | | | | 451,320 | | | | 451,320 | |
Average interest rate | | | 0.43 | % | | | 0.43 | % | | | 0.43 | % | | | 0.43 | % | | | 0.43 | % | | | 0.41 | % | | | 0.40 | % | | | 0.40 | % | | | 0.40 | % | | | | |
Time deposits | | | 54,979 | | | | 8,570 | | | | 28,500 | | | | 15,429 | | | | 1,605 | | | | 1,116 | | | | 965 | | | | - | | | | 111,164 | | | | 110,988 | |
Average interest rate | | | 1.27 | % | | | 0.57 | % | | | 1.13 | % | | | 1.05 | % | | | 0.93 | % | | | 0.99 | % | | | 0.99 | % | | | - | | | | 1.14 | % | | | | |
Subordinated debt | | | 11,246 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,635 | | | | 21,881 | | | | 16,286 | |
Average interest rate | | | 2.58 | % | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 8.00 | % | | | 5.21 | % | | | | |
Total | | $ | 69,440 | | | $ | 11,785 | | | $ | 34,930 | | | $ | 23,730 | | | $ | 7,969 | | | $ | 16,979 | | | $ | 19,960 | | | $ | 1,189,846 | | | $ | 1,374,639 | | | $ | 1,368,868 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative totals | | $ | 69,440 | | | $ | 81,225 | | | $ | 116,155 | | | $ | 139,885 | | | $ | 147,854 | | | $ | 164,833 | | | $ | 184,793 | | | $ | 1,374,639 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate sensitivity GAP | | $ | 280,867 | | | $ | 45,835 | | | $ | 84,919 | | | $ | 167,218 | | | $ | 149,851 | | | $ | 179,622 | | | $ | 157,150 | | | $ | (628,736 | ) | | | | | | | | |
Cumulative GAP | | $ | 280,867 | | | $ | 326,702 | | | $ | 411,621 | | | $ | 578,839 | | | $ | 728,690 | | | $ | 908,312 | | | $ | 1,065,462 | | | $ | 436,726 | | | | | | | | | |
Interest sensitive assets/Interest sensitive liabilities | | | 504.47 | % | | | 502.22 | % | | | 454.37 | % | | | 513.80 | % | | | 592.84 | % | | | 651.05 | % | | | 676.57 | % | | | 131.77 | % | | | | | | | | |
Cumulative GAP/ Total earning assets | | | 15.51 | % | | | 18.04 | % | | | 22.72 | % | | | 31.96 | % | | | 40.23 | % | | | 50.15 | % | | | 58.82 | % | | | 24.11 | % | | | | | | | | |
Interest Rate Sensitivity GapAs of December 31, 2018 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | 0 – 90 Days | | | 91-180 Days | | | 181-365 Days | | | 1-2 Years | | | 2-3 Years | | | 3-4 Years | | | 4-5 Years | | | More than 5 Years | | | Financial Statement Total | | | Fair Value | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitive assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities and other interest-bearing balances | | $ | 76,790 | | | $ | 32,871 | | | $ | 63,351 | | | $ | 117,191 | | | $ | 101,108 | | | $ | 87,070 | | | $ | 78,819 | | | $ | 567,919 | | | $ | 1,125,119 | | | $ | 1,110,879 | |
Average interest rate | | | 2.54% |
| | | 2.71% |
| | | 2.70% |
| | | 2.73% |
| | | 2.71% |
| | | 2.73% |
| | | 2.74% |
| | | 2.98% |
| | | 2.85% |
| | | | |
Loans receivable | | | 432,407 |
| | | 95,441 |
| | | 176,066 |
| | | 203,226 |
| | | 156,094 |
| | | 131,553 |
| | | 101,608 |
| | | 166,494 |
| | | 1,462,889 |
| | | 1,445,851 | |
Average interest rate | | | 5.98% |
| | | 3.52% |
| | | 3.42% |
| | | 4.80% |
| | | 4.81% |
| | | 4.82% |
| | | 4.90% |
| | | 6.84% |
| | | 5.14% |
| | | | |
Total | | $ | 509,197 |
| | $ | 128,312 | | | $ | 239,417 | | | $ | 320,417 | | | $ | 257,202 | | | $ | 218,623 | | | $ | 180,427 | | | $ | 734,413 | | | $ | 2,588,008 | | | $ | 2,556,730 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative totals | | $ | 509,197 |
| | $ | 637,509 | | | $ | 876,926 | | | $ | 1,197,343 | | | $ | 1,454,545 | | | $ | 1,673,168 | | | $ | 1,853,595 | | | $ | 2,588,008 | | | | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitive liabilities: | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand interest bearing(1) | | $ | 28,826 |
| | $ | 28,826 |
| | $ | 57,652 | | | $ | 18,126 | | | $ | 17,462 | | | $ | 16,987 | | | $ | 16,608 | | | $ | 858,074 | | | $ | 1,042,561 | | | $ | 1,042,561 | |
Average interest rate | | | 1.45% |
| | | 1.45% |
| | | 1.45% |
| | | 1.45% |
| | | 1.45% |
| | | 1.45% |
| | | 1.45% |
| | | 1.32% |
| | | 1.35% |
| | | | |
Savings accounts(1) | | | 1,229 |
| | | 1,229 | | | | 2,458 |
| | | 882 |
| | | 38 |
| | | 162 |
| | | 208 |
| | | 200,587 |
| | | 206,793 |
| | | 206,793 | |
Average interest rate | | | 0.23% |
| | | 0.23% |
| | | 0.23% |
| | | 0.24% |
| | | 0.46% |
| | | 0.19% |
| | | 0.19% |
| | | 0.45% |
| | | 0.44% |
| | | | |
Money market accounts(1) | | | 2,190 |
| | | 2,190 |
| | | 4,381 |
| | | 11,175 |
| | | 9,514 |
| | | 7,767 |
| | | 6,319 |
| | | 426,664 |
| | | 470,200 |
| | | 470,200 | |
Average interest rate | | | 0.94% |
| | | 0.94% |
| | | 0.94% |
| | | 0.94% |
| | | 0.94% |
| | | 0.94% |
| | | 0.94% |
| | | 0.89% |
| | | 0.90% |
| | | | |
Time deposits | | | 28,954 |
| | | 32,468 | | | | 32,595 |
| | | 57,136 |
| | | 1,135 |
| | | 958 |
| | | 1,011 |
| | | - | | | | 154,257 |
| | | 152,989 | |
Average interest rate | | | 0.77% |
| | | 1.59% |
| | | 1.40% |
| | | 2.15% |
| | | 0.96% |
| | | 0.99% |
| | | 1.09% |
| | | - | | | | 1.59% |
| | | | |
Overnight borrowings | | | 91,422 |
| | | - |
| | | - |
| | | - |
| | | - | | | | - | | | | - | | | | - | | | | 91,422 |
| | | 91,422 | |
Average interest rate | | | 2.71% |
| | | - |
| | | - |
| | | - |
| | | - | | | | - | | | | - | | | | - | | | | 2.71% |
| | | | |
Subordinated debt | | | 11,259 |
| | | - |
| | | - |
| | | - |
| | | - | | | | - | | | | - | | | | - | | | | 11,259 |
| | | 8,279 | |
Average interest rate | | | 4.39% |
| | | - |
| | | - |
| | | - |
| | | - | | | | - | | | | - | | | | - | | | | 4.39% |
| | | | |
Total | | $ | 163,880 |
| | $ | 64,713 |
| | $ | 97,086 |
| | $ | 87,319 |
| | $ | 28,149 | | | $ | 25,874 | | | $ | 24,146 | | | $ | 1,485,325 | | | $ | 1,976,492 | | | $ | 1,972,244 | |
| | | |
| | | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative totals | | $ | 163,880 |
| | $ | 228,593 |
| | $ | 325,679 |
| | $ | 412,998 |
| | $ | 441,147 | | | $ | 467,021 | | | $ | 491,167 | | | $ | 1,976,492 | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate sensitivity GAP | | $ | 345,317 |
| | $ | 63,599 |
| | $ | 142,331 |
| | $ | 233,098 |
| | $ | 229,053 | | | $ | 192,749 | | | $ | 156,281 | | | $ | (750,912 | ) | | | | | | | | |
Cumulative GAP | | $ | 345,317 |
| | $ | 408,916 |
| | $ | 551,247 |
| | $ | 784,345 |
| | $ | 1,013,398 | | | $ | 1,206,147 | | | $ | 1,362,428 | | | $ | 611,516 | | | | | | | | | |
Interest sensitive assets/Interest sensitive liabilities | | | 310.54% |
| | | 278.78% |
| | | 269.19% |
| | | 289.85% |
| | | 329.65% |
| | | 358.20% |
| | | 377.32% |
| | | 130.93% |
| | | | | | | | |
Cumulative GAP/ Total earning assets | | | 13.34% |
| | | 15.80% |
| | | 21.30% |
| | | 30.30% |
| | | 39.15% |
| | | 46.60% |
| | | 52.64% |
| | | 23.63% |
| | | | | | | | |
(1) Demand, savings and money market accounts are scheduled to reprice based upon decay rate and run off percentage estimates obtained through a deposit study performed by an independent third party, along with management'smanagement’s estimates of when rates would have to be increased to retain balances in response to competition. Such estimates are necessarily arbitrary and wholly judgmental.
In addition to the GAP analysis, we utilize income simulation modeling in measuring our interest rate risk and managing our interest rate sensitivity. Income simulation considers not only the impact of changing market interest rates on forecasted net interest income, but also other factors such as yield curve relationships, the volume and mix of assets and liabilities and general market conditions.
Net Portfolio Value and Net Interest Income Analysis
The income simulation models management used to measure interest rate risk and manage interest rate sensitivity generates estimates of the change in net portfolio value (NPV) and net interest income (NII) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of December 31, 20162018 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated (dollars in thousands):
Change in Interest Rates in Basis Points (Rate Shock) | | Net Portfolio Value | | | NPV as a % of Portfolio Value of Assets | | | Net Portfolio Value | | | NPV as a % of Portfolio Value of Assets | |
| Amount | | | $ Change | | | % Change | | | NPV Ratio | | | Change (in Basis Points) | | | Amount | | | $ Change | | | % Change | | | NPV Ratio | | | Change (in Basis Points) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
+400 | | $ | 411,407 | | | $ | 95,828 | | | | 30.38 | % | | | 24.26 | % | | | 766 | | | $ | 325,048 | | | $ | (935 | ) | | | (0.29)% |
| | | 13.77% |
| | | 180 | |
+300 | | | 396,593 | | | | 81,044 | | | | 25.68 | % | | | 22.71 | % | | | 611 | | | | 353,379 | | | | 27,396 | | | | 8.40% |
| | | 14.44% |
| | | 247 | |
+200 | | | 379,061 | | | | 63,512 | | | | 20.13 | % | | | 21.07 | % | | | 447 | | | | 369,234 | | | | 43,251 | | | | 13.27% |
| | | 14.54% |
| | | 257 | |
+100 | | | 352,680 | | | | 37,131 | | | | 11.77 | % | | | 19.04 | % | | | 244 | | | | 355,588 | | | | 29,605 | | | | 9.08% |
| | | 13.49% |
| | | 152 | |
Static | | | 315,549 | | | | - | | | | 0.00 | % | | | 16.60 | % | | | - | | | | 325,983 | | | | - | | | | 0.00% |
| | | 11.97% |
| | | - | |
-100 | | | 253,473 | | | | (62,076 | ) | | | (19.67 | )% | | | 13.09 | % | | | (351 | ) | | | 249,743 | | | | (76,240 | ) | | | (23.39)% |
| | | 8.93% |
| | | (304 | ) |
In addition to modeling changes in NPV, we also analyze potential changes to NII for a forecasted twelve-month period under rising and falling interest rate scenarios. The following table shows the NII model as of December 31, 20162018 (dollars in thousands):
Change in Interest Rates in Basis Points(1) | | Net Interest Income | | $ Change | | % Change | | Net Interest Income | | | $ Change | | | % Change | |
| | | | | | | | | | | | | | | | | | |
+400 | | $ | 67,295 | | | | 5,323 | | | | 8.59 | % | | $ | 88,048 | | | | 11,402 | | | | 14.88% |
|
+300 | | | 66,013 | | | | 4,041 | | | | 6.52 | % | | | 85,384 | | | | 8,738 | | | | 11.40% |
|
+200 | | | 64,701 | | | | 2,729 | | | | 4.40 | % | | | 82,690 | | | | 6,044 | | | | 7.89% |
|
+100 | | | 63,323 | | | | 1,351 | | | | 2.18 | % | | | 79,903 | | | | 3,257 | | | | 4.25% |
|
Static | | | 61,972 | | | | - | | | | 0.00 | % | | | 76,646 | | | | - | | | | 0.00% |
|
-100 | | | 61,171 | | | | (801 | ) | | | (1.29 | )% | | | 71,167 | | | | (5,479 | ) | | | (7.15)% |
|
| | | | | | | | | | | | | |
(1)The net interest income results were calculated assuming a rate ramp, achieving the rate change over a 12-month period, not an immediate and sustained rate shock.
As is the case with the GAP table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or re-pricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Management believes that the assumptions utilized in evaluating our estimated net interest income are reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. Periodically, we may and do make significant changes to underlying assumptions, which are wholly judgmental. Prepayments on residential mortgage loans and mortgage-backed securities have increased over historical levels in recent years due to the lower interest rate environment, and may result in reductions in margins.
Capital Resources
We have sponsored threetwo outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Corporation more commonly known as trust preferred securities. The subsidiary trusts are not consolidated for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
On December 27, 2006, Republic Capital Trust II (Trust II) issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to us. Trust II purchased $6.2 million of our floating rate junior subordinated debentures due 2037, and we used the proceeds to call the securities of Republic Capital Trust I (Trust I). The debentures purchased by Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month LIBOR. We may redeem the debentures on any interest payment date without a prepayment penalty.
On June 28, 2007, Republic Capital Trust III (Trust III), issued $5.0 million of trust preferred securities to one investor and $0.2 million common securities to us. Trust III purchased $5.2 million of our floating rate junior subordinated debentures due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month LIBOR. We have the ability to redeem the debentures on any interest payment date without a prepayment penalty.
On June 10, 2008, Republic First Bancorp Capital Trust IV (Trust IV) issued $10.8 million of convertible trust preferred securities as part of our strategic capital plan. The securities were purchased by investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp, and as of December 5, 2016, our chairman. The investor group also included a family trust of Harry D. Madonna, chairman, president and chief executive officer of Republic Bank, and Theodore J. Flocco, Jr., who has been elected by the shareholders to our Board of Directors and serves as the Chairman of our Audit Committee. Trust IV also issued $0.3 million of common securities to us. Trust IV purchased $11.1 million of our fixed rate junior subordinated convertible debentures due 2038, which paypaid interest at an annual rate of 8.0% and arewere considered redeemable on any interest payment date (a) at any time on or after June 13, 2013 if the closing price of our common stock for 20 trading days in the period of 30 consecutive trading days ending on the trading day prior to the mailing of the notice of redemption exceeds 120% of the then-applicable conversion price, or (b) on or after June 30, 2018, without a prepayment penalty. The trust preferred securities of Trust IV are currentlywere convertible into approximately 1.7 million shares of our common stock, which is subject to customary adjustments. One independent director converted $240,000 of trust preferred securities into 37,000 shares of common stock in 2017. On January 31, 2018, we notified the existing holders of its intent to fully redeem these securities in accordance with the Optional Redemption terms included in the Indenture Agreement. The remaining securities were redeemed on March 31, 2018 at a price equal to the outstanding principal amount. After redemption of the remaining securities, Trust IV was dissolved.
Deferred issuance costs included in subordinated debt were $595,000$82,000 and $619,000$555,000 at December 31, 20162018 and December 31, 2015,2017, respectively. Amortization of deferred issuance costs were $24,000, $24,000,$6,000, $29,000, and $24,000 for the years ended December 31, 2018, 2017, and 2016, 2015, and 2014, respectively.
On April 22, 2014, we issued 11,842,106 shares Deferred issuance costs in the amount of our$467,000 were recorded against additional paid in capital during the first quarter of 2018 as a result of the conversion of trust preferred securities into common stock in a private placement offering for gross proceeds of $45.0 million. accordance with ASC 470-20.
On December 5, 2016, we issued 18,691,589 shares of common stock in a registered direct offering for gross proceeds of $100.0 million.
Shareholders'Shareholders’ equity as of December 31, 20162018 totaled approximately $215.1$245.2 million compared to approximately $113.4$226.5 million as of December 31, 2015.2017. The book value per share of our common stock increased to $3.79$4.17 as of December 31, 2016,2018, based upon 56,754,86758,789,228 shares outstanding, from $3.00$3.97 as of December 31, 2015,2017, based upon 37,837,00356,989,764 shares outstanding at December 31, 2015.2017. Outstanding shares are adjusted for treasury stock and deferred compensation plan shares.
Regulatory Capital Requirements
We are required to comply with certain "risk-based"“risk-based” capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent"“credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies'agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implemented higher minimum capital requirements, added a new common equity tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements were a common equity tier 1 capital ratio of 4.5% (6.5% to be considered "well capitalized") and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered "well capitalized"); the total capital ratio remained at 8.0% under the new rules (10.0% to be considered "well capitalized"). Under the final capital rules, that became effective on January 1, 2015, there was a requirement for arisk-based capital ratios are calculated by dividing common equity Tier 1, capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimumTier 1, and total risk-based capital, standards inrespectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under the rule. Institutions that do notFederal Reserve’s rules, Republic is required to maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in oura minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%requirement of 4.5%, thea minimum Tier 1 capital ratio to 8.5%requirement of 6%, and thea minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the new rules, in order to 10.5%avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a fully phased-in basisbanking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2019.2016 at the 0.625% level and was phased in over a three year period (increasing by that amount on each January 1, until it reached 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and were phased-in over a three-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).
The following table shows the required capital ratios with the conservation buffer over the phase-in period.
| | Basel III Community Banks Minimum Capital Ratio Requirements |
| | 2016 | | 2017 | | 2018 | | 2019 |
| | | | | | | | | | | | |
Common equity tier 1 capital (CET1) | | | 5.125 | % | | | 5.750 | % | | | 6.375 | % | | | 7.000 | % |
Tier 1 capital (to risk weighted assets) | | | 6.625 | % | | | 7.250 | % | | | 7.875 | % | | | 8.500 | % |
Total capital (to risk-weighted assets) | | | 8.625 | % | | | 9.250 | % | | | 9.875 | % | | | 10.500 | % |
The risk-based capital ratios measure the adequacy of a bank'sbank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt“prompt corrective action"action” or other regulatory enforcement action. In assessing a bank'sbank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management'smanagement’s overall ability to monitor and control risks.
Management believes that the Company and Republic met, as of December 31, 20162018 and 2015,2017, all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect. In the current year, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification which management believes would have changed Republic'sRepublic’s category.
The Company and Republic'sRepublic’s ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on Republic'sRepublic’s loan customers and Republic'sRepublic’s ability to manage its interest rate risk, growth and other operating expenses.
The following table presents the Company'sCompany’s and Republic'sRepublic’s capital regulatory ratios calculated based on Basel III guidelines at December 31, 20162018 and 2015:2017:
(dollars in thousands) | | Actual | | | Minimum Capital Adequacy | | | Minimum Capital Adequacy with Capital Buffer | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | | | Actual | | | Minimum Capital Adequacy | | | Minimum Capital Adequacy with Capital Buffer | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
At December 31, 2016: | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2018: | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | $ | 179,057 | | | | 13.93 | % | | $ | 102,811 | | | | 8.00 | % | | $ | 110,843 | | | | 8.625 | % | | $ | 128,514 | | | | 10.00 | % | | $ | 231,610 | | | | 13.26% |
| | $ | 139,722 | | | | 8.00% |
| | $ | 172,489 | | | | 9.875% |
| | $ | 174,652 | | | | 10.00% |
|
Company | | | 245,043 | | | | 18.99 | % | | | 103,226 | | | | 8.00 | % | | | 111,290 | | | | 8.625 | % | | | - | | | | - | % | | | 262,964 | | | | 15.03% |
| | | 140,009 | | | | 8.00% |
| | | 172,824 | | | | 9.875% |
| | | - | | | | -% |
|
Tier one risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 169,902 | | | | 13.22 | % | | | 77,108 | | | | 6.00 | % | | | 85,140 | | | | 6.625 | % | | | 102,811 | | | | 8.00 | % | | | 222,995 | | | | 12.77% |
| | | 104,791 | | | | 6.00% |
| | | 137,539 | | | | 7.875% |
| | | 139,722 | | | | 8.00% |
|
Company | | | 235,888 | | | | 18.28 | % | | | 77,419 | | | | 6.00 | % | | | 85,484 | | | | 6.625 | % | | | - | | | | - | % | | | 254,349 | | | | 14.53% |
| | | 105,007 | | | | 6.00% |
| | | 137,821 | | | | 7.875% |
| | | - | | | | -% |
|
CET 1 risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 169,902 | | | | 13.22 | % | | | 57,831 | | | | 4.50 | % | | | 65,863 | | | | 5.125 | % | | | 83,534 | | | | 6.50 | % | | | 222,995 | | | | 12.77% |
| | | 78,594 | | | | 4.50% |
| | | 111,341 | | | | 6.375% |
| | | 113,524 | | | | 6.50% |
|
Company | | | 214,088 | | | | 16.59 | % | | | 58,064 | | | | 4.50 | % | | | 66,129 | | | | 5.125 | % | | | - | | | | - | % | | | 243,349 | | | | 13.90% |
| | | 78,755 | | | | 4.50% |
| | | 111,570 | | | | 6.375% |
| | | - | | | | -% |
|
Tier one leveraged capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 169,902 | | | | 9.20 | % | | | 73,843 | | | | 4.00 | % | | | 73,843 | | | | 4.00 | % | | | 92,304 | | | | 5.00 | % | | | 222,995 | | | | 8.21% |
| | | 108,685 | | | | 4.00% |
| | | 108,685 | | | | 4.00% |
| | | 135,857 | | | | 5.00% |
|
Company | | | 235,888 | | | | 12.74 | % | | | 74,073 | | | | 4.00 | % | | | 74,073 | | | | 4.00 | % | | | - | | | | - | % | | | 254,349 | | | | 9.35% |
| | | 108,800 | | | | 4.00% |
| | | 108,800 | | | | 4.00% |
| | | - | | | | -% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
At December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2017: | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Total risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | $ | 138,566 | | | | 12.65 | % | | $ | 87,617 | | | | 8.00 | % | | $ | - | | | | - | % | | $ | 109,521 | | | | 10.00 | % | | $ | 187,732 | | | | 12.57% |
| | $ | 119,446 | | | | 8.00% |
| | $ | 138,109 | | | | 9.25% |
| | $ | 149,307 | | | | 10.00% |
|
Company | | | 145,089 | | | | 13.19 | % | | | 87,976 | | | | 8.00 | % | | | - | | | | - | % | | | - | | | | - | % | | | 249,510 | | | | 16.70% |
| | | 119,521 | | | | 8.00% |
| | | 138,197 | | | | 9.25% |
| | | - | | | | -% |
|
Tier one risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 129,863 | | | | 11.86 | % | | | 65,712 | | | | 6.00 | % | | | - | | | | - | % | | | 87,617 | | | | 8.00 | % | | | 179,133 | | | | 12.00% |
| | | 89,584 | | | | 6.00% |
| | | 108,248 | | | | 7.25% |
| | | 119,446 | | | | 8.00% |
|
Company | | | 136,386 | | | | 12.40 | % | | | 65,982 | | | | 6.00 | % | | | - | | | | - | % | | | - | | | | - | % | | | 240,911 | | | | 16.13% |
| | | 89,641 | | | | 6.00% |
| | | 108,316 | | | | 7.25% |
| | | - | | | | -% |
|
CET 1 risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 129,863 | | | | 11.86 | % | | | 49,284 | | | | 4.50 | % | | | - | | | | - | % | | | 71,189 | | | | 6.50 | % | | | 179,133 | | | | 12.00% |
| | | 67,188 | | | | 4.50% |
| | | 85,852 | | | | 5.75% |
| | | 97,050 | | | | 6.50% |
|
Company | | | 114,586 | | | | 10.42 | % | | | 49,487 | | | | 4.50 | % | | | - | | | | - | % | | | - | | | | - | % | | | 220,433 | | | | 14.75% |
| | | 67,231 | | | | 4.50% |
| | | 85,906 | | | | 5.75% |
| | | - | | | | -% |
|
Tier one leveraged capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 129,863 | | | | 9.22 | % | | | 56,328 | | | | 4.00 | % | | | - | | | | - | % | | | 70,410 | | | | 5.00 | % | | | 179,133 | | | | 7.91% |
| | | 90,531 | | | | 4.00% |
| | | 90,531 | | | | 4.00% |
| | | 113,164 | | | | 5.00% |
|
Company | | | 136,386 | | | | 9.65 | % | | | 56,531 | | | | 4.00 | % | | | - | | | | - | % | | | - | | | | - | % | | | 240,911 | | | | 10.64% |
| | | 90,586 | | | | 4.00% |
| | | 90,586 | | | | 4.00% |
| | | - | | | | -% |
|
Liquidity
A financial institution must maintain and manage liquidity to ensure it has the ability to meet its financial obligations. These obligations include the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loans and other funding commitments; and the ability to take advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing liabilities. Our most liquid assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we have formed an asset/liability committee (ALCO), comprised of certain members of Republic'sRepublic’s Board of Directors and senior management to monitor such ratios. The ALCO committee is responsible for managing the liquidity position and interest sensitivity. That committee'scommittee’s primary objective is to maximize net interest income while configuring Republic'sRepublic’s interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. The ALCO committee meets on a quarterly basis or more frequently if deemed necessary.
Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $34.6$72.5 million at December 31, 2016,2018, compared to $27.1$61.9 million at December 31, 2015.2017. Loan maturities and repayments are another source of asset liquidity. At December 31, 2016,2018, Republic estimated that more than $55.0$100 million of loans would mature or repay in the six-month period ending June 30, 2017.2019. Additionally, a significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At December 31, 2016,2018, we had outstanding commitments (including unused lines of credit and letters of credit) of $221.6$300.3 million. Certificates of deposit scheduled to mature in one year totaled $65.2$94.0 million at December 31, 2016.2018. We anticipate that we will have sufficient funds available to meet all current commitments.
Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB of Pittsburgh. Our maximum borrowing capacity with the FHLB was $467.1$717.1 million at December 31, 2016.2018. As of December 31, 2016,2018, we had outstanding overnight borrowings of $91.4 million at 2.65%. At December 31, 2018, FHLB had issued a letter on Republic’s behalf, totaling $100.0 million against our available credit. At December 31, 2017, we had no outstanding borrowings with the FHLB. As of December 31, 2015, we had outstanding borrowings of $47.0 million. As of December 31, 2016,2017, FHLB had issued lettersa letter of credit, on Republic'sRepublic’s behalf, totaling $75.0 million against our available credit line. We also established a contingency line of credit of $10.0 million with Atlantic Community BankersACBB and a Fed Funds line of credit with Zions Bank ("ACBB")in the amount of $15.0 million to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit or the Zions Fed Funds line at both December 31, 20162018 and 2015.December 31, 2017.
Variable Interest Entities
We follow the guidance under ASC 810, Consolidation, with regard to variable interest entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity'sentity’s activities, or are not exposed to the entity'sentity’s losses or entitled to its residual returns ("(“variable interest entities"entities”). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity'sentity’s expected losses, receives a majority of its expected returns, or both.
We do not consolidate our subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if we have the right to a majority of the trusts'trusts’ expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $676,000.$341,000. In addition, the income received on our investment in the common securities of the trusts is included in other income.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is our need and ability to react to changes in interest rates. As discussed previously, management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.
Item 7A: | Quantitative and Qualitative Disclosure about Market Risk |
See "Management“Management Discussion and Analysis of Results of Operations and Financial Condition – Interest Rate Risk Management"Management”.
Item 8: | Financial Statements and Supplementary Data |
The Consolidated Financial Statements of the Company begin on page 71.
75.
| Tel: 717-233-8800
Fax: 717-233-8801
www.bdo.com
| 945 E. Park Drive, Suite 103
Harrisburg, PA 17111
|
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors and Shareholders
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Republic First Bancorp, Inc. (the “Company”) and Subsidiaries (the "Company")subsidiaries as of December 31, 20162018 and 2015 and2017, the related consolidated statements of income, comprehensive income, (loss),changes in shareholders’ equity, and cash flows and shareholders' equity for each of the three years in the period ended December 31, 2016. These2018, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic First Bancorp, Inc.the Company and Subsidiariessubsidiaries at December 31, 20162018 and 2015,2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20162018,in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”) and our report dated March 10, 201714, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
74
Harrisburg, Pennsylvania
March 10, 2017Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2013.
