UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended |
or
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from ____ to ____. |
Commission File Number:
Republic First Bancorp, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| |
| | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non-Accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
| Common Stock, $0.01 per share | |
| Title of Class | Number of Shares Outstanding as of March 13, 2023 |
| REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES |
||
| TABLE OF CONTENTS |
||
| Part I: Financial Information |
Page |
|
| Item 1. |
Financial Statements |
|
| Consolidated balance sheets as of September 30, 2022 (unaudited) and December 31, 2021 |
3 |
|
| Consolidated statements of income for the three and nine months ended September 30, 2022 and 2021 (unaudited) |
4 |
|
| Consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2022 and 2021 (unaudited) | 5 | |
| Consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 (unaudited) |
6 |
|
| Consolidated statements of changes in shareholders’ equity for the three and nine months ended September 30, 2022 and 2021 (unaudited) |
7 |
|
| Notes to consolidated financial statements (unaudited) |
8 |
|
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
54 |
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
74 |
| Item 4. |
Controls and Procedures |
74 |
| Part II: Other Information |
||
| Item 1. |
Legal Proceedings |
75 |
| Item 1A. |
Risk Factors |
76 |
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
77 |
| Item 3. |
Defaults Upon Senior Securities |
78 |
| Item 4. |
Mine Safety Disclosures |
78 |
| Item 5. |
Other Information |
78 |
| Item 6. |
Exhibits |
79 |
| Signatures |
81 |
|
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2022 and December 31, 2021
(Dollars in thousands, except per share data)
| September 30, 2022 (unaudited) | December 31, 2021
| |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest bearing deposits with banks | ||||||||
| Cash and cash equivalents | ||||||||
| Investment securities available for sale, at fair value | ||||||||
| Investment securities held to maturity, at amortized cost (fair value of $ and $, respectively) | ||||||||
| Equity securities | ||||||||
| Restricted stock, at cost | ||||||||
| Mortgage loans held for sale, at fair value | ||||||||
| Other loans held for sale | ||||||||
| Loans receivable (net of allowance for credit losses of $ and $, respectively) | ||||||||
| Premises and equipment, net | ||||||||
| Other real estate owned, net | ||||||||
| Accrued interest receivable | ||||||||
| Operating lease right-of-use asset | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Liabilities | ||||||||
| Deposits | ||||||||
| Demand – non-interest bearing | $ | $ | ||||||
| Demand – interest bearing | ||||||||
| Money market and savings | ||||||||
| Time deposits | ||||||||
| Total Deposits | ||||||||
| Other borrowings | ||||||||
| Accrued interest payable | ||||||||
| Other liabilities | ||||||||
| Operating lease liability | ||||||||
| Subordinated debt | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (see note 4) | ||||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, par value $ per share; liquidation preference $ per share; shares authorized; shares issued as of September 30, 2022 and as of December 31, 2021; shares outstanding as of September 30, 2022 and as of December 31, 2021 | ||||||||
| Common stock, par value $ per share: shares authorized; shares issued as of September 30, 2022 and as of December 31, 2021; shares outstanding as of September 30, 2022 and as of December 31, 2021 | ||||||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock at cost ( shares as of September 30, 2022 and December 31, 2021) | ( | ) | ( | ) | ||||
| Stock held by deferred compensation plan ( shares as of September 30, 2022 and December 31, 2021) | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2022 and 2021
(Dollars in thousands, except per share data)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Interest income: |
||||||||||||||||
| Interest and fees on taxable loans |
$ | $ | $ | $ | ||||||||||||
| Interest and fees on tax-exempt loans |
||||||||||||||||
| Interest and dividends on taxable investment securities |
||||||||||||||||
| Interest and dividends on tax-exempt investment securities |
||||||||||||||||
| Interest on federal funds sold and other interest-earning assets |
||||||||||||||||
| Total interest income |
||||||||||||||||
| Interest expense: |
||||||||||||||||
| Demand- interest bearing |
||||||||||||||||
| Money market and savings |
||||||||||||||||
| Time deposits |
||||||||||||||||
| Other borrowings |
||||||||||||||||
| Total interest expense |
||||||||||||||||
| Net interest income |
||||||||||||||||
| Provision for credit losses |
||||||||||||||||
| Net interest income after provision for credit losses |
||||||||||||||||
| Non-interest income: |
||||||||||||||||
| Loan and servicing fees |
||||||||||||||||
| Mortgage banking income |
||||||||||||||||
| Gain on sales of SBA loans |
||||||||||||||||
| Service fees on deposit accounts |
||||||||||||||||
| Net (loss) gain on sale or call of investment securities |
( |
) | ( |
) | ||||||||||||
| Other non-interest income |
( |
) | ||||||||||||||
| Total non-interest income |
||||||||||||||||
| Non-interest expenses: |
||||||||||||||||
| Salaries and employee benefits |
||||||||||||||||
| Occupancy |
||||||||||||||||
| Depreciation and amortization |
||||||||||||||||
| Legal |
||||||||||||||||
| Other real estate owned |
||||||||||||||||
| Appraisal and other loan expenses |
||||||||||||||||
| Advertising |
||||||||||||||||
| Data processing |
||||||||||||||||
| Insurance |
||||||||||||||||
| Professional fees |
||||||||||||||||
| Debit card processing |
||||||||||||||||
| Regulatory assessments and costs |
||||||||||||||||
| Taxes, other |
||||||||||||||||
| Other operating expenses |
||||||||||||||||
| Total non-interest expense |
||||||||||||||||
| Income before provision for income taxes |
||||||||||||||||
| Provision for income taxes |
||||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Preferred stock dividends |
||||||||||||||||
| Net income available to common shareholders |
$ | $ | $ | $ | ||||||||||||
| Net income per share |
||||||||||||||||
| Basic earnings per common share |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share |
$ | $ | $ | $ | ||||||||||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
For the Three and Nine Months Ended September 30, 2022 and 2021
(Dollars in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income (loss) | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Unrealized (losses) on securities (pre-tax , , , and , respectively) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Reclassification adjustment for securities losses (gains) (pre-tax $, , $, and , respectively) | ( | ) | ( | ) | ||||||||||||
| Net unrealized gains (losses) on securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of net unrealized holding losses to income during the period (pre-tax $, $, $, and $ respectively) | ||||||||||||||||
| Total other comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2022 and 2021
(Dollars in thousands)
(unaudited)
| Nine Months Ended September 30, |
||||||||
| 2022 |
2021 |
|||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Provision for credit losses |
||||||||
| Write down of other real estate owned |
||||||||
| Depreciation and amortization |
||||||||
| Stock based compensation |
||||||||
| Loss (gain) on sale or call of investment securities |
( |
) | ||||||
| Fair value adjustments on equity securities |
( |
) | ||||||
| Amortization of premiums on investment securities |
||||||||
| Accretion of discounts on retained SBA loans |
( |
) | ( |
) | ||||
| Fair value adjustments on SBA servicing assets |
||||||||
| Proceeds from sales of SBA loans originated for sale |
||||||||
| SBA loans originated for sale |
( |
) | ( |
) | ||||
| Gains on sales of SBA loans originated for sale |
( |
) | ( |
) | ||||
| Proceeds from sales of mortgage loans originated for sale |
||||||||
| Mortgage loans originated for sale |
( |
) | ( |
) | ||||
| Fair value adjustment for mortgage loans originated for sale |
||||||||
| Gains on sales of mortgage loans originated for sale |
( |
) | ( |
) | ||||
| Amortization of debt issuance costs |
||||||||
| Non-cash expense related to leases |
||||||||
| Repayment of operating lease liabilities |
( |
) | ( |
) | ||||
| Net (increase) decrease in accrued interest receivable and other assets |
( |
) | ||||||
| Net increase (decrease) in accrued interest payable and other liabilities |
( |
) | ||||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities |
||||||||
| Purchase of investment securities available for sale |
( |
) | ( |
) | ||||
| Purchase of investment securities held to maturity |
( |
) | ( |
) | ||||
| Proceeds from the sale of securities available for sale |
||||||||
| Proceeds from the paydown, maturity, or call of securities available for sale |
||||||||
| Proceeds from the paydown, maturity, or call of securities held to maturity |
||||||||
| Net purchase of restricted stock |
( |
) | ( |
) | ||||
| Net (increase) decrease in loans |
( |
) | ||||||
| Net proceeds from sale of other real estate owned |
||||||||
| Premises and equipment expenditures |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
||||||||
| Net proceeds from exercise of stock options |
||||||||
| Net increase in demand, money market and savings deposits |
||||||||
| Net (decrease) increase in time deposits |
( |
) | ||||||
| Net increase (repayment) in other borrowings |
( |
) | ||||||
| Preferred stock dividends paid |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
||||||||
| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents, beginning of year |
||||||||
| Cash and cash equivalents, end of period |
$ | $ | ||||||
| Supplemental disclosures |
||||||||
| Interest paid |
$ | $ | ||||||
| Income taxes paid |
$ | $ | ||||||
| Non-cash transfers from loans receivable to other real estate owned |
$ | $ | ||||||
| Non-cash transfers from loans held for sale to loans receivable |
$ | $ | ||||||
| Lease liabilities arising from obtaining right-of-use assets |
$ | $ | ||||||
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Three and Nine Months Ended September 30, 2022 and 2021
(Dollars in thousands)
(unaudited)
| Preferred Stock | Common Stock | Additional Paid in Capital | Retained Earnings / Accumulated Deficit | Treasury Stock | Stock Held by Deferred Compensation Plan | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance July 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Preferred stock dividends paid (1) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Units vested ( shares) | ||||||||||||||||||||||||||||||||
| Options exercised ( shares) | ||||||||||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Balance January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Adjustment for adoption of ASC 2016-13, net of tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Preferred stock dividends paid (2) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Conversion of preferred stock to common stock ( shares and shares) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Units vested ( shares) | ( | ) | ||||||||||||||||||||||||||||||
| Options exercised ( shares) | ||||||||||||||||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Balance July 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Preferred stock dividends paid (1) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Options exercised shares) | ||||||||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Balance January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Preferred stock dividends paid (2) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||
| Options exercised ( shares) | ||||||||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| (1) |
Dividends per share of $0.44 and $0.44 were declared and paid on preferred stock for the three months ended September 30, 2022 and September 30, 2021 |
| (2) |
Dividends per share of $1.32 and $1.32 were declared and paid on preferred stock for the nine months ended September 30, 2022 and September 30, 2021 |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Note 1: Basis of Presentation
Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly owned subsidiary, Republic First Bank, does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state-chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through its offices and branch locations in Philadelphia, Montgomery, Delaware and Bucks Counties in Pennsylvania, Camden, Burlington, Atlantic and Gloucester Counties, New Jersey and New York County. In 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. In 2018, Oak Mortgage was merged with and into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of separate issuances of trust preferred securities.
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional, and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or for any other period.
Note 2: Correction of Immaterial Errors in Previously Filed Financial Statements
Subsequent to filing the Form 10-Qs for both the first and second quarters of 2022, the Company identified certain errors related to the previously reported allowance for credit losses (the “ACL”) and related provision for credit losses for the reporting periods ended March 31, 2022 and June 30, 2022. Based on a total mix of factors, the Company concluded that the errors were immaterial to the unaudited financial statements for the reporting periods ended March 31, 2022 and June 30, 2022. As such, the errors have been corrected within this filing.