Philadelphia, Pennsylvania
March 14, 2019
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 20162018 and 20152017
(Dollars in thousands, except per share data)
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2018 | | | December 31, 2017 | |
ASSETS | | | | | | | | | | | | |
Cash and due from banks | | $ | 19,830 | | | $ | 13,777 | | | $ | 35,685 | | | $ | 36,073 | |
Interest bearing deposits with banks | | | 14,724 | | | | 13,362 | | | | 36,788 | | | | 25,869 | |
Cash and cash equivalents | | | 34,554 | | | | 27,139 | | | | 72,473 | | | | 61,942 | |
| | | | | | | | | | | | | | | | |
Investment securities available for sale, at fair value | | | 369,739 | | | | 284,795 | | | | 321,014 | | | | 464,430 | |
Investment securities held to maturity, at amortized cost (fair value of $425,183 and $171,845, respectively) | | | 432,499 | | | | 172,277 | | |
Investment securities held to maturity, at amortized cost (fair value of $747,323 and $463,799, respectively) | | | | 761,563 | | | | 472,213 | |
Restricted stock, at cost | | | 1,366 | | | | 3,059 | | | | 5,754 | | | | 1,918 | |
Loans held for sale | | | 28,065 | | | | 3,653 | | |
Loans receivable (net of allowance for loan losses of $9,155 and $8,703, respectively) | | | 955,817 | | | | 866,066 | | |
Mortgage loans held for sale, at fair value | | | | 20,887 | | | | 43,375 | |
Other loans held for sale | | | | 5,404 | | | | 2,325 | |
Loans receivable (net of allowance for loan losses of $8,615 and $8,599, respectively) | | | | 1,427,983 | | | | 1,153,679 | |
Premises and equipment, net | | | 57,040 | | | | 46,164 | | | | 87,661 | | | | 74,947 | |
Other real estate owned, net | | | 10,174 | | | | 11,313 | | | | 6,223 | | | | 6,966 | |
Accrued interest receivable | | | 5,497 | | | | 4,216 | | | | 9,025 | | | | 7,009 | |
Goodwill | | | 5,011 | | | | - | | | | 5,011 | | | | 5,011 | |
Intangible asset | | | 61 | | | | - | | |
Other assets | | | 24,108 | | | | 20,142 | | | | 30,299 | | | | 28,532 | |
Total Assets | | $ | 1,923,931 | | | $ | 1,438,824 | | | $ | 2,753,297 | | | $ | 2,322,347 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | |
Demand – non-interest bearing | | $ | 324,912 | | | $ | 243,695 | | | $ | 519,056 | | | $ | 438,500 | |
Demand – interest bearing | | | 605,950 | | | | 381,499 | | | | 1,042,561 | | | | 807,736 | |
Money market and savings | | | 635,644 | | | | 556,526 | | | | 676,993 | | | | 700,322 | |
Time deposits | | | 111,164 | | | | 67,578 | | | | 154,257 | | | | 116,737 | |
Total Deposits | | | 1,677,670 | | | | 1,249,298 | | | | 2,392,867 | | | | 2,063,295 | |
| | | | | | | | | |
Short-term borrowings | | | - | | | | 47,000 | | | | 91,422 | | | | - | |
Accrued interest payable | | | 444 | | | | 245 | | | | 558 | | | | 293 | |
Other liabilities | | | 8,883 | | | | 7,049 | | | | 12,002 | | | | 10,618 | |
Subordinated debt | | | 21,881 | | | | 21,857 | | | | 11,259 | | | | 21,681 | |
Total Liabilities | | | 1,708,878 | | | | 1,325,449 | | | | 2,508,108 | | | | 2,095,887 | |
| | | | | | | | | | | | | | | | |
Shareholders' Equity | | | | | | | | | |
Shareholders’ Equity | | | | | | | | | |
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | | | | - | | | | - | |
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 57,283,712 as of December 31, 2016 and 38,365,848 as of December 31, 2015; shares outstanding 56,754,867 as of December 31, 2016 and 37,837,003 as of December 31, 2015 | | | 573 | | | | 384 | | |
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,318,073 as of December 31, 2018 and 57,518,609 as of December 31, 2017; shares outstanding 58,789,228 as of December 31, 2018 and 56,989,764 as of December 31, 2017 | | | | 593 | | | | 575 | |
Additional paid in capital | | | 253,570 | | | | 152,897 | | | | 269,147 | | | | 256,285 | |
Accumulated deficit | | | (27,888 | ) | | | (32,833 | ) | | | (8,716 | ) | | | (18,983 | ) |
Treasury stock at cost (503,408 shares as of December 31, 2016 and December 31, 2015) | | | (3,725 | ) | | | (3,725 | ) | |
Stock held by deferred compensation plan (25,437 shares as of December 31, 2016 and December 31, 2015) | | | (183 | ) | | | (183 | ) | |
Treasury stock at cost (503,408 shares as of December 31, 2018 and December 31, 2017) | | | | (3,725 | ) | | | (3,725 | ) |
Stock held by deferred compensation plan (25,437 shares as of December 31, 2018 and December 31, 2017) | | | | (183 | ) | | | (183 | ) |
Accumulated other comprehensive loss | | | (7,294 | ) | | | (3,165 | ) | | | (11,927 | ) | | | (7,509 | ) |
Total Shareholders' Equity | | | 215,053 | | | | 113,375 | | |
Total Liabilities and Shareholders' Equity | | | 1,923,931 | | | $ | 1,438,824 | | |
Total Shareholders’ Equity | | | | 245,189 | | | | 226,460 | |
Total Liabilities and Shareholders’ Equity | | | $ | 2,753,297 | | | $ | 2,322,347 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 2016, 2015,2018, 2017, and 20142016
(Dollars in thousands, except per share data)
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Interest income | | | | | | | | | | | | | | | | | | |
Interest and fees on taxable loans | | $ | 40,827 | | | $ | 37,241 | | | $ | 34,530 | | | $ | 62,502 | | | $ | 48,993 | | | $ | 40,827 | |
Interest and fees on tax-exempt loans | | | 960 | | | | 540 | | | | 339 | | | | 1,543 | | | | 1,101 | | | | 960 | |
Interest and dividends on taxable investment securities | | | 11,264 | | | | 6,792 | | | | 5,053 | | | | 26,677 | | | | 19,643 | | | | 11,264 | |
Interest and dividends on tax-exempt investment securities | | | 703 | | | | 585 | | | | 364 | | | | 505 | | | | 535 | | | | 703 | |
Interest on federal funds sold and other interest-earning assets | | | 473 | | | | 278 | | | | 187 | | | | 847 | | | | 577 | | | | 473 | |
Total interest income | | | 54,227 | | | | 45,436 | | | | 40,473 | | | | 92,074 | | | | 70,849 | | | | 54,227 | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
Demand- interest bearing | | | 2,088 | | | | 1,401 | | | | 888 | | | | 7,946 | | | | 3,020 | | | | 2,088 | |
Money market and savings | | | 2,639 | | | | 2,170 | | | | 1,929 | | | | 4,898 | | | | 3,160 | | | | 2,639 | |
Time deposits | | | 942 | | | | 695 | | | | 719 | | | | 1,588 | | | | 1,238 | | | | 942 | |
Other borrowings | | | 1,194 | | | | 1,115 | | | | 1,108 | | | | 1,738 | | | | 1,366 | | | | 1,194 | |
Total interest expense | | | 6,863 | | | | 5,381 | | | | 4,644 | | | | 16,170 | | | | 8,784 | | | | 6,863 | |
Net interest income | | | 47,364 | | | | 40,055 | | | | 35,829 | | | | 75,904 | | | | 62,065 | | | | 47,364 | |
Provision for loan losses | | | 1,557 | | | | 500 | | | | 900 | | | | 2,300 | | | | 900 | | | | 1,557 | |
Net interest income after provision for loan losses | | | 45,807 | | | | 39,555 | | | | 34,929 | | | | 73,604 | | | | 61,165 | | | | 45,807 | |
Non-interest income | | | | | | | | | | | | | | | | | | | | | | | | |
Loan advisory and servicing fees | | | 1,627 | | | | 2,226 | | | | 1,452 | | |
Loan and servicing fees | | | | 1,401 | | | | 1,614 | | | | 1,627 | |
Mortgage banking income | | | 5,062 | | | | - | | | | - | | | | 10,233 | | | | 11,170 | | | | 5,062 | |
Gain on sales of SBA loans | | | 4,981 | | | | 3,139 | | | | 4,717 | | | | 3,105 | | | | 3,378 | | | | 4,981 | |
Service fees on deposit accounts | | | 2,658 | | | | 1,720 | | | | 1,224 | | | | 5,476 | | | | 3,904 | | | | 2,658 | |
Legal settlements | | | - | | | | 2,550 | | | | - | | |
Gain on sale of investment securities | | | 656 | | | | 108 | | | | 458 | | |
Gain (loss) on sale of investment securities | | | | (67 | ) | | | (146 | ) | | | 656 | |
Net securities impairment losses recognized in earnings | | | (7 | ) | | | (3 | ) | | | (7 | ) | | | - | | | | - | | | | (7 | ) |
Other non-interest income | | | 335 | | | | 203 | | | | 173 | | | | 174 | | | | 177 | | | | 335 | |
Total non-interest income | | | 15,312 | | | | 9,943 | | | | 8,017 | | | | 20,322 | | | | 20,097 | | | | 15,312 | |
Non-interest expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 28,602 | | | | 22,488 | | | | 20,089 | | | | 44,082 | | | | 37,959 | | | | 28,602 | |
Occupancy | | | 6,109 | | | | 4,929 | | | | 4,247 | | | | 8,046 | | | | 7,156 | | | | 6,109 | |
Depreciation and amortization | | | 3,518 | | | | 3,080 | | | | 2,382 | | | | 5,447 | | | | 4,618 | | | | 3,518 | |
Legal | | | 459 | | | | 915 | | | | 1,290 | | | | 985 | | | | 984 | | | | 459 | |
Other real estate owned | | | 2,182 | | | | 4,239 | | | | 1,794 | | | | 1,588 | | | | 4,092 | | | | 2,182 | |
Appraisal and other loan expenses | | | | 1,840 | | | | 1,878 | | | | 866 | |
Advertising | | | 811 | | | | 627 | | | | 597 | | | | 1,211 | | | | 1,279 | | | | 811 | |
Data processing | | | 2,408 | | | | 1,593 | | | | 1,345 | | | | 3,855 | | | | 3,134 | | | | 2,408 | |
Insurance | | | 962 | | | | 720 | | | | 586 | | | | 996 | | | | 982 | | | | 962 | |
Professional fees | | | 1,580 | | | | 1,268 | | | | 1,468 | | | | 2,048 | | | | 1,893 | | | | 1,580 | |
Automated teller machine expenses | | | | 1,868 | | | | 1,264 | | | | 814 | |
Regulatory assessments and costs | | | 1,413 | | | | 1,248 | | | | 1,065 | | | | 1,675 | | | | 1,367 | | | | 1,413 | |
Taxes, other | | | 366 | | | | 689 | | | | 616 | | | | 796 | | | | 817 | | | | 366 | |
Other operating expenses | | | 7,883 | | | | 5,295 | | | | 5,071 | | | | 9,284 | | | | 7,853 | | | | 6,203 | |
Total non-interest expense | | | 56,293 | | | | 47,091 | | | | 40,550 | | | | 83,721 | | | | 75,276 | | | | 56,293 | |
Income before benefit for income taxes | | | 4,826 | | | | 2,407 | | | | 2,396 | | | | 10,205 | | | | 5,986 | | | | 4,826 | |
Benefit for income taxes | | | (119 | ) | | | (26 | ) | | | (46 | ) | |
Provision (benefit) for income taxes | | | | 1,578 | | | | (2,919 | ) | | | (119 | ) |
Net income | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Net income per share | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.07 | | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.13 | |
Diluted | | $ | 0.12 | | | $ | 0.06 | | | $ | 0.07 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.12 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2016, 2015,2018, 2017, and 20142016
(Dollars in thousands)
| | Years Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | |
Net income | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | |
| | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | | | | | |
Unrealized gain (loss) on securities (pre-tax $(6,011), $(4,021) and $4,992, respectively) | | | (3,853 | ) | | | (2,577 | ) | | | 3,199 | |
Reclassification adjustment for securities gains (pre-tax $(656), $(108) and $(458), respectively) | | | (420 | ) | | | (69 | ) | | | (293 | ) |
Reclassification adjustment for impairment charge (pre-tax $7, $3 and $7, respectively) | | | 4 | | | | 2 | | | | 4 | |
Net unrealized gains (losses) on securities | | | (4,269 | ) | | | (2,644 | ) | | | 2,910 | |
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $-, $- and $(1,233), respectively) | | | - | | | | - | | | | (790 | ) |
Amortization of net unrealized holding losses during the period (pre-tax $219, $173 and $118, respectively) | | | 140 | | | | 111 | | | | 76 | |
| | | | | | | | | | | | |
Total other comprehensive income (loss) | | | (4,129 | ) | | | (2,533 | ) | | | 2,196 | |
| | | | | | | | | | | | |
Total comprehensive income (loss) | | $ | 816 | | | $ | (100 | ) | | $ | 4,638 | |
| | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
| | | | | | | | | | | | |
Other comprehensive , net of tax | | | | | | | | | | | | |
Unrealized gain/(loss) on securities (pre-tax $5,364, $(646), and $(6,011), respectively) | | | 3,927 | | | | (413 | ) | | | (3,853 | ) |
Reclassification adjustment for securities losses (gains) (pre-tax $67, $146 and $(656), respectively) | | | 49 | | | | 94 | | | | (420 | ) |
Reclassification adjustment for impairment charge (pre-tax $-, $- and $7, respectively) | | | - | | | | - | | | | 4 | |
Net unrealized gains/(losses) on securities | | | 3,976 | | | | (319 | ) | | | (4,269 | ) |
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $(9,362), $-, $-, respectively) | | | (6,855 | ) | | | - | | | | - | |
Amortization of net unrealized holding losses during the period (pre-tax $137, $163 and $219, respectively) | | | 101 | | | | 104 | | | | 140 | |
| | | | | | | | | | | | |
Total other comprehensive loss | | | (2,778 | ) | | | (215 | ) | | | (4,129 | ) |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 5,849 | | | $ | 8,690 | | | $ | 816 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016, 2015,2018, 2017, and 20142016
(Dollars in thousands)
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities | | | | | | | | | | | | | | | | | | |
Net income | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | |
Provision for loan losses | | | 1,557 | | | | 500 | | | | 900 | | | | 2,300 | | | | 900 | | | | 1,557 | |
Loss on sale of other real estate owned | | | - | | | | - | | | | 9 | | |
Write down of other real estate owned | | | 355 | | | | 3,069 | | | | 1,138 | | | | 563 | | | | 3,000 | | | | 355 | |
Depreciation and amortization | | | 3,518 | | | | 3,080 | | | | 2,382 | | | | 5,447 | | | | 4,618 | | | | 3,518 | |
Deferred income taxes | | | (380 | ) | | | (84 | ) | | | (142 | ) | | | 1,527 | | | | (5,056 | ) | | | (380 | ) |
Stock based compensation | | | 759 | | | | 600 | | | | 420 | | | | 2,116 | | | | 1,842 | | | | 759 | |
Gain on sale of investment securities | | | (656 | ) | | | (108 | ) | | | (458 | ) | |
Loss (gain) on sale of investment securities | | | | 67 | | | | 146 | | | | (656 | ) |
Impairment charges on investment securities | | | 7 | | | | 3 | | | | 7 | | | | - | | | | - | | | | 7 | |
Amortization of premiums on investment securities | | | 1,980 | | | | 840 | | | | 540 | | | | 2,878 | | | | 2,469 | | | | 1,980 | |
Accretion of discounts on retained SBA loans | | | (1,364 | ) | | | (1,005 | ) | | | (899 | ) | | | (1,332 | ) | | | (1,088 | ) | | | (1,364 | ) |
Fair value adjustments on SBA servicing assets | | | 1,075 | | | | 14 | | | | 655 | | | | 1,458 | | | | 1,187 | | | | 1,075 | |
Proceeds from sales of SBA loans originated for sale | | | 58,107 | | | | 32,922 | | | | 51,388 | | | | 42,726 | | | | 42,269 | | | | 58,107 | |
SBA loans originated for sale | | | (53,627 | ) | | | (31,760 | ) | | | (43,416 | ) | | | (42,700 | ) | | | (37,062 | ) | | | (53,627 | ) |
Gains on sales of SBA loans originated for sale | | | (4,981 | ) | | | (3,139 | ) | | | (4,717 | ) | | | (3,105 | ) | | | (3,378 | ) | | | (4,981 | ) |
Proceeds from sales of mortgage loans originated for sale | | | 163,414 | | | | - | | | | - | | | | 322,264 | | | | 311,187 | | | | 163,414 | |
Mortgage loans originated for sale | | | (161,717 | ) | | | - | | | | - | | | | (291,870 | ) | | | (321,222 | ) | | | (161,717 | ) |
Fair value adjustment for mortgage loans originated for sale | | | | 513 | | | | (846 | ) | | | (483 | ) |
Gains on mortgage loans originated for sale | | | (4,737 | ) | | | - | | | | - | | | | (8,378 | ) | | | (8,128 | ) | | | (3,712 | ) |
Amortization of intangible assets | | | 43 | | | | - | | | | - | | | | - | | | | 61 | | | | 43 | |
Amortization of debt issuance costs | | | 24 | | | | 24 | | | | 24 | | | | 6 | | | | 29 | | | | 24 | |
Increase in accrued interest receivable and other assets | | | (1,993 | ) | | | (2,966 | ) | | | (1,796 | ) | | | (5,047 | ) | | | (2,330 | ) | | | (2,729 | ) |
Net (decrease) increase in accrued interest payable and other liabilities | | | (1,040 | ) | | | 213 | | | | 325 | | |
Net cash provided by operating activities | | | 5,289 | | | | 4,636 | | | | 8,802 | | |
Net increase (decrease) in accrued interest payable and other liabilities | | | | 1,570 | | | | 1,513 | | | | (846 | ) |
Net cash provided by (used in) operating activities | | | | 39,630 | | | | (984 | ) | | | 5,289 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of investment securities available for sale | | | (207,482 | ) | | | (146,668 | ) | | | (78,825 | ) | | | (149,209 | ) | | | (165,065 | ) | | | (207,482 | ) |
Purchase of investment securities held to maturity | | | (294,187 | ) | | | (121,402 | ) | | | - | | | | (123,265 | ) | | | (89,350 | ) | | | (294,187 | ) |
Proceeds from the sale of securities available for sale | | | 78,585 | | | | 11,707 | | | | 5,700 | | | | 6,439 | | | | 31,197 | | | | 78,585 | |
Proceeds from the paydowns, maturity or call of securities available for sale | | | 36,982 | | | | 31,159 | | | | 25,822 | | |
Proceeds from the paydowns, maturity or call of securities held to maturity | | | 33,160 | | | | 16,689 | | | | 2,308 | | |
Net redemption (purchase) of restricted stock | | | 1,693 | | | | (1,902 | ) | | | 413 | | |
Proceeds from the paydown, maturity, or call of securities available for sale | | | | 48,796 | | | | 48,547 | | | | 36,982 | |
Proceeds from the paydown, maturity, or call of securities held to maturity | | | | 63,565 | | | | 37,315 | | | | 33,160 | |
Net (purchase) redemption of restricted stock | | | | (3,836 | ) | | | (552 | ) | | | 1,693 | |
Net increase in loans | | | (89,428 | ) | | | (106,616 | ) | | | (104,357 | ) | | | (275,587 | ) | | | (197,965 | ) | | | (89,428 | ) |
Net proceeds from sale of other real estate owned | | | 1,400 | | | | 792 | | | | 197 | | | | 495 | | | | 499 | | | | 1,400 | |
Net cash paid in acquisition | | | (5,913 | ) | | | - | | | | - | | | | - | | | | - | | | | (5,913 | ) |
Premises and equipment expenditures | | | (14,291 | ) | | | (14,214 | ) | | | (14,664 | ) | | | (18,161 | ) | | | (22,525 | ) | | | (14,291 | ) |
Net cash used in investing activities | | | (459,481 | ) | | | (330,455 | ) | | | (163,406 | ) | | | (450,763 | ) | | | (357,899 | ) | | | (459,481 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net proceeds from stock offering | | | 99,175 | | | | - | | | | 44,853 | | | | - | | | | - | | | | 99,175 | |
Net proceeds from exercise of stock options | | | 726 | | | | 64 | | | | 1 | | | | 670 | | | | 646 | | | | 726 | |
Net increase in demand, money market and savings deposits | | | 384,786 | | | | 184,859 | | | | 206,163 | | | | 292,053 | | | | 380,052 | | | | 384,786 | |
Net increase (decrease) in time deposits | | | 43,586 | | | | (7,791 | ) | | | (3,467 | ) | |
(Repayment) increase in short-term borrowings | | | (66,666 | ) | | | 47,000 | | | | - | | |
Net increase in time deposits | | | | 37,519 | | | | 5,573 | | | | 43,586 | |
Increase (repayment) in short-term borrowings | | | | 91,422 | | | | - | | | | (66,666 | ) |
Net cash provided by financing activities | | | 461,607 | | | | 224,132 | | | | 247,550 | | | | 421,664 | | | | 386,271 | | | | 461,607 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 7,415 | | | | (101,687 | ) | | | 92,946 | | |
Net increase in cash and cash equivalents | | | | 10,531 | | | | 27,388 | | | | 7,415 | |
Cash and cash equivalents, beginning of year | | | 27,139 | | | | 128,826 | | | | 35,880 | | | | 61,942 | | | | 34,554 | | | | 27,139 | |
Cash and cash equivalents, end of year | | $ | 34,554 | | | $ | 27,139 | | | $ | 128,826 | | | $ | 72,473 | | | $ | 61,942 | | | $ | 34,554 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Supplemental disclosures | | | | | | | | | | | | | | | | | | | | | | | | |
Interest paid | | $ | 6,664 | | | $ | 5,401 | | | $ | 4,616 | | | $ | 15,905 | | | $ | 8,935 | | | $ | 6,664 | |
Income taxes paid | | $ | 190 | | | $ | - | | | $ | 70 | | | $ | - | | | $ | 75 | | | $ | 190 | |
Non-cash transfers from loans to other real estate owned | | $ | 616 | | | $ | 11,459 | | | $ | 1,000 | | | $ | 315 | | | $ | 291 | | | $ | 616 | |
Transfer of available-for-sale-securities to held-to-maturity securities | | $ | - | | | $ | - | | | $ | 70,118 | | |
Conversion of subordinated debt to common stock | | | $ | 10,094 | | | $ | 229 | | | $ | - | |
Transfer of available-for-sale securities to held-to-maturity securities | | | $ | 230,094 | | | $ | - | | | $ | - | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders'Shareholders’ Equity
For the Years Ended December 31, 2016, 2015,2018, 2017, and 20142016
(Dollars in thousands)
| | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Treasury Stock | | | Stock Held by Deferred Compensation Plan | | | Accumulated Other Comprehensive Loss | | | Total Shareholders' Equity | | | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Treasury Stock | | | Stock Held by Deferred Compensation Plan | | | Accumulated Other Comprehensive Loss | | | Total Shareholders’ Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance January 1, 2014 | | $ | 265 | | | | 107,078 | | | | (37,708 | ) | | | (3,099 | ) | | | (809 | ) | | | (2,828 | ) | | | 62,899 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 2,442 | | | | | | | | | | | | | | | | 2,442 | | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | | | | | 2,196 | | | | 2,196 | | |
Proceeds from shares issued under common stock offering (11,842,106 shares) net of offering costs of $147 | | | 118 | | | | 44,735 | | | | | | | | | | | | | | | | | | | | 44,853 | | |
Stock based compensation | | | | | | | 420 | | | | | | | | | | | | | | | | | | | | 420 | | |
Options exercised (500 shares) | | | | | | | 1 | | | | | | | | | | | | | | | | | | | | 1 | | |
Transfer from deferred compensation plan to treasury stock (87,105 shares) | | | | | | | | | | | | | | | (626 | ) | | | 626 | | | | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2014 | | | 383 | | | | 152,234 | | | | (35,266 | ) | | | (3,725 | ) | | | (183 | ) | | | (632 | ) | | | 112,811 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 2,433 | | | | | | | | | | | | | | | | 2,433 | | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (2,533 | ) | | | (2,533 | ) | |
Stock based compensation | | | | | | | 600 | | | | | | | | | | | | | | | | | | | | 600 | | |
Options exercised (21,500 shares) | | | 1 | | | | 63 | | | | | | | | | | | | | | | | | | | | 64 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2015 | | | 384 | | | | 152,897 | | | | (32,833 | ) | | | (3,725 | ) | | | (183 | ) | | | (3,165 | ) | | | 113,375 | | |
Balance January 1, 2016 | | | $ | 384 | | | | 152,897 | | | | (32,833 | ) | | | (3,725 | ) | | | (183 | ) | | | (3,165 | ) | | | 113,375 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 4,945 | | | | | | | | | | | | | | | | 4,945 | | | | | | | | | | | | 4,945 | | | | | | | | | | | | | | | | 4,945 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (4,129 | ) | | | (4,129 | ) | | | | | | | | | | | | | | | | | | | | | | | (4,129 | ) | | | (4,129 | ) |
Proceeds from shares issued under common stock offering (18,691,589 shares) net of offering costs of $825 | | | 187 | | | | 98,988 | | | | | | | | | | | | | | | | | | | | 99,175 | | | | 187 | | | | 98,988 | | | | | | | | | | | | | | | | | | | | 99,175 | |
Stock based compensation | | | | | | | 759 | | | | | | | | | | | | | | | | | | | | 759 | | | | | | | | 759 | | | | | | | | | | | | | | | | | | | | 759 | |
Stock options issued in acquisition | | | | | | | 202 | | | | | | | | | | | | | | | | | | | | 202 | | | | | | | | 202 | | | | | | | | | | | | | | | | | | | | 202 | |
Options exercised (226,275 shares) | | | 2 | | | | 724 | | | | | | | | | | | | | | | | | | | | 726 | | | | 2 | | | | 724 | | | | | | | | | | | | | | | | | | | | 726 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2016 | | $ | 573 | | | $ | 253,570 | | | $ | (27,888 | ) | | $ | (3,725 | ) | | $ | (183 | ) | | $ | (7,294 | ) | | $ | 215,053 | | | | 573 | | | | 253,570 | | | | (27,888 | ) | | | (3,725 | ) | | | (183 | ) | | | (7,294 | ) | | | 215,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | 8,905 | | | | | | | | | | | | | | | | 8,905 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | | (215 | ) | | | (215 | ) |
Stock based compensation | | | | | | | | 1,842 | | | | | | | | | | | | | | | | | | | | 1,842 | |
Conversion of subordinated debt to common stock (36,922 shares) | | | | | | | | 229 | | | | | | | | | | | | | | | | | | | | 229 | |
Options exercised (197,975 shares) | | | | 2 | | | | 644 | | | | | | | | | | | | | | | | | | | | 646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2017 | | | | 575 | | | | 256,285 | | | | (18,983 | ) | | | (3,725 | ) | | | (183 | ) | | | (7,509 | ) | | | 226,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification due to the adoption of ASU 2018-02 | | | | | | | | | | | | 1,640 | | | | | | | | | | | | (1,640 | ) | | | - | |
Net income | | | | | | | | | | | | 8,627 | | | | | | | | | | | | | | | | 8,627 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | | (2,778 | ) | | | (2,778 | ) |
Stock based compensation | | | | | | | | 2,116 | | | | | | | | | | | | | | | | | | | | 2,116 | |
Conversion of subordinated debt to common stock (1,624,614 shares) | | | | 16 | | | | 10,078 | | | | | | | | | | | | | | | | | | | | 10,094 | |
Options exercised (174,850 shares) | | | | 2 | | | | 668 | | | | | | | | | | | | | | | | | | | | 670 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2018 | | | $ | 593 | | | $ | 269,147 | | | $ | (8,716 | ) | | $ | (3,725 | ) | | $ | (183 | ) | | $ | (11,927 | ) | | $ | 245,189 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Republic First Bancorp, Inc. (the "Company"“Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank ("Republic"(“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, Atlantic, and Gloucester Counties. On July 26,28, 2016, Republic entered into a purchase agreement with the owners of Oak Mortgage Company, LLC ("Oak Mortgage"), pursuant to which the owners agreed to sell to Republicacquired all of the issued and outstanding limited liability company interests of Oak Mortgage. The transaction closed on July 28, 2016,Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division with Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has threetwo unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of threetwo separate issuances of trust preferred securities.
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board ("FASB"(“FASB”). The FASB sets accounting principles generally accepted in the United States of America ("(“US GAAP"GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent primarily 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, ourthe Company’s results of operations are subject to risks and uncertainties surrounding ourRepublic’s exposure to changes in the interest rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The preparation of financial statements in conformity with USU.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment ("OTTI"(“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Significant Group Concentrations of Credit Risk
Most of the Company'sCompany’s activities are with customers located within the Greater Philadelphia region. Note 3 – Investment Securities discusses the types of investment securities that the Company invests in. Note 4 – Loans Receivable discusses the types of lending that the Company engages in, as well as loan concentrations. The Company does not have a significant concentration of credit risk with any one customer.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing in ninety days or less, to be cash and cash equivalents.
Restrictions on Cash and Due from Banks
Republic is required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the reserve computation periods that include December 31, 20162018 and 20152017 were approximately $23.3$51.4 million and $10.8$31.2 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance atheld by the Federal Reserve Bank of Philadelphia.
Investment Securities
Held to Maturity – Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale – Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Unrealized gains and losses are excluded from operations and are reported net of tax as a separate component of other comprehensive income until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statements of operationsincome and determined using the adjusted cost of the specific security sold on the trade date.
Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term "other-than-temporary"“other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings. Impairment charges on bank pooled trust preferred securities of $7,000 $3,000, and $7,000 were recognized during the yearsyear ended December 31, 2016 2015, and 2014, respectively, as a result of estimated other-than-temporary impairment. As of December 31, 2018, the Company no longer holds any bank pooled trust preferred securities.
In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of the securities. At December 31, 2018, the total approximated unrealized loss of $9.8 million remaining to be amortized includes eleven securities previously transferred in July 2014.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of December 31, 20162018 and 2015.2017. As of those dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic Community Bankers Bank ("ACBB"(“ACBB”). The required investment in the capital stock of the FHLB is calculated based on outstanding loan balances and open credit facilities with the FHLB. Excess investments are returned to Republic on a quarterly basis.
At December 31, 20162018 and December 31, 2015,2017, the investment in FHLB stock totaled $1.2$5.6 million and $2.9$1.8 million, respectively. The decreaseincrease was due primarily to a short-term borrowing fromhigher membership stock requirement by FHLB at December 31, 20152018 which resulted in a higher required investment as of that date. At both December 31, 20162018 and December 31, 2015,2017, ACBB stock totaled $143,000.
Mortgage Banking Activities and Mortgage Loans Held for Sale
LoansMortgage loans held for sale are originated and held until sold to permanent investors. On July 28, 2016, management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification ("ASC"(“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
LoansMortgage 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. Gains and losses on loan salesChanges in fair value are recordedreflected in non-interestmortgage banking income and directin the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
Interest Rate Lock Commitments
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and as other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 24 Derivatives and Risk Management Activities.Activities for further detail of IRLCs.
Best Efforts Forward Loan Sale Commitments
ForwardBest efforts forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. ForwardBest efforts forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Mandatory Forward Loan Sales Commitments
Mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Mandatory forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually as of July 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. A
The Company has one reportable segment: Community Banking. The community banking segment primarily encompasses the commercial loan and deposit activities of the Bank, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Oak Mortgage was acquired by the Bank on July 28, 2016 and organized as a wholly owned subsidiary of the Bank. Oak Mortgage was maintained as a separate legal entity through December 31, 2017 in order to preserve certain secondary market contracts and regulatory licensing requirements. As such, the Bank deemed Oak Mortgage to be a separate reporting unit as of July 31, 2017 and performed a Step One Test for Goodwill Impairment in compliance with ASC Topic 350-20 as of that date. At that time, via a Step One Test, the fair value of Oak Mortgage was higher than its book value and no Step Two analysis was required.
On January 1, 2018, Oak Mortgage operations were restructured as a division of Republic and all assets, liabilities, contracts, employees and activity were merged into the Republic. As a result of this restructuring, the Company re-evaluated its reporting unit structure and determined that as of July 31, 2018 there were no longer two reporting units but rather a sole reporting unit in Republic Bank. As of July 31, 2018, the Company performed a qualitative factor test can be performedassessment for its reporting unit to determine whether it is necessaryif the one-step quantitative impairment test was necessary. As part of its qualitative assessment, the Company reviewed regional and national trends in current and expected economic conditions, examining indicators such as GDP growth, interest rates and unemployment rates. The Company also considered its own historical performance, expectations of future performance and other trends specific to perform the two-step quantitative goodwillbanking industry. Based on its qualitative assessment, the Company determined that there was no evidence of impairment test. Ifon the resultsbalance of the qualitative review indicate that it is unlikely (less than 50% probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. There wasgoodwill. Goodwill totaled $5.0 million as of goodwill at December 31, 20162018 and $0 at December 31, 2015.2017, respectively.
Loans Receivable
The loans receivable portfolio is segmented into commercial and industrial loans, commercial real estate loans, owner occupied real estate loans, construction and land development loans, consumer and other loans, and residential mortgages. Consumer loans consist of home equity loans and other consumer loans.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower'sborrower’s ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Commercial real estate and owner occupied real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and owner occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
Construction and land development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals originated through the Company'sCompany’s retail network, which are typically secured by personal property or unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater credit risk because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Residential mortgage loans are secured by one to four family dwelling units. This group consists of first mortgages and are originated at loan to value ratios of 80% or less.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of discounts related to loans purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding.
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management'smanagement’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments would represent management'smanagement’s estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary. The allowance for credit losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
The allowance for credit losses is an amount that represents management'smanagement’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic'sRepublic’s control, the estimate of the allowance for credit losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are categorized as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management'smanagement’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers'borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
| 1) | Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices. |
| 2) | National, regional and local economic and business conditions as well as the condition of various segments. |
| 3) | Nature and volume of the portfolio and terms of loans. |
| 4) | Experience, ability and depth of lending management and staff. |
| 5) | Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications. |
| 6) | Quality of the Company'sCompany’s loan review system, and the degree of oversight by the Company'sCompany’s Board of Directors. |
| 7) | Existence and effect of any concentration of credit and changes in the level of such concentrations. |
| 8) | Effect of external factors, such as competition and legal and regulatory requirements. |
Each factor is assigned a value to reflect improving, stable or declining conditions based on management'smanagement’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment, include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower'sborrower’s prior payment record. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan'sloan’s effective interest rate, the loan'sloan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company'sCompany’s impaired loans are measured based on the estimated fair value of the loan'sloan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower'sborrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan'sloan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower'sborrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management'smanagement’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or loss are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company'sCompany’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management'smanagement’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Transfers of Financial Assets
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860, revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in loan advisory and servicing fees on the statement of operations.income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In all cases, we modelthe Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses various assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market.
For more information on the SBA servicing asset including the sensitivity of the current fair value of the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 – Fair Value Measurements and Fair Values of Financial Instruments.
SBAOther Loans Held for Sale
LoansOther loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a Gain on the Sale of SBA loans which is categorized as non-interest income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value adjustments to the SBA servicing asset and recorded as a net amount in Loan Advisory and Servicing Fees, which is also categorized as non-interest income.
Guarantees
The Company accounts for guarantees in accordance with ASC 815 Guarantor'sGuarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. ASC 815 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer'scustomer’s financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 20162018 is $5.7$13.9 million and they expire as follows: $5.2$12.5 million in 2017, $124,0002019 and $1.4 million in 2018, and $311,000 in 2019.2020. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. There was no liability for guarantees under standby letters of credit as of December 31, 20162018 and December 31, 2015.2017.
Premises and Equipment
Premises and equipment (including land) are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to current operations as incurred, and renewals and major improvements are capitalized.
Other Real Estate Owned
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Advertising Costs
It is the Company'sCompany’s policy to expense advertising costs in the period in which they are incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; thepercent. The terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management'smanagement’s judgment.
The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.
Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan ("(“the 2005 Plan"Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company'sCompany’s employees, directors, and certain consultants. The 2005 Plan initially became effective on November 14, 1995, and was amended and approved at the Company'sCompany’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of December 31, 2016,2018, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company'sCompany’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company'sCompany’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the "2014 Plan"“2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company'sCompany’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At December 31, 2016,2018, the maximum number of shares of common shares issuable under the 2014 Plan was 5.9 million.6.3 million shares. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur.
Earnings Per ShareVariable Interest Entities
We follow the guidance under ASC 810, Consolidation, with regard to variable interest entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns (“variable interest entities”). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both.
We do not consolidate our subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if we have the right to a majority of the trusts’ expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $341,000. In addition, the income received on our investment in the common securities of the trusts is included in other income.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is our need and ability to react to changes in interest rates. As discussed previously, management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.
Item 7A: | Quantitative and Qualitative Disclosure about Market Risk |
See “Management Discussion and Analysis of Results of Operations and Financial Condition – Interest Rate Risk Management”.
Item 8: | Financial Statements and Supplementary Data |
The Consolidated Financial Statements of the Company begin on page 75.
Report of Independent Registered Public Accounting Firm
Earnings
Shareholders and Board of Directors
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Republic First Bancorp, Inc. (the “Company”) and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2013.
Philadelphia, Pennsylvania
March 14, 2019
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2018 and 2017
(Dollars in thousands, except per share ("EPS"data)
| | December 31, 2018 | | | December 31, 2017 | |
ASSETS | | | | | | |
Cash and due from banks | | $ | 35,685 | | | $ | 36,073 | |
Interest bearing deposits with banks | | | 36,788 | | | | 25,869 | |
Cash and cash equivalents | | | 72,473 | | | | 61,942 | |
| | | | | | | | |
Investment securities available for sale, at fair value | | | 321,014 | | | | 464,430 | |
Investment securities held to maturity, at amortized cost (fair value of $747,323 and $463,799, respectively) | | | 761,563 | | | | 472,213 | |
Restricted stock, at cost | | | 5,754 | | | | 1,918 | |
Mortgage loans held for sale, at fair value | | | 20,887 | | | | 43,375 | |
Other loans held for sale | | | 5,404 | | | | 2,325 | |
Loans receivable (net of allowance for loan losses of $8,615 and $8,599, respectively) | | | 1,427,983 | | | | 1,153,679 | |
Premises and equipment, net | | | 87,661 | | | | 74,947 | |
Other real estate owned, net | | | 6,223 | | | | 6,966 | |
Accrued interest receivable | | | 9,025 | | | | 7,009 | |
Goodwill | | | 5,011 | | | | 5,011 | |
Other assets | | | 30,299 | | | | 28,532 | |
Total Assets | | $ | 2,753,297 | | | $ | 2,322,347 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Liabilities | | | | | | | | |
Deposits | | | | | | | | |
Demand – non-interest bearing | | $ | 519,056 | | | $ | 438,500 | |
Demand – interest bearing | | | 1,042,561 | | | | 807,736 | |
Money market and savings | | | 676,993 | | | | 700,322 | |
Time deposits | | | 154,257 | | | | 116,737 | |
Total Deposits | | | 2,392,867 | | | | 2,063,295 | |
Short-term borrowings | | | 91,422 | | | | - | |
Accrued interest payable | | | 558 | | | | 293 | |
Other liabilities | | | 12,002 | | | | 10,618 | |
Subordinated debt | | | 11,259 | | | | 21,681 | |
Total Liabilities | | | 2,508,108 | | | | 2,095,887 | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,318,073 as of December 31, 2018 and 57,518,609 as of December 31, 2017; shares outstanding 58,789,228 as of December 31, 2018 and 56,989,764 as of December 31, 2017 | | | 593 | | | | 575 | |
Additional paid in capital | | | 269,147 | | | | 256,285 | |
Accumulated deficit | | | (8,716 | ) | | | (18,983 | ) |
Treasury stock at cost (503,408 shares as of December 31, 2018 and December 31, 2017) | | | (3,725 | ) | | | (3,725 | ) |
Stock held by deferred compensation plan (25,437 shares as of December 31, 2018 and December 31, 2017) | | | (183 | ) | | | (183 | ) |
Accumulated other comprehensive loss | | | (11,927 | ) | | | (7,509 | ) |
Total Shareholders’ Equity | | | 245,189 | | | | 226,460 | |
Total Liabilities and Shareholders’ Equity | | $ | 2,753,297 | | | $ | 2,322,347 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands, except per share data)
| | Years Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Interest income | | | | | | | | | |
Interest and fees on taxable loans | | $ | 62,502 | | | $ | 48,993 | | | $ | 40,827 | |
Interest and fees on tax-exempt loans | | | 1,543 | | | | 1,101 | | | | 960 | |
Interest and dividends on taxable investment securities | | | 26,677 | | | | 19,643 | | | | 11,264 | |
Interest and dividends on tax-exempt investment securities | | | 505 | | | | 535 | | | | 703 | |
Interest on federal funds sold and other interest-earning assets | | | 847 | | | | 577 | | | | 473 | |
Total interest income | | | 92,074 | | | | 70,849 | | | | 54,227 | |
Interest expense | | | | | | | | | | | | |
Demand- interest bearing | | | 7,946 | | | | 3,020 | | | | 2,088 | |
Money market and savings | | | 4,898 | | | | 3,160 | | | | 2,639 | |
Time deposits | | | 1,588 | | | | 1,238 | | | | 942 | |
Other borrowings | | | 1,738 | | | | 1,366 | | | | 1,194 | |
Total interest expense | | | 16,170 | | | | 8,784 | | | | 6,863 | |
Net interest income | | | 75,904 | | | | 62,065 | | | | 47,364 | |
Provision for loan losses | | | 2,300 | | | | 900 | | | | 1,557 | |
Net interest income after provision for loan losses | | | 73,604 | | | | 61,165 | | | | 45,807 | |
Non-interest income | | | | | | | | | | | | |
Loan and servicing fees | | | 1,401 | | | | 1,614 | | | | 1,627 | |
Mortgage banking income | | | 10,233 | | | | 11,170 | | | | 5,062 | |
Gain on sales of SBA loans | | | 3,105 | | | | 3,378 | | | | 4,981 | |
Service fees on deposit accounts | | | 5,476 | | | | 3,904 | | | | 2,658 | |
Gain (loss) on sale of investment securities | | | (67 | ) | | | (146 | ) | | | 656 | |
Net securities impairment losses recognized in earnings | | | - | | | | - | | | | (7 | ) |
Other non-interest income | | | 174 | | | | 177 | | | | 335 | |
Total non-interest income | | | 20,322 | | | | 20,097 | | | | 15,312 | |
Non-interest expenses | | | | | | | | | | | | |
Salaries and employee benefits | | | 44,082 | | | | 37,959 | | | | 28,602 | |
Occupancy | | | 8,046 | | | | 7,156 | | | | 6,109 | |
Depreciation and amortization | | | 5,447 | | | | 4,618 | | | | 3,518 | |
Legal | | | 985 | | | | 984 | | | | 459 | |
Other real estate owned | | | 1,588 | | | | 4,092 | | | | 2,182 | |
Appraisal and other loan expenses | | | 1,840 | | | | 1,878 | | | | 866 | |
Advertising | | | 1,211 | | | | 1,279 | | | | 811 | |
Data processing | | | 3,855 | | | | 3,134 | | | | 2,408 | |
Insurance | | | 996 | | | | 982 | | | | 962 | |
Professional fees | | | 2,048 | | | | 1,893 | | | | 1,580 | |
Automated teller machine expenses | | | 1,868 | | | | 1,264 | | | | 814 | |
Regulatory assessments and costs | | | 1,675 | | | | 1,367 | | | | 1,413 | |
Taxes, other | | | 796 | | | | 817 | | | | 366 | |
Other operating expenses | | | 9,284 | | | | 7,853 | | | | 6,203 | |
Total non-interest expense | | | 83,721 | | | | 75,276 | | | | 56,293 | |
Income before benefit for income taxes | | | 10,205 | | | | 5,986 | | | | 4,826 | |
Provision (benefit) for income taxes | | | 1,578 | | | | (2,919 | ) | | | (119 | ) |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Net income per share | | | | | | | | | | | | |
Basic | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.13 | |
Diluted | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.12 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
| | Years Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
| | | | | | | | | | | | |
Other comprehensive , net of tax | | | | | | | | | | | | |
Unrealized gain/(loss) on securities (pre-tax $5,364, $(646), and $(6,011), respectively) | | | 3,927 | | | | (413 | ) | | | (3,853 | ) |
Reclassification adjustment for securities losses (gains) (pre-tax $67, $146 and $(656), respectively) | | | 49 | | | | 94 | | | | (420 | ) |
Reclassification adjustment for impairment charge (pre-tax $-, $- and $7, respectively) | | | - | | | | - | | | | 4 | |
Net unrealized gains/(losses) on securities | | | 3,976 | | | | (319 | ) | | | (4,269 | ) |
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $(9,362), $-, $-, respectively) | | | (6,855 | ) | | | - | | | | - | |
Amortization of net unrealized holding losses during the period (pre-tax $137, $163 and $219, respectively) | | | 101 | | | | 104 | | | | 140 | |
| | | | | | | | | | | | |
Total other comprehensive loss | | | (2,778 | ) | | | (215 | ) | | | (4,129 | ) |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 5,849 | | | $ | 8,690 | | | $ | 816 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
| | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities | | | | | | | | | |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Provision for loan losses | | | 2,300 | | | | 900 | | | | 1,557 | |
Write down of other real estate owned | | | 563 | | | | 3,000 | | | | 355 | |
Depreciation and amortization | | | 5,447 | | | | 4,618 | | | | 3,518 | |
Deferred income taxes | | | 1,527 | | | | (5,056 | ) | | | (380 | ) |
Stock based compensation | | | 2,116 | | | | 1,842 | | | | 759 | |
Loss (gain) on sale of investment securities | | | 67 | | | | 146 | | | | (656 | ) |
Impairment charges on investment securities | | | - | | | | - | | | | 7 | |
Amortization of premiums on investment securities | | | 2,878 | | | | 2,469 | | | | 1,980 | |
Accretion of discounts on retained SBA loans | | | (1,332 | ) | | | (1,088 | ) | | | (1,364 | ) |
Fair value adjustments on SBA servicing assets | | | 1,458 | | | | 1,187 | | | | 1,075 | |
Proceeds from sales of SBA loans originated for sale | | | 42,726 | | | | 42,269 | | | | 58,107 | |
SBA loans originated for sale | | | (42,700 | ) | | | (37,062 | ) | | | (53,627 | ) |
Gains on sales of SBA loans originated for sale | | | (3,105 | ) | | | (3,378 | ) | | | (4,981 | ) |
Proceeds from sales of mortgage loans originated for sale | | | 322,264 | | | | 311,187 | | | | 163,414 | |
Mortgage loans originated for sale | | | (291,870 | ) | | | (321,222 | ) | | | (161,717 | ) |
Fair value adjustment for mortgage loans originated for sale | | | 513 | | | | (846 | ) | | | (483 | ) |
Gains on mortgage loans originated for sale | | | (8,378 | ) | | | (8,128 | ) | | | (3,712 | ) |
Amortization of intangible assets | | | - | | | | 61 | | | | 43 | |
Amortization of debt issuance costs | | | 6 | | | | 29 | | | | 24 | |
Increase in accrued interest receivable and other assets | | | (5,047 | ) | | | (2,330 | ) | | | (2,729 | ) |
Net increase (decrease) in accrued interest payable and other liabilities | | | 1,570 | | | | 1,513 | | | | (846 | ) |
Net cash provided by (used in) operating activities | | | 39,630 | | | | (984 | ) | | | 5,289 | |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Purchase of investment securities available for sale | | | (149,209 | ) | | | (165,065 | ) | | | (207,482 | ) |
Purchase of investment securities held to maturity | | | (123,265 | ) | | | (89,350 | ) | | | (294,187 | ) |
Proceeds from the sale of securities available for sale | | | 6,439 | | | | 31,197 | | | | 78,585 | |
Proceeds from the paydown, maturity, or call of securities available for sale | | | 48,796 | | | | 48,547 | | | | 36,982 | |
Proceeds from the paydown, maturity, or call of securities held to maturity | | | 63,565 | | | | 37,315 | | | | 33,160 | |
Net (purchase) redemption of restricted stock | | | (3,836 | ) | | | (552 | ) | | | 1,693 | |
Net increase in loans | | | (275,587 | ) | | | (197,965 | ) | | | (89,428 | ) |
Net proceeds from sale of other real estate owned | | | 495 | | | | 499 | | | | 1,400 | |
Net cash paid in acquisition | | | - | | | | - | | | | (5,913 | ) |
Premises and equipment expenditures | | | (18,161 | ) | | | (22,525 | ) | | | (14,291 | ) |
Net cash used in investing activities | | | (450,763 | ) | | | (357,899 | ) | | | (459,481 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Net proceeds from stock offering | | | - | | | | - | | | | 99,175 | |
Net proceeds from exercise of stock options | | | 670 | | | | 646 | | | | 726 | |
Net increase in demand, money market and savings deposits | | | 292,053 | | | | 380,052 | | | | 384,786 | |
Net increase in time deposits | | | 37,519 | | | | 5,573 | | | | 43,586 | |
Increase (repayment) in short-term borrowings | | | 91,422 | | | | - | | | | (66,666 | ) |
Net cash provided by financing activities | | | 421,664 | | | | 386,271 | | | | 461,607 | |
| | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 10,531 | | | | 27,388 | | | | 7,415 | |
Cash and cash equivalents, beginning of year | | | 61,942 | | | | 34,554 | | | | 27,139 | |
Cash and cash equivalents, end of year | | $ | 72,473 | | | $ | 61,942 | | | $ | 34,554 | |
| | | | | | | | | | | | |
Supplemental disclosures | | | | | | | | | | | | |
Interest paid | | $ | 15,905 | | | $ | 8,935 | | | $ | 6,664 | |
Income taxes paid | | $ | - | | | $ | 75 | | | $ | 190 | |
Non-cash transfers from loans to other real estate owned | | $ | 315 | | | $ | 291 | | | $ | 616 | |
Conversion of subordinated debt to common stock | | $ | 10,094 | | | $ | 229 | | | $ | - | |
Transfer of available-for-sale securities to held-to-maturity securities | | $ | 230,094 | | | $ | - | | | $ | - | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
| | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Treasury Stock | | | Stock Held by Deferred Compensation Plan | | | Accumulated Other Comprehensive Loss | | | Total Shareholders’ Equity | |
| | | | | | | | | | | | | | | | | | | | | |
Balance January 1, 2016 | | $ | 384 | | | | 152,897 | | | | (32,833 | ) | | | (3,725 | ) | | | (183 | ) | | | (3,165 | ) | | | 113,375 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 4,945 | | | | | | | | | | | | | | | | 4,945 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (4,129 | ) | | | (4,129 | ) |
Proceeds from shares issued under common stock offering (18,691,589 shares) net of offering costs of $825 | | | 187 | | | | 98,988 | | | | | | | | | | | | | | | | | | | | 99,175 | |
Stock based compensation | | | | | | | 759 | | | | | | | | | | | | | | | | | | | | 759 | |
Stock options issued in acquisition | | | | | | | 202 | | | | | | | | | | | | | | | | | | | | 202 | |
Options exercised (226,275 shares) | | | 2 | | | | 724 | | | | | | | | | | | | | | | | | | | | 726 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2016 | | | 573 | | | | 253,570 | | | | (27,888 | ) | | | (3,725 | ) | | | (183 | ) | | | (7,294 | ) | | | 215,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 8,905 | | | | | | | | | | | | | | | | 8,905 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (215 | ) | | | (215 | ) |
Stock based compensation | | | | | | | 1,842 | | | | | | | | | | | | | | | | | | | | 1,842 | |
Conversion of subordinated debt to common stock (36,922 shares) | | | | | | | 229 | | | | | | | | | | | | | | | | | | | | 229 | |
Options exercised (197,975 shares) | | | 2 | | | | 644 | | | | | | | | | | | | | | | | | | | | 646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2017 | | | 575 | | | | 256,285 | | | | (18,983 | ) | | | (3,725 | ) | | | (183 | ) | | | (7,509 | ) | | | 226,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification due to the adoption of ASU 2018-02 | | | | | | | | | | | 1,640 | | | | | | | | | | | | (1,640 | ) | | | - | |
Net income | | | | | | | | | | | 8,627 | | | | | | | | | | | | | | | | 8,627 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (2,778 | ) | | | (2,778 | ) |
Stock based compensation | | | | | | | 2,116 | | | | | | | | | | | | | | | | | | | | 2,116 | |
Conversion of subordinated debt to common stock (1,624,614 shares) | | | 16 | | | | 10,078 | | | | | | | | | | | | | | | | | | | | 10,094 | |
Options exercised (174,850 shares) | | | 2 | | | | 668 | | | | | | | | | | | | | | | | | | | | 670 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2018 | | $ | 593 | | | $ | 269,147 | | | $ | (8,716 | ) | | $ | (3,725 | ) | | $ | (183 | ) | | $ | (11,927 | ) | | $ | 245,189 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Republic First Bancorp, Inc. (the “Company”) consistsis a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, Atlantic, and Gloucester Counties. On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division with 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 components, basic EPSissuances of trust preferred securities.
The Company and diluted EPS. Basic EPS is computed by dividing net incomeRepublic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the weightedFinancial Accounting Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within the Greater Philadelphia region. Note 3 – Investment Securities discusses the types of investment securities that the Company invests in. Note 4 – Loans Receivable discusses the types of lending that the Company engages in, as well as loan concentrations. The Company does not have a significant concentration of credit risk with any one customer.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing in ninety days or less, to be cash and cash equivalents.
Restrictions on Cash and Due from Banks
Republic is required to maintain certain average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net incomereserve balances as established by the weighted average numberFederal Reserve Board. The amounts of common shares outstanding plus dilutive common stock equivalents ("CSE"). CSEs consist of dilutive stock options grantedthose balances for the reserve computation periods that include December 31, 2018 and 2017 were approximately $51.4 million and $31.2 million, respectively. These requirements were satisfied through the Company's stock option plansrestriction of vault cash and convertiblea balance held by the Federal Reserve Bank of Philadelphia.
Investment Securities
Held to Maturity – Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale – Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Unrealized gains and losses are excluded from operations and are reported net of tax as a separate component of other comprehensive income until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold on the trade date.
Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings. Impairment charges on bank pooled trust preferred securities issuedof $7,000 were recognized during the year ended December 31, 2016 as a result of estimated other-than-temporary impairment. As of December 31, 2018, the Company no longer holds any bank pooled trust preferred securities.
In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in 2008. Inother comprehensive income and be amortized as an adjustment to yield over the diluted EPS computation,remaining life of the after tax interest expensesecurities. At December 31, 2018, the total approximated unrealized loss of $9.8 million remaining to be amortized includes eleven securities previously transferred in July 2014.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of December 31, 2018 and 2017. As of those dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic Community Bankers Bank (“ACBB”). The required investment in the capital stock of the FHLB is calculated based on outstanding loan balances and open credit facilities with the FHLB. Excess investments are returned to Republic on a quarterly basis.
At December 31, 2018 and December 31, 2017, the investment in FHLB stock totaled $5.6 million and $1.8 million, respectively. The increase was due primarily to a higher membership stock requirement by FHLB at December 31, 2018 which resulted in a higher required investment as of that date. At both December 31, 2018 and December 31, 2017, ACBB stock totaled $143,000.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. On July 28, 2016, management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the trust preferred securities issuancebalance sheet at fair value. The fair value is added backdetermined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
Interest Rate Lock Commitments
Mortgage loan commitments known as interest rate locks that relate to the netorigination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. In 2016, 2015,Outstanding IRLCs are subject to interest rate risk and 2014,related price risk during the effectperiod from the date of CSEs (convertible securitiesissuance 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 trust preferred securities only)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 related add back of after tax interest expense was considered anti-dilutive and therefore was notservicing released premium is included in the EPS calculations.market price. See Note 24 Derivatives and Risk Management Activities for further detail of IRLCs.
Best Efforts Forward Loan Sale Commitments
Best efforts forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Best efforts forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Mandatory Forward Loan Sales Commitments
Mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Mandatory forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.
The Company has one reportable segment: Community Banking. The community banking segment primarily encompasses the commercial loan and deposit activities of the Bank, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Oak Mortgage was acquired by the Bank on July 28, 2016 and organized as a wholly owned subsidiary of the Bank. Oak Mortgage was maintained as a separate legal entity through December 31, 2017 in order to preserve certain secondary market contracts and regulatory licensing requirements. As such, the Bank deemed Oak Mortgage to be a separate reporting unit as of July 31, 2017 and performed a Step One Test for Goodwill Impairment in compliance with ASC Topic 350-20 as of that date. At that time, via a Step One Test, the fair value of Oak Mortgage was higher than its book value and no Step Two analysis was required.
On January 1, 2018, Oak Mortgage operations were restructured as a division of Republic and all assets, liabilities, contracts, employees and activity were merged into the Republic. As a result of this restructuring, the Company re-evaluated its reporting unit structure and determined that as of July 31, 2018 there were no longer two reporting units but rather a sole reporting unit in Republic Bank. As of July 31, 2018, the Company performed a qualitative assessment for its reporting unit to determine if the one-step quantitative impairment test was necessary. As part of its qualitative assessment, the Company reviewed regional and national trends in current and expected economic conditions, examining indicators such as GDP growth, interest rates and unemployment rates. The Company also considered its own historical performance, expectations of future performance and other trends specific to the banking industry. Based on its qualitative assessment, the Company determined that there was no evidence of impairment on the balance of goodwill. Goodwill totaled $5.0 million as of December 31, 2018 and 2017, respectively.
Loans Receivable
The loans receivable portfolio is segmented into commercial and industrial loans, commercial real estate loans, owner occupied real estate loans, construction and land development loans, consumer and other loans, and residential mortgages. Consumer loans consist of home equity loans and other consumer loans.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Commercial real estate and owner occupied real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and owner occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
Construction and land development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals originated through the Company’s retail network, which are typically secured by personal property or unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater credit risk because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Residential mortgage loans are secured by one to four family dwelling units. This group consists of first mortgages and are originated at loan to value ratios of 80% or less.
The calculation of EPS
Loans that management has the intent and ability to hold for the years ended December 31, 2016, 2015,foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and 2014an allowance for loan losses. Interest on loans is as follows:
(dollars in thousands, except per share amounts) | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | |
Net income - basic and diluted | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | |
| | | | | | | | | | | | |
Weighted average shares outstanding | | | 39,281 | | | | 37,818 | | | | 34,232 | |
| | | | | | | | | | | | |
Net income per share – basic | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.07 | |
| | | | | | | | | | | | |
Weighted average shares outstanding (including dilutive CSEs) | | | 39,865 | | | | 38,094 | | | | 34,591 | |
| | | | | | | | | | | | |
Net income per share – diluted | | $ | 0.12 | | | $ | 0.06 | | | $ | 0.07 | |
calculated based upon the principal amounts outstanding. The following is a summaryCompany defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of securities that could potentially dilute basic earnings per common sharethe related loan. This results in future periods that were not included inan adjustment of the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.
(in thousands) | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | |
Anti-dilutive securities | | | | | | | | | |
| | | | | | | | | |
Share based compensation awards | | | 1,747 | | | | 1,671 | | | | 1,136 | |
| | | | | | | | | | | | |
Convertible securities | | | 1,662 | | | | 1,662 | | | | 1,662 | |
| | | | | | | | | | | | |
Total anti-dilutive securities | | | 3,409 | | | | 3,333 | | | | 2,798 | |
Comprehensive Income / (Loss)related loans yield.
The Company presents as a component of comprehensive income (loss) the amounts from transactions and other events, which currently are excluded from the consolidated statements of operations and are recorded directly to shareholders' equity. These amounts consist of unrealized holding gains (losses) on availableaccounts for sale securities and amortization of unrealized holding lossespremiums and accretion of discounts related to loans purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on available-for-sale securities transferreda current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to held-to-maturity.accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding.
Trust Preferred Securities
Allowance for Credit Losses
The Company has sponsored three outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debenturesallowance for credit losses consists of the corporation, more commonly knownallowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes. The purpose of the issuancesbalance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments would represent management’s estimate of these securities waslosses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary. The allowance for credit losses is established through a provision for loan losses charged to increase capital. operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
The trust preferred securities qualifyallowance for credit losses is an amount that represents management’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, the estimate of the allowance for credit losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are categorized as Tier 1 capitalimpaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for regulatory purposesseveral qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in amounts upthe underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to 25%any individual loan or group of total Tier 1 capital. See Note 7 "Borrowings" for further information regardingloans, and the issuances.entire allowance is available to absorb any and all loan losses.
In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
| 1) | Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices. |
| 2) | National, regional and local economic and business conditions as well as the condition of various segments. |
| 3) | Nature and volume of the portfolio and terms of loans. |
| 4) | Experience, ability and depth of lending management and staff. |
| 5) | Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications. |
| 6) | Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. |
| 7) | Existence and effect of any concentration of credit and changes in the level of such concentrations. |
| 8) | Effect of external factors, such as competition and legal and regulatory requirements. |
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment, include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower’s prior payment record. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or loss are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Transfers of Financial Assets
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860, revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in loan and servicing fees on the statement of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses various assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market.
For more information on the SBA servicing asset including the sensitivity of the current fair value of the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 – Fair Value Measurements and Fair Values of Financial Instruments.
Other Loans Held for Sale
Other loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a Gain on the Sale of SBA loans which is categorized as non-interest income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value adjustments to the SBA servicing asset and recorded as a net amount in Loan and Servicing Fees, which is also categorized as non-interest income.
Guarantees
The Company accounts for guarantees in accordance with ASC 815 Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. ASC 815 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer’s financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2018 is $13.9 million and they expire as follows: $12.5 million in 2019 and $1.4 million in 2020. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. There was no liability for guarantees under standby letters of credit as of December 31, 2018 and December 31, 2017.
Premises and Equipment
Premises and equipment (including land) are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to current operations as incurred, and renewals and major improvements are capitalized.
Other Real Estate Owned
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Advertising Costs
It is the Company’s policy to expense advertising costs in the period in which they are incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent. The terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.
Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of December 31, 2018, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At December 31, 2018, the maximum number of common shares issuable under the 2014 Plan was 6.3 million shares. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur.
Variable Interest Entities
We follow the guidance under ASC 810, Consolidation, with regard to variable interest entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns (“variable interest entities”). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both.
We do not consolidate our subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if we have the right to a majority of the trusts’ expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $341,000. In addition, the income received on our investment in the common securities of the trusts is included in other income.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is our need and ability to react to changes in interest rates. As discussed previously, management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.
Item 7A: | Quantitative and Qualitative Disclosure about Market Risk |
See “Management Discussion and Analysis of Results of Operations and Financial Condition – Interest Rate Risk Management”.
Item 8: | Financial Statements and Supplementary Data |
The Consolidated Financial Statements of the Company begin on page 75.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Republic First Bancorp, Inc. (the “Company”) and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2013.
Philadelphia, Pennsylvania
March 14, 2019
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
| | December 31, 2018 | | | December 31, 2017 | |
ASSETS | | | | | | |
Cash and due from banks | | $ | 35,685 | | | $ | 36,073 | |
Interest bearing deposits with banks | | | 36,788 | | | | 25,869 | |
Cash and cash equivalents | | | 72,473 | | | | 61,942 | |
| | | | | | | | |
Investment securities available for sale, at fair value | | | 321,014 | | | | 464,430 | |
Investment securities held to maturity, at amortized cost (fair value of $747,323 and $463,799, respectively) | | | 761,563 | | | | 472,213 | |
Restricted stock, at cost | | | 5,754 | | | | 1,918 | |
Mortgage loans held for sale, at fair value | | | 20,887 | | | | 43,375 | |
Other loans held for sale | | | 5,404 | | | | 2,325 | |
Loans receivable (net of allowance for loan losses of $8,615 and $8,599, respectively) | | | 1,427,983 | | | | 1,153,679 | |
Premises and equipment, net | | | 87,661 | | | | 74,947 | |
Other real estate owned, net | | | 6,223 | | | | 6,966 | |
Accrued interest receivable | | | 9,025 | | | | 7,009 | |
Goodwill | | | 5,011 | | | | 5,011 | |
Other assets | | | 30,299 | | | | 28,532 | |
Total Assets | | $ | 2,753,297 | | | $ | 2,322,347 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Liabilities | | | | | | | | |
Deposits | | | | | | | | |
Demand – non-interest bearing | | $ | 519,056 | | | $ | 438,500 | |
Demand – interest bearing | | | 1,042,561 | | | | 807,736 | |
Money market and savings | | | 676,993 | | | | 700,322 | |
Time deposits | | | 154,257 | | | | 116,737 | |
Total Deposits | | | 2,392,867 | | | | 2,063,295 | |
Short-term borrowings | | | 91,422 | | | | - | |
Accrued interest payable | | | 558 | | | | 293 | |
Other liabilities | | | 12,002 | | | | 10,618 | |
Subordinated debt | | | 11,259 | | | | 21,681 | |
Total Liabilities | | | 2,508,108 | | | | 2,095,887 | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,318,073 as of December 31, 2018 and 57,518,609 as of December 31, 2017; shares outstanding 58,789,228 as of December 31, 2018 and 56,989,764 as of December 31, 2017 | | | 593 | | | | 575 | |
Additional paid in capital | | | 269,147 | | | | 256,285 | |
Accumulated deficit | | | (8,716 | ) | | | (18,983 | ) |
Treasury stock at cost (503,408 shares as of December 31, 2018 and December 31, 2017) | | | (3,725 | ) | | | (3,725 | ) |
Stock held by deferred compensation plan (25,437 shares as of December 31, 2018 and December 31, 2017) | | | (183 | ) | | | (183 | ) |
Accumulated other comprehensive loss | | | (11,927 | ) | | | (7,509 | ) |
Total Shareholders’ Equity | | | 245,189 | | | | 226,460 | |
Total Liabilities and Shareholders’ Equity | | $ | 2,753,297 | | | $ | 2,322,347 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands, except per share data)
| | Years Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Interest income | | | | | | | | | |
Interest and fees on taxable loans | | $ | 62,502 | | | $ | 48,993 | | | $ | 40,827 | |
Interest and fees on tax-exempt loans | | | 1,543 | | | | 1,101 | | | | 960 | |
Interest and dividends on taxable investment securities | | | 26,677 | | | | 19,643 | | | | 11,264 | |
Interest and dividends on tax-exempt investment securities | | | 505 | | | | 535 | | | | 703 | |
Interest on federal funds sold and other interest-earning assets | | | 847 | | | | 577 | | | | 473 | |
Total interest income | | | 92,074 | | | | 70,849 | | | | 54,227 | |
Interest expense | | | | | | | | | | | | |
Demand- interest bearing | | | 7,946 | | | | 3,020 | | | | 2,088 | |
Money market and savings | | | 4,898 | | | | 3,160 | | | | 2,639 | |
Time deposits | | | 1,588 | | | | 1,238 | | | | 942 | |
Other borrowings | | | 1,738 | | | | 1,366 | | | | 1,194 | |
Total interest expense | | | 16,170 | | | | 8,784 | | | | 6,863 | |
Net interest income | | | 75,904 | | | | 62,065 | | | | 47,364 | |
Provision for loan losses | | | 2,300 | | | | 900 | | | | 1,557 | |
Net interest income after provision for loan losses | | | 73,604 | | | | 61,165 | | | | 45,807 | |
Non-interest income | | | | | | | | | | | | |
Loan and servicing fees | | | 1,401 | | | | 1,614 | | | | 1,627 | |
Mortgage banking income | | | 10,233 | | | | 11,170 | | | | 5,062 | |
Gain on sales of SBA loans | | | 3,105 | | | | 3,378 | | | | 4,981 | |
Service fees on deposit accounts | | | 5,476 | | | | 3,904 | | | | 2,658 | |
Gain (loss) on sale of investment securities | | | (67 | ) | | | (146 | ) | | | 656 | |
Net securities impairment losses recognized in earnings | | | - | | | | - | | | | (7 | ) |
Other non-interest income | | | 174 | | | | 177 | | | | 335 | |
Total non-interest income | | | 20,322 | | | | 20,097 | | | | 15,312 | |
Non-interest expenses | | | | | | | | | | | | |
Salaries and employee benefits | | | 44,082 | | | | 37,959 | | | | 28,602 | |
Occupancy | | | 8,046 | | | | 7,156 | | | | 6,109 | |
Depreciation and amortization | | | 5,447 | | | | 4,618 | | | | 3,518 | |
Legal | | | 985 | | | | 984 | | | | 459 | |
Other real estate owned | | | 1,588 | | | | 4,092 | | | | 2,182 | |
Appraisal and other loan expenses | | | 1,840 | | | | 1,878 | | | | 866 | |
Advertising | | | 1,211 | | | | 1,279 | | | | 811 | |
Data processing | | | 3,855 | | | | 3,134 | | | | 2,408 | |
Insurance | | | 996 | | | | 982 | | | | 962 | |
Professional fees | | | 2,048 | | | | 1,893 | | | | 1,580 | |
Automated teller machine expenses | | | 1,868 | | | | 1,264 | | | | 814 | |
Regulatory assessments and costs | | | 1,675 | | | | 1,367 | | | | 1,413 | |
Taxes, other | | | 796 | | | | 817 | | | | 366 | |
Other operating expenses | | | 9,284 | | | | 7,853 | | | | 6,203 | |
Total non-interest expense | | | 83,721 | | | | 75,276 | | | | 56,293 | |
Income before benefit for income taxes | | | 10,205 | | | | 5,986 | | | | 4,826 | |
Provision (benefit) for income taxes | | | 1,578 | | | | (2,919 | ) | | | (119 | ) |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Net income per share | | | | | | | | | | | | |
Basic | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.13 | |
Diluted | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.12 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
| | Years Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
| | | | | | | | | | | | |
Other comprehensive , net of tax | | | | | | | | | | | | |
Unrealized gain/(loss) on securities (pre-tax $5,364, $(646), and $(6,011), respectively) | | | 3,927 | | | | (413 | ) | | | (3,853 | ) |
Reclassification adjustment for securities losses (gains) (pre-tax $67, $146 and $(656), respectively) | | | 49 | | | | 94 | | | | (420 | ) |
Reclassification adjustment for impairment charge (pre-tax $-, $- and $7, respectively) | | | - | | | | - | | | | 4 | |
Net unrealized gains/(losses) on securities | | | 3,976 | | | | (319 | ) | | | (4,269 | ) |
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $(9,362), $-, $-, respectively) | | | (6,855 | ) | | | - | | | | - | |
Amortization of net unrealized holding losses during the period (pre-tax $137, $163 and $219, respectively) | | | 101 | | | | 104 | | | | 140 | |
| | | | | | | | | | | | |
Total other comprehensive loss | | | (2,778 | ) | | | (215 | ) | | | (4,129 | ) |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 5,849 | | | $ | 8,690 | | | $ | 816 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
| | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities | | | | | | | | | |
Net income | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Provision for loan losses | | | 2,300 | | | | 900 | | | | 1,557 | |
Write down of other real estate owned | | | 563 | | | | 3,000 | | | | 355 | |
Depreciation and amortization | | | 5,447 | | | | 4,618 | | | | 3,518 | |
Deferred income taxes | | | 1,527 | | | | (5,056 | ) | | | (380 | ) |
Stock based compensation | | | 2,116 | | | | 1,842 | | | | 759 | |
Loss (gain) on sale of investment securities | | | 67 | | | | 146 | | | | (656 | ) |
Impairment charges on investment securities | | | - | | | | - | | | | 7 | |
Amortization of premiums on investment securities | | | 2,878 | | | | 2,469 | | | | 1,980 | |
Accretion of discounts on retained SBA loans | | | (1,332 | ) | | | (1,088 | ) | | | (1,364 | ) |
Fair value adjustments on SBA servicing assets | | | 1,458 | | | | 1,187 | | | | 1,075 | |
Proceeds from sales of SBA loans originated for sale | | | 42,726 | | | | 42,269 | | | | 58,107 | |
SBA loans originated for sale | | | (42,700 | ) | | | (37,062 | ) | | | (53,627 | ) |
Gains on sales of SBA loans originated for sale | | | (3,105 | ) | | | (3,378 | ) | | | (4,981 | ) |
Proceeds from sales of mortgage loans originated for sale | | | 322,264 | | | | 311,187 | | | | 163,414 | |
Mortgage loans originated for sale | | | (291,870 | ) | | | (321,222 | ) | | | (161,717 | ) |
Fair value adjustment for mortgage loans originated for sale | | | 513 | | | | (846 | ) | | | (483 | ) |
Gains on mortgage loans originated for sale | | | (8,378 | ) | | | (8,128 | ) | | | (3,712 | ) |
Amortization of intangible assets | | | - | | | | 61 | | | | 43 | |
Amortization of debt issuance costs | | | 6 | | | | 29 | | | | 24 | |
Increase in accrued interest receivable and other assets | | | (5,047 | ) | | | (2,330 | ) | | | (2,729 | ) |
Net increase (decrease) in accrued interest payable and other liabilities | | | 1,570 | | | | 1,513 | | | | (846 | ) |
Net cash provided by (used in) operating activities | | | 39,630 | | | | (984 | ) | | | 5,289 | |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Purchase of investment securities available for sale | | | (149,209 | ) | | | (165,065 | ) | | | (207,482 | ) |
Purchase of investment securities held to maturity | | | (123,265 | ) | | | (89,350 | ) | | | (294,187 | ) |
Proceeds from the sale of securities available for sale | | | 6,439 | | | | 31,197 | | | | 78,585 | |
Proceeds from the paydown, maturity, or call of securities available for sale | | | 48,796 | | | | 48,547 | | | | 36,982 | |
Proceeds from the paydown, maturity, or call of securities held to maturity | | | 63,565 | | | | 37,315 | | | | 33,160 | |
Net (purchase) redemption of restricted stock | | | (3,836 | ) | | | (552 | ) | | | 1,693 | |
Net increase in loans | | | (275,587 | ) | | | (197,965 | ) | | | (89,428 | ) |
Net proceeds from sale of other real estate owned | | | 495 | | | | 499 | | | | 1,400 | |
Net cash paid in acquisition | | | - | | | | - | | | | (5,913 | ) |
Premises and equipment expenditures | | | (18,161 | ) | | | (22,525 | ) | | | (14,291 | ) |
Net cash used in investing activities | | | (450,763 | ) | | | (357,899 | ) | | | (459,481 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Net proceeds from stock offering | | | - | | | | - | | | | 99,175 | |
Net proceeds from exercise of stock options | | | 670 | | | | 646 | | | | 726 | |
Net increase in demand, money market and savings deposits | | | 292,053 | | | | 380,052 | | | | 384,786 | |
Net increase in time deposits | | | 37,519 | | | | 5,573 | | | | 43,586 | |
Increase (repayment) in short-term borrowings | | | 91,422 | | | | - | | | | (66,666 | ) |
Net cash provided by financing activities | | | 421,664 | | | | 386,271 | | | | 461,607 | |
| | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 10,531 | | | | 27,388 | | | | 7,415 | |
Cash and cash equivalents, beginning of year | | | 61,942 | | | | 34,554 | | | | 27,139 | |
Cash and cash equivalents, end of year | | $ | 72,473 | | | $ | 61,942 | | | $ | 34,554 | |
| | | | | | | | | | | | |
Supplemental disclosures | | | | | | | | | | | | |
Interest paid | | $ | 15,905 | | | $ | 8,935 | | | $ | 6,664 | |
Income taxes paid | | $ | - | | | $ | 75 | | | $ | 190 | |
Non-cash transfers from loans to other real estate owned | | $ | 315 | | | $ | 291 | | | $ | 616 | |
Conversion of subordinated debt to common stock | | $ | 10,094 | | | $ | 229 | | | $ | - | |
Transfer of available-for-sale securities to held-to-maturity securities | | $ | 230,094 | | | $ | - | | | $ | - | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
| | Common Stock | | | Additional Paid in Capital | | | Accumulated Deficit | | | Treasury Stock | | | Stock Held by Deferred Compensation Plan | | | Accumulated Other Comprehensive Loss | | | Total Shareholders’ Equity | |
| | | | | | | | | | | | | | | | | | | | | |
Balance January 1, 2016 | | $ | 384 | | | | 152,897 | | | | (32,833 | ) | | | (3,725 | ) | | | (183 | ) | | | (3,165 | ) | | | 113,375 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 4,945 | | | | | | | | | | | | | | | | 4,945 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (4,129 | ) | | | (4,129 | ) |
Proceeds from shares issued under common stock offering (18,691,589 shares) net of offering costs of $825 | | | 187 | | | | 98,988 | | | | | | | | | | | | | | | | | | | | 99,175 | |
Stock based compensation | | | | | | | 759 | | | | | | | | | | | | | | | | | | | | 759 | |
Stock options issued in acquisition | | | | | | | 202 | | | | | | | | | | | | | | | | | | | | 202 | |
Options exercised (226,275 shares) | | | 2 | | | | 724 | | | | | | | | | | | | | | | | | | | | 726 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2016 | | | 573 | | | | 253,570 | | | | (27,888 | ) | | | (3,725 | ) | | | (183 | ) | | | (7,294 | ) | | | 215,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | 8,905 | | | | | | | | | | | | | | | | 8,905 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (215 | ) | | | (215 | ) |
Stock based compensation | | | | | | | 1,842 | | | | | | | | | | | | | | | | | | | | 1,842 | |
Conversion of subordinated debt to common stock (36,922 shares) | | | | | | | 229 | | | | | | | | | | | | | | | | | | | | 229 | |
Options exercised (197,975 shares) | | | 2 | | | | 644 | | | | | | | | | | | | | | | | | | | | 646 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2017 | | | 575 | | | | 256,285 | | | | (18,983 | ) | | | (3,725 | ) | | | (183 | ) | | | (7,509 | ) | | | 226,460 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification due to the adoption of ASU 2018-02 | | | | | | | | | | | 1,640 | | | | | | | | | | | | (1,640 | ) | | | - | |
Net income | | | | | | | | | | | 8,627 | | | | | | | | | | | | | | | | 8,627 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | | | | (2,778 | ) | | | (2,778 | ) |
Stock based compensation | | | | | | | 2,116 | | | | | | | | | | | | | | | | | | | | 2,116 | |
Conversion of subordinated debt to common stock (1,624,614 shares) | | | 16 | | | | 10,078 | | | | | | | | | | | | | | | | | | | | 10,094 | |
Options exercised (174,850 shares) | | | 2 | | | | 668 | | | | | | | | | | | | | | | | | | | | 670 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance December 31, 2018 | | $ | 593 | | | $ | 269,147 | | | $ | (8,716 | ) | | $ | (3,725 | ) | | $ | (183 | ) | | $ | (11,927 | ) | | $ | 245,189 | |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, Atlantic, and Gloucester Counties. On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division with 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.
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within the Greater Philadelphia region. Note 3 – Investment Securities discusses the types of investment securities that the Company invests in. Note 4 – Loans Receivable discusses the types of lending that the Company engages in, as well as loan concentrations. The Company does not have a significant concentration of credit risk with any one customer.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing in ninety days or less, to be cash and cash equivalents.
Restrictions on Cash and Due from Banks
Republic is required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the reserve computation periods that include December 31, 2018 and 2017 were approximately $51.4 million and $31.2 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance held by the Federal Reserve Bank of Philadelphia.
Investment Securities
Held to Maturity – Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale – Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Unrealized gains and losses are excluded from operations and are reported net of tax as a separate component of other comprehensive income until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold on the trade date.
Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings. Impairment charges on bank pooled trust preferred securities of $7,000 were recognized during the year ended December 31, 2016 as a result of estimated other-than-temporary impairment. As of December 31, 2018, the Company no longer holds any bank pooled trust preferred securities.
In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of the securities. At December 31, 2018, the total approximated unrealized loss of $9.8 million remaining to be amortized includes eleven securities previously transferred in July 2014.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of December 31, 2018 and 2017. As of those dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic Community Bankers Bank (“ACBB”). The required investment in the capital stock of the FHLB is calculated based on outstanding loan balances and open credit facilities with the FHLB. Excess investments are returned to Republic on a quarterly basis.
At December 31, 2018 and December 31, 2017, the investment in FHLB stock totaled $5.6 million and $1.8 million, respectively. The increase was due primarily to a higher membership stock requirement by FHLB at December 31, 2018 which resulted in a higher required investment as of that date. At both December 31, 2018 and December 31, 2017, ACBB stock totaled $143,000.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. On July 28, 2016, management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
Interest Rate Lock Commitments
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 24 Derivatives and Risk Management Activities for further detail of IRLCs.
Best Efforts Forward Loan Sale Commitments
Best efforts forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Best efforts forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Mandatory Forward Loan Sales Commitments
Mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Mandatory forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of income.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.
The Company has one reportable segment: Community Banking. The community banking segment primarily encompasses the commercial loan and deposit activities of the Bank, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Oak Mortgage was acquired by the Bank on July 28, 2016 and organized as a wholly owned subsidiary of the Bank. Oak Mortgage was maintained as a separate legal entity through December 31, 2017 in order to preserve certain secondary market contracts and regulatory licensing requirements. As such, the Bank deemed Oak Mortgage to be a separate reporting unit as of July 31, 2017 and performed a Step One Test for Goodwill Impairment in compliance with ASC Topic 350-20 as of that date. At that time, via a Step One Test, the fair value of Oak Mortgage was higher than its book value and no Step Two analysis was required.
On January 1, 2018, Oak Mortgage operations were restructured as a division of Republic and all assets, liabilities, contracts, employees and activity were merged into the Republic. As a result of this restructuring, the Company re-evaluated its reporting unit structure and determined that as of July 31, 2018 there were no longer two reporting units but rather a sole reporting unit in Republic Bank. As of July 31, 2018, the Company performed a qualitative assessment for its reporting unit to determine if the one-step quantitative impairment test was necessary. As part of its qualitative assessment, the Company reviewed regional and national trends in current and expected economic conditions, examining indicators such as GDP growth, interest rates and unemployment rates. The Company also considered its own historical performance, expectations of future performance and other trends specific to the banking industry. Based on its qualitative assessment, the Company determined that there was no evidence of impairment on the balance of goodwill. Goodwill totaled $5.0 million as of December 31, 2018 and 2017, respectively.
Loans Receivable
The loans receivable portfolio is segmented into commercial and industrial loans, commercial real estate loans, owner occupied real estate loans, construction and land development loans, consumer and other loans, and residential mortgages. Consumer loans consist of home equity loans and other consumer loans.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Commercial real estate and owner occupied real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and owner occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
Construction and land development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals originated through the Company’s retail network, which are typically secured by personal property or unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater credit risk because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Residential mortgage loans are secured by one to four family dwelling units. This group consists of first mortgages and are originated at loan to value ratios of 80% or less.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of discounts related to loans purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding.