The correction of the immaterial errors in the Company’s previously reported allowance for credit losses and related provision for credit losses relate to the implementation of the Company’s new allowance methodology in connection with the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) in 2022. Specifically, the adjustments correct the calculation of historical loss data, improper loan portfolio segmentation, and the exclusion of off-balance sheet commitments from the allowance calculation. As a result, the Company’s provision for credit losses, loans receivable, other liabilities (which contains the ACL on off-balance sheet commitments), and other assets (which contains net deferred tax assets) for the quarters ended March 31, 2022 and June 30, 2022 were corrected.
The Company also corrected an immaterial error for an under accrual of legal fees for the quarter ended March 31, 2022, increasing other liabilities and legal expenses. The Company also adjusted other assets which contains net current tax assets. Such legal fees were subsequently paid in the quarter ended June 30, 2022. The Company assessed both the qualitative and quantitative factors individually and in aggregate with the other immaterial corrections noted above and determined the error was immaterial both individually and in aggregate.
For the three months ended March 31, 2022, the corrected net income is $
March 31, 2022 Financial Statements
The following table presents the impact of the correction of immaterial errors on the consolidated statement of financial condition at March 31, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| ASSETS | ||||||||||||
| Loans receivable (net of allowance for credit losses) | $ | $ | ( | ) | $ | |||||||
| Other assets | ||||||||||||
| Total Assets | $ | $ | ( | ) | $ | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
| Liabilities | ||||||||||||
| Other liabilities | $ | $ | $ | |||||||||
| Total Liabilities | ||||||||||||
| Shareholders' Equity | ||||||||||||
| Retained earnings | ( | ) | ||||||||||
| Total Shareholders' Equity | ( | ) | ||||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ( | ) | $ | |||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of income for the three months ended March 31, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Provision for credit losses | $ | $ | ( | ) | $ | ( | ) | |||||
| Net interest income after provision for credit losses | ||||||||||||
| Non-interest expenses | ||||||||||||
| Legal | ||||||||||||
| Total non-interest expense | ||||||||||||
| Net income before provision for income taxes | ||||||||||||
| Provision for income taxes | ||||||||||||
| Net income | $ | $ | $ | |||||||||
| Net income available to common shareholders | $ | $ | $ | |||||||||
| Net income per share | ||||||||||||
| Basic earnings per common share | $ | $ | $ | |||||||||
| Diluted earnings per common share | $ | $ | $ | |||||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of comprehensive income for the three months ended March 31, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Net income | $ | $ | $ | |||||||||
| Total comprehensive (loss) income | $ | ( | ) | $ | $ | ( | ) | |||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of cash flows for the three months ended March 31, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for credit losses | ( | ) | ( | ) | ||||||||
| Increase in accrued interest receivable and other assets | ( | ) | ( | ) | ||||||||
| Net increase (decrease) in accrued interest payable and other liabilities | ||||||||||||
| Net cash provided by operating activities | $ | $ | $ | |||||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of changes in shareholders’ equity for the three months ended March 31, 2022:
| As Previously Reported | Adjustments | As Corrected | ||||||||||||||||||
| (dollars in thousands) | Retained Earnings / Accumulated Deficit | Total Shareholders’ Equity | Retained Earnings / Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||
| Balance January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Adjustment for adoption of ASC 2016-23, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income | ||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
The Company recorded a net decrease to retained earnings of $
| January 1, 2022 | As Previously Reported | Adjustments | As Corrected | |||||||||||||||||||||
| (dollars in thousands) | As Reported Under | Pre-ASC 326 | Impact of ASC 326 Adoption | As Reported Under | As Reported Under | Impact of ASC 326 Adoption | ||||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Loans | $ | $ | $ | $ | $ | |||||||||||||||||||
| ACL on Loans: | ||||||||||||||||||||||||
| Commercial real estate | ( | ) | ( | ) | ||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||
| Commercial and industrial | ( | ) | ||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||||||
| Residential mortgage | ( | ) | ||||||||||||||||||||||
| Paycheck protection program | - | - | - | - | - | - | ||||||||||||||||||
| Unallocated | ( | ) | ( | ) | ||||||||||||||||||||
| Total ACL on Loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| ACL on off-balance sheet commitments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Tax effect | $ | $ | $ | |||||||||||||||||||||
| Shareholders' equity: | $ | $ | $ | |||||||||||||||||||||
The following table sets forth the Company’s gross loans by major category pre and post the correction of immaterial errors as of March 31, 2022 as disclosed in Note 6: Loans Receivable and Allowance for Credit Losses at March 31, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Total loans receivable | $ | $ | $ | |||||||||
| Deferred costs (fees) | ( | ) | ( | ) | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ( | ) | ||||||
| Net loans receivable | $ | $ | ( | ) | $ | |||||||
The following tables provide a summary of the allowance for credit losses and balance of loans receivable by loan class and by impairment method pre and post the correction of immaterial errors as of March 31, 2022 as disclosed in Note 6: Loans Receivable and Allowance for Credit Losses at March 31, 2022:
| March 31, 2022 | As Previously Reported | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for impairment | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| As Corrected | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class pre and post the correction of immaterial errors at and for the three months ended March 31, 2022 as disclosed in Note 6: Loans Receivable and Allowance for Credit Losses at March 31, 2022:
Three months ended March 31, 2022
| As Previously Reported | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance January 1, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance March 31, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance January 1, 2022 | - | - | ||||||||||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Charge-offs | - | - | ||||||||||||||||||||||||||||||||||
| Recoveries | - | - | ||||||||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||
| Ending balance March 31, 2022: | $ | ) | $ | $ | $ | $ | ) | $ | ) | $ | - | $ | - | $ | ||||||||||||||||||||||
| As Corrected | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residentia l Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance January 1, 2022 | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||
| Recoveries | - | |||||||||||||||||||||||||||||||||||
| Provisions (credits)(1) | ( | ) | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||
| Ending balance March 31, 2022: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
(1) Provision to roll forward the allowance for credit losses excludes a credit of $(
The ACL on off-balance sheet commitments as of March 31, 2022 was $
The following table presents the impact of the correction of immaterial errors on the Company’s regulatory capital ratios at March 31, 2022:
| (dollars in thousands) | Actual | |||||||||||
| At March 31, 2022: | As Previously Reported | Adjustment | Corrected | |||||||||
| Total risk based capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
| Tier one risk based capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
| CET 1 risk based capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
| Tier one leveraged capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
Refer to Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations for disclosure of relevant regulatory minimum capital ratios.
June 30, 2022 Financial Statements
The following table presents the impact of the correction of immaterial errors on the consolidated statement of financial condition at June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Adjusted | |||||||||
| ASSETS | ||||||||||||
| Loans receivable (net of allowance for credit losses) | $ | $ | ( | ) | $ | |||||||
| Other assets | ||||||||||||
| Total Assets | $ | $ | ( | ) | $ | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
| Liabilities | ||||||||||||
| Other liabilities | $ | $ | $ | |||||||||
| Total Liabilities | $ | $ | $ | |||||||||
| Shareholders' Equity | ||||||||||||
| Retained earnings | $ | $ | ( | ) | $ | |||||||
| Total Shareholders' Equity | ( | ) | ||||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ( | ) | $ | |||||||
The following table presents the impact of the correction of immaterial error on the consolidated statement of income for the three months ended June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Provision for credit losses | $ | ( | ) | $ | $ | |||||||
| Net interest income after provision for credit losses | ( | ) | ||||||||||
| Non-interest expenses | ||||||||||||
| Legal | ( | ) | ||||||||||
| Total non-interest expense | ( | ) | ||||||||||
| Net income before provision for income taxes | ( | ) | ||||||||||
| Provision for income taxes | ( | ) | ||||||||||
| Net income | $ | $ | ( | ) | $ | |||||||
| Net income available to common shareholders | $ | $ | ( | ) | $ | |||||||
| Net income per share | ||||||||||||
| Basic earnings per common share | ( | ) | ||||||||||
| Diluted earnings per common share | ( | ) | ||||||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of income for the six months ended June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Provision for credit losses | $ | $ | $ | |||||||||
| Net interest income after provision for credit losses | ( | ) | ||||||||||
| Net income before provision for income taxes | ( | ) | ||||||||||
| Provision for income taxes | ( | ) | ||||||||||
| Net income | $ | $ | ( | ) | $ | |||||||
| Net income available to common shareholders | $ | $ | ( | ) | $ | |||||||
| Net income per share | ||||||||||||
| Basic earnings per common share | ( | ) | ||||||||||
| Diluted earnings per common share | ( | ) | ||||||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of comprehensive income for the three months ended June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Net income | $ | $ | ( | ) | $ | |||||||
| Total comprehensive (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of comprehensive income for the six months ended June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Net income | $ | $ | ( | ) | $ | |||||||
| Total comprehensive (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of cash flows for the six months ended June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | $ | ( | ) | $ | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Provision for credit losses | ||||||||||||
| Increase in accrued interest receivable and other assets | ( | ) | ( | ) | ( | ) | ||||||
| Net cash provided by operating activities | $ | $ | $ | |||||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of shareholders’ equity for the three months ended June 30, 2022:
| As Previously Reported | Adjustments | As Corrected | ||||||||||||||||||
| (dollars in thousands) | Retained Earnings / Accumulated Deficit | Total Shareholders’ Equity | Retained Earnings / Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||
| Balance April 1, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Net income | ( | ) | ||||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
The following table presents the impact of the correction of immaterial errors on the consolidated statement of shareholders’ equity for the six months ended June 30, 2022:
| As Previously Reported | Adjustments | As Corrected | ||||||||||||||||||
| (dollars in thousands) | Retained Earnings / Accumulated Deficit | Total Shareholders’ Equity | Retained Earnings / Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||
| Balance January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Adjustment for adoption of ASC 2016-23, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income | ( | ) | ||||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
The following table sets forth the Company’s gross loans by major category pre and post the correction of immaterial errors as of June 30, 2022 as disclosed in Note 6: Loans Receivable and Allowance for Credit Losses at June 30, 2022:
| (dollars in thousands) | As Previously Reported | Adjustments | As Corrected | |||||||||
| Total loans receivable | $ | $ | $ | |||||||||
| Deferred costs (fees) | ( | ) | ( | ) | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ( | ) | ||||||
| Net loans receivable | $ | $ | ( | ) | $ | |||||||
The following tables detail activity in the allowance for credit losses pre and post the correction of immaterial errors for the three and six months ended June 30, 2022 as disclosed in Note 6: Loans Receivable and Allowance for Credit Losses at June 30, 2022. The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. The transition adjustment includes an increase in the allowance of $
| As Previously Reported | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance March 31, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance: June 30, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance March 31, 2022: | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ||||||||||||||||||||||||||||||||||
| Ending balance: June 30, 2022: | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| As Corrected | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance March 31, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions (credits)(1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Ending balance: June 30, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(1) Provision to roll forward the allowance for credit losses excludes a credit of $(
The ACL on off-balance sheet commitments as of June 30, 2022 was $
| As Previously Reported | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2021: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance June 30, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2021: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Ending balance June 30, 2022: | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||
| As Corrected | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2021: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provisions (credits)(1) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance June 30, 2022: | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
(1) Provision to roll forward the allowance for credit losses excludes a credit of $(
The ACL on off-balance sheet commitments as of June 30, 2022 was $
The following table presents the impact of the correction of immaterial errors on the Company’s regulatory capital ratios at June 30, 2022.
| (dollars in thousands) | Actual | |||||||||||
| At June 30, 2022: | As Previously Reported | Adjustment | Corrected | |||||||||
| Total risk based capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
| Tier one risk based capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
| CET 1 risk based capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
| Tier one leveraged capital | ||||||||||||
| Republic | % | % | % | |||||||||
| Company | % | % | % | |||||||||
Refer to Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations for disclosure of relevant regulatory minimum capital ratios
Note 3: Summary of Significant Accounting Policies
Risks and Uncertainties
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The coronavirus (“COVID-19”) outbreak and the public health response to contain it resulted in unprecedented economic and financial market conditions. Additionally, more recent geopolitical (including the conflict in Ukraine), inflationary pressures, interest rate hikes by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and potential recessionary conditions have added even further uncertainty to the overall economic environment. During 2022, the federal funds target range increased by 425 basis points to a range of 4.25% - 4.50% to curb inflation, with continued increases planned.