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments would represent management’s estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary. The allowance for credit losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
The allowance for credit losses is an amount that represents management’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, the estimate of the allowance for credit losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are categorized as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
| 1) | Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices. |
| 2) | National, regional and local economic and business conditions as well as the condition of various segments. |
| 3) | Nature and volume of the portfolio and terms of loans. |
| 4) | Experience, ability and depth of lending management and staff. |
| 5) | Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications. |
| 6) | Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. |
| 7) | Existence and effect of any concentration of credit and changes in the level of such concentrations. |
| 8) | Effect of external factors, such as competition and legal and regulatory requirements. |
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment, include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower’s prior payment record. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or loss are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Transfers of Financial Assets
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860, revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in loan and servicing fees on the statement of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses various assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market.
For more information on the SBA servicing asset including the sensitivity of the current fair value of the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 – Fair Value Measurements and Fair Values of Financial Instruments.
Other Loans Held for Sale
Other loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a Gain on the Sale of SBA loans which is categorized as non-interest income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value adjustments to the SBA servicing asset and recorded as a net amount in Loan and Servicing Fees, which is also categorized as non-interest income.
Guarantees
The Company accounts for guarantees in accordance with ASC 815 Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. ASC 815 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer’s financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2018 is $13.9 million and they expire as follows: $12.5 million in 2019 and $1.4 million in 2020. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. There was no liability for guarantees under standby letters of credit as of December 31, 2018 and December 31, 2017.
Premises and Equipment
Premises and equipment (including land) are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to current operations as incurred, and renewals and major improvements are capitalized.
Other Real Estate Owned
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Advertising Costs
It is the Company’s policy to expense advertising costs in the period in which they are incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent. The terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.
Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of December 31, 2018, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At December 31, 2018, the maximum number of common shares issuable under the 2014 Plan was 6.3 million shares. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur.
Earnings Per Share
Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans for the twelve months ended December 31, 2018. CSEs consisted of dilutive stock options granted through the Company’s stock option plans and convertible securities related to trust preferred securities issued in 2008 for the twelve months ended December 31, 2017. The convertible securities related to trust preferred securities issued in 2008 fully converted to common stock in 2018. There was no interest expense in 2018 related to the trust preferred securities issuance. In the diluted EPS computation, the after tax interest expense on the trust preferred securities issuance would normally be added back to the net income for the twelve months ended December 31, 2017 and 2016. However, the effect of CSEs (convertible securities related to the trust preferred securities only) and the related add back of after tax interest expense was considered anti-dilutive and therefore was not included in the EPS calculations.
The calculation of EPS for the years ended December 31, 2018, 2017, and 2016 is as follows:
(dollars in thousands, except per share amounts) | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net income - basic and diluted | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
| | | | | | | | | | | | |
Weighted average shares outstanding | | | 58,358 | | | | 56,933 | | | | 39,281 | |
| | | | | | | | | | | | |
Net income per share – basic | | $ | 0.15 | | | $ | 0.16 | | | $ | 0.13 | |
| | | | | | | | | | | | |
Weighted average shares outstanding (including dilutive CSEs) | | | 59,407 | | | | 58,250 | | | | 39,865 | |
| | | | | | | | | | | | |
Net income per share – diluted | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.12 | |
The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.
(in thousands) | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Anti-dilutive securities | | | | | | | | | |
| | | | | | | | | |
Share based compensation awards | | | 2,813 | | | | 1,689 | | | | 1,747 | |
| | | | | | | | | | | | |
Convertible securities | | | - | | | | 1,625 | | | | 1,662 | |
| | | | | | | | | | | | |
Total anti-dilutive securities | | | 2,813 | | | | 3,314 | | | | 3,409 | |
Comprehensive Income
The Company presents as a component of comprehensive income the amounts from transactions and other events, which currently are excluded from the consolidated statements of income and are recorded directly to shareholders’ equity. These amounts consist of unrealized holding gains (losses) on available for sale securities and amortization of unrealized holding losses on available-for-sale securities transferred to held-to-maturity.
Trust Preferred Securities
The Company has sponsored two outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital. See Note 7 “Borrowings” for further information regarding the issuances.
Variable Interest Entities
The Company follows the guidance under ASC 810, Consolidation, with regard to variable interest entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity'sentity’s activities, or are not exposed to the entity'sentity’s losses or entitled to its residual returns ("(“variable interest entities"entities”). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity'sentity’s expected losses, receives a majority of its expected returns, or both.
The Company does not consolidate its subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if the Company has the right to a majority of the trusts'trusts’ expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $676,000.$341,000. In addition, the income received on the Company'sCompany’s investment in the common securities of the trusts is included in other income.
Treasury Stock
Common stock purchased for treasury is recorded at cost.
Recent Accounting Pronouncements
ASU 2014-09
In May 2014, the FASB issued ASUAccounting Standards Update (“ASU”) 2014-09, "Revenue“Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40)." The purpose of this guidance is to clarify” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, early adoption of the update will be effective for interim and annual periods beginning after December 15, 2016. For public companies that elect to defer the update, adoption will be effective for interim and annual periods beginning after December 15, 2017. The Company expects that the most significant impact related to the standard's expected disclosure requirements will be the disaggregation of revenue. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect a material impact. In August 2015, the FASB issued ASU 2015-14, Revenue fromContracts with The Company (Topic 606): Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company has evaluated thiscore principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and it does not have(v) recognize revenue when (or as) the entity satisfies a significant impact on its financial condition or resultsperformance obligation. The Company’s revenue is comprised of operations.
ASU 2015-14
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferralnet interest income and noninterest income. The scope of the Effective Date. The guidance in this ASU is now effectiveexplicitly excludes interest income as well as many other revenues for annual reporting periods beginning after December 15, 2017,financial assets and liabilities including interim reporting periods within that reporting period. The Company has evaluated this ASUrevenue derived from loans, investment securities, and it does not have a significant impact on its financial condition or results of operations.
ASU 2015-16
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the guidance in this ASU eliminates the requirement to retrospectively account for those adjustments and requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance in thisderivatives. This ASU was effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and should be applied prospectively tothe Company on January 1, 2018. The Company adopted this ASU on a modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to provisional amounts that occur after the effective date of this ASU.opening retained earnings was not deemed necessary. The adoption of this ASU did not have ana material impact on the Company'sto its financial condition, or results of operations.operations, and consolidated financial statements. Refer to Note 25: Revenue Recognition for further disclosure as to the impact of Topic 606.
ASU 2016-01
In January 2016, the FASB issued Accounting Standards Update ("ASU")ASU No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance was effective for the Company has evaluated thison January 1, 2018 and was adopted using a modified retrospective approach. The adoption of ASU and it doesNo. 2016-01 on January 1, 2018 did not have a significantmaterial impact on the Company’s Consolidated Financial Statements. In accordance with (4) above, the Company measured the fair value of its financial condition or resultsloan portfolio as of operations.December 31, 2018 using an exit price notion (see Note 7 Fair Value of Financial Instruments).
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update ("ASU")ASU No. 2016-02, Leases. From the RepublicCompany’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the landlord perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn'tdoesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A
In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the option to apply the new leasing standard to all open leases as of the adoption date. Prior to this ASU issuance, a modified retrospective transition approach was required.
In December 2018, the FASB issued ASU 2018-20 “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides lessors a policy election to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Additionally, the update requires certain lessors to exclude from variable payments lessor costs paid by lessees directly to third parties.
The Company adopted this ASU on January 1, 2019. The Company is requiredexpected to recognize an ROU asset of approximately $48.9 million at January 1, 2019. The increase in assets is expected to lower capital ratios for lesseesthe Company by an average of 39 basis points, remaining in compliance with the regulatory definition of well capitalized. The Company does not expect material changes to the recognition of operating lease expense in its consolidated statements of income. The Company adopted certain practical expedients available under the new guidance, which will not require it to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification for capitalany expired or existing leases, (3) reassess initial direct costs for any existing leases, and operating leases existing(4) evaluate whether certain sales taxes and other similar taxes are lessor costs. The Company has elected the use-of-hindsight practical expedient. Additionally, the Company elected to apply the new lease guidance at or entered into after,the adoption date, rather than at the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. After evaluating the impact of the pending adoption of the new standard on its consolidated financial statements, the Company expects an increase of assets and liabilities on the Company's books.
presented.
ASU 2016-09
In March 2016, the FASB issued Accounting Standards Update ("ASU")ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.Accounting. ASU 2016-09 will amend current guidance such that all excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified along with other income tax cash flows as an operating activity rather than a financing activity. ASU 2016-09 also provides that any entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU 2016-09 will bewas effective January 1, 2017 and it does not have a significant2017. There was no material impact on ourthe consolidated financial statements.statements upon adoption.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company is currently evaluating the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. The Company expects that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company’s allowance for loan losses which will depend upon the nature and characteristics of the Company’s loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company hascurrently does not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.intend to early adopt this new guidance.
ASU 2016-15
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The ASU addresses classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance is effectivewas adopted on January 1, 2018, on a retrospective basis, with earlybasis. The adoption permitted. This new accounting guidance willof 2016-15 did not result in someany changes in classificationclassifications in the Consolidated Statement of Cash Flows, which the Company does not expect will be significant, and will not have any impact on the consolidated financial statements.Flows.
ASU-2017-01ASU 2017-01
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). The ASU clarifies the definition of a business in ASC 805. The FASB issued the ASU in response to stakeholder feedback that the definition of a business in ASC 805 is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. Concerns about the definition of a business were among the primary issues raised in connection with the Financial Accounting Foundation'sFoundation’s post-implementation review report on FASB Statement No. 141(R), Business Combinations (codified in ASC 805). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. The ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. For all other entities, the ASU is effective in annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The ASU must be applied prospectively on or after the effective date, and no disclosures for a change in accounting principle are required at transition. Early adoption is permitted for transactions (i.e., acquisitions or dispositions) that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. TheUnless the Company has not yet determinedenters into a business combination, the impact of the adoption of ASU 2017-01 will not have a material impact on the consolidated financial statements.
ASU 2017-04
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test For Goodwill Impairment. The ASU simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if "the“the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit."” For public business entities that are SEC filers, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company has not yet determinedearly adopted this ASU on July 1, 2018 using the impact thesimplified method. The adoption of ASU 2017-04 willdid not have a material impact on the consolidated financial statements.
ASU 2017-08
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2017-08 did not have a material impact on the consolidated financial statements.
ASU 2017-09
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification in ASC 718. The ASU also provides that modification accounting is only required if the fair value, vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The ASU became effective January 1, 2018 on a prospective basis for awards modified on or after the adoption date. The adoption of ASU-2017-09 did not have a material impact on the consolidated financial statements.
ASU 2018-02
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act described in the “Income Taxes” section below. The amount of the reclassification should include the effect of the change in the federal corporate income tax rate related to items remaining in accumulated other comprehensive income (loss). The ASU would require an entity to disclose whether it elects to reclassify stranded tax effects from accumulated other comprehensive income (loss) to retained earnings in the period of adoption and, more generally, a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income (loss). The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption of the amendments in this update is permitted for periods for which financial statements have not yet been issued or made available for issuance, including in the period the Act was enacted. The Company adopted this ASU on January 1, 2018, by recording the reclassification adjustment to its beginning retained earnings in the amount of $1.6 million. The Company utilized the portfolio approach when releasing tax effects from AOCI for its investment securities.
ASU 2018-03
In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10). The ASU was issued to clarify certain aspects of ASU 2016-01 such as treatment for discontinuations and adjustments for equity securities without a readily determinable market value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. The Company adopted this ASU on January 1, 2018. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations and consolidated financial statements.
ASU 2018-07
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). The ASU simplifies the accounting for share based payments granted to non-employees for goods and services. The ASU applies to all share based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor’s own operations by issuing share based payment awards. With the amended guidance from ASU 2018-07, non-employees share based payments are measured with an estimate of the fair value of the equity of the business is obligated to issue at the grant date (the date that the business and the stock award recipient agree to the terms of the award). Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for goods and services instead of stock. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on January 1, 2019. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations, and consolidated financial statements.
Reclassifications
Certain reclassifications haveA reclassification has been made to 20152017 and 20142016 information to conform to the 20162018 presentation. The reclassificationsreclassification had no effect on the results of operations or shareholders'shareholders’ equity. Included in the reclassificationsreclassification are $595,000$1.3 million and $619,000$814,000 of deferred debt issuance costsautomated teller machine expenses from "Other assets" to "Subordinated debt" at“Other operating expenses” for the years ended December 31, 2017 and 2016, and December 31, 2015, respectively, as a result of the adoption of ASU 2015-03.respectively.
A summary of the amortized cost and market value of securities available for sale and securities held to maturity at December 31, 20162018 and 20152017 is as follows:
| | At December 31, 2016 | | | At December 31, 2018 | |
(dollars in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 230,252 | | | $ | 145 | | | $ | (5,632 | ) | | $ | 224,765 | | | $ | 197,812 | | | $ | 567 | | | $ | (2,120 | ) | | $ | 196,259 | |
Agency mortgage-backed securities | | | 37,973 | | | | 32 | | | | (1,295 | ) | | | 36,710 | | | | 39,105 | | | | 5 | | | | (611 | ) | | | 38,499 | |
Municipal securities | | | 26,825 | | | | 151 | | | | (429 | ) | | | 26,547 | | | | 20,807 | | | | 64 | | | | (232 | ) | | | 20,639 | |
Corporate bonds | | | 66,718 | | | | 8 | | | | (1,978 | ) | | | 64,748 | | | | 62,583 | | | | 87 | | | | (3,396 | ) | | | 59,274 | |
Asset-backed securities | | | 15,565 | | | | - | | | | (416 | ) | | | 15,149 | | | | 6,433 | | | | - | | | | (90 | ) | | | 6,343 | |
Trust preferred securities | | | 3,063 | | | | - | | | | (1,243 | ) | | | 1,820 | | |
Total securities available for sale | | $ | 380,396 | | | $ | 336 | | | $ | (10,993 | ) | | $ | 369,739 | | | $ | 326,740 | | | $ | 723 | | | $ | (6,449 | ) | | $ | 321,014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 98,538 | | | $ | 8 | | | $ | (2,238 | ) | | $ | 96,308 | | | $ | 107,390 | | | $ | - | | | $ | (3,772 | ) | | $ | 103,618 | |
Collateralized mortgage obligations | | | 202,990 | | | | 793 | | | | (2,553 | ) | | | 201,230 | | | | 500,690 | | | | 570 | | | | (5,793 | ) | | | 495,467 | |
Agency mortgage-backed securities | | | 129,951 | | | | 1 | | | | (3,327 | ) | | | 126,625 | | | | 153,483 | | | | - | | | | (5,245 | ) | | | 148,238 | |
Other securities | | | 1,020 | | | | - | | | | - | | | | 1,020 | | |
Total securities held to maturity | | $ | 432,499 | | | $ | 802 | | | $ | (8,118 | ) | | $ | 425,183 | | | $ | 761,563 | | | $ | 570 | | | $ | (14,810 | ) | | $ | 747,323 | |
| | At December 31, 2015 | | | At December 31, 2017 | |
(dollars in thousands) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 180,795 | | | $ | 523 | | | $ | (3,173 | ) | | $ | 178,145 | | | $ | 327,972 | | | $ | - | | | $ | (7,731 | ) | | $ | 320,241 | |
Agency mortgage-backed securities | | | 10,073 | | | | 176 | | | | (78 | ) | | | 10,171 | | | | 55,664 | | | | 2 | | | | (800 | ) | | | 54,866 | |
Municipal securities | | | 22,814 | | | | 562 | | | | (32 | ) | | | 23,344 | | | | 15,142 | | | | 20 | | | | (62 | ) | | | 15,100 | |
Corporate bonds | | | 54,294 | | | | 135 | | | | (300 | ) | | | 54,129 | | | | 62,670 | | | | 103 | | | | (2,491 | ) | | | 60,282 | |
Asset-backed securities | | | 17,631 | | | | - | | | | (626 | ) | | | 17,005 | | | | 13,414 | | | | 38 | | | | - | | | | 13,452 | |
Trust preferred securities | | | 3,070 | | | | - | | | | (1,187 | ) | | | 1,883 | | | | 725 | | | | - | | | | (236 | ) | | | 489 | |
Other securities | | | 115 | | | | 3 | | | | - | | | | 118 | | |
Total securities available for sale | | $ | 288,792 | | | $ | 1,399 | | | $ | (5,396 | ) | | $ | 284,795 | | | $ | 475,587 | | | $ | 163 | | | $ | (11,320 | ) | | $ | 464,430 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 17,067 | | | $ | 39 | | | $ | (72 | ) | | $ | 17,034 | | | $ | 112,605 | | | $ | 50 | | | $ | (2,235 | ) | | $ | 110,420 | |
Collateralized mortgage obligations | | | 146,458 | | | | 402 | | | | (780 | ) | | | 146,080 | | | | 215,567 | | | | 314 | | | | (3,970 | ) | | | 211,911 | |
Agency mortgage-backed securities | | | 7,732 | | | | - | | | | (21 | ) | | | 7,711 | | | | 143,041 | | | | 47 | | | | (2,620 | ) | | | 140,468 | |
Other securities | | | 1,020 | | | | - | | | | - | | | | 1,020 | | | | 1,000 | | | | - | | | | - | | | | 1,000 | |
Total securities held to maturity | | $ | 172,277 | | | $ | 441 | | | $ | (873 | ) | | $ | 171,845 | | | $ | 472,213 | | | $ | 411 | | | $ | (8,825 | ) | | $ | 463,799 | |
The following table presents investment securities by stated maturity at December 31, 2016.2018. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date.
| | Available for Sale | | | Held to Maturity | | | Available for Sale | | | Held to Maturity | |
(dollars in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Due in 1 year or less | | $ | 1,000 | | | $ | 1,002 | | | $ | - | | | $ | - | | | $ | 2,375 | | | $ | 2,375 | | | $ | - | | | $ | - | |
After 1 year to 5 years | | | 19,693 | | | | 19,491 | | | | 4,646 | | | | 4,606 | | | | 6,894 | | | | 6,908 | | | | 14,116 | | | | 13,937 | |
After 5 years to 10 years | | | 66,007 | | | | 63,587 | | | | 94,912 | | | | 92,722 | | | | 75,320 | | | | 71,734 | | | | 93,274 | | | | 89,681 | |
After 10 years | | | 25,471 | | | | 24,184 | | | | - | | | | - | | | | 5,234 | | | | 5,239 | | | | - | | | | - | |
Collateralized mortgage obligations | | | 230,252 | | | | 224,765 | | | | 202,990 | | | | 201,230 | | | | 197,812 | | | | 196,259 | | | | 500,690 | | | | 495,467 | |
Agency mortgage-backed securities | | | 37,973 | | | | 36,710 | | | | 129,951 | | | | 126,625 | | | | 39,105 | | | | 38,499 | | | | 153,483 | | | | 148,238 | |
Total | | $ | 380,396 | | | $ | 369,739 | | | $ | 432,499 | | | $ | 425,183 | | | $ | 326,740 | | | $ | 321,014 | | | $ | 761,563 | | | $ | 747,323 | |
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
The Company'sCompany’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.financial institutions. There were no private label mortgage-backed securities ("MBS"(“MBS”) or collateralized mortgage obligations ("CMO"(“CMO”) held in the investment securities portfolio as of December 31, 20162018 and December 31, 2015.2017. There were also no MBS or CMO securities that were rated "Alt-A"“Alt-A” or "sub-prime"“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'shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.
The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An other-than-temporary impairment ("OTTI")OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale.
ImpairmentThere were no impairment charges (credit losses) recorded during the years ended December 31, 2018 and 2017. Impairment charges on trust preferred securities for the yearsyear ended December 31, 2016 2015, and 2014 amounted to $7,000, $3,000, and $7,000, respectively.
$7,000.
At December 31, 20162018 and 2015,2017, investment securities in the amount of approximately $380.1$710.7 million and $209.4$555.2 million, respectively, were pledged as collateral for public deposits and certain other deposits as required by law.
The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at December 31, 2016, 2015,2018, 2017, and 20142016 for which a portion of OTTI was recognized in other comprehensive income:
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | |
Beginning Balance, January 1st | | $ | 930 | | | $ | 3,966 | | | $ | 3,959 | |
Additional credit-related impairment loss on securities for which an | | | | | | | | | | | | |
other-than-temporary impairment was previously recognized | | | 7 | | | | 3 | | | | 7 | |
Reductions for securities sold during the period | | | - | | | | (3,039 | ) | | | - | |
Ending Balance, December 31st | | $ | 937 | | | $ | 930 | | | $ | 3,966 | |
(dollars in thousands) | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Beginning Balance, January 1st | | $ | 274 | | | $ | 937 | | | $ | 930 | |
Additional credit-related impairment loss on securities for which an other-than-temporary impairment was previously recognized | | | - | | | | - | | | | 7 | |
Reductions for securities sold during the period | | | (274 | ) | | | (663 | ) | | | - | |
Ending Balance, December 31st | | $ | - | | | $ | 274 | | | $ | 937 | |
The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 20162018 and 2015:2017:
| At December 31, 2016 | | | At December 31, 2018 | |
| Less than 12 months | | 12 months or more | | Total | | | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 192,308 | | | $ | 5,380 | | | $ | 7,579 | | | $ | 252 | | | $ | 199,887 | | | $ | 5,632 | | | $ | 58,883 | | | $ | 270 | | | $ | 83,377 | | | $ | 1,850 | | | $ | 142,260 | | | $ | 2,120 | |
Agency mortgage-backed securities | | | 29,916 | | | | 1,260 | | | | 3,199 | | | | 35 | | | | 33,115 | | | | 1,295 | | | | 1,134 | | | | 10 | | | | 16,768 | | | | 601 | | | | 17,902 | | | | 611 | |
Municipal securities | | | 15,414 | | | | 429 | | | | - | | | | - | | | | 15,414 | | | | 429 | | | | 1,549 | | | | 7 | | | | 12,154 | | | | 225 | | | | 13,703 | | | | 232 | |
Corporate bonds | | | 32,257 | | | | 1,708 | | | | 10,726 | | | | 270 | | | | 42,983 | | | | 1,978 | | | | - | | | | - | | | | 53,189 | | | | 3,396 | | | | 53,189 | | | | 3,396 | |
Asset backed securities | | | - | | | | - | | | | 15,149 | | | | 416 | | | | 15,149 | | | | 416 | | | | 6,343 | | | | 90 | | | | - | | | | - | | | | 6,343 | | | | 90 | |
Trust preferred securities | | | - | | | | - | | | | 1,820 | | | | 1,243 | | | | 1,820 | | | | 1,243 | | |
Total Available for Sale | | $ | 269,895 | | | $ | 8,777 | | | $ | 38,473 | | | $ | 2,216 | | | $ | 308,368 | | | $ | 10,993 | | | $ | 67,909 | | | $ | 377 | | | $ | 165,488 | | | $ | 6,072 | | | $ | 233,397 | | | $ | 6,449 | |
| At December 31, 2016 | | | At December 31, 2018 | |
| Less than 12 months | | 12 months or more | | Total | | | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 67,725 | | | $ | 2,198 | | | $ | 3,586 | | | $ | 40 | | | $ | 71,311 | | | $ | 2,238 | | | $ | 5,351 | | | $ | 26 | | | $ | 98,267 | | | $ | 3,746 | | | $ | 103,618 | | | $ | 3,772 | |
Collateralized mortgage obligations | | | 108,974 | | | | 2,469 | | | | 8,572 | | | | 84 | | | | 117,546 | | | | 2,553 | | | | 44,574 | | | | 475 | | | | 173,467 | | | | 5,318 | | | | 218,041 | | | | 5,793 | |
Agency mortgage-backed securities | | | 97,725 | | | | 3,327 | | | | - | | | | - | | | | 97,725 | | | | 3,327 | | | | - | | | | - | | | | 119,243 | | | | 5,245 | | | | 119,243 | | | | 5,245 | |
Total Held to Maturity | | $ | 274,424 | | | $ | 7,994 | | | $ | 12,158 | | | $ | 124 | | | $ | 286,582 | | | $ | 8,118 | | | $ | 49,925 | | | $ | 501 | | | $ | 390,977 | | | $ | 14,309 | | | $ | 440,902 | | | $ | 14,810 | |
| At December 31, 2015 | | | At December 31, 2017 | |
| Less than 12 months | | 12 months or more | | Total | | | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 116,161 | | | $ | 3,173 | | | $ | - | | | $ | - | | | $ | 116,161 | | | $ | 3,173 | | | $ | 150,075 | | | $ | 1,565 | | | $ | 170,166 | | | $ | 6,166 | | | $ | 320,241 | | | $ | 7,731 | |
Agency mortgage-backed securities | | | 2,389 | | | | 14 | | | | 5,502 | | | | 64 | | | | 7,891 | | | | 78 | | | | 29,967 | | | | 226 | | | | 21,045 | | | | 574 | | | | 51,012 | | | | 800 | |
Municipal securities | | | 886 | | | | 15 | | | | 1,814 | | | | 17 | | | | 2,700 | | | | 32 | | | | 5,742 | | | | 27 | | | | 2,656 | | | | 35 | | | | 8,398 | | | | 62 | |
Corporate bonds | | | 9,583 | | | | 258 | | | | 2,952 | | | | 42 | | | | 12,535 | | | | 300 | | | | - | | | | - | | | | 52,509 | | | | 2,491 | | | | 52,509 | | | | 2,491 | |
Asset backed securities | | | 17,005 | | | | 626 | | | | - | | | | - | | | | 17,005 | | | | 626 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Trust preferred securities | | | - | | | | - | | | | 1,883 | | | | 1,187 | | | | 1,883 | | | | 1,187 | | | | - | | | | - | | | | 489 | | | | 236 | | | | 489 | | | | 236 | |
Total Available for Sale | | $ | 146,024 | | | $ | 4,086 | | | $ | 12,151 | | | $ | 1,310 | | | $ | 158,175 | | | $ | 5,396 | | | $ | 185,784 | | | $ | 1,818 | | | $ | 246,865 | | | $ | 9,502 | | | $ | 432,649 | | | $ | 11,320 | |
| At December 31, 2015 | | | At December 31, 2017 | |
| Less than 12 months | | 12 months or more | | Total | | | Less than 12 months | | | 12 months or more | | | Total | |
(dollars in thousands) | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | | | Fair Value | | | Unrealized Losses | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 11,954 | | | $ | 72 | | | $ | - | | | $ | - | | | $ | 11,954 | | | $ | 72 | | | $ | 42,045 | | | $ | 213 | | | $ | 59,594 | | | $ | 2,022 | | | $ | 101,639 | | | $ | 2,235 | |
Collateralized mortgage obligations | | | 68,888 | | | | 732 | | | | 15,956 | | | | 48 | | | | 84,844 | | | | 780 | | | | 56,955 | | | | 767 | | | | 107,986 | | | | 3,203 | | | | 164,941 | | | | 3,970 | |
Agency mortgage-backed securities | | | 7,711 | | | | 21 | | | | - | | | | - | | | | 7,711 | | | | 21 | | | | 55,170 | | | | 221 | | | | 82,479 | | | | 2,399 | | | | 137,649 | | | | 2,620 | |
Total Held to Maturity | | $ | 88,553 | | | $ | 825 | | | $ | 15,956 | | | $ | 48 | | | $ | 104,509 | | | $ | 873 | | | $ | 154,170 | | | $ | 1,201 | | | $ | 250,059 | | | $ | 7,624 | | | $ | 404,229 | | | $ | 8,825 | |
Unrealized losses on securities in the investment portfolio amounted to $19.1$21.3 million with a total fair value of $595.0$674.3 million as of December 31, 20162018 compared to unrealized losses of $6.3$20.1 million with a total fair value of $262.7$836.9 million as of December 31, 2015.2017. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.
The Company held tenfourteen U.S. Government agency securities, fifty-twosixty-four collateralized mortgage obligations and nineteentwenty-six agency mortgage-backed securities that were in an unrealized loss position at December 31, 2016.2018. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of December 31, 2016.2018.
All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody'sMoody’s or Standard & Poor's.Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At December 31, 2016,2018, the investment portfolio included twenty-threenineteen municipal securities that were in an unrealized loss position. Management believes the unrealized losses were the result of movements in long-term interest rates and are not reflective of any credit deterioration.
At December 31, 2016,2018, the investment portfolio included twoone asset-backed securitiessecurity that werewas in an unrealized loss position. The asset-backed securitiessecurity held in the investment securities portfolio consist solely ofis a Sallie Mae bonds,bond, collateralized by student loans which are guaranteed by the U.S. Department of Education. Management believes the unrealized lossesloss on these securities werethis security was driven by changes in market interest rates and not a result of any credit deterioration.
At December 31, 2016,2018, the investment portfolio also included eightseven corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of any credit deterioration.
The unrealized losses on the trust preferred securities are primarily the result of the secondary market for such securities becoming inactive and are also considered temporary at this time. The following table provides additional detail on the trust preferred securities held in the portfolio as of December 31, 2016.
(dollars in thousands) | | Class / Tranche | | Amortized Cost | | | Fair Value | | | Unrealized Losses | | | Lowest Credit Rating Assigned | | | Number of Banks Currently Performing | | | Deferrals / Defaults as % of Current Balance | | | Conditional Default Rates for 2017 and beyond
| | | Cumulative OTTI Life to Date | |
TPREF Funding II | | Class B Notes | | $ | 725 | | | $ | 402 | | | $ | (323 | ) | | | C | | | | 19 | | | | 37% | | | | 0.41% | | | $ | 274 | |
TPREF Funding III | | Class B2 Notes | | | 1,518 | | | | 889 | | | | (629 | ) | | | C | | | | 15 | | | | 32 | | | | 0.44 | | | | 483 | |
ALESCO Preferred Funding V | | Class C1 Notes | | | 820 | | | | 529 | | | | (291 | ) | | | C | | | | 41 | | | | 14 | | | | 0.40 | | | | 180 | |
Total | | | | $ | 3,063 | | | $ | 1,820 | | | $ | (1,243 | ) | | | | | | | 75 | | | | 28% | | | | | | | $ | 937 | |
The Company had proceeds fromProceeds associated with the sale of securities available for sale in 2016 of $78.62018 were $6.4 million. Gross gains of $680,000 and gross losses of $24,000 were realized on theses sales. The tax provision applicable to these gross gains in 2016 amounted to approximately $236,000.
Proceeds of sales of securities available for sale in 2015 were $11.7 million. Gross gains of $396,000 and gross losses of $288,000$67,000 were realized on these sales. The tax provisionbenefit applicable to the net gainslosses for the year ended December 31, 20152018 amounted to $39,000.$18,000. Included in the 20152018 sales activity werewas the salessale of fourone CDO securities.security. Proceeds from the sale of the CDO securitiessecurity totaled $2.0 million. Gross gains$660,000. A gross loss of $70,000 and gross losses of $288,000 were$66,000 was realized on these sales.this sale. The tax provisionbenefit applicable to the net lossesloss for the twelve months ended December 31, 20152018 amounted to $78,000.$17,000. Management had previously stated that it did not intend to sell the CDO securitiessecurity prior to theirits maturity or the recovery of theirits cost bases,basis, nor would it be forced to sell these securitiesthis security prior to maturity or recovery of the cost bases.basis. This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2015,2018, management received several inquiries regarding the availability of the remaining CDO securitiessecurity and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell the fourremaining CDO security resulting in a net loss of $66,000 during 2018.
Proceeds of sales of securities available for sale in 2017 were $31.2 million. Gross gains of $652,000 and gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2017 amounted to $52,000. Included in the 2017 sales activity were the sales of two CDO securities. Proceeds from the sale of the CDO securities totaled $1.5 million. Gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the twelve months ended December 31, 2017 amounted to $287,000. As a result of the increased activity and the level of bids received, management elected to sell two CDOs resulting in a net loss of $218,000$798,000 during 20152017 which was offset by gains on sales of agency mortgage- backedmortgage-backed securities, collateralized mortgage obligations and corporate bonds.
The Bank continuesCompany had proceeds from the sale of securities available for sale in 2016 of $78.6 million. Gross gains of $680,000 and gross losses of $24,000 were realized on these sales. The tax provision applicable to demonstratethese gross gains in 2016 amounted to approximately $236,000.
In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale were transferred to the abilityheld-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in other comprehensive income and intentbe amortized as an adjustment to holdyield over the remaining CDOs until maturity or recoverylife of the cost bases, but will evaluate future opportunitiessecurities. At December 31, 2018, the total approximated unrealized loss of $9.8 million remaining to sell the remaining CDOs if they arise.be amortized includes eleven securities previously transferred in July 2014.
The following table sets forth the Company'sCompany’s gross loans by major categories as of December 31, 20162018 and 2015:2017:
(dollars in thousands) | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2018 | | | December 31, 2017 | |
| | | | | | | | | | | | |
Commercial real estate | | $ | 378,519 | | | $ | 349,726 | | | $ | 515,738 | | | $ | 433,304 | |
Construction and land development | | | 61,453 | | | | 46,547 | | | | 121,042 | | | | 104,617 | |
Commercial and industrial | | | 174,744 | | | | 181,850 | | | | 200,423 | | | | 173,343 | |
Owner occupied real estate | | | 276,986 | | | | 246,398 | | | | 367,895 | | | | 309,838 | |
Consumer and other | | | 63,660 | | | | 48,126 | | | | 91,152 | | | | 76,183 | |
Residential mortgage | | | 9,682 | | | | 2,380 | | | | 140,364 | | | | 64,764 | |
Total loans receivable | | | 965,044 | | | | 875,027 | | | | 1,436,614 | | | | 1,162,049 | |
Deferred costs (fees) | | | (72 | ) | | | (258 | ) | | | (16 | ) | | | 229 | |
Allowance for loan losses | | | (9,155 | ) | | | (8,703 | ) | | | (8,615 | ) | | | (8,599 | ) |
Net loans receivable | | $ | 955,817 | | | $ | 866,066 | | | $ | 1,427,983 | | | $ | 1,153,679 | |
The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses.
The Company'sCompany’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, and residential mortgages. The remaining loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
Included in loans are loans due from directors and other related parties of $13.0 million at December 31, 2018, $8.9 million at December 31, 2017, and $7.9 million at December 31, 2016, $8.5 million at December 31, 2015, and $8.8 million at December 31, 2014.2016. The Board of Directors approves loans to individual directors to confirm that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with and conform to our underwriting policies. The following presents the activity in amount due from directors and other related parties for the years ended December 31, 2016, 2015,2018, 2017, and 2014.2016.