The effects of geopolitical conflict, inflationary pressures, higher interest rates and potential recessionary conditions may meaningfully impact loan production, income levels, and the measurement of certain significant estimates such the allowance for credit losses. Moreover, if in a period of economic contraction, elevated levels of credit losses and reduced interest income may occur. The extent to which the economic environment impacts the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the current economic environment and actions taken by governmental authorities and other third parties in response to geopolitical conflict and inflationary pressures.
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for credit losses and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
Interest Rate Lock Commitments
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance in FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding interest rate lock commitments (“IRLCs”) are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation, or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 12: Derivatives and Risk Management Activities for further detail of IRLCs.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for credit losses for in-scope financial instruments including investments of debt securities, loans, unfunded commitments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, the composition of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for credit losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, the estimates of the allowance for credit losses and the carrying values of other real estate owned could differ materially in the near term.
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments for their current expected credit losses effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of governance and reporting processes and related internal controls; model development, documentation and validation; and the incorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (“PD/LGD”). We contracted with a third-party vendor to assist us in the application of ASU 2016-13 and utilize various methodologies such as Cohort and Weighted Average Remaining Maturity to estimate the allowance for credit losses.
In evaluating the Company’s ability to recover deferred tax assets, management considers available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. The establishment of or an increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Stock-Based Compensation
The Company has a Stock Option and Restricted Stock Plan (the “2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. Under the terms of the 2005 Plan,
On April 29, 2014, the Company’s shareholders approved the Republic First Bancorp, Inc. 2014 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,
On April 27, 2021, the Company’s shareholders approved the Republic First Bancorp, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is
The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant.
During the nine months ended September 30, 2022 and 2021,
Information regarding stock-based compensation for the nine months ended September 30, 2022 and 2021 is set forth below:
| 2022 | 2021 | |||||||
| Stock-based compensation expense recognized | $ | $ | ||||||
| Number of unvested stock options | ||||||||
| Fair value of unvested stock options | $ | $ | ||||||
| Amount remaining to be recognized as expense | $ | $ | ||||||
The remaining unrecognized expense amount of $
The Company granted stock units under the 2014 Plan during the nine-month period ended September 30, 2022 and 2021. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.
The following table details the Stock Units under the 2014 plan for the three and nine months ended September 30, 2022 and September 30, 2021:
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | |||||||||||||||
| Number of Units | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | |||||||||||||
| Beginning balance | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Ending balance | $ | $ | ||||||||||||||
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||||||||||
| Number of Units | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | |||||||||||||
| Beginning balance | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Ending balance | $ | $ | ||||||||||||||
Information regarding stock unit compensation under the 2014 plan for the nine months ended September 30, 2022 and 2021 is set forth below:
| 2022
| 2021
| |||||||
| Stock based compensation expense recognized | $ | $ | ||||||
| Number of unvested stock units | ||||||||
| Fair value of unvested stock units | $ | $ | ||||||
| Amount remaining to be recognized as expense | $ | $ | ||||||
The remaining unrecognized expense amount of $
The Company granted stock units under the 2021 Plan during the nine-month period ended September 30, 2022. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.
The following table details the Stock Units under the 2021 plan for the three and nine months ended September 30, 2022.
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||
| Number of Units | Weighted Average Grant Date Fair Value | Number of Units | Weighted Average Grant Date Fair Value | |||||||||||||
| Beginning balance | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ||||||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Ending balance | $ | $ | ||||||||||||||
Information regarding stock unit compensation under the 2021 plan for the nine months ended September 30, 2022 and 2021 is set forth below:
| 2022 | 2021 | |||||||
| Stock based compensation expense recognized | $ | $ | ||||||
| Number of unvested stock units | ||||||||
| Fair value of unvested stock units | $ | $ | ||||||
| Amount remaining to be recognized as expense | $ | $ | ||||||
The remaining unrecognized expense amount of $
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 units and convertible preferred stock/dilutive stock options granted through the Company’s stock option plans for the three- and nine-months ended September 30, 2022 and September 30, 2021.
The calculation of EPS for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income attributable to basic common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Net income per share – basic | $ | $ | $ | $ | ||||||||||||
| Preferred stock dividends | $ | $ | $ | $ | ||||||||||||
| Net income attributable to diluted common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding (including dilutive CSEs) | ||||||||||||||||
| Net income per share – diluted | $ | $ | $ | $ | ||||||||||||
The following is a summary of securities that could potentially dilute basic earnings per common share in future periods. These securities were not included in the computation of diluted earnings per common share because the effect would have been anti-dilutive for the periods presented. Anti-dilutive options are those options with weighted average exercise prices in excess of the weighted average market value for the periods presented.
| (in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Anti-dilutive securities | ||||||||||||||||
| Share based compensation awards | ||||||||||||||||
| Convertible preferred stock | ||||||||||||||||
| Total anti-dilutive securities | ||||||||||||||||
Recent Accounting Pronouncements
ASU 2016-13
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments for their current expected credit losses (“CECL”) effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of governance and reporting processes and related internal controls; model development, documentation and validation; and the incorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (“PD/LGD”). We contracted with a third-party vendor to assist us in the application of ASU 2016-13 and utilize various methodologies such as Cohort and Weighted Average Remaining Maturity to estimate the allowance for credit losses.
Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13, including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020.
Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief will expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.
The Company elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020 and 2021. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period, which the Company has established as a one-year period. In the unprecedented circumstances surrounding the COVID-19 pandemic and the response thereto, the Company believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to delay adoption of ASU 2016-13 to January 1, 2022. This allowed the Company to utilize the CECL standard for the entire year of adoption.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $
An analysis of the impact of adoption of ASC 326 as of January 1, 2022 is disclosed in Note 2: Changes to Previously Reported Allowance for Credit Losses.
An analysis of the allowance for credit losses for the three months ended March 31, 2022 and June 30, 2022 is disclosed in Note 2: Correction of Immaterial Errors in Previously Filed Financial Statements.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.
ASU 2021-01
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.
ASU 2022-02
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. This ASU will become effective for the Company on January 1, 2023. The adoption of ASU No. 2022-02 is not expected to have a material impact on the Company's financial statements.
Note 4: Commitments and Contingencies
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, except as noted below.
On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its then Interim Chief Executive Officer and director and two other current directors. The lawsuit is styled Vernon Hill et al. v. Lisa Jacobs, et al., Case No. 220901684. The complaint was amended on December 12, 2022. The two plaintiffs, the former Chairman of the Board and Chief Executive Officer of the Company and a former director of the Company, allege defamation, defamation per se and false light against the three individual defendants. The amended complaint includes three additional allegations by the former Chairman of the Board and Chief Executive Officer of the Company, alleging fraudulent inducement (against Madonna and Wildstein), fraudulent concealment (against Madonna, Jacobs and Wildstein), and unjust enrichment (against the Company). The former Chairman of the Board and Chief Executive Officer also alleges a breach of his employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and (as against the individual defendants) punitive damages. The defendants all filed Preliminary Objections to the complaint, as well as to the amended complaint, and discovery has commenced. On February 27, 2023, Plaintiffs filed papers opposing the Preliminary Objections, and briefing of those Objections is ongoing. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter. The Company plans to defend itself vigorously.
On November 22, 2022, shareholders George E. Norcross, III, Gregory B. Braca and Philip A. Norcross filed a complaint in the same Philadelphia Court of Common Pleas against the Company and its directors. The lawsuit, captioned George E. Norcross, III, et al. v. Republic First Bancorp, Inc. Case No. 221102195, alleges generally that the Company and its Board have acted in violation of their fiduciary duties by rejecting Plaintiffs’ efforts to nominate Mr. Braca as a director candidate at its 2022 annual meeting of shareholders. The Company rejected that attempted nomination on grounds that the plaintiff who made the nomination was not a stockholder of record, as the Company’s By-Laws require. Plaintiffs seek injunctive and declaratory relief that includes a demand that the Court waive enforcement of the Company’s By-Laws, reopen the deadline for nominating director candidates or find that the defendants violated the Company’s By-Laws in connection with its appointment of director Benjamin Duster to fill a vacancy on the Board. On December 6, 2022, plaintiffs filed a motion for preliminary injunction and asked defendants to accept service of the complaint, which they have done. Following a status conference on January 18, 2023, a hearing on the preliminary injunction motion was scheduled for April 25, 2023, and the Company was ordered not to hold any shareholder vote with regard to any vacancy on its board of directors until May 31, 2023, at the earliest. Given its early stage, the Company cannot predict potential outcomes of the matter or plaintiffs’ motion; however, the defendants deny the alleged wrongdoing and intend to defend the matter vigorously.
On November 28, 2022, Plaintiffs Vernon Hill (“Hill”) and Interarch, Inc. (“Interarch”) filed an action in the United States District Court for the Eastern District of Pennsylvania, captioned Hill and Interarch v. Republic First Bancorp, Inc. et al., No. 2:22-cv-04735, and they filed an amended complaint on February 10, 2023. Hill is a former Republic First Bancorp, Inc. (“Republic”) board chair and Chief Executive Officer and a former Republic director. Interarch, owned by Hill’s wife, Shirley Hill, provided certain branding and architecture services to Republic. Plaintiffs Hill and Interarch bring claims against Defendants Republic and two Republic employees (who are former Interarch employees), Rodney Dean (“Dean”) and John Chessa (“Chessa”). Plaintiff Interarch brings claims for copyright infringement (against Republic), , breach of contract (against Republic), and breach of the duty of loyalty (against Dean and Chessa). Hill, in turn, brings a claim for trademark infringement (against Republic) and violation of Hill’s right of publicity (against Republic). Hill and Interarch together bring claims for unjust enrichment (against Republic), unfair competition (against Republic), misappropriation of trade secrets under federal and state law (against all Defendants), misappropriation of trade secrets under federal and state law (against all Defendants), misappropriation of confidential information under state law (against all Defendants), tortious interference (against Republic) and a request for a declaratory judgment relating to these claims (against all Defendants). This matter is in its early stages, and Republic is assessing the potential outcome and materiality of this matter. The Company intends to defend itself vigorously.