(dollars in thousands) | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2016 | |
Balance at beginning of year | | $ | 8,521 | | | $ | 8,753 | | | $ | 8,762 | | | $ | 8,920 | | | $ | 7,862 | | | $ | 8,521 | |
Additions | | | - | | | | 295 | | | | 500 | | | | 4,812 | | | | 1,896 | | | | - | |
Repayments | | | (659 | ) | | | (527 | ) | | | (509 | ) | | | (703 | ) | | | (838 | ) | | | (659 | ) |
Balance at end of year | | $ | 7,862 | | | $ | 8,521 | | | $ | 8,753 | | | $ | 13,029 | | | $ | 8,920 | | | $ | 7,862 | |
5. | Allowances for Loan Losses |
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
(dollars in thousands) | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Unallocated | | | Total | | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December, 2018 | | Year ended December, 2018 | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance: | | $ | 2,393 | | | $ | 338 | | | $ | 2,932 | | | $ | 2,030 | | | $ | 295 | | | $ | 14 | | | $ | 701 | | | $ | 8,703 | | | $ | 3,774 | | | $ | 725 | | | $ | 1,317 | | | $ | 1,737 | | | $ | 573 | | | $ | 392 | | | $ | 81 | | | $ | 8,599 | |
Charge-offs | | | - | | | | (60 | ) | | | (143 | ) | | | (1,052 | ) | | | (11 | ) | | | (10 | ) | | | - | | | | (1,276 | ) | | | (1,603 | ) | | | - | | | | (151 | ) | | | (465 | ) | | | (219 | ) | | | - | | | | - | | | | (2,438 | ) |
Recoveries | | | 6 | | | | - | | | | 163 | | | | - | | | | 2 | | | | - | | | | - | | | | 171 | | | | 50 | | | | - | | | | 81 | | | | 20 | | | | 3 | | | | - | | | | - | | | | 154 | |
Provisions (credits) | | | 855 | | | | 279 | | | | (68 | ) | | | 404 | | | | 302 | | | | 54 | | | | (269 | ) | | | 1,557 | | |
Provisions | | | | 241 | | | | 52 | | | | 507 | | | | 741 | | | | 220 | | | | 502 | | | | 37 | | | | 2,300 | |
Ending balance | | $ | 3,254 | | | $ | 557 | | | $ | 2,884 | | | $ | 1,382 | | | $ | 588 | | | $ | 58 | | | $ | 432 | | | $ | 9,155 | | | $ | 2,462 | | | $ | 777 | | | $ | 1,754 | | | $ | 2,033 | | | $ | 577 | | | $ | 894 | | | $ | 118 | | | $ | 8,615 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December, 2017 | | Year ended December, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance: | | $ | 6,828 | | | $ | 917 | | | $ | 1,579 | | | $ | 1,638 | | | $ | 234 | | | $ | 2 | | | $ | 338 | | | $ | 11,536 | | | $ | 3,254 | | | $ | 557 | | | $ | 2,884 | | | $ | 1,382 | | | $ | 588 | | | $ | 58 | | | $ | 432 | | | $ | 9,155 | |
Charge-offs | | | (2,624 | ) | | | (260 | ) | | | (408 | ) | | | (133 | ) | | | - | | | | - | | | | - | | | | (3,425 | ) | | | - | | | | - | | | | (1,366 | ) | | | (157 | ) | | | (53 | ) | | | - | | | | - | | | | (1,576 | ) |
Recoveries | | | 4 | | | | 5 | | | | 49 | | | | - | | | | 34 | | | | - | | | | - | | | | 92 | | | | 54 | | | | - | | | | 64 | | | | - | | | | 2 | | | | - | | | | - | | | | 120 | |
Provisions (credits) | | | (1,815 | ) | | | (324 | ) | | | 1,712 | | | | 525 | | | | 27 | | | | 12 | | | | 363 | | | | 500 | | | | 466 | | | | 168 | | | | (265 | ) | | | 512 | | | | 36 | | | | 334 | | | | (351 | ) | | | 900 | |
Ending balance | | $ | 2,393 | | | $ | 338 | | | $ | 2,932 | | | $ | 2,030 | | | $ | 295 | | | $ | 14 | | | $ | 701 | | | $ | 8,703 | | | $ | 3,774 | | | $ | 725 | | | $ | 1,317 | | | $ | 1,737 | | | $ | 573 | | | $ | 392 | | | $ | 81 | | | $ | 8,599 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance: | | $ | 6,454 | | | $ | 1,948 | | | $ | 2,309 | | | $ | 985 | | | $ | 225 | | | $ | 14 | | | $ | 328 | | | $ | 12,263 | | | $ | 2,393 | | | $ | 338 | | | $ | 2,932 | | | $ | 2,030 | | | $ | 295 | | | $ | 14 | | | $ | 701 | | | $ | 8,703 | |
Charge-offs | | | (364 | ) | | | (303 | ) | | | (1,185 | ) | | | (150 | ) | | | (10 | ) | | | - | | | | - | | | | (2,012 | ) | | | - | | | | (60 | ) | | | (143 | ) | | | (1,052 | ) | | | (11 | ) | | | (10 | ) | | | - | | | | (1,276 | ) |
Recoveries | | | 5 | | | | 214 | | | | 166 | | | | - | | | | - | | | | - | | | | - | | | | 385 | | | | 6 | | | | - | | | | 163 | | | | - | | | | 2 | | | | - | | | | - | | | | 171 | |
Provisions (credits) | | | 733 | | | | (942 | ) | | | 289 | | | | 803 | | | | 19 | | | | (12 | ) | | | 10 | | | | 900 | | | | 855 | | | | 279 | | | | (68 | ) | | | 404 | | | | 302 | | | | 54 | | | | (269 | ) | | | 1,557 | |
Ending balance | | $ | 6,828 | | | $ | 917 | | | $ | 1,579 | | | $ | 1,638 | | | $ | 234 | | | $ | 2 | | | $ | 338 | | | $ | 11,536 | | | $ | 3,254 | | | $ | 557 | | | $ | 2,884 | | | $ | 1,382 | | | $ | 588 | | | $ | 58 | | | $ | 432 | | | $ | 9,155 | |
The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of December 31, 20162018 and 2015:2017:
(dollars in thousands) | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Unallocated | | Total | | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 1,277 | | | $ | - | | | $ | 1,624 | | | $ | 274 | | | $ | 293 | | | $ | - | | | $ | - | | | $ | 3,468 | | | $ | 295 | | | $ | - | | | $ | 867 | | | $ | 217 | | | $ | 94 | | | $ | - | | | $ | - | | | $ | 1,473 | |
Collectively evaluated for impairment | | | 1,977 | | | | 557 | | | | 1,260 | | | | 1,108 | | | | 295 | | | | 58 | | | | 432 | | | | 5,687 | | | | 2,167 | | | | 777 | | | | 887 | | | | 1,816 | | | | 483 | | | | 894 | | | | 118 | | | | 7,142 | |
Total allowance for loan losses | | $ | 3,254 | | | $ | 557 | | | $ | 2,884 | | | $ | 1,382 | | | $ | 588 | | | $ | 58 | | | $ | 432 | | | $ | 9,155 | | | $ | 2,462 | | | $ | 777 | | | $ | 1,754 | | | $ | 2,033 | | | $ | 577 | | | $ | 894 | | | $ | 118 | | | $ | 8,615 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans evaluated individually | | $ | 19,245 | | | $ | - | | | $ | 5,180 | | | $ | 2,325 | | | $ | 1,290 | | | $ | 130 | | | $ | - | | | $ | 28,170 | | | $ | 10,947 | | | $ | - | | | $ | 3,662 | | | $ | 2,560 | | | $ | 861 | | | $ | - | | | $ | - | | | $ | 18,030 | |
Loans evaluated collectively | | | 359,274 | | | | 61,453 | | | | 169,564 | | | | 274,661 | | | | 62,370 | | | | 9,552 | | | | - | | | | 936,874 | | | | 504,791 | | | | 121,042 | | | | 196,761 | | | | 365,335 | | | | 90,291 | | | | 140,364 | | | | - | | | | 1,418,584 | |
Total loans receivable | | $ | 378,519 | | | $ | 61,453 | | | $ | 174,744 | | | $ | 276,986 | | | $ | 63,660 | | | $ | 9,682 | | | $ | - | | | $ | 965,044 | | | $ | 515,738 | | | $ | 121,042 | | | $ | 200,423 | | | $ | 367,895 | | | $ | 91,152 | | | $ | 140,364 | | | $ | - | | | $ | 1,436,614 | |
(dollars in thousands) | Commercial Real Estate | | Construction and Land Development | | Commercial and Industrial | | Owner Occupied Real Estate | | Consumer and Other | | Residential Mortgage | | Unallocated | | Total | | | Commercial Real Estate | | | Construction and Land Development | | | Commercial and Industrial | | | Owner Occupied Real Estate | | | Consumer and Other | | | Residential Mortgage | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 47 | | | $ | - | | | $ | 1,111 | | | $ | 1059 | | | $ | 21 | | | $ | - | | | $ | - | | | $ | 2,238 | | | $ | 1,964 | | | $ | - | | | $ | 374 | | | $ | 235 | | | $ | 217 | | | $ | - | | | $ | - | | | $ | 2,790 | |
Collectively evaluated for impairment | | | 2,346 | | | | 338 | | | | 1,821 | | | | 971 | | | | 274 | | | | 14 | | | | 701 | | | | 6,465 | | | | 1,810 | | | | 725 | | | | 943 | | | | 1,502 | | | | 356 | | | | 392 | | | | 81 | | | | 5,809 | |
Total allowance for loan losses | | $ | 2,393 | | | $ | 338 | | | $ | 2,932 | | | $ | 2,030 | | | $ | 295 | | | $ | 14 | | | $ | 701 | | | $ | 8,703 | | | $ | 3,774 | | | $ | 725 | | | $ | 1,317 | | | $ | 1,737 | | | $ | 573 | | | $ | 392 | | | $ | 81 | | | $ | 8,599 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans evaluated individually | | $ | 12,203 | | | $ | 117 | | | $ | 5,493 | | | $ | 3,369 | | | $ | 947 | | | $ | - | | | $ | - | | | $ | 22,129 | | | $ | 15,415 | | | $ | - | | | $ | 4,501 | | | $ | 3,798 | | | $ | 1,002 | | | $ | - | | | $ | - | | | $ | 24,716 | |
Loans evaluated collectively | | | 337,523 | | | | 46,430 | | | | 176,357 | | | | 243,029 | | | | 47,179 | | | | 2,380 | | | | - | | | | 852,898 | | | | 417,889 | | | | 104,617 | | | | 168,842 | | | | 306,040 | | | | 75,181 | | | | 64,764 | | | | - | | | | 1,137,333 | |
Total loans receivable | | $ | 349,726 | | | $ | 46,547 | | | $ | 181,850 | | | $ | 246,398 | | | $ | 48,126 | | | $ | 2,380 | | | $ | - | | | $ | 875,027 | | | $ | 433,304 | | | $ | 104,617 | | | $ | 173,343 | | | $ | 309,838 | | | $ | 76,183 | | | $ | 64,764 | | | $ | - | | | $ | 1,162,049 | |
A loan is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include internally classified accruing loans. The following table summarizes information with regard to impaired loans by loan portfolio class as of December 31, 20162018 and 2015:2017:
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2018 | | | December 31, 2017 | |
(dollars in thousands) | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | |
| | | | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 12,347 | | | $ | 12,348 | | | $ | - | | | $ | 11,692 | | | $ | 11,730 | | | $ | - | | | $ | 6,332 | | | $ | 6,337 | | | $ | - | | | $ | 9,264 | | | $ | 9,268 | | | $ | - | |
Construction and land development | | | - | | | | - | | | | - | | | | 117 | | | | 2,208 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | 1,955 | | | | 3,111 | | | | - | | | | 2,381 | | | | 3,683 | | | | - | | | | 1,655 | | | | 5,418 | | | | - | | | | 2,756 | | | | 6,674 | | | | - | |
Owner occupied real estate | | | 621 | | | | 733 | | | | - | | | | 507 | | | | 507 | | | | - | | | | 1,905 | | | | 2,013 | | | | - | | | | 2,595 | | | | 2,743 | | | | - | |
Consumer and other | | | 687 | | | | 976 | | | | - | | | | 800 | | | | 1,084 | | | | - | | | | 710 | | | | 1,082 | | | | - | | | | 655 | | | | 981 | | | | - | |
Residential mortgage | | | 130 | | | | 130 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 15,740 | | | $ | 17,298 | | | $ | - | | | $ | 15,497 | | | $ | 19,212 | | | $ | - | | | $ | 10,602 | | | $ | 14,850 | | | $ | - | | | $ | 15,270 | | | $ | 19,666 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | $ | 4,615 | | | $ | 5,498 | | | $ | 295 | | | $ | 6,151 | | | $ | 6,165 | | | $ | 1,964 | |
Construction and land development | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | | 2,007 | | | | 2,195 | | | | 867 | | | | 1,745 | | | | 1,752 | | | | 374 | |
Owner occupied real estate | | | | 655 | | | | 704 | | | | 217 | | | | 1,203 | | | | 1,206 | | | | 235 | |
Consumer and other | | | | 151 | | | | 158 | | | | 94 | | | | 347 | | | | 379 | | | | 217 | |
Residential mortgage | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | | $ | 7,428 | | | $ | 8,555 | | | $ | 1,473 | | | $ | 9,446 | | | $ | 9,502 | | | $ | 2,790 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | $ | 10,947 | | | $ | 11,835 | | | $ | 295 | | | $ | 15,415 | | | $ | 15,433 | | | $ | 1,964 | |
Construction and land development | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | | 3,662 | | | | 7,613 | | | | 867 | | | | 4,501 | | | | 8,426 | | | | 374 | |
Owner occupied real estate | | | | 2,560 | | | | 2,717 | | | | 217 | | | | 3,798 | | | | 3,949 | | | | 235 | |
Consumer and other | | | | 861 | | | | 1,240 | | | | 94 | | | | 1,002 | | | | 1,360 | | | | 217 | |
Residential mortgage | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | | $ | 18,030 | | | $ | 23,405 | | | $ | 1,473 | | | $ | 24,716 | | | $ | 29,168 | | | $ | 2,790 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 6,898 | | | $ | 6,912 | | | $ | 1,277 | | | $ | 511 | | | $ | 511 | | | $ | 47 | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | 3,225 | | | | 5,892 | | | | 1,624 | | | | 3,112 | | | | 5,779 | | | | 1,111 | |
Owner occupied real estate | | | 1,704 | | | | 1,704 | | | | 274 | | | | 2,862 | | | | 2,876 | | | | 1,059 | |
Consumer and other | | | 603 | | | | 627 | | | | 293 | | | | 147 | | | | 147 | | | | 21 | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 12,430 | | | $ | 15,135 | | | $ | 3,468 | | | $ | 6,632 | | | $ | 9,313 | | | $ | 2,238 | |
Total: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 19,245 | | | $ | 19,260 | | | $ | 1,277 | | | $ | 12,203 | | | $ | 12,241 | | | $ | 47 | |
Construction and land development | | | - | | | | - | | | | - | | | | 117 | | | | 2,208 | | | | - | |
Commercial and industrial | | | 5,180 | | | | 9,003 | | | | 1,624 | | | | 5,493 | | | | 9,462 | | | | 1,111 | |
Owner occupied real estate | | | 2,325 | | | | 2,437 | | | | 274 | | | | 3,369 | | | | 3,383 | | | | 1,059 | |
Consumer and other | | | 1,290 | | | | 1,603 | | | | 293 | | | | 947 | | | | 1,231 | | | | 21 | |
Residential mortgage | | | 130 | | | | 130 | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 28,170 | | | $ | 32,433 | | | $ | 3,468 | | | $ | 22,129 | | | $ | 28,525 | | | $ | 2,238 | |
The following table presents additional information regarding the Company'sCompany’s impaired loans for the years ended December 31, 2016, 2015,2018, 2017, and 2014:
| | Years Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | |
(dollars in thousands) | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 12,033 | | | $ | 264 | | | $ | 12,796 | | | $ | 282 | | | $ | 7,739 | | | $ | 450 | |
Construction and land development | | | 58 | | | | - | | | | 206 | | | | 2 | | | | 462 | | | | - | |
Commercial and industrial | | | 1,828 | | | | 42 | | | | 3,225 | | | | 78 | | | | 3,070 | | | | 22 | |
Owner occupied real estate | | | 642 | | | | 10 | | | | 700 | | | | 6 | | | | 714 | | | | 8 | |
Consumer and other | | | 858 | | | | 16 | | | | 685 | | | | 13 | | | | 482 | | | | 4 | |
Residential mortgage | | | 26 | | | | 1 | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 15,445 | | | $ | 333 | | | $ | 17,612 | | | $ | 381 | | | $ | 12,467 | | | $ | 484 | |
2016:
With an allowance recorded: | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 4,455 | | | $ | 52 | | | $ | 5,544 | | | $ | 13 | | | $ | 13,197 | | | $ | 5 | |
Construction and land development | | | 12 | | | | - | | | | 90 | | | | - | | | | 557 | | | | - | |
Commercial and industrial | | | 3,357 | | | | 74 | | | | 2,587 | | | | 28 | | | | 3,244 | | | | - | |
Owner occupied real estate | | | 2,104 | | | | 31 | | | | 3,643 | | | | 92 | | | | 3,446 | | | | 125 | |
Consumer and other | | | 322 | | | | 12 | | | | 59 | | | | 2 | | | | 40 | | | | - | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 10,250 | | | $ | 169 | | | $ | 11,923 | | | $ | 135 | | | $ | 20,484 | | | $ | 130 | |
| | | Years Ended December 31, | |
| | | 2018 | | | 2017 | | | 2016 | |
(dollars in thousands) | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | $ | 10,429 | | | $ | 288 | | | $ | 9,579 | | | $ | 366 | | | $ | 12,033 | | | $ | 264 | |
Construction and land development | | | | - | | | | - | | | | - | | �� | | - | | | | 58 | | | | - | |
Commercial and industrial | | | | 3,341 | | | | 52 | | | | 2,270 | | | | 37 | | | | 1,828 | | | | 42 | |
Owner occupied real estate | | | | 2,275 | | | | 58 | | | | 1,894 | | | | 58 | | | | 642 | | | | 10 | |
Consumer and other | | | | 658 | | | | 21 | | | | 801 | | | | 21 | | | | 858 | | | | 16 | |
Residential mortgage | | | | - | | | | - | | | | 26 | | | | 1 | | | | 26 | | | | 1 | |
Total | | | $ | 16,703 | | | $ | 419 | | | $ | 14,570 | | | $ | 483 | | | $ | 15,445 | | | $ | 333 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | $ | 3,076 | | | $ | - | | | $ | 6,490 | | | $ | 14 | | | $ | 4,455 | | | $ | 52 | |
Construction and land development | | | | - | | | | - | | | | - | | | | - | | | | 12 | | | | - | |
Commercial and industrial | | | | 1,862 | | | | 6 | | | | 2,517 | | | | 68 | | | | 3,357 | | | | 74 | |
Owner occupied real estate | | | | 969 | | | | 25 | | | | 1,390 | | | | 32 | | | | 2,104 | | | | 31 | |
Consumer and other | | | | 191 | | | | 1 | | | | 420 | | | | 10 | | | | 322 | | | | 12 | |
Residential mortgage | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | | $ | 6,098 | | | $ | 32 | | | $ | 10,817 | | | $ | 124 | | | $ | 10,250 | | | $ | 169 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 16,488 | | | $ | 316 | | | $ | 18,340 | | | $ | 295 | | | $ | 20,936 | | | $ | 455 | | | $ | 13,505 | | | $ | 288 | | | $ | 16,069 | | | $ | 380 | | | $ | 16,488 | | | $ | 316 | |
Construction and land development | | | 70 | | | | - | | | | 296 | | | | 2 | | | | 1,019 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 70 | | | | - | |
Commercial and industrial | | | 5,185 | | | | 116 | | | | 5,812 | | | | 106 | | | | 6,314 | | | | 22 | | | | 5,203 | | | | 58 | | | | 4,787 | | | | 105 | | | | 5,185 | | | | 116 | |
Owner occupied real estate | | | 2,746 | | | | 41 | | | | 4,343 | | | | 98 | | | | 4,160 | | | | 133 | | | | 3,244 | | | | 83 | | | | 3,284 | | | | 90 | | | | 2,746 | | | | 41 | |
Consumer and other | | | 1,180 | | | | 28 | | | | 744 | | | | 15 | | | | 522 | | | | 4 | | | | 849 | | | | 22 | | | | 1,221 | | | | 31 | | | | 1,180 | | | | 28 | |
Residential mortgage | | | 26 | | | | 1 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 26 | | | | 1 | | | | 26 | | | | 1 | |
Total | | $ | 25,695 | | | $ | 502 | | | $ | 29,535 | | | $ | 516 | | | $ | 32,951 | | | $ | 614 | | | $ | 22,801 | | | $ | 451 | | | $ | 25,387 | | | $ | 607 | | | $ | 25,695 | | | $ | 502 | |
The total average recorded investment on the Company'sCompany’s impaired loans for the years ended December 31, 2018, 2017, and 2016 2015, and 2014 were $25.7$22.8 million, $29.5$25.4 million, and $33.0$25.7 million, respectively, and the related interest income recognized for those dates was $502,000, $516,000,$451,000, $607,000, and $614,000, respectively. If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $1.0 million, $765,000, and $980,000 for the years ended December 31, 2016, 2015, and 2014,$502,000, respectively.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 20162018 and 2015:
(dollars in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Loans Receivable > 90 Days and Accruing | |
At December 31, 2016 | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | - | | | $ | 9 | | | $ | 13,089 | | | $ | 13,098 | | | $ | 365,421 | | | $ | 378,519 | | | $ | - | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | 61,453 | | | | 61,453 | | | | - | |
Commercial and industrial | | | 568 | | | | - | | | | 3,151 | | | | 3,719 | | | | 171,025 | | | | 174,744 | | | | - | |
Owner occupied real estate | | | 468 | | | | - | | | | 1,718 | | | | 2,186 | | | | 274,800 | | | | 276,986 | | | | 172 | |
Consumer and other | | | 24 | | | | 22 | | | | 808 | | | | 854 | | | | 62,806 | | | | 63,660 | | | | - | |
Residential mortgage | | | - | | | | - | | | | 130 | | | | 130 | | | | 9,552 | | | | 9,682 | | | | 130 | |
Total | | $ | 1,060 | | | $ | 31 | | | $ | 18,896 | | | $ | 19,987 | | | $ | 945,057 | | | $ | 965,044 | | | $ | 302 | |
2017:
(dollars in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Loans Receivable > 90 Days and Accruing | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Loans Receivable > 90 Days and Accruing | |
At December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | - | | | $ | 7,657 | | | $ | 5,913 | | | $ | 13,570 | | | $ | 336,156 | | | $ | 349,726 | | | $ | - | | | $ | 339 | | | $ | 921 | | | $ | 4,631 | | | $ | 5,891 | | | $ | 509,847 | | | $ | 515,738 | | | $ | - | |
Construction and land development | | | - | | | | - | | | | 117 | | | | 117 | | | | 46,430 | | | | 46,547 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 121,042 | | | | 121,042 | | | | - | |
Commercial and industrial | | | 1,661 | | | | 997 | | | | 3,156 | | | | 5,814 | | | | 176,036 | | | | 181,850 | | | | - | | | | 280 | | | | - | | | | 3,661 | | | | 3,941 | | | | 196,482 | | | | 200,423 | | | | - | |
Owner occupied real estate | | | 800 | | | | 469 | | | | 2,894 | | | | 4,163 | | | | 242,235 | | | | 246,398 | | | | - | | | | - | | | | 653 | | | | 1,188 | | | | 1,841 | | | | 366,054 | | | | 367,895 | | | | - | |
Consumer and other | | | 285 | | | | 192 | | | | 542 | | | | 1,019 | | | | 47,107 | | | | 48,126 | | | | - | | | | 214 | | | | - | | | | 861 | | | | 1,075 | | | | 90,077 | | | | 91,152 | | | | - | |
Residential mortgage | | | 132 | | | | - | | | | - | | | | 132 | | | | 2,248 | | | | 2,380 | | | | - | | | | 302 | | | | - | | | | - | | | | 302 | | | | 140,062 | | | | 140,364 | | | | - | |
Total | | $ | 2,878 | | | $ | 9,315 | | | $ | 12,622 | | | $ | 24,815 | | | $ | 850,212 | | | $ | 875,027 | | | $ | - | | | $ | 1,135 | | | $ | 1,574 | | | $ | 10,341 | | | $ | 13,050 | | | $ | 1,423,564 | | | $ | 1,436,614 | | | $ | - | |
(dollars in thousands) | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Greater than 90 Days | | | Total Past Due | | | Current | | | Total Loans Receivable | | | Loans Receivable > 90 Days and Accruing | |
At December 31, 2017 | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | - | | | $ | - | | | $ | 8,963 | | | $ | 8,963 | | | $ | 424,341 | | | $ | 433,304 | | | $ | - | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | 104,617 | | | | 104,617 | | | | - | |
Commercial and industrial | | | 969 | | | | - | | | | 2,895 | | | | 3,864 | | | | 169,479 | | | | 173,343 | | | | - | |
Owner occupied real estate | | | - | | | | - | | | | 2,136 | | | | 2,136 | | | | 307,702 | | | | 309,838 | | | | - | |
Consumer and other | | | 144 | | | | - | | | | 851 | | | | 995 | | | | 75,188 | | | | 76,183 | | | | - | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | 64,764 | | | | 64,764 | | | | - | |
Total | | $ | 1,113 | | | $ | - | | | $ | 14,845 | | | $ | 15,958 | | | $ | 1,146,091 | | | $ | 1,162,049 | | | $ | - | |
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within our internal risk rating system as of December 31, 20162018 and 2015:2017:
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
At December 31, 2016: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 364,066 | | | $ | 877 | | | $ | 13,576 | | | $ | - | | | $ | 378,519 | |
Construction and land development | | | 61,453 | | | | - | | | | - | | | | - | | | | 61,453 | |
Commercial and industrial | | | 168,958 | | | | 606 | | | | 3,751 | | | | 1,429 | | | | 174,744 | |
Owner occupied real estate | | | 274,150 | | | | 511 | | | | 2,325 | | | | - | | | | 276,986 | |
Consumer and other | | | 62,370 | | | | - | | | | 1,290 | | | | - | | | | 63,660 | |
Residential mortgage | | | 9,552 | | | | - | | | | 130 | | | | - | | | | 9,682 | |
Total | | $ | 940,549 | | | $ | 1,994 | | | $ | 21,072 | | | $ | 1,429 | | | $ | 965,044 | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
At December 31, 2015: | | | | | | | | | | | | | �� | | | |
At December 31, 2018: | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 329,567 | | | $ | 7,956 | | | $ | 12,203 | | | $ | - | | | $ | 349,726 | | | $ | 510,186 | | | $ | 921 | | | $ | 4,631 | | | $ | - | | | $ | 515,738 | |
Construction and land development | | | 46,430 | | | | - | | | | 117 | | | | - | | | | 46,547 | | | | 121,042 | | | | - | | | | - | | | | - | | | | 121,042 | |
Commercial and industrial | | | 176,132 | | | | 225 | | | | 4,064 | | | | 1,429 | | | | 181,850 | | | | 196,751 | | | | 10 | | | | 3,382 | | | | 280 | | | | 200,423 | |
Owner occupied real estate | | | 242,560 | | | | 469 | | | | 3,369 | | | | - | | | | 246,398 | | | | 364,032 | | | | 1,303 | | | | 2,560 | | | | - | | | | 367,895 | |
Consumer and other | | | 47,104 | | | | 75 | | | | 947 | | | | - | | | | 48,126 | | | | 90,291 | | | | - | | | | 861 | | | | - | | | | 91,152 | |
Residential mortgage | | | 2,380 | | | | - | | | | - | | | | - | | | | 2,380 | | | | 140,240 | | | | 124 | | | | - | | | | - | | | | 140,364 | |
Total | | $ | 844,173 | | | $ | 8,725 | | | $ | 20,700 | | | $ | 1,429 | | | $ | 875,027 | | | $ | 1,422,542 | | | $ | 2,358 | | | $ | 11,434 | | | $ | 280 | | | $ | 1,436,614 | |
(dollars in thousands) | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
At December 31, 2017: | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 423,382 | | | $ | 959 | | | $ | 8,963 | | | $ | - | | | $ | 433,304 | |
Construction and land development | | | 104,617 | | | | - | | | | - | | | | - | | | | 104,617 | |
Commercial and industrial | | | 168,702 | | | | 140 | | | | 4,221 | | | | 280 | | | | 173,343 | |
Owner occupied real estate | | | 306,040 | | | | - | | | | 3,798 | | | | - | | | | 309,838 | |
Consumer and other | | | 75,181 | | | | - | | | | 1,002 | | | | - | | | | 76,183 | |
Residential mortgage | | | 64,637 | | | | 127 | | | | - | | | | - | | | | 64,764 | |
Total | | $ | 1,142,559 | | | $ | 1,226 | | | $ | 17,984 | | | $ | 280 | | | $ | 1,162,049 | |
The following table shows non-accrual loans by class as of December 31, 20162018 and 2015:2017:
(dollars in thousands) | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2018 | | | December 31, 2017 | |
| | | | | | | | | | | | |
Commercial real estate | | $ | 13,089 | | | $ | 5,913 | | | $ | 4,631 | | | $ | 8,963 | |
Construction and land development | | | - | | | | 117 | | | | - | | | | - | |
Commercial and industrial | | | 3,151 | | | | 3,156 | | | | 3,661 | | | | 2,895 | |
Owner occupied real estate | | | 1,546 | | | | 2,894 | | | | 1,188 | | | | 2,136 | |
Consumer and other | | | 808 | | | | 542 | | | | 861 | | | | 851 | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 18,594 | | | $ | 12,622 | | | $ | 10,341 | | | $ | 14,845 | |
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $498,000, $590,000, and $1.0 million, $765,000,for 2018, 2017, and $980,000, for 2016, 2015, and 2014, respectively.
Troubled Debt Restructurings
A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring ("TDR"(“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.
The following table summarizes information with regard to outstanding troubled debt restructurings at December 31, 20162018 and 2015:2017:
(dollars in thousands) | | Number of Loans | | | Accrual Status | | | Non- Accrual Status | | | Total TDRs | | | | Number of Loans | | | Accrual Status | | | Non- Accrual Status | | | Total TDRs | |
December 31, 2016 | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Commercial real estate | | | 1 | | | $ | 5,669 | | | $ | - | | | $ | 5,669 | | | | | 1 | | | $ | 6,316 | | | $ | - | | | $ | 6,316 | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | 2 | | | | 228 | | | | 349 | | | | 577 | | | | | 3 | | | | - | | | | 1,224 | | | | 1,224 | |
Owner occupied real estate | | | - | | | | - | | | | - | | | | - | | | | | 1 | | | | - | | | | 242 | | | | 242 | |
Consumer and other | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
Total | | | 3 | | | $ | 5,897 | | | $ | 349 | | | $ | 6,246 | | | | | 5 | | | $ | 6,316 | | | $ | 1,466 | | | $ | 7,782 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | | | | | |
Commercial real estate | | | 1 | | | $ | 5,778 | | | $ | - | | | $ | 5,778 | | | | | 1 | | | $ | 6,452 | | | $ | - | | | $ | 6,452 | |
Construction and land development | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
Commercial and industrial | | | 2 | | | | 252 | | | | 935 | | | | 1,187 | | | | | 3 | | | | 1,175 | | | | 349 | | | | 1,524 | |
Owner occupied real estate | | | 1 | | | | - | | | | 1,825 | | | | 1,825 | | | | | 1 | | | | 242 | | | | - | | | | 242 | |
Consumer and other | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
Residential mortgage | | | - | | | | - | | | | - | | | | - | | | | | - | | | | - | | | | - | | | | - | |
Total | | | 4 | | | $ | 6,030 | | | $ | 2,760 | | | $ | 8,790 | | | | | 5 | | | $ | 7,869 | | | $ | 349 | | | $ | 8,218 | |
All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into our estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.
There were no loan modifications made during the twelve months ended December 31, 2018 that met the criteria of a TDR.
The Company modified one commercial and industrial loan during the twelve month period ended December 31, 2017. In accordance with the modified terms of the commercial and industrial loan, the principal balance of $975,000 was converted from a line of credit to a term loan with a five year maturity.
The Company modified one owner occupied real estate loan during the twelve month period ended December 31, 2017. In accordance with the modified terms of the owner occupied loan of $245,000, certain concessions have been granted, including a reduction in the interest rate and an extension of the maturity date of the loan.
The Company modified one commercial real estate loan in the amount of $6.5 million during the twelve month period ended December 31, 2017 that met the criteria of a TDR. This loan was transferred to non-accrual status during the second quarter of 2015 as a result of delinquency caused by tenant vacancies. The Company restructured the loan based on new leases obtained by the borrower. In accordance with the modified terms of the loan, certain concessions have been granted, including a reduction in the interest rate. In addition, the principal was increased by $421,000. As a result of current payments for six consecutive months, the loan was returned to accrual status in the third quarter of 2017.
There were no loan modifications made during the twelve months ended December 31, 2016 that met the criteria of a TDR. There was one loan modification made during the year ended December 31, 2015 that met the criteria of a TDR.
The Company modified one commercial and industrial loan during the year ended December 31, 2015. In accordance with the modified terms of the commercial and industrial loan, the Company increased the principal by $30,000. The Company also extended the maturity date of the loan. The commercial and industrial loan has been and continues to be an accruing loan. The borrower has remained current since the modification. The pre-modification balance was $230,000 and the post modification balance was $260,000.
There were no residential mortgages in the process of foreclosure as of December 31, 2016 and December 31, 2015. Other real estate owned relating to residential real estate was $126,000 and $193,000 at December 31, 2016 and 2015, respectively.
After a loan is determined to be a TDR, we continue to track its performance under the most recent restructured terms. There were no TDRthree TDRs that subsequently defaulted during the year ended December 31, 2016.2018. There was one TDRwere no TDRs that subsequently defaulted during the year ended December 31, 2015. One loan classified as a TDR also subsequently defaulted during the year ended December 31, 2013. Partial writedowns were recorded during the years ended December 31, 20142017 and 2015,2016.
There were no residential mortgages in the process of foreclosure as of December 31, 2018 and a partial transfer to otherDecember 31, 2017, respectively. Other real estate owned relating to residential real estate was recorded during the year ended$0 and $42,000 at December 31, 2015.2018 and 2017, respectively.
6. 6. | Other Real Estate Owned |
Other real estate owned consists of properties acquired as a result of foreclosures or deeds in-lieu-of foreclosure. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. As of December 31, 20162018 the balance of OREO is comprised of twelvesix commercial construction, and residentialconstruction properties.
The following table presents a reconciliation of other real estate owned for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
(dollars in thousands) | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2018 | | | December 31, 2017 | | | December 31, 2016 | |
Beginning Balance, January 1st | | $ | 11,313 | | | $ | 3,715 | | | | 4,059 | | | $ | 6,966 | | | $ | 10,174 | | | | 11,313 | |
Additions | | | 616 | | | | 11,459 | | | | 1,000 | | | | 315 | | | | 291 | | | | 616 | |
Valuation adjustments | | | (355 | ) | | | (3,069 | ) | | | (1,147 | ) | | | (563 | ) | | | (3,000 | ) | | | (355 | ) |
Dispositions | | | (1,400 | ) | | | (792 | ) | | | (197 | ) | | | (495 | ) | | | (499 | ) | | | (1,400 | ) |
Ending Balance | | $ | 10,174 | | | $ | 11,313 | | | | 3,715 | | | $ | 6,223 | | | $ | 6,966 | | | | 10,174 | |
A summary of premises and equipment is as follows:
(dollars in thousands) | | December 31, 2016 | | | December 31, 2015 | | | | December 31, 2018 | | | December 31, 2017 | |
Land | | $ | 10,170 | | | $ | 8,029 | | | | $ | 15,957 | | | $ | 12,711 | |
Buildings | | | 25,693 | | | | 16,215 | | | | | 49,204 | | | | 40,519 | |
Leasehold improvements | | | 20,236 | | | | 19,621 | | | | | 20,396 | | | | 20,477 | |
Furniture, fixtures and equipment | | | 15,006 | | | | 11,680 | | | | | 21,430 | | | | 18,521 | |
Construction in progress | | | 3,734 | | | | 4,471 | | | | | 8,041 | | | | 4,961 | |
| | | 74,839 | | | | 60,016 | | | | | 115,028 | | | | 97,189 | |
Less accumulated depreciation | | | (17,799 | ) | | | (13,852 | ) | | | | (27,367 | ) | | | (22,242 | ) |
Net premises and equipment | | $ | 57,040 | | | $ | 46,164 | | | | $ | 87,661 | | | $ | 74,947 | |
Depreciation expense on premises and equipment amounted to approximately $5.4 million, $4.6 million, and $3.5 million $3.1 million,in 2018, 2017, and $2.4 million in 2016, 2015, and 2014, respectively. The construction in progress balance of $3.7$8.0 million mainly represents costs incurred for the selection and development of future store locations. Of this balance, $1.1$2.7 million represents land purchased and land deposits for fiveseven future store locations. CostsContractual construction commitments related to complete the projects in process are estimated to be $19.4future store locations were $8.0 million as of December 31, 2016.2018.
Republic has a line of credit with the Federal Home Loan Bank ("FHLB"(“FHLB”) of Pittsburgh with a maximum borrowing capacity of $467.1$717.1 million as of December 31, 2016.2018. As of December 31, 2016,2018 and 2017, there were no fixed term or overnight advancesborrowings against this line of credit. As of December 31, 2015, there were no fixed term advances2018, we had overnight borrowings of $91.4 million at a rate of 2.65% against this line of credit. There were no overnight borrowings outstanding as of December 31, 2017. As of December 31, 2015, there was an overnight advance of $47.0 million against this line of credit. The interest rate on the overnight advance as of December 31, 2015 was 0.43%. As of December 31, 2016,2018 and 2017, FHLB had issued letters of credit, on Republic'sRepublic’s behalf, totaling $100.0 million and $75.0 million, respectively, against its available credit line, primarily to be used as collateral for public deposits. There were no fixed term advances outstanding at any month-end during 20162018 and 2015.2017. At December 31, 2016, $675.8 million2018, $1.0 billion of loans collateralized the overnight advance and the lettersletter of credit. The maximum amount of overnight borrowings outstanding at any month-end was $48.8$206.9 million in 20162018 and $47.0$82.9 million in 2015.2017.
Republic also has a line of credit in the amount of $10.0 million available for the purchase of federal funds through another correspondent bank.the Atlantic Community Bankers Bank (“ACBB”). At December 31, 20162018 and 2015,2017, Republic had no amount outstanding against this line.the line at ACBB. There were no overnight advances on this line at any month end in 20162018 and 2015.2017.
Republic also established a line of credit with Zions Bank in the amount of $15.0 million to assist in managing our liquidity position during the year ended December 31, 2018. At December 31, 2018, Republic had no amount outstanding against the line at Zions Bank. There were no overnight balances on this line at any month end in 2018.
Subordinated debt and corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation:
The Company has sponsored threetwo outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the Company for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in an amount up to 25% of total Tier 1 capital.
In December 2006, Republic Capital Trust II ("(“Trust II"II”) issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to the Company. Trust II purchased $6.2 million of junior subordinated debentures of the Company due 2037, and the Company used the proceeds to call the securities of Republic Capital Trust I ("(“Trust I"I”). The debentures supporting Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month Libor. The Company may call the securities on any interest payment date after five years without a prepayment penalty.
On June 28, 2007, the Company caused Republic Capital Trust III ("(“Trust III"III”), through a pooled offering, to issue $5.0 million of trust preferred securities to investors and $0.2 million common securities to the Company. Trust III purchased $5.2 million of junior subordinated debentures of the Company due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month Libor. The Company has the ability to call the securities on any interest payment date without a prepayment penalty.