Note 5: Segment Reporting
The Company has
Note 6: Investment Securities
A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities as of September 30, 2022 and December 31, 2021 is as follows:
| September 30, 2022 | ||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized / Unrecognized Gains | Gross Unrealized / Unrecognized Losses | Fair Value | ||||||||||||
| Available for sale | ||||||||||||||||
| U.S. Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations | ( | ) | ||||||||||||||
| Agency mortgage-backed securities | ( | ) | ||||||||||||||
| Municipal securities | ( | ) | ||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Investment securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Held to maturity | ||||||||||||||||
| U.S. Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations | ( | ) | ||||||||||||||
| Agency mortgage-backed securities | ( | ) | ||||||||||||||
| Investment securities held to maturity | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities (1) | $ | |||||||||||||||
| (1) | Equity securities consist of investments in non-cumulative preferred stock. |
| December 31, 2021 | ||||||||||||||||
| (dollars in thousands) | Amortized Cost | Gross Unrealized / Unrecognized Gains | Gross Unrealized / Unrecognized Losses | Fair Value | ||||||||||||
| Available for sale | ||||||||||||||||
| U.S. Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Collateralized mortgage obligations | ( | ) | ||||||||||||||
| Agency mortgage-backed securities | ( | ) | ||||||||||||||
| Municipal securities | ||||||||||||||||
| Corporate bonds | ( | ) | ||||||||||||||
| Investment securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Held to maturity | ||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations | ( | ) | ||||||||||||||
| Agency mortgage-backed securities | ( | ) | ||||||||||||||
| Investment securities held to maturity | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities (1) | $ | |||||||||||||||
| (1) | Equity securities consist of investments in non-cumulative preferred stock. |
The following table presents investment securities by stated maturity as of September 30, 2022. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.
| Available for Sale | Held to Maturity | |||||||||||||||
| (dollars in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
| Due in 1 year or less | $ | $ | $ | $ | ||||||||||||
| After 1 year to 5 years | ||||||||||||||||
| After 5 years to 10 years | ||||||||||||||||
| After 10 years | ||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Total investment securities | $ | $ | $ | $ | ||||||||||||
The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities. Equity securities consist of investments in non-cumulative preferred stock. There were private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of September 30, 2022 or December 31, 2021. There was also MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis. The adoption of CECL on January 1, 2022 resulted in no impact to the held-to-maturity securities portfolio, as the Company’s entire portfolio consists of securities guaranteed by various agencies or government-sponsored enterprises and carries risk of nonpayment.
The Company evaluates investment securities that are in an unrealized/unrecognized loss position on a quarterly basis and more frequently when warranted in order to determine if the decline in fair value is below the amortized cost of the asset. Accounting standards require the evaluation of the discounted cash flows when estimating expected credit losses to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no credit-related impairment charges recognized in net income during the nine months ended September 30, 2022 or the year ended December 31, 2021.
The following tables show the fair value and gross unrealized/unrecognized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized/unrecognized loss position as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||||||||||
| Municipal securities | ||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Investment Securities Available for Sale | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | ||||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||||||||||
| Investment Securities Held to Maturity | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||||||||||
| Municipal securities | ||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Investment Securities Available for Sale | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | ||||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||||||||||
| Investment Securities Held to Maturity | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Unrealized/unrecognized losses on securities in the investment portfolio amounted to $
The Company held U.S. Government agency securities,
All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. As of September 30, 2022, the investment portfolio included
On September 30, 2022, the investment portfolio included
Proceeds associated with the sale of securities available for sale during the three and nine months ended September 30, 2022 were each $
There was
Note 7: Loans Receivable and Allowance for Credit Losses
The following table sets forth the Company’s gross loans by major category as of September 30, 2022 and December 31, 2021:
| (dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Commercial real estate | $ | $ | ||||||
| Construction and land development | ||||||||
| Commercial and industrial | ||||||||
| Owner occupied real estate | ||||||||
| Consumer and other | ||||||||
| Residential mortgage | ||||||||
| Paycheck protection program | ||||||||
| Total loans receivable | ||||||||
| Deferred costs (fees) | ( | ) | ( | ) | ||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Net loans receivable | $ | $ | ||||||
The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for credit losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner-occupied real estate, consumer, residential mortgages and Paycheck Protection Program (“PPP”) loans, which are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2022 and December 31, 2021.
| (dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Loans Receivable | Loans Receivable > 90 Days and Accruing | |||||||||||||||||||||
| At September 30, 2022 | ||||||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||||||
| Paycheck protection program | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (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, 2021 | ||||||||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||||||||||
| Paycheck protection program | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Credit Quality Indicators:
The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information, and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy. The Company uses the following regulatory definitions for criticized and classified risk ratings:
Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions, and values.
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.
The following table presents the classes of the loan portfolio summarized by the amortized cost basis by origination year and the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2022:
Loans Amortized Cost Basis by Origination Year
| (dollar in thousands) September 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 and Prior | Revolving | Total | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Commercial Real Estate | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Construction | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Commercial & Industrial | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Owner Occupied Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Owner Occupied | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Consumer & Other | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Consumer & Other | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Residential Mortgage | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Residential Mortgage | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Paycheck Protection Program | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Paycheck Protection | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2021:
|
(dollars in thousands) | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
| December 31, 2021: | ||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | |||||||||||||||
| Construction and land development | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Owner occupied real estate | ||||||||||||||||||||
| Consumer and other | ||||||||||||||||||||
| Residential mortgage | ||||||||||||||||||||
| Paycheck protection program | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The following table shows non-accrual loans by class as of September 30, 2022 and December 31, 2021:
| (dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Commercial real estate | $ | $ | ||||||
| Construction and land development | ||||||||
| Commercial and industrial | ||||||||
| Owner occupied real estate | ||||||||
| Consumer and other | ||||||||
| Residential mortgage | ||||||||
| Paycheck protection program | ||||||||
| Total | $ | $ | ||||||
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2022:
| (dollars in thousands) | Real Estate | Business Asset | Total | |||||||||
| Commercial real estate | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Owner occupied real estate | ||||||||||||
| Consumer and other | ||||||||||||
| Residential mortgage | ||||||||||||
| Paycheck protection program | ||||||||||||
| Total | $ | $ | $ | |||||||||
Impaired loans – Impaired loans disclosures presented below as of December 31, 2021 and for the three and nine months ended September 30, 2021, represent requirements prior to the adoption of CECL on January 1, 2022.
The following table summarizes information regarding impaired loans by loan portfolio class as of December 31, 2021:
| December 31, 2021 | ||||||||||||
| (dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||
| With no related allowance recorded: | ||||||||||||
| Commercial real estate | $ | $ | $ | - | ||||||||
| Construction and land development | - | |||||||||||
| Commercial and industrial | - | |||||||||||
| Owner occupied real estate | - | |||||||||||
| Consumer and other | - | |||||||||||
| Residential mortgage | - | |||||||||||
| Paycheck protection program | - | |||||||||||
| Total | $ | $ | $ | - | ||||||||
| With an allowance recorded: | ||||||||||||
| Commercial real estate | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Owner occupied real estate | ||||||||||||
| Consumer and other | ||||||||||||
| Residential mortgage | ||||||||||||
| Paycheck protection program | ||||||||||||
| Total | $ | $ | $ |
| Total: | ||||||||||||
| Commercial real estate | $ | $ | $ | |||||||||
| Construction and land development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Owner occupied real estate | ||||||||||||
| Consumer and other | ||||||||||||
| Residential mortgage | ||||||||||||
| Paycheck protection program | ||||||||||||
| Total | $ | $ | $ |
The following table presents additional information regarding the Company’s impaired loans for the three and nine months ended September 30, 2021:
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||
| (dollars in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | ||||||||||||
| Construction and land development | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Owner occupied real estate | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| Paycheck protection program | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | ||||||||||||
| Construction and land development | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Owner occupied real estate | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| Paycheck protection program | ||||||||||||||||
| Total | $ | $ | $ | $ |
| Total: | ||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | ||||||||||||
| Construction and land development | ||||||||||||||||
| Commercial and industrial | ||||||||||||||||
| Owner occupied real estate | ||||||||||||||||
| Consumer and other | ||||||||||||||||
| Residential mortgage | ||||||||||||||||
| Paycheck protection program | ||||||||||||||||
| Total | $ | $ | $ | $ |
The following tables detail activity in the allowance for credit losses for the three and nine months ended September 30, 2022 and the allowance for loan losses for the three and nine months ended September 30, 2021. The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. Results for the periods beginning after January 1, 2022 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The transition adjustment includes an increase in the allowance of $
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection Program | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance June 30, 2022: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| Charge-offs | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||
| Recoveries | - | |||||||||||||||||||||||||||||||||||
| Provisions (credits)(1) | - | |||||||||||||||||||||||||||||||||||
| Ending balance September 30, 2022: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| (1) | Provision to roll forward the allowance for credit losses excludes a provision of $ |
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection Program | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Credit Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2021: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| Day 1 effect of CECL | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||
| Recoveries | - | |||||||||||||||||||||||||||||||||||
| Provisions (credits)(1) | ( | ) | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||
| Ending balance September 30, 2022: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| (1) | Provision to roll forward the allowance for credit losses excludes a provision of $ |
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection Program | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance June 30, 2021: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| Charge-offs | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||
| Recoveries | - | |||||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||
| Ending balance September 30, 2021: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| (dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate | Consumer and Other | Residential Mortgage | Paycheck Protection Program | Unallocated | Total | |||||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||||||
| Beginning balance December 31, 2020: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||
| Recoveries | - | |||||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||
| Ending balance September 30, 2021: | $ | $ | $ | $ | $ | $ | $ | - | $ | $ | ||||||||||||||||||||||||||
Allowance for Credit Losses on Off Balance Sheet Commitments
The following table presets the activity in the allowance for credit losses for off balance sheet commitments for the nine months ended September 30, 2022:
| Allowance for Credit Losses on Off Balance Sheet Commitments | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Pre-ASC 326 | Impact of | Provision | September 30, 2022 | |||||||||||||
| (dollars in thousands) | Adoption | adopting ASC 326 | (Credit) | Ending ACL | ||||||||||||
| ACL on off-balance sheet commitments | $ | $ | $ | $ | ||||||||||||
| Total ACL | $ | $ | $ | $ | ||||||||||||
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in the interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.
Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency were not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law, which extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declared a termination of the national emergency related to the COVID-19 pandemic. As of September 30, 2022 and December 31, 2021, there were
There were no loan modifications made during the three and nine months ended September 30, 2022 or September 30, 2021 that met the criteria of a TDR.
After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were TDRs that subsequently defaulted during the three and nine months ended September 30, 2022. There were TDRs that subsequently defaulted during the year ended December 31, 2021. The last remaining TDR on the Company’s books was paid off in full during 2021.
There were residential mortgages in the process of foreclosure as of September 30, 2022. There was residential mortgage in the process of foreclosure at December 31, 2021. There was
Note 8: Other Borrowings
We have established a line of credit with the Federal Home Loan Bank (“FHLB”) of Pittsburgh. Our maximum borrowing capacity with the FHLB was $
Note 9: Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
The Company follows the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2022 and December 31, 2021 were as follows:
| (dollars in thousands) | Total | (Level 1) Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
| September 30, 2022 | ||||||||||||||||
| Assets: | ||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Investment securities available for sale | $ | $ | $ | |||||||||||||
| Equity securities | ||||||||||||||||
| Mortgage Loans Held for Sale | $ | $ | $ | $ | ||||||||||||
| SBA Servicing Assets | ||||||||||||||||
| Interest Rate Lock Commitments | ||||||||||||||||
| Best Efforts Forward Loan Sales Commitments | ||||||||||||||||
| Mandatory Forward Loan Sales Commitments | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Interest Rate Lock Commitments | ||||||||||||||||
| Best Efforts Forward Loan Sales Commitments | ||||||||||||||||
| Mandatory Forward Loan Sales Commitments | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Assets: | ||||||||||||||||
| U.S. Government agencies | $ | $ | $ | $ | ||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Municipal securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Investment securities available for sale | $ | $ | $ | |||||||||||||
| Equity securities | ||||||||||||||||
| Mortgage Loans Held for Sale | $ | $ | $ | $ | ||||||||||||
| SBA Servicing Assets | ||||||||||||||||
| Interest Rate Lock Commitments | ||||||||||||||||
| Best Efforts Forward Loan Sales Commitments | ||||||||||||||||
| Mandatory Forward Loan Sales Commitments | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Interest Rate Lock Commitments | ||||||||||||||||
| Best Efforts Forward Loan Sales Commitments | ||||||||||||||||
| Mandatory Forward Loan Sales Commitments | ||||||||||||||||
The following tables present an analysis of the activity in the SBA servicing assets for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Beginning balance, July 1st | $ | $ | ||||||
| Additions | ||||||||
| Fair value adjustments | ( | ) | ( | ) | ||||
| Ending balance, September 30th | $ | $ | ||||||
| Nine Months Ended September 30, | ||||||||
| (dollars in thousands) | 2022 | 2021 | ||||||
| Beginning balance, January 1st | $ | $ | ||||||
| Additions | ||||||||
| Fair value adjustments | ( | ) | ( | ) | ||||
| Ending balance, September 30th | $ | $ | ||||||
Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Level 3 Investments Only (dollars in thousands) | Corporate Bonds | Corporate Bonds | ||||||
| Balance, July 1st | $ | $ | ||||||
| Unrealized gains (losses) | ||||||||
| Proceeds from sales | ||||||||
| Realized losses | ||||||||
| Balance, September 30th | $ | $ | ||||||
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Level 3 Investments Only (dollars in thousands) | Corporate Bonds | Corporate Bonds | ||||||
| Balance, January 1st | $ | $ | ||||||
| Unrealized gains (losses) | ( | ) | ||||||
| Proceeds from sales | ||||||||
| Realized losses | ||||||||
| Balance, September 30th | $ | $ | ||||||
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2022 and December 31, 2021 were as follows:
| (dollars in thousands) | Total | (Level 1) Quoted Prices in Active Markets for Identical Assets | (Level 2) Significant Other Observable Inputs | (Level 3) Significant Unobservable Inputs | ||||||||||||
| September 30, 2022 | ||||||||||||||||
| Individually evaluated loans | $ | $ | $ | $ | ||||||||||||
| Other real estate owned | ||||||||||||||||
| December 31, 2021 | ||||||||||||||||
| Impaired loans | $ | $ | $ | $ | ||||||||||||
| Other real estate owned | ||||||||||||||||
The table below presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis (dollars in thousands):
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||
| Asset Description | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||||
| September 30, 2022 | ||||||||||||
| Corporate bonds | $ | Discounted Cash Flows | Discount Rate | |||||||||
| SBA servicing assets | $ | Discounted Cash Flows | Conditional Prepayment Rate Discount Rate | |||||||||
| Individually evaluated loans | $ | Appraised Value of Collateral (1) | Liquidation expenses (2) | |||||||||
| Other real estate owned | $ | Appraised Value of Collateral (1) | Liquidation expenses (2) | |||||||||
| Sales Price | Liquidation expenses (2) | |||||||||||
| December 31, 2021 | ||||||||||||
| Corporate bonds | $ | Discounted Cash Flows | Discount Rate | |||||||||
| SBA servicing assets | $ | Discounted Cash Flows | Conditional Prepayment Rate Discount Rate | |||||||||
| Appraised Value of Collateral (1) | Liquidation expenses (2) | |||||||||||
| Impaired loans | $ | Sales Price | Liquidation expenses (2) | |||||||||
| Estimated Value of Insurance Proceeds (4) | ||||||||||||
| Other real estate owned | $ | Appraised Value of Collateral (1) | Liquidation expenses (2) | |||||||||
| Sales Price | Liquidation expenses (2) | |||||||||||
| (1) | Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable. |
| (2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. |
| (3) | The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value. |
| (4) | The valuation technique is determined based on estimated insurance proceeds and litigation. |
The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company’s actual sales of other real estate owned which are assessed annually.
Fair Value Assumptions
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments as of September 30, 2022 and December 31, 2021.
Investment Securities
The fair value of investment securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value investment securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities, which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments. The fair value of equity securities (carried at fair value) is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1).
The types of instruments valued based on matrix pricing in active markets include all of the Company’s U.S. government and agency securities, corporate bonds, and municipal obligations held in the investment securities portfolio. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Republic has one Level 3 investment classified as available for sale which is a single corporate bond.
The corporate bond included in Level 3 was transferred from Level 2 in 2010 and is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.
Mortgage Loans Held for Sale (Carried at Fair Value)
The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect their economic value. Interest income on loans held for sale, which totaled $
The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of June 30, 2022 and December 31, 2021 (dollars in thousands):
| Carrying Amount | Aggregate Unpaid Principal Balance | Excess Carrying Amount Over Aggregate Unpaid Principal Balance | ||||||||||
| September 30, 2022 | $ | $ | $ | |||||||||
| December 31, 2021 | $ | $ | $ | |||||||||
Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of income in mortgage banking income. As of September 30, 2022, Republic had mortgage loans held for sale recorded at fair value that was 90 or more days past due and on non-accrual. Republic did have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual as of December 31, 2021.
Interest Rate Lock Commitments
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 IRLC’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, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.
Best Efforts Forward Loan Sales Commitments
Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best-efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.
Mandatory Forward Loan Sales Commitments
Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Republic, best efforts mandatory loan sales commitments are classified within Level 2 of the valuation hierarchy.
Individually Evaluated Collateral Dependent Loans
When a loan is individually evaluated, it is valued at the lower of cost or fair value. Collateral dependent loans which are individually evaluated and carried at fair value have been partially charged off or receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Additionally, updated independent appraisals valuations are obtained annually for all collateral dependent loans.
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 September 30, 2022 and December 31, 2021, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.
SBA Servicing Asset (Carried at Fair Value)
The SBA servicing asset is initially recorded when loans are sold, and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a quarterly basis and adjustments are presented as loan and servicing fees on the statement of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows is then calculated utilizing the Company’s market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. As of September 30, 2022 and December 31, 2021, the sensitivity of the current fair value of the SBA loan servicing rights to immediate and
| (dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| SBA Servicing Asset | ||||||||
| Fair Value of SBA Servicing Asset | $ | $ | ||||||
| Composition of SBA Loans Serviced for Others | ||||||||
| Fixed-rate SBA loans | % | % | ||||||
| Adjustable-rate SBA loans | % | % | ||||||
| Total | % | % | ||||||
| Weighted Average Remaining Term (in years) | | | ||||||
| Prepayment Speed | % | % | ||||||
| Effect on fair value of a 10% increase | $ | ( | ) | $ | ( | ) | ||
| Effect on fair value of a 20% increase | ( | ) | ( | ) | ||||
| Weighted Average Discount Rate | % | % | ||||||
| Effect on fair value of a 10% increase | $ | ( | ) | $ | ( | ) | ||
| Effect on fair value of a 20% increase | ( | ) | ( | ) | ||||
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.
Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Company’s financial instruments as of September 30, 2022 were as follows.
| Fair Value Measurements as of September 30, 2022 | ||||||||||||||||||||
| (dollars in thousands) | Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
| Balance Sheet Data | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available for sale | ||||||||||||||||||||
| Investment securities held to maturity | ||||||||||||||||||||
| Equity securities | ||||||||||||||||||||
| Restricted stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans receivable, net | ||||||||||||||||||||
| SBA servicing assets | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||
| Best efforts forward loan sales commitments | ||||||||||||||||||||
| Mandatory forward loan sales commitments | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Demand, savings and money market | $ | $ | $ | $ | $ | |||||||||||||||
| Time | ||||||||||||||||||||
| Subordinated debt | ||||||||||||||||||||
| Other borrowings | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||
| Best efforts forward loan sales commitments | ||||||||||||||||||||
| Mandatory forward loan sales commitments | ||||||||||||||||||||
| Off-Balance Sheet Data | ||||||||||||||||||||
| Commitments to extend credit | ||||||||||||||||||||
| Standby letters-of-credit | ||||||||||||||||||||
The estimated fair values of the Company’s financial instruments as of December 31, 2021 were as follows:
| Fair Value Measurements as of December 31, 2021 | ||||||||||||||||||||
| (dollars in thousands) | Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1 | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
| Balance Sheet Data | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available for sale | ||||||||||||||||||||
| Investment securities held to maturity | ||||||||||||||||||||
| Equity securities | ||||||||||||||||||||
| Restricted stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans receivable, net | ||||||||||||||||||||
| SBA servicing assets | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||
| Best efforts forward loan sales commitments | ||||||||||||||||||||
| Mandatory forward loan sales commitments | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Demand, savings and money market | $ | $ | $ | $ | $ | |||||||||||||||
| Time | ||||||||||||||||||||
| Subordinated debt | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||
| Best efforts forward loan sales commitments | ||||||||||||||||||||
| Mandatory forward loan sales commitments | ||||||||||||||||||||
| Off-Balance Sheet Data | ||||||||||||||||||||
| Commitments to extend credit | ||||||||||||||||||||
| Standby letters-of-credit | ||||||||||||||||||||
Note 10: Changes in Accumulated Other Comprehensive (Loss) Income By Component (1)
The following table presents the changes in accumulated other comprehensive (loss) income by component for the three and nine months ended September 30, 2022 and 2021, and the year ended December 31, 2021.