On June 10, 2008, the Company caused Republic First Bancorp Capital Trust IV ("(“Trust IV"IV”) to issue $10.8 million of convertible trust preferred securities as part of the Company'sCompany’s strategic capital plan. The securities were purchased by various investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp and, since December 5, 2016, chairman of the Company. This investor group also included a family trust of Harry D. Madonna, chairmanpresident and chief executive officer of Republic Bank,First Bancorp, Inc, and Theodore J. Flocco, Jr., who, since the investment, has been elected to the Company'sCompany’s Board of Directors and serves as the Chairman of the Audit Committee. Trust IV also issued $0.3 million of common securities to the Company. Trust IV purchased $11.1 million of junior subordinated debentures due 2038, which paypaid interest at an annual rate of 8.0% and arewere callable after the fifth year under certain terms and conditions. The trust preferred securities of Trust IV arewere convertible into approximately 1.7 million shares of common stock of the Company, based on a conversion price of $6.50 per share of Company common stock. One independent director converted $240,000 of trust preferred securities into 37,000 shares of common stock andin 2017. On January 31, 2018, the Company notified the existing holders of Trust IV of its intent to fully redeem these securities in accordance with the Optional Redemption terms included in the Indenture Agreement. The securities were redeemed on March 31, 2018 at Decembera price equal to the outstanding principal amount. The holders had the option to convert these securities into shares of the Company’s common stock at any time until the end of the last business day preceding the redemption date. During the first quarter of 2018, $10.1 million of trust preferred securities were converted into 1.6 million shares of common stock. After redemption of the remaining securities on March 31 2016 were fully convertible.2018, Trust IV was dissolved.
Deferred issuance costs included in subordinated debt were $595,000$82,000 and $619,000$555,000 at December 31, 20162018 and December 31, 2015,2017, respectively. Amortization of deferred issuance costs were $24,000, $24,000,$6,000, $29,000, and $24,000 for the years ended December 31, 2018, 2017, and 2016, 2015, and 2014, respectively. Deferred issuance costs in the amount of $467,000 were recorded against additional paid in capital during the first quarter of 2018 as a result of the conversion of trust preferred securities into common stock in accordance with ASC 470-20.
The following is a breakdown, by contractual maturities of the Company'sCompany’s certificates of deposit for the years 20172019 through 2021.2023.
(dollars in thousands) | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Thereafter | | | Total | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Certificates of Deposit | | $ | 65,247 | | | $ | 21,554 | | | $ | 1,605 | | | $ | 21,793 | | | $ | 965 | | | $ | - | | | $ | 111,164 | | | $ | 94,022 | | | $ | 57,138 | | | $ | 1,135 | | | $ | 958 | | | $ | 1,004 | | | $ | - | | | $ | 154,257 | |
Certificates of deposit of $250,000 or more totaled $42.5$104.6 million and $8.0$57.5 million at December 31, 20162018 and 2015,2017, respectively.
Deposits of related parties totaled $120.2$102.7 million and $93.5$107.1 million at December 31, 20162018 and 2015,2017, respectively. Brokered deposits totaled $18.6 million and $18.4 million at December 31, 2018 and 2017, respectively. Overdrafts totaled $277,000 and $132,000 at December 31, 2018 and 2017, respectively.
The benefitprovision (benefit) for income taxes for the years ended December 31, 2016, 2015,2018, 2017, and 20142016 consists of the following:
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Current | | | | | | | | | | | | | | | | | | |
Federal | | $ | 261 | | | $ | 58 | | | $ | 96 | | | $ | - | | | $ | 2,137 | | | $ | 261 | |
State | | | - | | | | - | | | | - | | | | 51 | | | | - | | | | - | |
Deferred | | | (380 | ) | | | (84 | ) | | | (142 | ) | | | | | | | | | | | | |
Total benefit for income taxes | | $ | (119 | ) | | $ | (26 | ) | | $ | (46 | ) | |
Federal | | | | 2,006 | | | | (5,056 | ) | | | (380 | ) |
State | | | | (479 | ) | | | - | | | | - | |
Total provision (benefit) for income taxes | | | $ | 1,578 | | | $ | (2,919 | ) | | $ | (119 | ) |
The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of 21.0% for the year ended December 31, 2018 and 35.0% for the years ended December 31, 2016, 2015,2017, and 2014.2016.
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Tax provision computed at statutory rate | | $ | 1,689 | | | $ | 843 | | | $ | 839 | | |
Tax provision computed at federal statutory rate | | | $ | 2,143 | | | $ | 2,095 | | | $ | 1,689 | |
State income tax, net of federal benefit | | | | (340 | ) | | | - | | | | - | |
Tax exempt interest | | | (582 | ) | | | (394 | ) | | | (246 | ) | | | (430 | ) | | | (573 | ) | | | (582 | ) |
Deferred tax only items | | | | 199 | | | | - | | | | - | |
Effect of change in tax rate | | | | - | | | | 7,661 | | | | - | |
Deferred tax asset valuation allowance adjustment | | | (1,508 | ) | | | (937 | ) | | | (679 | ) | | | - | | | | (12,214 | ) | | | (1,508 | ) |
Other | | | 282 | | | | 462 | | | | 40 | | | | 6 | | | | 112 | | | | 282 | |
Total benefit for income taxes | | $ | (119 | ) | | $ | (26 | ) | | $ | (46 | ) | |
Total provision (benefit) for income taxes | | | $ | 1,578 | | | $ | (2,919 | ) | | $ | (119 | ) |
The significant components of the Company'sCompany’s net deferred tax asset as of December 31, 20162018 and 20152017 are as follows:
(dollars in thousands) | | 2018 | | | 2017 | |
Deferred tax assets | | | | | | |
Allowance for loan losses | | $ | 2,185 | | | $ | 2,047 | |
Deferred compensation | | | 591 | | | | 557 | |
Unrealized losses on securities available for sale | | | 3,935 | | | | 2,789 | |
Realized losses in other than temporary impairment charge | | | - | | | | 65 | |
Foreclosed real estate write-downs | | | 2,351 | | | | 1,468 | |
Interest income on non-accrual loans | | | 615 | | | | 525 | |
Net operating loss carryforward | | | 3,541 | | | | 5,549 | |
Other | | | 1,472 | | | | 1,266 | |
Total deferred tax assets | | | 14,690 | | | | 14,266 | |
Deferred tax liabilities | | | | | | | | |
Deferred loan costs | | | 1,103 | | | | 998 | |
Premises and equipment | | | 634 | | | | 211 | |
Other | | | 619 | | | | 342 | |
Total deferred tax liabilities | | | 2,356 | | | | 1,551 | |
Net deferred tax asset | | $ | 12,334 | | | $ | 12,715 | |
(dollars in thousands) | | 2016 | | | 2015 | | |
Deferred tax assets | | | | | | | |
Allowance for loan losses | | $ | 3,288 | | | $ | 3,125 | | |
Deferred compensation | | | 824 | | | | 786 | | |
Unrealized losses on securities available for sale | | | 4,087 | | | | 1,774 | | |
Realized losses in other than temporary impairment charge | | | 336 | | | | 334 | | |
Foreclosed real estate write-downs | | | 2,377 | | | | 2,350 | | |
Interest income on non-accrual loans | | | 1,425 | | | | 1,185 | | |
Net operating loss carryforward | | | 8,896 | | | | 10,775 | | |
Other | | | 2,001 | | | | 1,580 | | |
Total deferred tax assets | | | 23,234 | | | | 21,909 | | |
Deferred tax liabilities | | | | | | | | | |
Deferred loan costs | | | 1,313 | | | | 1,029 | | |
Other | | | 528 | | | | 672 | | |
Total deferred tax liabilities | | | 1,841 | | | | 1,701 | | |
Net deferred tax asset before valuation allowance | | | 21,393 | | | | 20,208 | | |
Less: valuation allowance | | | (12,214 | ) | | | (13,722 | ) | |
Net deferred tax asset | | $ | 9,179 | | | $ | 6,486 | | |
The Company'sCompany’s net deferred tax asset before the consideration of a valuation allowance increaseddecreased to $21.4$12.3 million at December 31, 20162018 compared to $20.2$12.7 million at December 31, 2015. This increase was primarily driven by increases2017. The Company began recognizing an increased provision for federal and state income taxes during the first quarter of 2018 after reversing our deferred tax asset valuation allowance during the fourth quarter of 2017. The company initially recorded a deferred tax asset valuation allowance in 2011 and continued to carry this allowance after determining that some portion of the deferred tax asset balance may not be realized within its life cycle based on the weight of available evidence. Adjustments to the valuation allowance resulted in the unrealized losses on securities availablerecognition of a minimal provision for sale duringincome taxes in each period until its reversal in 2017. The effective tax rates for the twelve month periodyear ended December 31, 2016. 2018 and 2017 were 15% and 27%, excluding the adjustment to the deferred tax asset valuation allowance and offsets for the impact of the new tax legislation.
The $21.4$12.3 million net deferred tax asset as of December 31, 20162018 is comprised of $8.9$3.5 million currently recognizable through NOLnet operating loss carryforwards (“NOLs”) and $12.5$8.8 million attributable to several items associated with temporary timing differences which will reverse at some point in the future to provide a net reduction in tax liabilities. The Company'sCompany’s largest future reversal relates to its unrealized losses on securities available for sale, which totaled $4.1$3.9 million as of December 31, 2016.2018.
The Company evaluates the carrying amount of its deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification TopicASC 740, (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management'smanagement’s evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, the Company believes it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by financial institutions and their ability to absorb potential losses are important distinctions to be considered for bank holding companies like the Company. In addition, it is also important to consider that NOLs for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years.years, for NOLs created prior to January 1, 2018. The Company has ana federal NOL in the amount of $24.0$16.9 million which will begin to expire after December 31, 2030 through December 31, 2031 if not utilized prior to that date. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
years prior to expiration.
In assessing the need for a valuation allowance, the Company carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
Positive evidence evaluated when considering the need for a valuation allowance included:
| · | the annual improvement in pre-tax earnings during the four year period ended December 31, 2018; |
| · | strong growth in interest-earning assets is expected to continue and is supported by the capital raise completed during the fourth quarter of 2016; |
| · | deposit growth in the stores opened since the inception of the “Power of Red is Back” growth and expansion strategy in 2014 has met or exceeded expectations; |
| · | loan growth during 2018 was greater than 20%; |
| · | the acquisition of a residential mortgage lending team (Oak Mortgage Company) completed in July 2016 continues to supplement earnings growth; |
| · | the ratio of non-performing assets to total assets along with other credit quality metrics continue to improve; and |
| · | a cumulative loss has not been recorded in recent years. |
Negative evidence evaluated when considering the need for a valuation allowance included:
| · | profitability metrics including return on average assets and return on average equity remain below industry standards; |
| · | the Bank’s net interest margin declined during 2018 as a result of the challenging interest rate environment; and |
| · | past earnings have been heavily dependent upon the success of the SBA Lending Team which has recently experienced reduced loan volumes and the recently acquired Mortgage Division which can be significantly impacted by a changing interest rate environment and other various economic factors. |
The ongoing success of the Company’s growth and expansion strategy, along with the successful integration of the mortgage company and the limited exposure remaining with current asset quality issues put the Company in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against its deferred tax assets. Based on the analysis of availableguidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive andevidence considered at December 31, 2017 outweighed the negative evidence and that it was more likely than not that all of the Company determined thatCompany’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance should be recorded as ofwas not required at December 31, 20162017 and 2015.
The Company did assess tax planning strategies as defined under ASC 740-10-30 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method$10.6 million benefit for tax purposes for future fixed asset purchases. The Company believes that these tax planning strategies are (i.) prudent and feasible, (ii.) steps that the Company would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (iii.) would resultincome taxes was recorded in the realizationfourth quarter of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in2017 to reflect the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. The Company believes that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic directionreversal of the organization today and therefore, has no present intention to implement such strategies.valuation allowance.
The net deferred tax asset balance before consideration of a valuation allowance was $21.4$12.3 million as of December 31, 20162018 and $20.2$12.7 million as of December 31, 2015.2017. The tax planning strategies assessed resulted in the projected realization of approximately $9.2 million in net deferred tax assets as of December 31, 2016 and $6.5 million as of December 31, 2015 which can be considered more likely than not to be realized. Accordingly, the Company recorded a partial valuation allowance related to the deferred tax asset balance in the amount of $12.2 million as of December 31, 2016 and $13.7 million as of December 31, 2015.
2016. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. As the Company continues to record consecutive quarters of profitable results, projections of future taxable income become more reliable and can again be used as a factor in assessing the ability to fully realize the deferred tax asset. When the determination is made to include projections of future taxable income as a factor, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The Company has not identified any uncertain tax position as of December 31, 2016.2018. No interest or penalties have been recorded for the years ended December 31, 2016, 2015,2018, 2017, and 2014.2016. The Internal Revenue Service has completed its audits of the Company'sCompany’s federal tax returns for all tax years through December 31, 2009. The Internal Revenue Service is currently conducting an income tax audit for the year ended December 31, 2013.2014. The Pennsylvania Department of Revenue is not currently conducting any income tax audits. The Company'sCompany’s federal income tax returns filed subsequent to 20092015 remain subject to examination by the Internal Revenue Service.
11. | Financial Instruments with Off-Balance Sheet Risk |
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $215.9$286.4 million and $165.1$264.3 million and standby letters of credit of approximately $5.7$13.9 million and $5.2$12.6 million at December 31, 20162018 and 2015,2017, respectively. Commitments often expire without being drawn upon. Of the $215.9$286.4 million of commitments to extend credit at December 31, 2016,2018, substantially all were variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer'scustomer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management'smanagement’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management'smanagement’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of liability as of December 31, 20162018 and 20152017 for guarantees under standby letters of credit issued is not material. material
12. | Commitments and Contingencies |
Lease Arrangements
As of December 31, 2016,2018, the Company had entered into non-cancelable leases expiring on various dates through November 30, 2036.December 31, 2058. Certain leases include escalation clauses that will require increasing cash payments over the term of the lease. The leases are accounted for as operating leases. The minimum annual rental payments required under these leases are as follows (dollars in thousands):
Year Ended | | Amount | | | | Amount | |
| | | | | | | |
2017 | | $ | 3,581 | | | |
2018 | | | 3,449 | | | |
2019 | | | 3,306 | | | | $ | 4,124 | |
2020 | | | 3,253 | | | | | 4,128 | |
2021 | | | 2,028 | | | | | 2,879 | |
2022 | | | | 2,590 | |
2023 | | | | 1,916 | |
Thereafter | | | 14,883 | | | | | 36,036 | |
Total | | $ | 30,500 | | | | $ | 51,673 | |
The Company incurred rent expense of $3.4$4.4 million, $2.9$4.0 million, and $2.7$3.4 million for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively.
Other
The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
Dividend payments by Republic to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code"“Banking Code”) and the Federal Deposit Insurance Act (the "FDIA"“FDIA”). Under the Banking Code, no dividends may be paid except from "accumulated“accumulated net earnings"earnings” (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, Republic would be limited to $23.9$48.5 million of dividends plus an additional amount equal to its net profit for 2017,2019, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios.
State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by Republic. Federal banking agencies impose four minimum capital requirements on the Company'sCompany’s risk-based capital ratios based on total capital, Tier 1 capital, CET 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank'sbank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt“prompt corrective action"action” or other regulatory enforcement action. In assessing a bank'sbank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit; quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management'smanagement’s overall ability to monitor and control risks.
The following table presents the Company'sCompany’s and Republic'sRepublic’s capital regulatory ratios calculated based on Basel III guidelines at December 31, 20162018 and 2015:2017:
(dollars in thousands) | | Actual | | | Minimum Capital Adequacy | | | Minimum Capital Adequacy with Capital Buffer | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
At December 31, 2018: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total risk based capital | | | | | | | | | | | | | | | | | | | | | |
Republic | | $ | 231,610 | | | | 13.26% |
| | $ | 139,722 | | | | 8.00% |
| | $ | 172,489 | | | | 9.875% |
| | $ | 174,652 | | | | 10.00% |
|
Company | | | 262,964 | | | | 15.03% |
| | | 140,009 | | | | 8.00% |
| | | 172,824 | | | | 9.875% |
| | | - | | | | -% |
|
Tier one risk based capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 222,995 | | | | 12.77% |
| | | 104,791 | | | | 6.00% |
| | | 137,539 | | | | 7.875% |
| | | 139,722 | | | | 8.00% |
|
Company | | | 254,349 | | | | 14.53% |
| | | 105,007 | | | | 6.00% |
| | | 137,821 | | | | 7.875% |
| | | - | | | | -% |
|
CET 1 risk based capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 222,995 | | | | 12.77% |
| | | 78,594 | | | | 4.50% |
| | | 111,341 | | | | 6.375% |
| | | 113,524 | | | | 6.50% |
|
Company | | | 243,349 | | | | 13.90% |
| | | 78,755 | | | | 4.50% |
| | | 111,570 | | | | 6.375% |
| | | - | | | | -% |
|
Tier one leveraged capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 222,995 | | | | 8.21% |
| | | 108,685 | | | | 4.00% |
| | | 108,685 | | | | 4.00% |
| | | 135,857 | | | | 5.00% |
|
Company | | | 254,349 | | | | 9.35% |
| | | 108,800 | | | | 4.00% |
| | | 108,800 | | | | 4.00% |
| | | - | | | | -% |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
At December 31, 2017: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Total risk based capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | $ | 187,732 | | | | 12.57% |
| | $ | 119,446 | | | | 8.00% |
| | $ | 138,109 | | | | 9.25% |
| | $ | 149,307 | | | | 10.00% |
|
Company | | | 249,510 | | | | 16.70% |
| | | 119,521 | | | | 8.00% |
| | | 138,197 | | | | 9.25% |
| | | - | | | | -% |
|
Tier one risk based capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 179,133 | | | | 12.00% |
| | | 89,584 | | | | 6.00% |
| | | 108,248 | | | | 7.25% |
| | | 119,446 | | | | 8.00% |
|
Company | | | 240,911 | | | | 16.13% |
| | | 89,641 | | | | 6.00% |
| | | 108,316 | | | | 7.25% |
| | | - | | | | -% |
|
CET 1 risk based capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 179,133 | | | | 12.00% |
| | | 67,188 | | | | 4.50% |
| | | 85,852 | | | | 5.75% |
| | | 97,050 | | | | 6.50% |
|
Company | | | 220,433 | | | | 14.75% |
| | | 67,231 | | | | 4.50% |
| | | 85,906 | | | | 5.75% |
| | | - | | | | -% |
|
Tier one leveraged capital | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
Republic | | | 179,133 | | | | 7.91% |
| | | 90,531 | | | | 4.00% |
| | | 90,531 | | | | 4.00% |
| | | 113,164 | | | | 5.00% |
|
Company | | | 240,911 | | | | 10.64% |
| | | 90,586 | | | | 4.00% |
| | | 90,586 | | | | 4.00% |
| | | - | | | | -% |
|
(dollars in thousands) | | Actual | | | Minimum Capital Adequacy | | | Minimum Capital Adequacy with Capital Buffer | | | To Be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
At December 31, 2016: | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Total risk based capital | | | | | | | | | | | | | | | | | | | | | |
Republic | | $ | 179,057 | | | | 13.93 | % | | | $ | 102,811 | | | | 8.00 | % | | $ | 110,843 | �� | | | 8.625 | % | | $ | 128,514 | | | | 10.00 | % |
Company | | | 245,043 | | | | 18.99 | % | | | | 103,226 | | | | 8.00 | % | | | 111,290 | | | | 8.625 | % | | | - | | | | - | % |
Tier one risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | | 169,902 | | | | 13.22 | % | | | | 77,108 | | | | 6.00 | % | | | 85,140 | | | | 6.625 | % | | | 102,811 | | | | 8.00 | % |
Company | | | 235,888 | | | | 18.28 | % | | | | 77,419 | | | | 6.00 | % | | | 85,484 | | | | 6.625 | % | | | - | | | | - | % |
CET 1 risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | | 169,902 | | | | 13.22 | % | | | | 57,831 | | | | 4.50 | % | | | 65,863 | | | | 5.125 | % | | | 83,534 | | | | 6.50 | % |
Company | | | 214,088 | | | | 16.59 | % | | | | 58,064 | | | | 4.50 | % | | | 66,129 | | | | 5.125 | % | | | - | | | | - | % |
Tier one leveraged capital | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | | 169,902 | | | | 9.20 | % | | | | 73,843 | | | | 4.00 | % | | | 73,843 | | | | 4.00 | % | | | 92,304 | | | | 5.00 | % |
Company | | | 235,888 | | | | 12.74 | % | | | | 74,073 | | | | 4.00 | % | | | 74,073 | | | | 4.00 | % | | | - | | | | - | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2015: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total risk based capital | | | | | | | | | | | | | | | | | | | | | |
Republic | | $ | 138,566 | | | | 12.65 | % | | | $ | 87,617 | | | | 8.00 | % | | $ | - | | | | - | % | | $ | 109,521 | | | | 10.00 | % |
Company | | | 145,089 | | | | 13.19 | % | | | | 87,976 | | | | 8.00 | % | | | - | | | | - | % | | | - | | | | - | % |
Tier one risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | | 129,863 | | | | 11.86 | % | | | | 65,712 | | | | 6.00 | % | | | - | | | | - | % | | | 87,617 | | | | 8.00 | % |
Company | | | 136,386 | | | | 12.40 | % | | | | 65,982 | | | | 6.00 | % | | | - | | | | - | % | | | - | | | | - | % |
CET 1 risk based capital | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | | 129,863 | | | | 11.86 | % | | | | 49,284 | | | | 4.50 | % | | | - | | | | - | % | | | 71,189 | | | | 6.50 | % |
Company | | | 114,586 | | | | 10.42 | % | | | | 49,487 | | | | 4.50 | % | | | - | | | | - | % | | | - | | | | - | % |
Tier one leveraged capital | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Republic | | | 129,863 | | | | 9.22 | % | | | | 56,328 | | | | 4.00 | % | | | - | | | | - | % | | | 70,410 | | | | 5.00 | % |
Company | | | 136,386 | | | | 9.65 | % | | | | 56,531 | | | | 4.00 | % | | | - | | | | - | % | | | - | | | | - | % |
Management believes that Republic met, as of December 31, 2016,2018, all capital adequacy requirements to which it is subject. As of December 31, 20162018 and 2015,2017, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification that management believes have changed Republic'sRepublic’s category.
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies' capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implemented higher minimum capital requirements, added a new common equity tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements were a common equity tier 1 capital ratio of 4.5% (6.5% to be considered "well capitalized") and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered "well capitalized"); the total capital ratio remained at 8.0% under the new rules (10.0% to be considered "well capitalized"). Under the final capital rules, that became effective on January 1, 2015, there was a requirement for arisk-based capital ratios are calculated by dividing common equity Tier 1, capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimumTier 1, and total risk-based capital, standards inrespectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under the rule. Institutions that do notFederal Reserve’s rules, Republic is required to maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in oura minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%requirement of 4.5%, thea minimum Tier 1 capital ratio to 8.5%requirement of 6%, and thea minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the new rules, in order to 10.5%avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a fully phased-in basisbanking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2019. 2016 at the 0.625% level and has been phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and have been phased-in over a three-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter.
The following table shows the required capital ratios with the conversation buffer over the phase-in period.
| | Basel III Community Banks Minimum Capital Ratio Requirements |
| | 2016 | | 2017 | | 2018 | | 2019 |
| | | | | | | | | | | | |
Common equity tier 1 capital (CET1) | | | 5.125 | % | | | 5.750 | % | | | 6.375 | % | | | 7.000 | % |
Tier 1 capital (to risk weighted assets) | | | 6.625 | % | | | 7.250 | % | | | 7.875 | % | | | 8.500 | % |
Total capital (to risk-weighted assets) | | | 8.625 | % | | | 9.250 | % | | | 9.875 | % | | | 10.500 | % |
The Company believes that, as of December 31, 2016,2018, all capital adequacy requirements are met under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.
Defined Contribution Plan
The Company has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Company limited to 4% of total salary. The total expense charged to Republic, and included in salaries and employee benefits relating to the plan, was $1.1 million in 2018, $927,000 in 2017, and $627,000 in 2016, $546,000 in 2015, and $480,000 in 2014.2016.
Directors'Directors’ and Officers'Officers’ Plans
The Company has agreements that provide for an annuity payment upon the retirement or death of certain directors and officers, ranging from $15,000 to $25,000 per year for ten years. The agreements were modified for most participants in 2001, to establish a minimum age of 65 to qualify for the payments. All participants are fully vested. The accrued benefits under the plan amounted to $1.3$1.1 million at December 31, 20162018 and 2015,$1.2 million at December 31, 2017, which is included in other liabilities. The expense for the years ended December 31, 2018, 2017, and 2016, 2015,totaled $18,000, $24,000, and 2014, totaled $31,000, $34,000, and $36,000, respectively, which is included in salaries and employee benefits. The Company funded the plan through the purchase of certain life insurance contracts. The aggregate cash surrender value of these contracts (owned by the Company) was $2.4 million and $2.3$2.5 million at December 31, 20162018 and 2015, respectively,$2.4 million at December 31, 2017 and is included in other assets.
The Company maintains a deferred compensation plan for the benefit of certain officers and directors. As of December 31, 2016, no additional individuals may participate in the plan. The plan permits certain participants to make elective contributions to their accounts, subject to applicable provisions of the Internal Revenue Code. In addition, the Company may make discretionary contributions to participant accounts. Company contributions are subject to vesting, and generally vest three years after the end of the plan year to which the contribution applies, subject to acceleration of vesting upon certain changes in control (as defined in the plan) and to forfeiture upon termination for cause (as defined in the plan). Participant accounts are adjusted to reflect contributions and distributions, and income, gains, losses, and expenses as if the accounts had been invested in permitted investments selected by the participants, including Company common stock. The plan provides for distributions upon retirement and, subject to applicable limitations under the Internal Revenue Code, limited hardship withdrawals. As of both December 31, 20162018 and 2015, $974,000 and $851,000, respectively,2017, $1.2 million in benefits had vested and the accrued benefits are included in other liabilities.
A reduction in expense of $15,000 was recognized for the deferred compensation plan during 2018. Expense recognized for the deferred compensation plan for 2017 and 2016 2015,was $28,000 and 2014 was $88,000, $15,000 and $147,000, respectively, and is included in salaries and employee benefits. Although the plan is an unfunded plan, and does not require the Company to segregate any assets, the Company has purchased shares of Company common stock in anticipation of its obligation to pay benefits under the plan. Such shares are classified in the financial statements as stock held by deferred compensation plan. No purchases were made in 2016, 2015,2018, 2017, and 2014.2016. As of December 31, 2016,2018, approximately 25,437 shares of Company common stock were classified as stock held by deferred compensation plan.
15. | Fair Value Measurements and Fair Values of Financial Instruments |
Management uses its best judgment in estimating the fair value of the Company'sCompany’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'sliability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 20162018 and 2015December 31, 2017 were as follows:
(dollars in thousands) | | Total | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | | | Total | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Collateralized mortgage obligations | | | $ | 196,259 | | | $ | - | | | $ | 196,259 | | | $ | - | |
Agency mortgage-backed securities | | | | 38,499 | | | | - | | | | 38,499 | | | | - | |
Municipal securities | | | | 20,639 | | | | - | | | | 20,639 | | | | - | |
Corporate bonds | | | | 59,274 | | | | - | | | | 56,205 | | | | 3,069 | |
Asset-backed securities | | | | 6,343 | | | | - | | | | 6,343 | | | | - | |
Securities Available for Sale | | | $ | 321,014 | | | $ | - | | | $ | 317,945 | | | $ | 3,069 | |
| | | | | | | | | | | | | | | | | |
Mortgage Loans Held for Sale | | | $ | 20,887 | | | $ | - | | | $ | 20,887 | | | $ | - | |
SBA Servicing Assets | | | | 4,785 | | | | - | | | | - | | | | 4,785 | |
Interest Rate Lock Commitments | | | | 410 | | | | - | | | | 410 | | | | - | |
Best Efforts Forward Loan Sales Commitments | | | | 5 | | | | - | | | | 5 | | | | - | |
Mandatory Forward Loan Sales Commitments | | | | 10 | | | | - | | | | 10 | | | | - | |
| | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest Rate Lock Commitments | | | | - | | | | - | | | | - | | | | - | |
Best Efforts Forward Loan Sales Commitments | | | | 138 | | | | - | | | | 138 | | | | - | |
Mandatory Forward Loan Sales Commitments | | | | 230 | | | | - | | | | 230 | | | | - | |
| | | | | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 224,765 | | | $ | - | | | $ | 224,765 | | | $ | - | | | $ | 320,241 | | | $ | - | | | $ | 320,241 | | | $ | - | |
Agency mortgage-backed securities | | | 36,710 | | | | - | | | | 36,710 | | | | - | | | | 54,866 | | | | - | | | | 54,866 | | | | - | |
Municipal securities | | | 26,547 | | | | - | | | | 26,547 | | | | - | | | | 15,100 | | | | - | | | | 15,100 | | | | - | |
Corporate bonds | | | 64,748 | | | | - | | | | 61,777 | | | | 2,971 | | | | 60,282 | | | | - | | | | 57,196 | | | | 3,086 | |
Asset-backed securities | | | 15,149 | | | | - | | | | 15,149 | | | | - | | | | 13,452 | | | | - | | | | 13,452 | | | | - | |
Trust Preferred Securities | | | 1,820 | | | | - | | | | - | | | | 1,820 | | | | 489 | | | | - | | | | - | | | | 489 | |
Securities Available for Sale | | $ | 369,739 | | | $ | - | | | $ | 364,948 | | | $ | 4,791 | | | $ | 464,430 | | | $ | - | | | $ | 460,855 | | | $ | 3,575 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loans Held for Sale | | $ | 23,911 | | | $ | - | | | $ | 23,911 | | | $ | - | | | $ | 43,375 | | | $ | - | | | $ | 43,375 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
SBA Servicing Assets | | | 5,352 | | | | - | | | | - | | | | 5,352 | | | | 5,243 | | | | - | | | | - | | | | 5,243 | |
| | | | | | | | | | | | | | | | | |
Interest Rate Lock Commitments | | | 439 | | | | - | | | | 439 | | | | - | | | | 363 | | | | - | | | | 363 | | | | - | |
| | | | | | | | | | | | | | | | | |
Best Efforts Forward Loan Sales Commitments | | | 103 | | | | - | | | | 103 | | | | - | | | | 5 | | | | - | | | | 5 | | | | - | |
| | | | | | | | | | | | | | | | | |
Mandatory Forward Loan Sales Commitments | | | 229 | | | | - | | | | 229 | | | | - | | | | 19 | | | | - | | | | 19 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Lock Commitments | | | 55 | | | | - | | | | 55 | | | | - | | | | 1 | | | | - | | | | 1 | | | | - | |
| | | | | | | | | | | | | | | | | |
Best Efforts Forward Loan Sales Commitments | | | 125 | | | | - | | | | 125 | | | | - | | | | 93 | | | | - | | | | 93 | | | | - | |
| | | | | | | | | | | | | | | | | |
Mandatory Forward Loan Sales Commitments | | | 38 | | | | - | | | | 38 | | | | - | | | | 195 | | | | - | | | | 195 | | | | - | |
| | | | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Collateralized mortgage obligations | | $ | 178,145 | | | $ | - | | | $ | 178,145 | | | $ | - | | |
Agency mortgage-backed securities | | | 10,171 | | | | - | | | | 10,171 | | | | - | | |
Municipal securities | | | 23,344 | | | | - | | | | 23,344 | | | | - | | |
Corporate bonds | | | 54,129 | | | | - | | | | 51,295 | | | | 2,834 | | |
Asset-backed securities | | | 17,005 | | | | - | | | | 17,005 | | | | - | | |
Trust Preferred Securities | | | 1,883 | | | | - | | | | - | | | | 1,883 | | |
Other securities | | | 118 | | | | - | | | | 118 | | | | - | | |
Securities Available for Sale | | $ | 284,795 | | | $ | - | | | $ | 280,078 | | | $ | 4,717 | | |
| | | | | | | | | | | | | | | | | |
SBA Servicing Assets | | $ | 4,886 | | | $ | - | | | $ | - | | | $ | 4,886 | | |
The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
(dollars in thousands) | | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Beginning balance, January 1st | | $ | 4,886 | | | $ | 4,099 | | | | 3,477 | | |
Beginning balance, January 1st | | | $ | 5,243 | | | $ | 5,352 | | | | 4,886 | |
Additions | | | 1,541 | | | | 801 | | | | 1,277 | | | | 1,000 | | | | 1,078 | | | | 1,541 | |
Fair value adjustments | | | (1,075 | ) | | | (14 | ) | | | (655 | ) | | | (1,458 | ) | | | (1,187 | ) | | | (1,075 | ) |
Ending balance, December 31st | | $ | 5,352 | | | $ | 4,886 | | | | 4,099 | | |
Ending balance, December 31st | | | $ | 4,785 | | | $ | 5,243 | | | | 5,352 | |
Fair value adjustments are recorded as loan advisory and servicing fees on the statement of operations.income. Servicing fee income, not including fair value adjustments, totaled $2.0 million, $1.8 million, $1.7 million, and $1.5$1.8 million for the years ended December 31, 2018, 2017, and 2016, 2015,respectively. Total loans in the amount of $204.4 million at December 31, 2018 and 2014, respectively.$204.9 million at December 31, 2017 were serviced for others.
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2016, 2015,2018, 2017, and 2014:2016:
| | Year Ended December 31, 2016 | | | Year Ended December 31, 2015 | | | Year Ended December 31, 2014 | | | Year Ended December 31, 2018 | | | Year Ended December 31, 2017 | | | Year Ended December 31, 2016 | |
Level 3 Investments Only (dollars in thousands) | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | | | Trust Preferred Securities | | | Corporate Bonds | |
Balance, January 1, | | $ | 1,883 | | | $ | 2,834 | | | $ | 3,193 | | | $ | 3,005 | | | $ | 2,850 | | | $ | 3,006 | | | $ | 489 | | | $ | 3,086 | | | $ | 1,820 | | | $ | 2,971 | | | $ | 1,883 | | | $ | 2,834 | |
Security transferred to Level 3 measurement | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Unrealized (losses) gains | | | (56 | ) | | | 137 | | | | 882 | | | | (171 | ) | | | 360 | | | | (1 | ) | | | 237 | | | | (17 | ) | | | 1,006 | | | | 115 | | | | (56 | ) | | | 137 | |
Paydowns | | | - | | | | - | | | | (19 | ) | | | - | | | | (10 | ) | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | |
Proceeds from sales | | | - | | | | - | | | | (1,952 | ) | | | - | | | | - | | | | - | | | | (660 | ) | | | - | | | | (1,539 | ) | | | - | | | | - | | | | - | |
Realized losses | | | - | | | | - | | | | (218 | ) | | | - | | | | - | | | | - | | | | (66 | ) | | | - | | | | (798 | ) | | | - | | | | - | | | | - | |
Impairment charges on Level 3 | | | (7 | ) | | | - | | | | (3 | ) | | | - | | | | (7 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7 | ) | | | - | |
Balance, December 31, | | $ | 1,820 | | | $ | 2,971 | | | $ | 1,883 | | | $ | 2,834 | | | $ | 3,193 | | | $ | 3,005 | | | $ | - | | | $ | 3,069 | | | $ | 489 | | | $ | 3,086 | | | $ | 1,820 | | | $ | 2,971 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 20162018 and 2015,2017, respectively, were as follows:
(dollars in thousands) | | Total | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | | | Total | | | (Level 1) Quoted Prices in Active Markets for Identical Assets | | | (Level 2) Significant Other Observable Inputs | | | (Level 3) Significant Unobservable Inputs | |
December 31, 2016: | | | | | | | | | | | | | |
December 31, 2018: | | | | | | | | | | | | | |
Impaired loans | | $ | 9,110 | | | $ | - | | | $ | - | | | $ | 9,110 | | | $ | 5,955 | | | $ | - | | | $ | - | | | $ | 5,955 | |
Other real estate owned | | | 8,563 | | | | - | | | | - | | | | 8,563 | | | | 1,114 | | | | - | | | | - | | | | 1,114 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015: | | | | | | | | | | | | | | | | | |
December 31, 2017: | | | | | | | | | | | | | | | | | |
Impaired loans | | $ | 5,734 | | | $ | - | | | $ | - | | | $ | 5,734 | | | $ | 7,322 | | | $ | - | | | $ | - | | | $ | 7,322 | |
Other real estate owned | | | 10,034 | | | | - | | | | - | | | | 10,034 | | | | 5,727 | | | | - | | | | - | | | | 5,727 | |
The table below presents additional quantitative information about Level 3 assets measured at fair value (dollars in thousands):
| | Quantitative Information about Level 3 Fair Value Measurements | | | | Quantitative Information about Level 3 Fair Value Measurements |
Asset Description | | Fair Value | | Valuation Technique | | Unobservable Input | | Range Weighted Average | | Fair Value | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
December 31, 2016 | | | | | | | | | | |
December 31, 2018 | | | | | | | | | |
| | | | | | | | | |
Corporate bonds | | $ | 2,971 | | Discounted Cash Flows | | Discount Rate | | (4.68%) | | $ | 3,069 | | Discounted Cash Flows | | Discount Rate | | | (8.24%) |
| | | | | | | | | | | | | | | | | | | |
Trust preferred securities | | $ | 1,820 | | Discounted Cash Flows | | Discount Rate | | 8.85% - 9.35% (9.08%) | |
| | | | | | | | | | |
|
| | Discounted | | Conditional Prepayment Rate | | | (10.31%) |
SBA servicing assets | | $ | 5,352 | | Discounted Cash Flows | | Conditional Prepayment Rate Discount Rate | | (6.12%) (10.00%) | | $
| 4,785 | | Cash Flows | | | | | |
| | | | | | | | Discount Rate | | | (11.50%) |
| | | | | | | | | | | | | | | | | | | |
Impaired loans | | $ | 9,110 | | Appraised Value of Collateral (1) Sales Price | | Liquidation expenses (2) Liquidation expenses (2) | | 7% - 20% (11%) (3) (7%) (3) | | $ | 5,955 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | | 11% - 24% (13%) (3) |
| | | | | | | | | | | | | | | | | | | |
Other real estate owned | | $ | 8,563 | | Appraised Value of Collateral (1) Sales Price | | Liquidation expenses (2) Liquidation expenses (2) | | 5% - 76% (17%) (3) 7% - 8% (7%) (3) | | $ | 1,114 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | | (7%) (3) |
| | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | |
| | | | | | | | | | | |
Corporate bonds | | $ | 2,834 | | Discounted Cash Flows | | Discount Rate | | (4.11%) | | $ | 3,086 | | Discounted Cash Flows | | Discount Rate | | | (5.99%) |
| | | | | | | | | | | | | | | | | | | |
Trust preferred securities | | $ | 1,883 | | Discounted Cash Flows | | Discount Rate | | 7.31% - 7.81% (7.77%) | | $ | 489 | | Discounted Cash Flows | | Discount Rate | | | (8.33%) |
| | | | | | | | | | | | | | | | | | | |
| | |
|
| | Discounted | | Conditional Prepayment Rate | | | (7.85%) |
SBA servicing assets | | $ | 4,886 | | Discounted Cash Flows | | Conditional Prepayment Rate Discount Rate | | (6.27%) (10.00%) | | $
| 5,243 | | Cash Flows | | | | | |
| | | | | | | | Discount Rate | | | (10.50%) |
| | | | | | | | | | | | | | | | | | | |
Impaired loans | | $ | 5,734 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | 12% - 78% (20%) (3) | | $ | 7,322 | | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | | 10% - 21% (14%) (3) |
| | | | | | | | | | | | | | | | | | | |
| |
|
|
| | Appraised Value of Collateral (1) | | Liquidation expenses (2) | | | (22%) (3) |
Other real estate owned | | $ | 10,034 | | Appraised Value of Collateral (1) Sales Price | | Liquidation expenses (2) Appraisal adjustment (2) Liquidation expenses (2) | | 6% - 30% (10%) (3) (50%) (3) 7% - 9% (9%) (3) | | $ | 5,727 | | | | | | | |
| | | | | | Sales Price | | Liquidation expenses (2) | | | 4% - 7% (7%) (3) |
| (1) | Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable. |
| (2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. |
| (3) | The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value. |
The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company'sCompany’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'sCompany’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'sCompany’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'sCompany’s financial instruments at December 31, 20162018 and December 31, 2015:2017:
Cash and Cash Equivalents (Carried at Cost)122
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.