| Unrealized Gains (Losses) on Available- For-Sale Securities | Unrealized Holding Losses on Securities Transferred From Available-For-Sale To Held-To-Maturity | Total | ||||||||||
| (dollars in thousands) | ||||||||||||
| Balance July 1, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Unrealized loss on securities | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive (loss) income to net income (2) | ||||||||||||
| Net current-period other comprehensive (loss) income | ( | ) | ( | ) | ||||||||
| Total change in accumulated other comprehensive (loss) income | ( | ) | ( | ) | ||||||||
| Balance September 30, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Balance July 1, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Unrealized loss on securities | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive (loss) income to net income (2) | ||||||||||||
| Net current-period other comprehensive income | ( | ) | ( | ) | ||||||||
| Total change in accumulated other comprehensive income | ( | ) | ( | ) | ||||||||
| Balance September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Balance January 1, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Unrealized loss on securities | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive (loss) income to net income (2) | ||||||||||||
| Net current-period other comprehensive (loss) income | ( | ) | ( | ) | ||||||||
| Total change in accumulated other comprehensive (loss) income | ( | ) | ( | ) | ||||||||
| Balance September 30, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Balance January 1, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||
| Unrealized loss on securities | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) to net income (2) | ( | ) | ||||||||||
| Net current-period other comprehensive (loss) income | ( | ) | ( | ) | ||||||||
| Total change in accumulated other comprehensive (loss) income | ( | ) | ( | ) | ||||||||
| Balance September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| (1) | All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income. |
| (2) | Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Income. |
Note 11: Shareholders’ Equity
On August 26, 2020, the Company issued
Holders of shares of Series A Preferred Stock may convert such shares into shares of the Company’s common stock at a conversion price of $
Note 12: 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 nine months ended September 30, 2022 and the nine months ended September 30, 2021. The following table summarizes the amounts recorded in the Company’s statement of financial condition for derivatives designated as hedging instruments as of September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | Balance Sheet Presentation | Fair Value | Notional Amount | ||||||
| Asset derivatives: | |||||||||
| IRLC’s | Other Assets | $ | $ | ||||||
| Best efforts forward loan sales commitments | Other Assets | ||||||||
| Mandatory forward loan sales commitments | Other Assets | ||||||||
| Liability derivatives: | |||||||||
| IRLC’s | Other Liabilities | $ | $ | ||||||
| Best efforts forward loan sales commitments | Other Liabilities | ||||||||
| Mandatory forward loan sales commitments | Other Liabilities | ||||||||
| December 31, 2021 | Balance Sheet Presentation | Fair Value | Notional Amount | ||||||
| Asset derivatives: | |||||||||
| IRLC’s | Other Assets | $ | $ | ||||||
| Best efforts forward loan sales commitments | Other Assets | ||||||||
| Mandatory forward loan sales commitments | Other Assets | ||||||||
| Liability derivatives: | |||||||||
| IRLC’s | Other Liabilities | $ | $ | ||||||
| Best efforts forward loan sales commitments | Other Liabilities | ||||||||
| Mandatory forward loan sales commitments | Other Liabilities | ||||||||
The following tables summarize the amounts recorded in Republic’s statement of income for derivative instruments not designated as hedging instruments for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| Statement of Income Presentation | Three Months Ended September 30, 2022 Gain/(Loss) | Nine Months Ended September 30, 2022 Gain/(Loss) | |||||||
| Asset derivatives: | |||||||||
| IRLCs | Mortgage banking income | $ | ( | ) | $ | ( | ) | ||
| Best efforts forward loan sales commitments | Mortgage banking income | ||||||||
| Mandatory forward loan sales commitments | Mortgage banking income | ||||||||
| Liability derivatives: | |||||||||
| IRLCs | Mortgage banking income | $ | ( | ) | $ | ( | ) | ||
| Best efforts forward loan sales commitments | Mortgage banking income | ||||||||
| Mandatory forward loan sales commitments | Mortgage banking income |
| Statement of Income Presentation | Three Months Ended September 30, 2021 Gain/(Loss) | Nine Months Ended September 30, 2021 Gain/(Loss) | |||||||
| Asset derivatives: | |||||||||
| IRLCs | Mortgage banking income | $ | ( | ) | $ | ( | ) | ||
| Best efforts forward loan sales commitments | Mortgage banking income | ||||||||
| Mandatory forward loan sales commitments | Mortgage banking income | ||||||||
| Liability derivatives: | |||||||||
| IRLCs | Mortgage banking income | $ | $ | ||||||
| Best efforts forward loan sales commitments | Mortgage banking income | ||||||||
| Mandatory forward loan sales commitments | Mortgage banking income |
The fair value of Republic’s IRLCs, best efforts forward loan sales commitments, and mandatory forward loan sales commitments are based upon the estimated value of the underlying mortgage loan (determined consistent with “Loans Held for Sale”), adjusted for (1) estimated costs to complete and originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price.
Note 13: Revenue from Contracts with Customers
The following table presents non-interest income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, “Revenue from Contracts with Customers,” for the three and nine months ended September 30, 2022 and 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (dollars in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Non-interest income | ||||||||||||||||
| In-scope of Topic 606 | ||||||||||||||||
| Service charges on deposit accounts | $ | $ | $ | $ | ||||||||||||
| Other non-interest income | ( | ) | ||||||||||||||
| Non-interest income (in-scope of Topic 606) | ||||||||||||||||
| Non-interest income (out-of-scope of Topic 606) | ||||||||||||||||
| Total non-interest income | $ | $ | $ | $ | ||||||||||||
Note 14: Leases
We have operating lease agreements for certain land, buildings, and equipment. In some instances, a lease may contain renewal options to extend the term of the lease. We do not have any short-term leases in the calculation of the right-of-use assets and lease liability obligations. The most significant assumption related to the Company’s lease application of ASC 842 was the discount rate assumption. Since most of the lease agreements do not provide an implicit interest rate, the discount rate used in determining the operating lease liability obligation for each individual lease was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease term.
As of September 30, 2022, the Company had
As of September 30, 2021, the Company had operating lease agreements, which include operating leases for
The following table presents operating lease costs net of sublease income for the three and nine months ended September 30, 2022 and 2021.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Sublease income | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
The following table presents a maturity analysis of total operating lease liability obligations and reconciliation of the undiscounted cash flows to total operating lease liability obligations at September 30, 2022 and 2021.
| September 30, 2022 | September 30, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Operating lease payments due: | ||||||||
| Within one year | $ | $ | ||||||
| One to three years | ||||||||
| Three to five years | ||||||||
| More than five years | ||||||||
| Total undiscounted cash flows | ||||||||
| Discount on cash flows | ( | ) | ( | ) | ||||
| Total operating lease liability obligations | $ | $ | ||||||
The following table presents cash and non-cash activities for the three and nine months ended September 30 2022 and 2021.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (dollars in thousands) | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||
| Non-cash investing and financing activities | ||||||||||||||||
| Additions to Operating leases – right of use Asset | ||||||||||||||||
| New operating lease liability obligation | $ | $ | $ | $ | ||||||||||||
Note 15: Subsequent Events
On December 22, 2022, Mr. Madonna resigned from his position as Interim Chief Executive Officer of the Company. Under his employment agreement, upon his resignation, Mr. Madonna was entitled to receive a severance payment of $
The Company reassessed classification of certain investments, and effective December 2022, the Company transferred approximately $
On March 10, 2023 the Company announced that it has entered into a definitive agreement with certain accredited investors for a private placement of equity securities of the Company (the “Capital Raise”) in the aggregate amount of $
The Capital Raise includes (i) Common Stock of the Company, par value $
At closing, in exchange for the cash consideration of $
In 2020, the Company purchased $
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of our financial condition, changes in financial condition, and results of operations in the accompanying consolidated financial statements. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.
We may from time to time make written or oral “forward-looking statements,” including statements contained in this quarterly report. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties can arise with changes in: general economic conditions, including turmoil in the financial markets and related efforts of government agencies to stabilize the financial system; the impact of the COVID-19 pandemic on our business and results of operation; geopolitical conflict and inflationary pressures including Federal Reserve interest rate hikes; the effect of potential recessionary conditions; the adequacy of our allowance for credit losses and our methodology for determining such allowance; adverse changes in our loan portfolio and credit risk-related losses and expenses; concentrations within our loan portfolio, including our exposure to commercial real estate loans; inflation; changes to our primary service area; changes in interest rates; our ability to identify, negotiate, secure and develop new branch locations and renew, modify, or terminate leases or dispose of properties for existing branch locations effectively; business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items; deposit flows; loan demand; the regulatory environment, including evolving banking industry standards, changes in legislation or regulation; our securities portfolio and the valuation of our securities; change in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; rapidly changing technology; our ability to regain compliance with Nasdaq Listing Rules 5250(c)(1) and 5620(a); the failure to maintain current technologies; failure to attract or retain key employees; our ability to access cost-effective funding; fluctuations in real estate values; litigation liabilities, including costs, expenses, settlements and judgments; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. You should carefully review the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2021, and other documents we file from time to time with the Securities and Exchange Commission. The words "would be," "could be," "should be," "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions are intended to identify forward-looking statements. All such statements are made in good faith by us pursuant to the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us, except as may be required by applicable law or regulations.
Executive Summary
Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank. We offer a variety of credit and depository banking services to individuals and businesses primarily in Greater Philadelphia, Southern New Jersey, and New York City through our offices and branch locations in those markets.
As of September 30, 2022, we serve our customers through 34 branch locations, in addition to four loan offices that specialize in commercial, small business and residential mortgage lending. It is our goal to deliver best in class customer service across all delivery channels including not only our physical branch locations, but through online and mobile options as well.
Economic Environment
The coronavirus (“COVID-19”) outbreak and the public health response to contain it resulted in unprecedented economic and financial market conditions. Additionally, more recent geopolitical (including the conflict in Ukraine), inflationary pressures, interest rate hikes by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and potential recessionary conditions have added even further uncertainty to the overall economic environment. During 2022, the federal funds target range increased by 425 basis points to a range of 4.25% - 4.50% to curb inflation, with continued increases planned.
The effects of geopolitical conflict, inflationary pressures, higher interest rates and potential recessionary conditions may meaningfully impact loan production, income levels, asset quality and the measurement of certain significant estimates such the allowance for credit losses. Moreover, if in a period of economic contraction, elevated levels of credit losses and reduced interest income may occur. The extent to which the economic environment impacts the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the current economic environment and actions taken by governmental authorities and other third parties in response to geopolitical conflict and inflationary pressures.
Loss Mitigation and Loan Portfolio Analysis
We take a proactive approach to analyzing and preparing for the potential challenges faced by the effects of the current economic environment on our customers. A detailed analysis of loan concentrations and segments that may present the areas of highest risk has been prepared and continues to be closely monitored. Our lending team is dedicated to working with our loan customers to discuss the impact that the economic environment has had on them or their businesses and the expected ramifications that could be felt in the future. We are ready to provide assistance as necessary such as loan modifications and payment deferral plans for customers that have an immediate need for assistance.
As a result of the changes in economic conditions cited above, we also continue to monitor levels of qualitative factors for certain components of Republic’s allowance for credit loss calculation. We believe the combination of ongoing communication with our customers, lower loan-to-value ratios on underlying collateral, loan payment deferrals and, increased focus on risk management practices should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of inflationary pressures continue. Based on the current expected credit loss methodology currently utilized by Republic, the provision for credit losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and severity of the economic downturn and the full impact on our loan portfolio.
Financial Condition
Assets
Total assets increased by $372.6 million, or 7%, to $6.00 billion as of September 30, 2022, compared to $5.63 billion at December 31, 2021. The increase in assets was primarily due to an increase in loans receivable of 22%. In addition to the ongoing success with our expansion strategy, the growth in assets was also driven by our participation in the PPP loan program, which resulted in a significant increase in new business relationships and deposit account openings.
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 categories decreased by $66.4 million to $52.5 million as of September 30, 2022, compared to $118.9 million as of December 31, 2021 as excess cash was used to fund loan originations and security purchases.