Investment Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities'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'smanagement’s best estimate is used. Management'sManagement’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
The types of instruments valued based on matrix pricing in active markets include all of the Company'sCompany’s U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations.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'smanagement’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. TheRepublic has one Level 3 investment securities classified as available for sale are comprised of various issues of trust preferred securities andwhich is a single corporate bond.
The trust preferred securities are pools of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations ("CDOs") which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically. The secondary market for these securities has become inactive, and therefore these securities are classified as Level 3 securities. The fair value analysis does not reflect or represent the actual terms or prices at which any party could purchase the securities. There is currently a limited secondary market for the securities and there can be no assurance that any secondary market for the securities will expand.
An independent, third party pricing service is used to estimate the current fair market value of each CDO held in the investment securities portfolio. The calculations used to determine fair value are based on the attributes of the trust preferred securities, the financial condition of the issuers of the trust preferred securities, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of each security and its specific collateral as of December 31, 2016 and December 31, 2015. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and SNL Financial. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss severity percentages.
The fair market valuation for each CDO was determined based on discounted cash flow analyses. The cash flows are primarily dependent on the estimated speeds at which the trust preferred securities are expected to prepay, the estimated rates at which the trust preferred securities are expected to defer payments, the estimated rates at which the trust preferred securities are expected to default, and the severity of the losses on securities that do default.
Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of the Company's senior and mezzanine tranches of CDOs. The values of the Company's mezzanine tranches of CDOs are also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of the Company's holdings are not quantifiably estimable.
Alsocorporate bond included in Level 3 investment securities classified as available for sale is a corporate bondwas transferred from Level 2 in 2010 thatand 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'sissuer’s financial statements. The issuer is a "well capitalized"“well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.
SBA Loans Held For Sale (Carried at Lower of Cost or Fair Value)
The fair values of SBA loans held for sale is determined, when possible, using quoted secondary-market prices and are classified within Level 3 of the fair value hierarchy. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the year ended December 31, 2016 and the year ended December 31, 2015.
Mortgage Loans Held for Sale (Carried at Fair Value)
The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. In 2016, Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect thetheir economic value of the mortgages held for sale on the balance sheet. All mortgage loans held for sale originated subsequent to the election date are carried at fair value. All loans held for sale originated prior to the election date were sold prior to September 30, 2016. Interest income on loans held for sale, which totaled $283,000$1.2 million and $976,000 for the twelve months ended December 31, 2016,2018 and December 31, 2017, respectively, are included in interest and fees in the statements of income.
The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of December 31, 20162018 and December 31, 2017 (dollars in thousands):
Mortgage loans held for sale | Carrying Amount | | Aggregate Unpaid Principal Balance | | Excess Carrying Amount Over Aggregate Unpaid Principal Balance | |
December 31, 2016 | | $ | 23,911 | | | $ | 23,428 | | | $ | 483 | |
| | Carrying Amount | | | Aggregate Unpaid Principal Balance | | | Excess Carrying Amount Over Aggregate Unpaid Principal Balance | |
December 31, 2018 | | $ | 20,887 | | | $ | 20,071 | | | $ | 816 | |
| | | | | | | | | | | | |
December 31, 2017 | | $ | 43,375 | | | $ | 42,046 | | | $ | 1,329 | |
Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of income in mortgage banking income. Republic did not have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at December 31, 2016.2018 and December 31, 2017.
Interest Rate Lock Commitments ("IRLC"(“IRLC”)
The Company determines the value of IRLC’s 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 Republic'sIRLC’S 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, instruments are based uponthe purpose of the mortgage (purchase versus financing), the stage of completion of the underlying loans measured at fair value on a recurring basisapplication and underwriting process, and the probability of such commitments being exercised. Due to observable market data inputs used by Republic,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.
Loans Receivable (Carried at Cost)
The fair values of loans receivable, excluding all nonaccrual loans and accruing loans deemed impaired with specific loan allowances, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.
Impaired Loans (Carried at Lower of Cost or Fair Value)
Impaired loans are those that the Company has measured impairment based on the fair value of the loan'sloan’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. At December 31, 20162018 and December 31, 2015,2017, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.
SBA Servicing Asset (Carried at Fair Value)
The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a quarterly basis and adjustments are presented as loan advisory and servicing fees on the statement of operations.income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company'sCompany’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing the Company'sCompany’s market-based discount ratio assumptions. In all cases, the Company'sCompany models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. At December 31, 20162018 and December 31, 2015,2017, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are included in the accompanying table.
(dollars in thousands) | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2018 | | | December 31, 2017 | |
| | | | | | | | | | | | |
SBA Servicing Asset | | | | | | | | | | | | |
| | | | | | | | | | | | |
Fair Value of SBA Servicing Asset | | $ | 5,352 | | | $ | 4,886 | | | $ | 4,785 | | | $ | 5,243 | |
| | | | | | | | | | | | | | | | |
Composition of SBA Loans Serviced for Others | | | | | | | | | | | |
| | | | |
Fixed-rate SBA loans | | | 0 | % | | | 0 | % | | | 2% |
| | | 2% |
|
Adjustable-rate SBA loans | | | 100 | % | | | 100 | % | | | 98% |
| | | 98% |
|
Total | | | 100 | % | | | 100 | % | | | 100% |
| | | 100% |
|
| | | | | | | | | | | |
| | | |
|
Weighted Average Remaining Term | | 21.1 years | | 20.9 years | | 20.4 years |
| | 20.5 years |
|
| | | | | | | | | | | |
| | | |
|
Prepayment Speed | | | 6.12 | % | | | 6.27 | % | | | 10.31% |
| | | 7.85% |
|
Effect on fair value of a 10% increase | | $ | (161 | ) | | $ | (151 | ) | | $ | (170) |
| | $ | (171) |
|
Effect on fair value of a 20% increase | | | (316 | ) | | | (296 | ) | | | (330) |
| | | (333) |
|
| | | | | | | | | | | |
| | | |
|
Weighted Average Discount Rate | | | 10.00 | % | | | 10.00 | % | | | 11.50% |
| | | 10.50% |
|
Effect on fair value of a 10% increase | | $ | (226 | ) | | $ | (206 | ) | | $ | (186) |
| | $ | (211) |
|
Effect on fair value of a 20% increase | | | (435 | ) | | | (397 | ) | | | (359) |
| | | (407) |
|
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.
Restricted Stock (Carried at Cost)125
The carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities. Restricted stock is classified within Level 2 of the fair value hierarchy.
Accrued Interest Receivable and Payable (Carried at Cost)
The carrying amounts of accrued interest receivable and accrued interest payable approximates fair value and are classified within Level 2 of the fair value hierarchy.
Deposit Liabilities (Carried at Cost)
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Short-term Borrowings (Carried at Cost)
Due to their short-term nature, the carrying amounts of short-term borrowings, which include overnight borrowings approximate their fair value. Short-term borrowings are classified within Level 2 of the fair value hierarchy.
Subordinated Debt (Carried at Cost)
Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Due to the significant judgment involved in developing the spreads used to value the subordinated debt, it is classified within Level 3 of the fair value hierarchy.
Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)
Fair values for the Company's’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'counterparties’ credit standing.
The estimated fair values of the Company'sCompany’s financial instruments were as follows at December 31, 2016 and 2015:2018 were as follows:
| | Fair Value Measurements at December 31, 2016 | |
(dollars in thousands) | | Carrying Amount | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Balance Sheet Data | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 34,554 | | | $ | 34,554 | | | $ | 34,554 | | | $ | - | | | $ | - | |
Investment securities available for sale | | | 369,739 | | | | 369,739 | | | | - | | | | 364,948 | | | | 4,791 | |
Investment securities held to maturity | | | 432,499 | | | | 425,183 | | | | - | | | | 425,183 | | | | - | |
Restricted stock | | | 1,366 | | | | 1,366 | | | | - | | | | 1,366 | | | | - | |
Loans held for sale | | | 28,065 | | | | 28,267 | | | | - | | | | 23,911 | | | | 4,356 | |
Loans receivable, net | | | 955,817 | | | | 937,944 | | | | - | | | | - | | | | 937,944 | |
SBA servicing assets | | | 5,352 | | | | 5,352 | | | | - | | | | - | | | | 5,352 | |
Accrued interest receivable | | | 5,497 | | | | 5,497 | | | | - | | | | 5,497 | | | | - | |
Interest rate lock commitments | | | 439 | | | | 439 | | | | - | | | | 439 | | | | - | |
Best efforts forward loan sales commitments | | | 103 | | | | 103 | | | | - | | | | 103 | | | | - | |
Mandatory forward loan sales commitments | | | 229 | | | | 229 | | | | - | | | | 229 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market | | $ | 1,566,506 | | | $ | 1,566,506 | | | $ | - | | | $ | 1,566,506 | | | $ | - | |
Time | | | 111,164 | | | | 110,988 | | | | - | | | | 110,988 | | | | - | |
Subordinated debt | | | 21,881 | | | | 16,286 | | | | - | | | | - | | | | 16,286 | |
Accrued interest payable | | | 444 | | | | 444 | | | | - | | | | 444 | | | | - | |
Interest rate lock commitments | | | 55 | | | | 55 | | | | - | | | | 55 | | | | - | |
Best efforts forward loan sales commitments | | | 125 | | | | 125 | | | | - | | | | 125 | | | | - | |
Mandatory forward loan sales commitments | | | 38 | | | | 38 | | | | - | | | | 38 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Off-Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | | - | | | | - | | | | - | |
Standby letters-of-credit | | | - | | | | - | | | | - | | | | - | | | | - | |
| | Fair Value Measurements at December 31, 2015 | | | Fair Value Measurements at December 31, 2018 | |
(dollars in thousands) | | Carrying Amount | | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | 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 | | $ | 27,139 | | | $ | 27,139 | | | $ | 27,139 | | | $ | - | | | $ | - | | | $ | 72,473 | | | $ | 72,473 | | | $ | 72,473 | | | $ | - | | | $ | - | |
Investment securities available for sale | | | 284,795 | | | | 284,795 | | | | - | | | | 280,078 | | | | 4,717 | | | | 321,014 | | | | 321,014 | | | | - | | | | 317,945 | | | | 3,069 | |
Investment securities held to maturity | | | 172,277 | | | | 171,845 | | | | - | | | | 171,845 | | | | - | | | | 761,563 | | | | 747,323 | | | | - | | | | 747,323 | | | | - | |
Restricted stock | | | 3,059 | | | | 3,059 | | | | - | | | | 3,059 | | | | - | | | | 5,754 | | | | 5,754 | | | | - | | | | 5,754 | | | | - | |
Loans held for sale | | | 3,653 | | | | 3,831 | | | | - | | | | - | | | | 3,831 | | | | 26,291 | | | | 26,291 | | | | - | | | | 20,887 | | | | 5,404 | |
Loans receivable, net | | | 866,066 | | | | 849,578 | | | | - | | | | - | | | | 849,578 | | | | 1,427,983 | | | | 1,410,945 | | | | - | | | | - | | | | 1,410,945 | |
SBA servicing assets | | | 4,886 | | | | 4,886 | | | | - | | | | - | | | | 4,886 | | | | 4,785 | | | | 4,785 | | | | - | | | | - | | | | 4,785 | |
Accrued interest receivable | | | 4,216 | | | | 4,216 | | | | - | | | | 4,216 | | | | - | | | | 9,025 | | | | 9,025 | | | | - | | | | 9,025 | | | | - | |
Interest rate lock commitments | | | | 410 | | | | 410 | | | | - | | | | 410 | | | | - | |
Best efforts forward loan sales commitments | | | | 5 | | | | 5 | | | | - | | | | 5 | | | | - | |
Mandatory forward loan sales commitments | | | | 10 | | | | 10 | | | | - | | | | 10 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market | | $ | 1,181,720 | | | $ | 1,181,720 | | | $ | - | | | $ | 1,181,720 | | | $ | - | | | $ | 2,238,610 | | | $ | 2,238,610 | | | $ | - | | | $ | 2,238,610 | | | $ | - | |
Time | | | 67,578 | | | | 67,422 | | | | - | | | | 67,422 | | | | - | | | | 154,257 | | | | 152,989 | | | | - | | | | 152,989 | | | | - | |
Short-term borrowings | | | 47,000 | | | | 47,000 | | | | - | | | | 47,000 | | | | - | | |
Subordinated debt | | | 21,857 | | | | 18,353 | | | | - | | | | - | | | | 18,353 | | | | 11,259 | | | | 8,279 | | | | - | | | | - | | | | 8,279 | |
Accrued interest payable | | | 245 | | | | 245 | | | | - | | | | 245 | | | | - | | | | 558 | | | | 558 | | | | - | | | | 558 | | | | - | |
Interest rate lock commitments | | | | - | | | | - | | | | - | | | | - | | | | - | |
Best efforts forward loan sales commitments | | | | 138 | | | | 138 | | | | - | | | | 138 | | | | - | |
Mandatory forward loan sales commitments | | | | 230 | | | | 230 | | | | - | | | | 230 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Off-Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Standby letters-of-credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
The estimated fair values of the Company’s financial instruments at December 31, 2017 were as follows:
| | Fair Value Measurements at December 31, 2017 | |
(dollars in thousands) | | Carrying Amount | | | Fair Value | | | Quoted Prices
in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Balance Sheet Data | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 61,942 | | | $ | 61,942 | | | $ | 61,942 | | | $ | - | | | $ | - | |
Investment securities available for sale | | | 464,430 | | | | 464,430 | | | | - | | | | 460,855 | | | | 3,575 | |
Investment securities held to maturity | | | 472,213 | | | | 463,799 | | | | - | | | | 463,799 | | | | - | |
Restricted stock | | | 1,918 | | | | 1,918 | | | | - | | | | 1,918 | | | | - | |
Loans held for sale | | | 45,700 | | | | 45,714 | | | | - | | | | 43,375 | | | | 2,339 | |
Loans receivable, net | | | 1,153,679 | | | | 1,120,305 | | | | - | | | | - | | | | 1,120,305 | |
SBA servicing assets | | | 5,243 | | | | 5,243 | | | | - | | | | - | | | | 5,243 | |
Accrued interest receivable | | | 7,009 | | | | 7,009 | | | | - | | | | 7,009 | | | | - | |
Interest rate lock commitments | | | 363 | | | | 363 | | | | - | | | | 363 | | | | - | |
Best efforts forward loan sales commitments | | | 5 | | | | 5 | | | | - | | | | 5 | | | | - | |
Mandatory forward loan sales commitments | | | 19 | | | | 19 | | | | - | | | | 19 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | |
Demand, savings and money market | | $ | 1,946,558 | | | $ | 1,946,558 | | | $ | - | | | $ | 1,946,558 | | | $ | - | |
Time | | | 116,737 | | | | 115,673 | | | | - | | | | 115,673 | | | | - | |
Subordinated debt | | | 21,681 | | | | 18,458 | | | | - | | | | - | | | | 18,458 | |
Accrued interest payable | | | 293 | | | | 293 | | | | - | | | | 293 | | | | - | |
Interest rate lock commitments | | | 1 | | | | 1 | | | | - | | | | 1 | | | | - | |
Best efforts forward loan sales commitments | | | 93 | | | | 93 | | | | - | | | | 93 | | | | - | |
Mandatory forward loan sales commitments | | | 195 | | | | 195 | | | | - | | | | 195 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Off-Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | | - | | | | - | | | | - | |
Standby letters-of-credit | | | - | | | | - | | | | - | | | | - | | | | - | |
16. | Stock Based Compensation |
The Company has a Stock Option and Restricted Stock Plan ("(“the 2005 Plan"Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company'sCompany’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company'sCompany’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of December 31, 2016,2018, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company'sCompany’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company'sCompany’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the "2014 Plan"“2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company'sCompany’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At December 31, 2016,2018, the maximum number of shares of common shares issuable under the 2014 Plan was 5.9 million.6.3 million shares. During the twelve months ended December 31, 2016, 661,7502018, 1,106,800 options were granted under the 2014 Plan with a weighted average grant date fair value of $1,191,224.$3,030,999. During 2018, options to purchase the Company’s common stock were granted to certain employees and directors. The exercise price for the options granted was equal to the closing price of the Company’s common stock on the date of grant. The options issued are subject to a one to four year vesting period and expire after ten years.
The Company utilized the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant. A summary of the assumptions used in the Black-Scholes option pricing model for 2016, 2015,2018, 2017, and 20142016 is as follows:
| | 2016 | | | 2015 | | | 2014 | |
Dividend yield(1) | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Expected volatility(2) | | 46.38% to 52.54 | % | | 53.78% to 56.00 | % | | 55.79% to 57.99 | % |
Risk-free interest rate(3) | | 1.23% to 1.82 | % | | 1.49% to 2.00 | % | | 1.51% to 2.26 | % |
Expected life(4) | | 5.5 to 7.0 years | | 5.5 to 7.0 years | | 5.5 to 7.0 years |
Assumed forfeiture rate(5) | | | 10.0 | % | | | 19.0 | % | | | 23.0 | % |
| | | | | | | | | | | | |
| | 2018 | | | | 2017 | | | | 2016 | | | |
Dividend yield(1) | | | 0.0% |
| | | | 0.0% |
| | | | 0.0% |
| | |
Expected volatility | | | 28.22% |
| (2)
|
| 44.00% to 50.09% |
| (3)
|
| 46.38% to 52.54% |
| (3)
|
|
Risk-free interest rate(4) | | 2.35% to 2.96% |
| | | 1.89% to 2.30% |
| | | 1.23% to 1.82% |
| | |
Expected life(5) | | 6.25 years |
| | | 5.5 to 7.0 years |
| | | 5.5 to 7.0 years |
| | |
Assumed forfeiture rate(6) | | | 4.0% |
| | | | 6.0% |
| | | | 10.0% |
| | |
(1) | A dividend yield of 0.0% is utilized because cash dividends have never been paid. |
(2) | Expected volatility is based on Bloomberg's five and one-half to seven year volatility calculation for "FRBK" stock. |
(1) A dividend yield of 0.0% is utilized because cash dividends have never been paid.(3) | The risk-free interest rate is based on the five to seven year Treasury bond. |
(2) The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to estimate expected volatility.(4) | The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior(3) Expected volatility is based on Bloomberg’s five and one-half to seven year volatility calculation for “FRBK” stock..
|
(5) | Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period. |
(4) The risk-free interest rate is based on the five to seven year Treasury bond.(5) The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.
(6) Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period.
During 2016, 517,5502018, 753,864 options vested as compared to 349,062529,624 options in 20152017 and 209,825519,050 options in 2014.2016. Expense is recognized ratably over the period required to vest. At December 31, 2016,2018, the intrinsic value of the 2,331,4003,861,650 options outstanding was $10,871,297,$4.3 million, while the intrinsic value of the 1,048,1741,899,487 exercisable (vested) options was $4,911,116.$3.6 million. During 2016, 50,3002018, 76,125 options were forfeited with a weighted average grant date fair value of $89,383.
$235,000.
Information regarding stock based compensation for the years ended December 31, 2016, 2015,2018, 2017, and 20142016 is set forth below:
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Stock based compensation expense recognized | | $ | 759,000 | | | $ | 600,000 | | | $ | 420,000 | | | $ | 2,116,000 | | | $ | 1,842,000 | | | $ | 759,000 | |
Number of unvested stock options | | | 1,283,226 | | | | 1,173,276 | | | | 1,039,638 | | | | 1,962,163 | | | | 1,659,102 | | | | 1,283,226 | |
Fair value of unvested stock options | | $ | 2,184,773 | | | $ | 1,906,691 | | | $ | 1,548,840 | | | $ | 5,550,820 | | | $ | 4,587,565 | | | $ | 2,184,773 | |
Amount remaining to be recognized as expense | | $ | 1,104,424 | | | $ | 873,714 | | | $ | 702,220 | | | $ | 3,406,394 | | | $ | 2,508,314 | | | $ | 1,104,424 | |
The remaining amount of $1,104,424$3.4 million will be recognized ratably as expense through November 2020.December 2022.
A summary of stock option activity under the Plan as of December 31, 2016, 2015,2018, 2017, and 20142016 is as follows:
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
| | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding, beginning of year | | | 1,946,225 | | | $ | 3.56 | | | | 1,494,399 | | | $ | 3.59 | | | | 1,215,530 | | | $ | 3.66 | | | | 3,005,825 | | | $ | 4.98 | | | | 2,332,900 | | | $ | 3.70 | | | | 1,947,725 | | | $ | 3.56 | |
Granted | | | 661,750 | | | | 4.06 | | | | 505,200 | | | | 3.55 | | | | 360,900 | | | | 3.69 | | | | 1,106,800 | | | | 8.34 | | | | 916,000 | | | | 8.03 | | | | 661,750 | | | | 4.06 | |
Exercised | | | (226,275 | ) | | | 3.21 | | | | (21,500 | ) | | | 3.01 | | | | (500 | ) | | | 1.95 | | | | (174,850 | ) | | | 3.83 | | | | (197,975 | ) | | | 3.26 | | | | (226,275 | ) | | | 3.21 | |
Forfeited | | | (50,300 | ) | | | 5.21 | | | | (31,874 | ) | | | 5.13 | | | | (81,531 | ) | | | 5.15 | | | | (76,125 | ) | | | 6.80 | | | | (45,100 | ) | | | 7.95 | | | | (50,300 | ) | | | 5.21 | |
Outstanding, end of year | | | 2,331,400 | | | $ | 3.70 | | | | 1,946,225 | | | $ | 3.56 | | | | 1,494,399 | | | $ | 3.59 | | | | 3,861,650 | | | $ | 5.96 | | | | 3,005,825 | | | $ | 4.98 | | | | 2,332,900 | | | $ | 3.70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options exercisable at year-end | | | 1,048,174 | | | $ | 3.70 | | | | 772,949 | | | $ | 4.18 | | | | 454,761 | | | $ | 5.06 | | | | 1,899,487 | | | $ | 4.53 | | | | 1,346,723 | | | $ | 3.55 | | | | 1,049,674 | | | $ | 3.70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average fair value of options granted during the year | | | | | | $ | 1.80 | | | | | | | $ | 1.89 | | | | | | | $ | 2.07 | | | | | | | $ | 2.85 | | | | | | | $ | 3.75 | | | | | | | $ | 1.80 | |
A summary of stock option exercises and related proceeds during the years end December 31, 2016, 2015,2018, 2017, and 20142016 is as follows:
| | | For the Years Ended December 31, | | |
| | | 2016 | | | 2015 | | | 2014 | | |
| | | | | | | | | | | |
| Number of options exercised | | | 226,275 | | | | 21,500 | | | | 500 | | |
| Cash received | | $ | 726,157 | | | $ | 64,624 | | | $ | 975 | | |
| Intrinsic value | | $ | 739,699 | | | $ | 26,532 | | | $ | 1,010 | | |
| Tax benefit | | $ | - | | | $ | - | | | $ | - | | |
| | For the Years Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Number of options exercised | | | 174,850 | | | | 197,975 | | | | 226,275 | |
Cash received | | $ | 670,413 | | | $ | 646,263 | | | $ | 726,157 | |
Intrinsic value | | $ | 814,855 | | | $ | 991,957 | | | $ | 739,699 | |
Tax benefit | | $ | 12,288 | | | $ | 81,589 | | | $ | - | |
The following table summarizes information about options outstanding at December 31, 2016:2018:
| | | Options Outstanding | | | Options Exercisable | | |
| Range of Exercise Prices | | Number Outstanding | | | Weighted- Average Remaining Contractual Life | | | Weighted- Average Exercise Price | | | Shares | | | Weighted- Average Exercise Price | | |
| | | | | | | | | | | | | | | | | |
| $1.55 to $2.95 | | | 538,675 | | | | 5.7 | | | $ | 2.36 | | | | 361,837 | | | $ | 2.20 | | |
| $3.14 to $3.68 | | | 897,275 | | | | 7.3 | | | | 3.55 | | | | 428,137 | | | | 3.51 | | |
| $3.95 to $8.00 | | | 886,100 | | | | 7.3 | | | | 4.58 | | | | 248,850 | | | | 5.89 | | |
| $11.77 to $12.13 | | | 9,350 | | | | - | | | | 11.77 | | | | 9,350 | | | | 11.77 | | |
| | | | 2,331,400 | | | | | | | $ | 3.70 | | | | 1,048,174 | | | $ | 3.70 | | |
Options Outstanding | | | Options Exercisable | |
Range of Exercise Prices | | | Number Outstanding | | | Weighted- Average Remaining Contractual Life | | | Weighted- Average Exercise Price | | | Shares | | | Weighted- Average Exercise Price | |
| | | | | | | | | | | | | | | | |
$ 1.55 to $3.53 | | | | 518,200 | | | | 3.5 | | | $ | 2.52 | | | | 508,200 | | | $ | 2.50 | |
$ 3.55 to $3.95 | | | | 663,050 | | | | 5.5 | | | | 3.62 | | | | 526,312 | | | | 3.64 | |
$ 3.99 to $7.85 | | | | 737,225 | | | | 6.2 | | | | 4.50 | | | | 435,850 | | | | 4.55 | |
$ 8.00 to $9.50 | | | | 1,943,175 | | | | 8.5 | | | | 8.23 | | | | 429,125 | | | | 8.00 | |
| | | | | 3,861,650 | | | | | | | $ | 5.96 | | | | 1,899,487 | | | $ | 4.53 | |
A roll-forward of non-vested options during the year ended December 31, 20162018 is as follows:
| | Number of Shares | | | Weighted- Average Grant Date Fair Value | | | | Number of Shares | | | Weighted- Average Grant Date Fair Value | |
Nonvested, beginning of year | | | 1,173,276 | | | $ | 1.63 | | | | | 1,659,102 | | | $ | 2.77 | |
Granted | | | 661,750 | | | | 1.80 | | | | | 1,106,800 | | | | 2.85 | |
Vested | | | (517,550 | ) | | | 1.53 | | | | | (753,864 | ) | | | 2.92 | |
Forfeited | | | (34,250 | ) | | | 2.01 | | | | | (49,875 | ) | | | 2.94 | |
Nonvested, end of year | | | 1,283,226 | | | $ | 1.70 | | | | | 1,962,163 | | | $ | 2.83 | |
The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. We do not have loan production offices in those states.
18. | Transactions with Affiliates and Related Parties |
The Company made payments to related parties in the amount of $685,000, $653,000, and $1.0 million during 2018, 2017, and 2016, and 2015 and $754,000 during 2014.respectively. The disbursements made during 2018, 2017, and 2016 2015,include $400,000, $361,000, and 2014 include $450,000, $415,000, and $343,000, respectively, in fees for marketing, graphic design, architectural and project management services paid to InterArch, a company owned by the spouse of Vernon W. Hill, II. Mr. Hill is the Chairman of the Company, and beneficially owns 8.1% of the common shares currently outstanding. The Company paid $165,000, $172,000 and $194,000 during 20162018, 2017, and $144,000 during 20152016 to Glassboro Properties, LLC related to a land lease agreement for its Glassboro store. Mr. Hill has an ownership interest in Glassboro Properties LLC, a commercial real estate firm. The Company paid $7,000 during 2015 to SDI Commercial Real Estate LLC for reimbursement of development costs related to site development as part of the Company's growth and expansion strategy. Mr. Hill has an ownership interest in SDI Commercial Real Estate LLC, a commercial real estate firm. Prior to his appointment as Chairman in December 2016, Mr. Hill acted as a consultant for the Company and was paid $250,000 annually for his services.
The Company paid $120,000 during 20162018, 2017 and 20152016 to Brian Communications for public relations services in addition to reimbursements for out-of-pocket expenses and other reimbursable costs. Brian Tierney, a member of the Board of Directors, is the CEO of Brian Communications, a strategic communications agency.
19. 19. | Parent Company Financial Information |
The following financial statements for Republic First Bancorp, Inc. (Parent Company) should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements.
Balance Sheet | |
December 31, 2016 and 2015 | |
(Dollars in thousands) | |
| | | | | | |
| | December 31, 2016 | | | December 31, 2015 | |
ASSETS | | | | | | |
Cash | | $ | 61,011 | | | $ | 2,051 | |
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding junior obligations of the corporation | | | 676 | | | | 676 | |
Investment in subsidiaries | | | 170,868 | | | | 128,652 | |
Other assets | | | 4,589 | | | | 3,873 | |
Total Assets | | $ | 237,144 | | | $ | 135,252 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
Liabilities | | | | | | | | |
Accrued expenses | | $ | 210 | | | $ | 20 | |
Corporation-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the corporation | | | 21,881 | | | | 21,857 | |
Total Liabilities | | | 22,091 | | | | 21,877 | |
| | | | | | | | |
Shareholders' Equity | | | | | | | | |
Total Shareholders' Equity | | | 215,053 | | | | 113,375 | |
| | | | | | | | |
Total Liabilities and Shareholders' Equity | | $ | 237,144 | | | $ | 135,252 | |
Balance Sheet
December 31, 2018 and 2017
(Dollars in thousands)
| | December 31, 2018 | | | December 31, 2017 | |
ASSETS | | | | | | |
Cash | | $ | 27,722 | | | $ | 60,309 | |
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding junior obligations of the corporation | | | 341 | | | | 676 | |
Investment in subsidiaries | | | 220,864 | | | | 181,256 | |
Other assets | | | 7,572 | | | | 5,931 | |
Total Assets | | $ | 256,499 | | | $ | 248,172 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Liabilities | | | | | | | | |
Accrued expenses | | $ | 51 | | | $ | 31 | |
Corporation-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the corporation | | | 11,259 | | | | 21,681 | |
Total Liabilities | | | 11,310 | | | | 21,712 | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Total Shareholders’ Equity | | | 245,189 | | | | 226,460 | |
| | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 256,499 | | | $ | 248,172 | |
Statements of Income, Comprehensive Income (Loss), and Changes in Shareholders’ Equity
For the years ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
Statements of Income, Comprehensive Income (Loss), and Changes in Shareholders' Equity | | |
For the years ended December 31, 2016, 2015, and 2014 | | |
(Dollars in thousands) | | |
| | |
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | | | |
Interest income | | $ | 35 | | | $ | 34 | | | $ | 33 | | | $ | 13 | | | $ | 37 | | | $ | 35 | |
Total income | | | 35 | | | | 34 | | | | 33 | | | | 13 | | | | 37 | | | | 35 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Trust preferred interest expense | | | 1,160 | | | | 1,114 | | | | 1,107 | | | | 441 | | | | 1,225 | | | | 1,160 | |
Expenses | | | 717 | | | | 572 | | | | 424 | | |
Other expenses | | | | 4,972 | | | | 1,424 | | | | 717 | |
Total expenses | | | 1,877 | | | | 1,686 | | | | 1,531 | | | | 5,413 | | | | 2,649 | | | | 1,877 | |
Net loss before taxes | | | (1,842 | ) | | | (1,652 | ) | | | (1,498 | ) | | | (5,400 | ) | | | (2,612 | ) | | | (1,842 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Benefit for income taxes | | | (645 | ) | | | (578 | ) | | | (524 | ) | | | (1,640 | ) | | | (914 | ) | | | (645 | ) |
Loss before undistributed income of subsidiaries | | | (1,197 | ) | | | (1,074 | ) | | | (974 | ) | | | (3,760 | ) | | | (1,698 | ) | | | (1,197 | ) |
Equity in undistributed income of subsidiaries | | | 6,142 | | | | 3,507 | | | | 3,416 | | | | 12,387 | | | | 10,603 | | | | 6,142 | |
Net income | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Total other comprehensive income (loss) | | | (4,129 | ) | | | (2,533 | ) | | | 2,196 | | |
Total other comprehensive loss | | | | (2,778 | ) | | | (215 | ) | | | (4,129 | ) |
Total comprehensive income (loss) | | $ | 816 | | | $ | (100 | ) | | $ | 4,638 | | | $ | 5,849 | | | $ | 8,690 | | | $ | 816 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders' equity, beginning of year | | $ | 113,375 | | | $ | 112,811 | | | $ | 62,899 | | |
Shareholders’ equity, beginning of year | | | $ | 226,460 | | | $ | 215,053 | | | $ | 113,375 | |
Shares issued under common stock offering | | | 99,175 | | | | - | | | | 44,853 | | | | - | | | | - | | | | 99,175 | |
Stock based compensation | | | 759 | | | | 600 | | | | 420 | | | | 2,116 | | | | 1,842 | | | | 759 | |
Stock options issued in acquisition | | | 202 | | | | - | | | | - | | | | - | | | | - | | | | 202 | |
Exercise of stock options | | | 726 | | | | 64 | | | | 1 | | | | 670 | | | | 646 | | | | 726 | |
Conversion of subordinated debt to common shares | | | | 10,094 | | | | 229 | | | | - | |
Net income | | | 4,945 | | | | 2,433 | | | | 2,442 | | | | 8,627 | | | | 8,905 | | | | 4,945 | |
Total other comprehensive income (loss) | | | (4,129 | ) | | | (2,533 | ) | | | 2,196 | | |
Shareholders' equity, end of year | | $ | 215,053 | | | $ | 113,375 | | | $ | 112,811 | | |
Total other comprehensive loss | | | | (2,778 | ) | | | (215 | ) | | | (4,129 | ) |
Shareholders’ equity, end of year | | | $ | 245,189 | | | $ | 226,460 | | | $ | 215,053 | |
Statements of Cash Flows
For the years ended December 31, 2018, 2017, and 2016
(Dollars in thousands)
Statements of Cash Flows | | |
For the years ended December 31, 2016, 2015, and 2014 | | |
(Dollars in thousands) | | |
| | |
| | 2016 | | | 2015 | | | 2014 | | | 2018 | | | 2017 | | | 2016 | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
Net income | | $ | 4,945 | | | $ | 2,433 | | | $ | 2,442 | | | $ | 8,627 | | | $ | 8,905 | | | $ | 4,945 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Share based compensation | | | 961 | | | | 600 | | | | 420 | | | | 2,116 | | | | 1,842 | | | | 961 | |
Amortization of debt issuance costs | | | 24 | | | | 24 | | | | 24 | | | | 6 | | | | 29 | | | | 24 | |
Increase in other assets | | | (716 | ) | | | (636 | ) | | | (550 | ) | | | (1,639 | ) | | | (1,342 | ) | | | (716 | ) |
Net increase in other liabilities | | | 190 | | | | 2 | | | | - | | |
Net increase (decrease) in other liabilities | | | | 20 | | | | (179 | ) | | | 190 | |
Equity in undistributed income of subsidiaries | | | (6,142 | ) | | | (3,507 | ) | | | (3,416 | ) | | | (12,387 | ) | | | (10,603 | ) | | | (6,142 | ) |
Net cash used in operating activities | | | (738 | ) | | | (1,084 | ) | | | (1,080 | ) | | | (3,257 | ) | | | (1,348 | ) | | | (738 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Investment in subsidiary | | | (40,203 | ) | | | (6,400 | ) | | | (35,000 | ) | | | (30,000 | ) | | | - | | | | (40,203 | ) |
Net cash used in investing activities | | | (40,203 | ) | | | (6,400 | ) | | | (35,000 | ) | | | (30,000 | ) | | | - | | | | (40,203 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Net proceeds from stock offering | | | 99,175 | | | | - | | | | 44,853 | | | | - | | | | - | | | | 99,175 | |
Exercise of stock options | | | 726 | | | | 64 | | | | 1 | | | | 670 | | | | 646 | | | | 726 | |
Net cash provided by financing activities | | | 99,901 | | | | 64 | | | | 44,854 | | | | 670 | | | | 646 | | | | 99,901 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Increase (decrease) in cash | | | 58,960 | | | | (7,420 | ) | | | 8,774 | | | | (32,587 | ) | | | (702 | ) | | | 58,960 | |
Cash, beginning of period | | | 2,051 | | | | 9,471 | | | | 697 | | | | 60,309 | | | | 61,011 | | | | 2,051 | |
Cash, end of period | | $ | 61,011 | | | $ | 2,051 | | | $ | 9,471 | | | $ | 27,722 | | | $ | 60,309 | | | $ | 61,011 | |
20. | Quarterly Financial Data (unaudited) |
The following represents summarized unaudited quarterly financial data of the Company for each of the quarters ended during 20162018 and 2015.2017.