Loans Held for Sale
Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration (“SBA”) and residential mortgage loans, both of which we intend to sell in the future. Total SBA loans held for sale were $4.8 million as of September 30, 2022 as compared to $5.2 million as of December 31, 2021. Residential mortgage loans held for sale were $6.0 million at September 30, 2022, a decrease of $2.5 million, versus $8.5 million at December 31, 2021. A decrease in the volume of residential mortgage loans originated during the nine months ended September 30, 2022 due to the higher interest rate environment drove the decrease in residential mortgage loans held for sale compared to December 31, 2021. Loans held for sale as a percentage of total assets were less than 1% at September 30, 2022.
Loans Receivable
The loan portfolio represents 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, commercial real estate loans, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others.
Net loans increased $547.2 million, or 22%, to $3.04 billion at September 30, 2022, versus $2.49 billion at December 31, 2021. Loans originated through the PPP loan program continue to be repaid or forgiven by the SBA, which offsets the growth experienced in other categories in the portfolio. Excluding the impact of the PPP loans, gross loans increased by $657.9 million, or 27%, to $3.05 billion at September 30, 2022 compared to $2.39 billion at December 31, 2021. This growth was primarily the result of the successful execution of our relationship banking model which has driven a steady flow in quality loan demand particularly within the residential mortgages and commercial real estate categories.
Investment Securities
Investment securities 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 debt securities consist primarily of U.S. Government agency SBA bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Investment securities available for sale totaled $999.5 million at September 30, 2022 as compared to $1.08 billion at December 31, 2021. The $75.8 million decrease was primarily due to a net unrealized loss of $191.9 million on available for sale securities, paydowns, maturities, and calls of securities available for sale totaling $100.0 million and proceeds from the sale of securities available for sale totaling $34.1 million, partially offset by the purchase of securities available for sale totaling $251.9 million during the nine months ended September 30, 2022. At September 30, 2022, the portfolio had a net unrealized loss on available for sale securities of $203.5 million compared to a net unrealized loss of $11.6 million at December 31, 2021. The $191.9 million decrease in the market value of the investment portfolio was driven by an increase in market interest rates, which drove a decrease in the value of the available for sale securities held in our portfolio at September 30, 2022. As interest rates are expected to continue to increase throughout 2022, management will be looking to mitigate the trend on our investment portfolio with offsetting strategies and opportunities.
Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (“SBIC”) and SBA bonds, CMO’s and MBS’s. The amortized cost of securities held-to-maturity totaled $1.56 billion and $1.66 billion at September 30, 2022 and December 31, 2021, respectively, with the decrease primarily attributable to securities paydowns in the held-to maturity category. The fair value of securities held-to-maturity totaled $1.27 billion and $1.65 billion at September 30, 2022 and December 31, 2021, respectively. The $379.8 million decrease was primarily due to a net unrecognized loss of $281.8 million on held to maturity securities and paydowns, maturities, and calls of securities held to maturity totaling $147.4 million, partially offset by the purchase of securities held to maturity totaling $51.1 million during the nine-month period ended September 30, 2022. At September 30, 2022, the portfolio had a net unrecognized loss on held-to-maturity securities of $294.8 million compared to a net unrecognized loss of $12.9 million at December 31, 2021. The $281.8 million decrease in the market value of the investment portfolio was driven by an increase in market interest rates, which drove a decrease in the value of the held-to-maturity securities held in our portfolio at September 30, 2022.
Equity securities consist of investments in the preferred stock of domestic banks. Equity securities are held at fair value. The fair value of equity securities totaled $6.6 million at September 30, 2022 compared to $9.2 million at December 31, 2021.
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 September 30, 2022 and December 31, 2021. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”).
At September 30, 2022 and December 31, 2021, the investment in FHLB of Pittsburgh capital stock totaled $21.8 million and $3.4 million, respectively. At both September 30, 2022 and December 31, 2020, ACBB capital stock totaled $143,000. Both the FHLB and ACBB paid dividends during the third quarter of 2022.
Premises and Equipment
The balance of premises and equipment increased by $3.5 million to $130.9 million at September 30, 2022 from $127.4 million at December 31, 2021. The increase was primarily due to purchases of premises and equipment totaling $9.9 million partially offset by depreciation and amortization expense of $6.5 million during the nine months ended September 30, 2022. The total branch count was 34 at September 30, 2022 with the opening of two new branches in Ocean City, NJ and Wayne, PA compared to 32 at December 31, 2021.
Other Real Estate Owned
At September 30, 2022 and December 31, 2021, the balance of other real estate owned was $876,000 and $360,000, respectively.
Operating Leases – Right of Use Asset
Under ASC 842, the right-of-use asset is valued as the initial amount of the lease liability obligation adjusted for any initial direct costs, prepaid or accrued rent, and any lease incentives. At September 30, 2022 and December 31, 2021, the balance of operating leases – right-of-use asset was $73.1 million and $75.6 million, respectively.
Deposits
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings, and time deposits, are Republic’s major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
Total deposits increased by $60.4 million to $5.25 billion at September 30, 2022 from $5.19 billion at December 31, 2021 with the increase primarily driven in the interest-bearing demand account category. We 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. 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 internet certificates of deposit. Our participation in the PPP loan program also resulted in significant growth in new deposit relationships.
Other Borrowings
At September 30, 2022, we had $442.5 million in other borrowings compared to no borrowings at December 31, 2021 as borrowings were used to fund loan growth.
Operating Lease Liability Obligation
Under ASC 842, the operating lease liability obligation is calculated as the present value of the lease payments, using the discount rate specified in the lease, or if that is not available, our incremental borrowing rate. At September 30, 2022 and December 31, 2021, the balance of the operating lease liability obligation was $79.6 million and $81.8 million, respectively.
Shareholders’ Equity
Total shareholders’ equity decreased $134.7 million to $189.5 million at September 30, 2022 compared to $324.2 million at December 31, 2021. The decrease was primarily due to a decrease in the accumulated other comprehensive loss of $142.8 million partially offset by an increase in retained earnings of $6.0 million. The decrease in the accumulated other comprehensive loss due to an increase in market interest rates which drove a decrease in the market value of the securities held in our portfolio.
Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
We reported net income available to common shareholders of $909,000, or $0.01 per diluted share, for the three-month period ended September 30, 2022, compared to net income of $5.2 million or $0.08 per diluted share, for the three months ended September 30, 2021. The decrease for the three months ended September 30, 2022 compared to the same period in 2021 was primarily driven by an increase in non-interest expenses and a decrease in non-interest income partially offset by an increase in net interest income.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
We reported net income available to common shareholders of $9.6 million, or $0.14 per diluted share, for the nine months ended September 30, 2022, compared to net income of $16.5 million, or $0.25 per diluted share, for the nine months ended September 30, 2021. The decrease in earnings year over year was primarily driven by an increase in non-interest expenses and a decrease in non-interest income, partially offset by an increase in net interest income. The increase in non-interest expense was primarily related to an increase in legal expenses during the nine months ended September 30, 2022. Legal expenses increased by $10.2 million for the nine months ended September 30, 2022 when compared to the same period last year due to attorney fees paid related to litigation as described in Note 4, Commitments and Contingencies and other shareholder-related issues. The decrease in non-interest income was primarily driven by a decrease in mortgage banking income due to a reduction in the volume of mortgage originations during the nine months ended September 30, 2022. The increase in net interest income was primarily driven by an increase in interest and dividends on investment securities.
Analysis of Net Interest Income
Our earnings depend primarily upon Republic’s net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, using a rate of 24% in 2022 and 24% in 2021.
Average Balances and Net Interest Income
| For the three months ended September 30, 2022 |
For the three months ended September 30, 2021 |
|||||||||||||||||||||||
| (dollars in thousands) | 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 |
$ | 46,073 | $ | 54 | 0.46 | % |
$ | 480,166 | $ | 182 | 0.15 | % | ||||||||||||
| Investment securities and restricted stock (2) ((2) |
2,837,891 | 14,800 | 2.09 | % |
1,948,532 | 8,240 | 1.68 | % | ||||||||||||||||
| Loans receivable (2) |
2,894,473 | 31,419 | 4.31 | % |
2,495,611 | 27,493 | 4.37 | % | ||||||||||||||||
| Total interest-earning assets |
5,778,437 | 46,273 | 3.18 | % |
4,924,309 | 35,915 | 2.89 | % | ||||||||||||||||
| Other assets |
142,619 | 248,095 | ||||||||||||||||||||||
| Total assets |
$ | 5,921,056 | $ | 5,172,404 | ||||||||||||||||||||
| Interest-earning liabilities: |
||||||||||||||||||||||||
| Demand – non-interest bearing |
$ | 1,398,086 | $ | 1,301,102 | ||||||||||||||||||||
| Demand – interest bearing |
2,398,016 | 4,798 | 0.79 | % |
2,022,477 | 3,165 | 0.62 | % | ||||||||||||||||
| Money market & savings |
1,300,374 | 843 | 0.26 | % |
1,219,009 | 837 | 0.27 | % | ||||||||||||||||
| Time deposits |
132,298 | 140 | 0.42 | % |
193,816 | 281 | 0.58 | % | ||||||||||||||||
| Total deposits |
5,228,774 | 5,781 | 0.44 | % |
4,736,404 | 4,283 | 0.36 | % | ||||||||||||||||
| Total interest-bearing deposits |
3,830,688 | 5,781 | 0.60 | % |
3,435,302 | 4,283 | 0.49 | % | ||||||||||||||||
| Other borrowings |
345,758 | 2,228 | 2.56 | % |
11,276 | 53 | 1.86 | % | ||||||||||||||||
| Total interest-bearing liabilities |
4,176,446 | 8,009 | 0.76 | % |
3,446,578 | 4,336 | 0.50 | % | ||||||||||||||||
| Total deposits and other borrowings |
5,574,532 | 8,009 | 0.57 | % |
4,747,680 | 4,336 | 0.36 | % | ||||||||||||||||
| Non-interest bearing other liabilities |
111,131 | 100,773 | ||||||||||||||||||||||
| Shareholders’ equity |
227,393 | 323,951 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 5,921,056 | $ | 5,172,404 | ||||||||||||||||||||
| Net interest income (2) |
$ | 38,264 | $ | 31,579 | ||||||||||||||||||||
| Net interest spread | 2.42 | % | 2.39 | % | ||||||||||||||||||||
| Net interest margin (2) | 2.63 | % | 2.54 | % | ||||||||||||||||||||
(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. Net interest income has been increased over the financial statement amount by $265 and $137 for the three months ended September 30, 2022 and 2021, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.