Summary of Selected Quarterly Consolidated Financial Data | |
(dollars in thousands, except per share data) | |
| | | |
| | For the Quarter Ended | |
| | December 31st | | | September 30th | | | June 30th | | | March 31st | |
2016 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest income | | $ | 14,636 | | | $ | 13,620 | | | $ | 13,209 | | | $ | 12,762 | |
Interest expense | | | 1,946 | | | | 1,834 | | | | 1,612 | | | | 1,471 | |
Net interest income | | | 12,690 | | | | 11,786 | | | | 11,597 | | | | 11,291 | |
Provision for loan losses | | | - | | | | 607 | | | | 650 | | | | 300 | |
Non-interest income | | | 4,727 | | | | 5,142 | | | | 3,031 | | | | 2,412 | |
Non-interest expense | | | 15,970 | | | | 15,013 | | | | 12,967 | | | | 12,343 | |
Benefit for income taxes | | | (50 | ) | | | (32 | ) | | | (12 | ) | | | (25 | ) |
Net income | | $ | 1,497 | | | $ | 1,340 | | | $ | 1,023 | | | $ | 1,085 | |
| | | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.03 | | | $ | 0.04 | | | $ | 0.03 | | | $ | 0.03 | |
Diluted | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.03 | |
| | | | | | | | | | | | | | | | |
2015 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest income | | $ | 12,406 | | | $ | 11,370 | | | $ | 10,899 | | | $ | 10,761 | |
Interest expense | | | 1,419 | | | | 1,378 | | | | 1,290 | | | | 1,294 | |
Net interest income | | | 10,987 | | | | 9,992 | | | | 9,609 | | | | 9,467 | |
Provision for loan losses | | | 500 | | | | - | | | | - | | | | - | |
Non-interest income | | | 4,740 | | | | 1,604 | | | | 2,022 | | | | 1,577 | |
Non-interest expense | | | 14,446 | | | | 11,024 | | | | 11,103 | | | | 10,518 | |
Benefit for income taxes | | | (9 | ) | | | (10 | ) | | | (5 | ) | | | (2 | ) |
Net income | | $ | 790 | | | $ | 582 | | | $ | 533 | | | $ | 528 | |
| | | | | | | | | | | | | | | | |
Net income per share (1): | | | | | | | | | | | | | | | | |
Basic | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.01 | | | $ | 0.01 | |
Diluted | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.01 | | | $ | 0.01 | |
Summary of Selected Quarterly Consolidated Financial Data
(dollars in thousands, except per share data)
| | For the Quarter Ended | |
| | December 31st | | | September 30th | | | June 30th | | | March 31st | |
2018 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest income | | $ | 25,293 | | | $ | 23,558 | | | $ | 22,324 | | | $ | 20,899 | |
Interest expense | | | 5,313 | | | | 4,412 | | | | 3,662 | | | | 2,783 | |
Net interest income | | | 19,980 | | | | 19,146 | | | | 18,662 | | | | 18,116 | |
Provision for loan losses | | | 600 | | | | 500 | | | | 800 | | | | 400 | |
Non-interest income | | | 4,888 | | | | 5,131 | | | | 5,768 | | | | 4,535 | |
Non-interest expense | | | 22,057 | | | | 20,833 | | | | 20,729 | | | | 20,102 | |
Provision for income taxes | | | 54 | | | | 622 | | | | 530 | | | | 372 | |
Net income | | $ | 2,157 | | | $ | 2,322 | | | $ | 2,371 | | | $ | 1,777 | |
| | | | | | | | | | | | | | | | |
Net income per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.03 | |
Diluted | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.03 | |
| | | | | | | | | | | | | | | | |
2017 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest income | | $ | 19,409 | | | $ | 17,922 | | | $ | 17,331 | | | $ | 16,187 | |
Interest expense | | | 2,542 | | | | 2,210 | | | | 2,064 | | | | 1,968 | |
Net interest income | | | 16,867 | | | | 15,712 | | | | 15,267 | | | | 14,219 | |
Provision for loan losses | | | 400 | | | | - | | | | 500 | | | | - | |
Non-interest income | | | 5,012 | | | | 5,778 | | | | 4,969 | | | | 4,338 | |
Non-interest expense | | | 21,622 | | | | 19,165 | | | | 17,685 | | | | 16,804 | |
Provision (benefit) for income taxes | | | (2,881 | ) | | | 4 | | | | (8 | ) | | | (34 | ) |
Net income | | $ | 2,738 | | | $ | 2,321 | | | $ | 2,059 | | | $ | 1,787 | |
| | | | | | | | | | | | | | | | |
Net income per share (1): | | | | | | | | | | | | | | | | |
Basic | | $ | 0.05 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.03 | |
Diluted | | $ | 0.05 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.03 | |
| (1) | Quarterly net income per share does not add to full year net income per share due to rounding. |
21. | Changes in Accumulated Other Comprehensive Income (Loss) By Component (1) |
The following table presents the changes in accumulated other comprehensive loss by component, net of taxes, for the years ended December 31, 2016, 2015,2018, 2017, and 2014.2016.
| | 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, 2016 | | $ | (2,562 | ) | | $ | (603 | ) | | $ | (3,165 | ) |
Unrealized loss on securities | | | (3,853 | ) | | | - | | | | (3,853 | ) |
Amounts reclassified from accumulated other comprehensive income to net income (2) | | | (416 | ) | | | 140 | | | | (276 | ) |
Net current-period other comprehensive income (loss) | | | (4,269 | ) | | | 140 | | | | (4,129 | ) |
Balance December 31, 2016 | | $ | (6,831 | ) | | $ | (463 | ) | | $ | (7,294 | ) |
| | | | | | | | | | | | |
Balance January 1, 2015 | | $ | 82 | | | $ | (714 | ) | | $ | (632 | ) |
Unrealized loss on securities | | | (2,577 | ) | | | - | | | | (2,577 | ) |
Amounts reclassified from accumulated other comprehensive income to net income (2) | | | (67 | ) | | | 111 | | | | 44 | |
Net current-period other comprehensive income (loss) | | | (2,644 | ) | | | 111 | | | | (2,533 | ) |
Balance December 31, 2015 | | $ | (2,562 | ) | | $ | (603 | ) | | $ | (3,165 | ) |
| | | | | | | | | | | | |
Balance January 1, 2014 | | $ | (2,828 | ) | | $ | - | | | $ | (2,828 | ) |
Unrealized gain on securities | | | 3,199 | | | | - | | | | 3,199 | |
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity | | | - | | | | (790 | ) | | | (790 | ) |
Amounts reclassified from accumulated other comprehensive income to net income (2) | | | (289 | ) | | | 76 | | | | (213 | ) |
Net current-period other comprehensive income | | | 2,910 | | | | (714 | ) | | | 2,196 | |
Balance December 31, 2014 | | $ | 82 | | | $ | (714 | ) | | $ | (632 | ) |
| | Unrealized Gains (Losses) on Available- For-Sale Securities | | | Unrealized Holding Losses on Securities Transferred From Available-For-Sale To Held-To-Maturity | | | Total | |
(dollars in thousands) | | | | | | | | | |
Balance January 1, 2018 | | $ | (7,150 | ) | | $ | (359 | ) | | $ | (7,509 | ) |
Reclassification due to the adoption of ASU 2018-02 | | | (1,562 | ) | | | (78 | ) | | | (1,640 | ) |
Unrealized gain/(loss) on securities | | | 3,927 | | | | - | | | | 3,927 | |
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity | | | - | | | | (6,855 | ) | | | (6,855 | ) |
Amounts reclassified from accumulated other comprehensive income to net income (2) | | | 49 | | | | 101 | | | | 150 | |
Net current-period other comprehensive income (loss) | | | 3,976 | | | | (6,754 | ) | | | (2,778 | ) |
Total change in accumulated other comprehensive income (loss) | | | 2,414 | | | | (6,832 | ) | | | (4,418 | ) |
Balance December 31, 2018 | | $ | (4,736 | ) | | $ | (7,191 | ) | | $ | (11,927 | ) |
| | | | | | | | | | | | |
Balance January 1, 2017 | | $ | (6,831 | ) | | $ | (463 | ) | | $ | (7,294 | ) |
Unrealized loss on securities | | | (413 | ) | | | - | | | | (413 | ) |
Amounts reclassified from accumulated other comprehensive income to net income (2) | | | 94 | | | | 104 | | | | 198 | |
Net current-period other comprehensive income (loss) | | | (319 | ) | | | 104 | | | | (215 | ) |
Balance December 31, 2017 | | $ | (7,150 | ) | | $ | (359 | ) | | $ | (7,509 | ) |
| | | | | | | | | | | | |
Balance January 1, 2016 | | $ | (2,562 | ) | | $ | (603 | ) | | $ | (3,165 | ) |
Unrealized loss on securities | | | (3,853 | ) | | | - | | | | (3,853 | ) |
Amounts reclassified from accumulated other comprehensive income to net income (2) | | | (416 | ) | | | 140 | | | | (276 | ) |
Net current-period other comprehensive income (loss) | | | (4,269 | ) | | | 140 | | | | (4,129 | ) |
Balance December 31, 2016 | | $ | (6,831 | ) | | $ | (463 | ) | | $ | (7,294 | ) |
| (1) | All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income. |
| (2) | Reclassification amounts are reported as gainsgains/losses on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Operations.Income. |
Oak Mortgage Company, LLC
On July 26,28, 2016, Republic entered into an agreement with the owners of Oak Mortgage Company, LLC pursuant to which the owners agreed to sell to Republicacquired all of the issued and outstanding limited liability company interests of Oak Mortgage. The transaction closed on July 28, 2016,Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. The aggregate cash purchase price paid to the Sellers for their limited liability company interests at closing was $7.1 million, $1.0 million of which was deposited in an escrow account to be disbursed one year from closing subject to adjustment for any covered indemnity claims under the Purchase Agreement. Escrow funds were disbursed in the third quarter of 2017. The purchase price is subject to certain post-closing adjustments.was considered final as of December 31, 2017.
In connection with the Oak Mortgage acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, the subsequent adjustments to estimates, the final valuation of the fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, and the resulting goodwill recorded (in thousands):
Consideration paid: | | Original Estimates | | | Adjustments to Estimates | | | Final Valuation | | | Original Estimates | | | Adjustments to Estimates | | | Final Valuation | |
Cash | | $ | 7,136 | | | $ | - | | | $ | 7,136 | | | $ | 7,136 | | | $ | - | | | $ | 7,136 | |
Equity instruments | | | 202 | | | | - | | | | 202 | | | | 202 | | | | - | | | | 202 | |
Deferred additional purchase price | | | 500 | | | | - | | | | 500 | | | | 500 | | | | - | | | | 500 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Value of consideration | | $ | 7,838 | | | $ | - | | | $ | 7,838 | | | $ | 7,838 | | | $ | - | | | $ | 7,838 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Assets acquired: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,223 | | | $ | - | | | $ | 1,223 | | | $ | 1,223 | | | $ | - | | | $ | 1,223 | |
Loans held for sale | | | 20,871 | | | | - | | | | 20,871 | | | | 20,871 | | | | - | | | | 20,871 | |
Loans receivable | | | 1,132 | | | | - | | | | 1,132 | | | | 1,132 | | | | - | | | | 1,132 | |
Premises and equipment | | | 103 | | | | - | | | | 103 | | | | 103 | | | | - | | | | 103 | |
Derivative assets | | | 1,508 | | | | - | | | | 1,508 | | | | 1,508 | | | | - | | | | 1,508 | |
Intangible assets – non compete agreements | | | 104 | | | | - | | | | 104 | | | | 104 | | | | - | | | | 104 | |
Other assets | | | 125 | | | | - | | | | 125 | | | | 125 | | | | - | | | | 125 | |
Total assets | | | 25,066 | | | | - | | | | 25,066 | | | | 25,066 | | | | - | | | | 25,066 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities assumed: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Warehouse lines of credit | | | 19,666 | | | | - | | | | 19,666 | | | | 19,666 | | | | - | | | | 19,666 | |
Derivative liabilities | | | 412 | | | | - | | | | 412 | | | | 412 | | | | - | | | | 412 | |
Other liabilities | | | 2,042 | | | | 119 | | | | 2,161 | | | | 2,042 | | | | 119 | | | | 2,161 | |
Total liabilities | | | 22,120 | | | | 119 | | | | 22,239 | | | | 22,120 | | | | 119 | | | | 22,239 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net assets acquired | | | 2,946 | | | | (119 | ) | | | 2,827 | | | | 2,946 | | | | (119 | ) | | | 2,827 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill resulting from acquisition of Oak Mortgage | | $ | 4,892 | | | $ | 119 | | | $ | 5,011 | | | $ | 4,892 | | | $ | 119 | | | $ | 5,011 | |
An adjustment was made to other liabilities which affected goodwill resulting from the acquisition of Oak Mortgage. As of December 31, 2016, the estimates of fair values of the assets acquired and liabilities assumed in the acquisition of Oak Mortgage are final.were finalized.
The following table presentsOn an unaudited pro forma information, in thousands, as ifbasis for the acquisition of Oak Mortgage byyear ended December 31, 2016, the Company had been completed on January 1, 2015.would have reported total revenues of $69.4 million and net income of $6.1 million. The pro forma information does not necessarily reflect the results of operations that would have occurred had Oak Mortgage been acquired by the Company at the beginning of 2015.2016. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.
| | Year Ended December 31, | | |
| | 2016 | | | 2015 | | |
| Total revenues | | $ | 69,436 | | | | $ | 56,520 | | |
| | | | | | | | | | | |
| Net income | | $ | 6,144 | | | | $ | 4,790 | | |
23:23. | Goodwill and Other Intangibles |
The Company'sCompany completed an annual impairment test for goodwill as of July 31, 2018 and 2017. Future impairment testing will be conducted as of July 31 on an annual basis, unless a triggering event occurs in the interim that would suggest impairment, in which case it would be tested as of the date of the triggering event. During the year ended December 31, 2018 and 2017, there was no goodwill impairment recorded. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
The Company’s goodwill and intangible assets related to the acquisition of Oak Mortgage in July 2016 is detailed below:
(dollars in thousands) | | Balance December 31, 2015 | | | Additions/ Adjustments | | | Amortization | | | Balance December 31, 2016 | | | Amortization Period (in years) | | | Balance December 31, 2017 | | | Additions/ Adjustments | | | Amortization | | | Balance December 31, 2018 | | Amortization Period (in years) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | - | | | $ | 5,011 | | | $ | - | | | $ | 5,011 | | | Indefinite | | | $ | 5,011 | | | $ | - | | | $ | - | | | $ | 5,011 | | | Indefinite | |
Non-compete agreements | | | - | | | | 104 | | | | (43 | ) | | | 61 | | | 1 | | |
Total | | $ | - | | | $ | 5,115 | | | $ | (43 | ) | | $ | 5,072 | | | | | | |
(dollars in thousands) | | Balance December 31, 2016 | | | Additions/ Adjustments | | | Amortization | | | Balance December 31, 2017 | | | Amortization Period (in years) | |
| | | | | | | | | | | | | | | |
Goodwill | | $ | 5,011 | | | $ | - | | | $ | - | | | $ | 5,011 | | |
| Indefinite | |
Non-compete agreements | | | 61 | | | | - | | | | (61 | ) | | | - | | | | 1 | |
Total | | $ | 5,072 | | | $ | - | | | $ | (61 | ) | | $ | 5,011 | | | | | |
24:24. | Derivatives and Risk Management Activities |
Republic did not have any derivative instruments designated as hedging instruments, or subject to master netting and collateral agreements for the twelve months ended December 31, 2016.2018 and 2017. The following table summarizes the amounts recorded in Republic'sRepublic’s statement of financial condition for derivatives not designated as hedging instruments as of December 31, 20162018 and December 31, 2017 (in thousands):
December 31, 2016 | | Balance Sheet Presentation | | Fair Value | | | Notional Amount | | | |
December 31, 2018 | | Balance Sheet Presentation | | Fair Value | | | Notional Amount | |
| | | | | | | | | | | | | | | | |
Asset derivatives: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
IRLC's | | Other Assets | | $ | 439 | | | $ | 20,792 | | | |
IRLC’s | | Other Assets | | $ | 410 | | | $ | 16,966 | |
Best efforts forward loan sales commitments | | Other Assets | | | 103 | | | | 8,586 | | | Other Assets | | | 5 | | | | 1,639 | |
Mandatory forward loan sales commitments | | Other Assets | | | 229 | | | | 18,373 | | | Other Assets | | | 10 | | | | 865 | |
| | | | | | | | | | | | | | | | | | | | |
Liability derivatives: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
IRLC's | | Other Liabilities | | $ | 55 | | | $ | 6,757 | | | |
IRLC’s | | Other Liabilities | | $ | - | | | $ | - | |
Best efforts forward loan sales commitments | | Other Liabilities | | | 125 | | | | 18,963 | | | Other Liabilities | | | 138 | | | | 15,327 | |
Mandatory forward loan sales commitments | | Other Liabilities | | | 38 | | | | 5,024 | | | Other Liabilities | | | 230 | | | | 18,980 | |
December 31, 2017 | Balance Sheet Presentation | | Fair Value | | | Notional Amount | |
| | | | | | | |
Asset derivatives: | | | | | | | |
| | | | | | | |
IRLC’s | Other Assets | | $ | 363 | | | $ | 16,366 | |
Best efforts forward loan sales commitments | Other Assets | | | 5 | | | | 1,807 | |
Mandatory forward loan sales commitments | Other Assets | | | 19 | | | | 4,566 | |
| | | | | | | | | |
Liability derivatives: | | | | | | | | | |
| | | | | | | | | |
IRLC’s | Other Liabilities | | $ | 1 | | | $ | 424 | |
Best efforts forward loan sales commitments | Other Liabilities | | | 93 | | | | 14,983 | |
Mandatory forward loan sales commitments | Other Liabilities | | | 195 | | | | 36,223 | |
The following table summarizes the amounts recorded in Republic'sRepublic’s statement of income for derivative instruments not designated as hedging instruments for the twelve months ended December 31, 2018, 2017, and 2016 (in thousands):
Twelve Months Ended December 31, 2016 | | Income Statement Presentation | | Gain/(Loss) | | | |
Twelve Months Ended December 31, 2018 | | Income Statement Presentation | | Gain/(Loss) | |
| | | | | | | | | | |
Asset derivatives: | | | | | | | | | | |
| | | | | | | | | | |
IRLC's | | Mortgage banking income | | $ | (1,042 | ) | | |
IRLC’s | | Mortgage banking income | | $ | 47 | |
Best efforts forward loan sales commitments | | Mortgage banking income | | | 77 | | | Mortgage banking income | | | - | |
Mandatory forward loan sales commitments | | Mortgage banking income | | | 229 | | | Mortgage banking income | | | (9 | ) |
| | | | | | | | | | | | |
Liability derivatives: | | | | | | | | | | | | |
| | | | | | | | | | | | |
IRLC's | | Mortgage banking income | | $ | (32 | ) | | |
IRLC’s | | Mortgage banking income | | $ | 1 | |
Best efforts forward loan sales commitments | | Mortgage banking income | | | 264 | | | Mortgage banking income | | | (45 | ) |
Mandatory forward loan sales commitments | | Mortgage banking income | | | (38 | ) | | Mortgage banking income | | | (35 | ) |
Twelve Months Ended December 31, 2017 | Income Statement Presentation | | Gain/(Loss) | |
| | | | |
Asset derivatives: | | | | |
| | | | |
IRLC’s | Mortgage banking income | | $ | (76 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | (98 | ) |
Mandatory forward loan sales commitments | Mortgage banking income | | | (210 | ) |
| | | | | |
Liability derivatives: | | | | | |
| | | | | |
IRLC’s | Mortgage banking income | | $ | 54 | |
Best efforts forward loan sales commitments | Mortgage banking income | | | 32 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | (157 | ) |
Twelve Months Ended December 31, 2016 | Income Statement Presentation | | Gain/(Loss) | |
| | | | |
Asset derivatives: | | | | |
| | | | |
IRLC’s | Mortgage banking income | | $ | (1,042 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | 77 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | 229 | |
| | | | | |
Liability derivatives: | | | | | |
| | | | | |
IRLC’s | Mortgage banking income | | $ | (32 | ) |
Best efforts forward loan sales commitments | Mortgage banking income | | | 264 | |
Mandatory forward loan sales commitments | Mortgage banking income | | | (38 | ) |
The fair value of Republic'sRepublic’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“Loans Held for Sale"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.
25. | Tel: 717-233-8800
Fax: 717-233-8801
www.bdo.com
| 945 E. Park Drive, Suite 103
Harrisburg, PA 17111 Revenue Recognition |
On January 1, 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 2 Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement of recognition of revenue. Management determined that a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and investments. In addition, certain non-interest income streams such as gains on sales of residential mortgage and SBA loans, income associated with servicing assets, and loan fees, including residential mortgage originations to be sold and prepayment and late fees charged across all loan categories are also not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams such as service charges on deposit accounts. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), ATM fees, NSF fees, and other deposit related fees.
The Company’s performance obligation for account analysis fees and monthly services fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided, which is typically one month. Revenue is recognized at month end after the completion of the service period and payment for these service charges on deposit accounts is primarily received through a direct charge to customers’ accounts.
ATM fees, NSF fees, and other deposit related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and the related revenue recognized, at a point in time. Payment for these service charges are received immediately through a direct charge to customers’ accounts.
For the Company, there are no other material revenue streams within the scope of Topic 606.
The following tables present non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the twelve months ended December 31, 2018, 2017, and 2016.
| | Twelve Months Ended December 31, | |
(dollars in thousands) | | 2018 | | | 2017 | | | 2016 | |
Non-interest income | | | | | | | | | |
In-scope of Topic 606 | | | | | | | | | |
Service charges on deposit accounts | | $ | 5,476 | | | $ | 3,904 | | | $ | 2,658 | |
Other non-interest income | | | 174 | | | | 177 | | | | 335 | |
Non-interest income (in-scope of Topic 606) | | | 5,650 | | | | 4,081 | | | | 2,993 | |
Non-interest income (out-of-scope of Topic 606) | | | 14,672 | | | | 16,016 | | | | 12,319 | |
Total non-interest income | | $ | 20,322 | | | $ | 20,097 | | | $ | 15,312 | |
Contract Balances
A contract assets balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transaction activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2018, 2017, and 2016, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize as an expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the assets that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors and Shareholders
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on Internal Control over Financial Reporting
We have audited Republic First Bancorp, Inc. and Subsidiaries'’s (the "Company"“Company’s”) internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria)criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our report dated March 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management'sManagement’s Report on Internal Controls.Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Republic First Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Republic First Bancorp, Inc. and Subsidiaries as of December 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income (loss), cash flows, and shareholders' equity for each of the three years in the period ended December 31, 2016 and our report dated March 10, 2017 expressed an unqualified opinion thereon.
Harrisburg, Pennsylvania
March 10, 2017
/s/ BDO USA, LLP
Philadelphia, Pennsylvania
March 14, 2019
Item 9: | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms and accumulated and communicated to the Company'sCompany’s management, including the Company'sCompany’s principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company'sCompany’s management, with the participation of the principal executive officer and the principal financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company'sCompany’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the principal executive officer and the principal financial officer have concluded that, as of the end of the period covered by this report, the Company'sCompany’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.
Changes in Internal Controls
The principal executive officer and principal financial officer also conducted an evaluation of the Company'sCompany’s internal control over financial reporting ("(“Internal Control"Control”) to determine whether any changes in Internal Control occurred during the quarter ended December 31, 20162018 that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended December 31, 2016.2018.
Management'sManagement’s Report on Internal Controls
Management of Republic First Bancorp, Inc. (the "Company"“Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
The Company'sCompany’s management, under the supervision and with the participation of the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of internal control over financial reporting, as of December 31, 2016,2018, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control – Integrated Framework 2013, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2016.2018.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not an absolute, level of assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
BDO, an independent registered public accounting firm, has audited the Company'sCompany’s consolidated financial statements as of and for the years ended December 31, 20162018 and 2015,2017, and the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2016,2018, as stated in their reports, which are included herein.
On March 9, 2017, the Company entered into an agreement with Vernon W. Hill, II regarding Mr. Hill's provision of services to the Company as Chairman of the board of directors. The initial term of the agreement is a five-year period commencing on March 9, 2017. The agreement will be extended on each annual anniversary date to provide for a five-year term unless either party provides the other with timely written notice of termination, in which case the agreement will expire four years from the annual anniversary date next following the notice. This agreement replaces the existing consulting agreement with Mr. Hill that was initially entered into on June 10, 2008.
Under the agreement, Mr. Hill agrees to serve as Chairman of the board of directors of the Company, to preside over all meetings of the Company's board of directors and shareholders, and perform such other functions as required of a public company board chairman and such other duties as the Company's board of directors may require. For services under the agreement, Mr. Hill will receive base compensation ("compensation") of not less than $360,000 per year, and he will be entitled to participate in any bonus programs, incentive compensation plans, stock option plans or similar benefit or compensation plans at any time in effect that are made generally available to directors and executive officers of the Company.
The Company may terminate Mr. Hill's services under the agreement at any time with or without "cause" (as defined in the agreement). In the event of a termination by the Company for cause, Mr. Hill would be entitled to any prorated portion of his compensation through the termination date and the Company would have no further obligations under the agreement. In the event that the Company terminates Mr. Hill's services without cause, the Company would be required to pay Mr. Hill, in a lump-sum, compensation due to him until the end of the then current term of the agreement. The Company may also terminate the agreement for permanent disability, in which case Mr. Hill would receive a portion of his compensation for the balance of the remaining term of the agreement offset by any disability payments due to Mr. Hill under any company-sponsored disability plan. In the event of death, Mr. Hill's estate would be entitled to a death benefit equal to three times compensation.
Mr. Hill may voluntarily terminate his services under the agreement for specified events of "good reason" occurring within three years after a change in control of the Company. In the event of Mr. Hill's voluntary termination for any of such events of good reason following a change in control of the Company, he would be entitled to a payment equal to four times compensation.
A copy of Mr. Hill's agreement is attached as Exhibit 10.7 to this Form 10-K. The foregoing description is qualified by reference to the agreement.
On March 9, 2017, the Compensation Committee of the board of directors extended the term of the existing employment agreement, dated May 10, 2013, as amended by a first amendment to employment agreement, dated March 18, 2015 (as so amended, the "Employment Agreement"), with Harry D. Madonna, President and Chief Executive Officer of the Company and Chief Executive Officer of Republic Bank. The agreement will be extended on each annual anniversary date to provide for a three-year term unless either party provides written notice that they desire to terminate the agreement within six months of the termination date. Prior to the amendment, the Employment Agreement renewed annually each year unless either party provided written notice that it desired to terminate the Employment Agreement within six months of any annual renewal date. Except for the extension described herein, the terms of the Employment Agreement were not changed.
None
PART III
Item 10: Directors, Executive Officers and Corporate GovernanceItem 10: | Directors, Executive Officers and Corporate Governance |
Except as set forth below, the information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2017Company’s 2019 annual meeting of shareholders, including, but not necessarily limited to, the sections entitled "Board“Board of Directors and Committees"Committees” and "Executive“Executive Officers and Compensation."”
The Company has adopted a code of ethics that applies to the Company'sCompany’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of the Company'sCompany’s code of ethics is available on the Company'sCompany’s website at www.myrepublicbank.com. We intend to disclose any changes in or revision to our code of ethics on our website, if applicable.
Item 11: Executive Compensation
The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2017Company’s 2019 annual meeting of shareholders, including, but not necessarily limited to, the section entitled "Executive“Executive Officers and Compensation."
”
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except as set forth below, the information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2017Company’s 2019 annual meeting of shareholders, including, but not necessarily limited to, the section entitled "Security“Security Ownership of Certain Beneficial Owners and Management."”
The following table sets forth information as of December 31, 2016,2018, with respect to the shares of common stock that may be issued under the Company'sCompany’s existing equity compensation plans.
Plan Category | | Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column) | | | Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column) | |
Equity compensation plans approved by security holders | | | 2,331,400 | | | $ | 3.70 | | | | 4,789,177 | (1)(2) | | | | 3,861,650 | | | $ | 5.96 | | | | 3,179,213 (1) (2) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 2,331,400 | | | $ | 3.70 | | | | 4,789,177 | (1)(2) | | | | 3,861,650 | | | $ | 5.96 | | | | 3,179,213 (1)(2) | |
(1)Pursuant to the terms of the Stock Option and Restricted Stock Plan, as amended and restated in 2005, no additional equity awards were issuable after November 14, 2015.
(2)The 2014 Republic First Bancorp, Inc. Equity Incentive Plan provides for 2,600,000 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, to be available for such grants.
Item 13: Certain Relationships and Related Transactions, and Director IndependenceItem 13: | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2017Company’s 2019 annual meeting of shareholders, including, but not necessarily limited to, the sections entitled "Certain“Certain Relationships and Related Transactions"Transactions” and "Board“Board of Directors and Committees."”
Item 14: Principal Accountant Fees and ServicesItem 14: | Principal Accountant Fees and Services |
The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in connection with the Company's 2017Company’s 2019 annual meeting of shareholders, including, but not necessarily limited to, the section entitled "Information“Information Regarding Independent Registered Public Accounting Firm"Firm”.
PART IV
Item 15: | Exhibits, Financial Statement Schedules |
| (a) | (1) The following financial statements and related documents of Republic First Bancorp, Inc. are filed as part of this Annual Report on Form 10-K in Part II – Item 8 "Financial“Financial Statements and Supplementary Data"Data”: |
| a. | Consolidated Balance Sheets as of December 31, 20162018 and 2015;2017; |
| b. | Consolidated Statements of Income for the years ended December 31, 2016, 2015,2018, 2017, and 2014;2016; |
| c. | Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015,2018, 2017, and 2014;2016; |
| d. | Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015,2018, 2017, and 2014;2016; |
| e. | Consolidated Statements of Changes in Shareholders'Shareholders’ Equity for the years ended December 31, 2016, 2015,2018, 2017, and 2014;2016; and |
| f. | Notes to Consolidated Financial Statements. |
| (a) | (3) The exhibits filed or furnished, as applicable, as part of this report are listed under Exhibits at subsection (b) of this Item 15. |
The following Exhibits are filed as part of this report.
Exhibit Number | | Description | | Location |
| | Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc. | | Incorporated by reference to Form 10-K filed March 10, 2017 |
| | | | |
| | Amended and Restated By-Laws of Republic First Bancorp, Inc. | | Incorporated by reference to Form S-1 filed April 23, 2010 (333-166286) |
| | | | |
4.1 | | The Company will furnish to the SEC upon request copies of the following documents relating to the Company'sCompany’s Floating Rate Junior Subordinated Debt Securities due 2037: (i) Indenture dated as of December 27, 2006, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic Capital Trust II, dated as of December 27, 2006; and (iii) Guarantee Agreement dated as of December 27, 2006, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic Capital Trust II | | |
Exhibit Number | | Description | | Location |
4.2 | | The Company will furnish to the SEC upon request copies of the following documents relating to the Company'sCompany’s Floating Rate Junior Subordinated Debt Securities due 2037: (i) Indenture dated as of June 28, 2007, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic Capital Trust III, dated as of June 28, 2007; and (iii) Guarantee Agreement dated as of June 28, 2007, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic Capital Trust III | | |
| | | | |
4.3 | | The Company will furnish to the SEC upon request copies of the following documents relating to the Company'sCompany’s Fixed Rate Junior Subordinated Convertible Debt Securities due 2038: (i) Indenture dated as of June 10, 2008, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic First Bancorp Capital Trust IV, dated as of June 10, 2008; and (iii) Guarantee Agreement dated as of June 10, 2008, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic First Bancorp Capital Trust IV | | |
| | | | |
| | Form of Employment Agreement, dated July 1, 2015, by and among, certain named Executive Officers, Republic First Bancorp, Inc. and Republic First Bank* | | Incorporated by reference to Form 8-K filed July 14, 2015 |
| | | | |
| | Amended and Restated Stock Option Plan and Restricted Stock Plan* | | Incorporated by reference to Form 10-K filed March 10, 2008 |
| | | | |
| | Deferred Compensation Plan* | | Incorporated by reference to Form 10-K filed March 16, 2010 |
| | | | |
| | Amended and Restated Supplemental Retirement Plan Agreements between Republic First Bank and Certain Directors* | | Incorporated by reference to Form 10-Q filed November 7, 2008 |
| | | | |
Exhibit Number | | Description | | Location |
| | Purchase Agreement among Republic First Bancorp, Inc., Republic First Bancorp Capital Trust IV, and Purchasers of the Trust IV Capital Securities | | Incorporated by reference to Form 10-Q filed November 7, 2008 |
| | | | |
| | Registration Rights Agreement among Republic First Bancorp, Inc. and the Holders of the Trust IV Capital Securities | | Incorporated by reference to Form10-Q filed November 7, 2008 |
| | | | |
10.7 | | Agreement, dated March 9, 2017, between Republic First Bancorp, Inc. and Vernon W. Hill II | | Incorporated by reference to Form 10-K filed March 10, 2017 |
| | | | |
| | Employment Agreement, dated May 10, 2013, by and among Harry D. Madonna, Republic First Bancorp, Inc., and Republic First Bank* | | Incorporated by reference to Form 10-Q filed on May 10, 2013 |
| | | | |
| | First Amendment to Employment Agreement, dated March 18, 2015, by and among Harry D. Madonna, Republic First Bancorp, Inc. and Republic First Bank* | | Incorporated by reference to Form 8-K filed on March 20, 2015 |
| | | | |
| | Form of Option Award* | | Incorporated by reference to Form S-1 filed April 23, 2010 (333-166286) |
| | | | |
| | Republic First Bancorp, Inc. 2014 Equity Incentive Plan* | | Incorporated by reference to the definitive proxy statement on Schedule 14A filed on March 26, 2014 |
| | | | |
| | Form of Incentive Stock Option Award – 2014 Equity Incentive Plan* | | Incorporated by reference to Form 10-K filed on March 13, 2015 |
| | | | |
| | Form of Nonqualified Stock Option Award – 2014 Equity Incentive Plan* | | Incorporated by reference to Form 10-K filed on March 13, 2015 |
| | | | |
| | Form of Investment Agreement | | Incorporated by reference to Form 8-K filed on April 22, 2014 |
| | | | |
| | Limited Liability Company Purchase Agreement dated July 26, 2016 by and among, Republic First Bank d/b/a Republic Bank and Owners of Oak Mortgage Company, LLC | | Incorporated by reference to form 8-K filed August 1, 2016 |
| | | | |
| | Subsidiaries of the Company | | |
| | | | |
| | Consent of BDO USA, LLP | | |
| | | | |
| | Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer of Republic First Bancorp, Inc. | | |
Exhibit Number | | Description | | Location |
| | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Republic First Bancorp, Inc. | | |
| | | | |
| | Section 1350 Certification of Harry D. Madonna | | |
| | | | |
| | Section 1350 Certification of Frank A. Cavallaro | | |
| | | | |
101 | | The following materials from the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 20162018 and December 31, 2015,2017, (ii) Consolidated Statements of Income for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, (v) Consolidated Statements of Changes in Shareholders'Shareholders’ Equity for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, and (vi) Notes to Consolidated Financial Statements. | | |
| * | | | |
* Constitutes a management compensation agreement or arrangement. |
| | | | |
|
| (c) | All financial statement schedules are omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or notes thereto contained herein. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | REPUBLIC FIRST BANCORP, INC. |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Harry D. Madonna |
| | Harry D. Madonna |
| | President and Chief Executive Officer |
| | (principal executive officer) |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Frank A. Cavallaro |
| | Frank A. Cavallaro |
| | Executive Vice President and Chief Financial Officer |
| | (principal financial and accounting officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 10, 201714, 2019 | By: | /s/ Vernon W. Hill, II |
| | Vernon W. Hill, II, Chairman of the Board |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Andrew B. Cohen |
| | Andrew B. Cohen, Director |
| | |
Date: March 14, 2019 | By: | /s/ Theodore J. Flocco, Jr. |
| | Theodore J. Flocco, Jr., Director |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Lisa R. Jacobs |
| | Lisa R. Jacobs, Director |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Harry D. Madonna |
| | Harry D. Madonna, Director |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Barry L. Spevak |
| | Barry L. Spevak, Director |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Brian P. Tierney |
| | Brian P. Tierney, Director |
| | |
Date: March 10, 201714, 2019 | By: | /s/ Harris Wildstein, Esq. |
| | Harris Wildstein, Esq., Director |
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