Average Balances and Net Interest Income
| For the nine months ended September 30, 2022 |
For the nine months ended September 30, 2021 |
|||||||||||||||||||||||
| (dollars in thousands) |
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 |
$ | 93,078 | $ | 179 | 0.26 | % |
$ | 332,590 | $ | 294 | 0.12 | % |
||||||||||||
| Investment securities and restricted stock (2) |
2,851,543 | 42,857 | 2.00 | % |
1,691,294 | 21,579 | 1.71 | % |
||||||||||||||||
| Loans receivable (2) |
2,680,415 | 85,295 | 4.25 | % |
2,609,622 | 86,086 | 4.41 | % |
||||||||||||||||
| Total interest-earning assets |
5,625,036 | 128,331 | 3.05 | % |
4,633,506 | 107,959 | 3.12 | % |
||||||||||||||||
| Other assets |
174,066 | 262,383 | ||||||||||||||||||||||
| Total assets |
$ | 5,799,102 | $ | 4,895,889 | ||||||||||||||||||||
| Interest-earning liabilities: |
||||||||||||||||||||||||
| Demand – non-interest bearing |
$ | 1,392,449 | $ | 1,207,065 | ||||||||||||||||||||
| Demand – interest bearing |
2,381,573 | 9,536 | 0.54 | % |
1,945,074 | 9,706 | 0.67 | % |
||||||||||||||||
| Money market & savings |
1,339,751 | 2,416 | 0.24 | % |
1,110,962 | 2,888 | 0.35 | % |
||||||||||||||||
| Time deposits |
170,435 | 609 | 0.48 | % |
188,613 | 1,245 | 0.88 | % |
||||||||||||||||
| Total deposits |
5,284,208 | 12,561 | 0.32 | % |
4,451,714 | 13,839 | 0.42 | % |
||||||||||||||||
| Total interest-bearing deposits |
3,891,759 | 12,561 | 0.43 | % |
3,244,649 | 13,839 | 0.57 | % |
||||||||||||||||
| Other borrowings |
143,529 | 2,579 | 2.40 | % |
26,019 | 200 | 1.03 | % |
||||||||||||||||
| Total interest-bearing liabilities |
4,035,288 | 15,140 | 0.50 | % |
3,270,668 | 14,039 | 0.57 | % |
||||||||||||||||
| Total deposits and other borrowings |
5,427,737 | 15,140 | 0.37 | % |
4,477,733 | 14,039 | 0.42 | % |
||||||||||||||||
| Non-interest bearing other liabilities |
109,974 | 101,678 | ||||||||||||||||||||||
| Shareholders’ equity |
261,391 | 316,478 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 5,799,102 | $ | 4,895,889 | ||||||||||||||||||||
| Net interest income (2) |
$ | 113,191 | $ | 93,920 | ||||||||||||||||||||
| Net interest spread |
2.55 | % |
2.55 | % |
||||||||||||||||||||
| Net interest margin (2) |
2.69 | % |
2.71 | % |
||||||||||||||||||||
(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. Net interest income has been increased over the financial statement amount by $652 and $407 for the nine months ended September 30, 2022 and 2021, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates. Net interest income and net interest margin are presented on a tax equivalent basis.
| For the three months ended September 30, 2022 vs. 2021 |
For the nine months ended September 30, 2022 vs. 2021 |
|||||||||||||||||||||||
| Changes due to: |
Changes due to: |
|||||||||||||||||||||||
| (dollars in thousands) |
Average Volume |
Average Rate |
Total Change |
Average Volume |
Average Rate |
Total Change |
||||||||||||||||||
| Interest earned: |
||||||||||||||||||||||||
| Federal funds sold and other interest-earning assets |
$ | (309 | ) | $ | 181 | $ | (128 | ) | $ | (459 | ) | $ | 344 | $ | (115 | ) | ||||||||
| Securities |
4,698 | 1,862 | 6,560 | 17,438 | 3,840 | 21,278 | ||||||||||||||||||
| Loans |
2,984 | 942 | 3,926 | (589 | ) | (202 | ) | (791 | ) | |||||||||||||||
| Total interest-earning assets |
7,373 | 2,985 | 10,358 | 16,390 | 3,982 | 20,372 | ||||||||||||||||||
| Interest expense: |
||||||||||||||||||||||||
| Deposits |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
815 | 818 | 1,633 | 1,748 | (1,918 | ) | (170 | ) | ||||||||||||||||
| Money market and savings |
46 | (40 | ) | 6 | 378 | (850 | ) | (472 | ) | |||||||||||||||
| Time deposits |
(75 | ) | (66 | ) | (141 | ) | (65 | ) | (571 | ) | (636 | ) | ||||||||||||
| Total deposit interest expense |
786 | 712 | 1,498 | 2,061 | (3,339 | ) | (1,278 | ) | ||||||||||||||||
| Other borrowings |
2,023 | 152 | 2,175 | 2,077 | 302 | 2,379 | ||||||||||||||||||
| Total interest expense |
2,809 | 864 | 3,673 | 4,138 | (3,037 | ) | 1,101 | |||||||||||||||||
| Net interest income |
$ | 4,564 | $ | 2,121 | $ | 6,685 | $ | 12,252 | $ | 7,019 | $ | 19,271 | ||||||||||||
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, for the three months ended September 30, 2022 increased $6.7 million, or 21%, over the same period in 2021. Interest income on interest-earning assets totaled $46.3 million for the three months ended September 30, 2022, an increase of $10.4 million, compared to $35.9 million for the three months ended September 30, 2021. The increase in interest income was primarily the result of an $854.1 million increase in the average balance of interest-earning assets and a 29-basis point increase in the average yield on interest-earning assets. The most significant increase in interest-earning assets was a $889.4 million increase in the average balance of the investment securities portfolio. Total interest expense for the three months ended September 30, 2022 increased by $3.7 million, or 85%, over the same period in 2021. Interest expense on deposits increased by $1.5 million, or 35%, for the three months ended September 30, 2022 versus the same period in 2021 due primarily to a $492.4 million increase in the average balance of deposits and an 8-basis point increase in the average cost of deposit balances. Interest expense on other borrowings increased by $2.2 million for the three months ended September 30, 2022 compared to September 30, 2021 due primarily to an increase in the average balance of overnight borrowings.
Net interest income, on a fully tax-equivalent basis, for the nine months ended September 30, 2022 increased $19.3 million, or 21%, over the same period in 2021. Interest income on interest-earning assets totaled $128.3 million for the nine months ended September 30, 2022, an increase of $20.4 million, compared to $108.0 million for the nine months ended September 30, 2021. The increase in interest income earned was primarily the result of a $991.5 million increase in the average balance of interest earning assets, offset by a 7-point decrease in the average yield on interest-earning assets. The most significant increase in interest-earning assets was a $1.16 billion increase in the average balance of the investment portfolio. Total interest expense for the nine months ended September 30, 2022 increased by $1.1 million, or 8%, for the same period in 2021. Interest expense on deposits decreased by $1.3 million, or 9%, for the nine months ended September 30, 2022 versus the same period in 2021 due primarily to a 10-basis point decrease in the average cost of deposit balances. Interest expense on other borrowings increased by $2.4 million for the nine months ended September 30, 2022 as compared to September 30, 2021 due primarily to an increase in the average balance of overnight borrowings balances.
Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.42% for the three months ended September 30, 2022 compared to 2.39% for the three months ended September 30, 2021 and was 2.55% for the nine months ended September 30, 2022 and September 30, 2021. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the three months ended September 30, 2022 and September 30, 2021, the fully tax-equivalent net interest margin was 2.63% and 2.54%, respectively. The increase in the net interest margin during the three months ended September 30, 2022 was primarily related to the yield on interest-earning assets rising at a faster rate than the cost of funds on interest-earning liabilities. For the nine months ended September 30, 2022 and September 30, 2021, the fully tax-equivalent net interest margin was 2.69% and 2.71%, respectively. The decrease in the net interest margin for the nine months ended September 30, 2022 was primarily related to the cost of funds on interest-earning liabilities rising at a faster rate than the yield on interest-earning assets.
Provision for Credit Losses
We recorded a provision of $4.0 million for credit losses for the three months ended September 30, 2022 compared to a $900,000 provision for the three months ended September 30, 2021. We recorded a $4.8 million provision for credit losses for the nine months ended September 30, 2022 compared to $3.9 million provision for the nine months ended September 30, 2021. The provision recorded is charged to operations in an amount necessary to bring the total allowance for credit losses to a level that management believes is adequate to absorb life of loan losses in the loan portfolio and unfunded commitments. The increase in the provision for credit losses for the three- and nine-month periods was primarily driven by requirements related to the allowance for credit losses (“ACL”) on loan balances and unfunded commitments due to the adoption of ASU 2016-13 during 2022.
Non‑Interest Income
Total non-interest income for the three months ended September 30, 2022 decreased by $1.6 million, or 22%, compared to the same period in 2021. Mortgage banking income totaled $844,000 during the three months ended September 30, 2022, which represents a decrease of $1.6 million compared to the same period in 2021 due to a decrease in residential mortgage loan originations due to the higher interest rate environment. Loan and servicing fees totaled $311,000 for the three months ended September 30, 2022, which represents a decrease of $635,000 from the same period in 2021. Gains on the sales of SBA loans decreased $139,000 for the three months ended September 30, 2022 to $502,000 when compared to same period in 2021. Service fees on deposit accounts increased $385,000 to $3.7 million for the three months ended September 30, 2022 compared to $3.3 million for the three months ended September 30, 2021.
Total non-interest income for the nine months ended September 30, 2022 decreased $10.3 million, or 41%, compared to the same period in 2021. Mortgage banking income totaled $2.8 million during the nine months ended September 30, 2022, which represents a decrease of $7.0 million compared to the same period in 2021 due to an decrease in residential mortgage loan originations year over year. Loan and servicing fees totaled $1.5 million for the nine months ended September 30, 2022, which represents a decrease of $739,000 from the same period in 2021. Gains on the sales of SBA loans decreased $322,000 for the nine months ended September 30, 2022 to $1.7 million when compared to same period in 2021. Service fees on deposit accounts totaled $10.2 million for the nine months ended September 30, 2022, which represents a decrease of $260,000 over the same period in 2021.
Non‑Interest Expenses
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Non-interest expenses increased $7.9 million, or 27%, to $37.7 million for the three months ended September 30, 2022 compared to the same period in 2021. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.
Salaries and employee benefits increased by $1.6 million, or 11%, for the three months ended September 30, 2022 compared to the same period in 2021 primarily as a result of merit increases and increased staffing levels. There were 34 branches open as of September 30, 2022 compared to 32 branches at September 30, 2021. A new branch was opened in Broomall, PA in November 2022.
Occupancy expense, including depreciation and amortization expenses, increased by $486,000, or 9%, for the three months ended September 30, 2022 compared to the same period last year primarily as a result of new branches being opened in 2022.
Other real estate owned expenses totaled $317,000 during the three months ended September 30, 2022, an increase of $198,000, or 166%, compared to the same period in 2021. The increase was primarily related to higher costs to carry foreclosed properties during the current period.
All other non-interest expenses increased by $5.6 million, or 60%, for the three months ended September 30, 2022 compared to the same period last year due primarily to increases in expenses related to legal expenses and professional fees.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Non-interest expenses increased $17.5 million, or 20%, to $107.2 million for the nine months ended September 30, 2022 compared to the same period in 2021. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.
Salaries and employee benefits increased by $2.9 million, or 7%, for the nine months ended September 30, 2022 compared to the same period in 2021 as a result of merit increases and increased staffing levels. New branches were opened in Ocean City, NJ and Wayne, PA during the nine months ended September 30, 2022 bringing the total branch count to 34.
Occupancy expense, including depreciation and amortization expenses, increased by $231,000, or 1%, for the nine months ended September 30, 2022 compared to the same period last year, primarily as a result of new branches being opened in 2022.
Other real estate expenses totaled $409,000 during the nine months ended September 30, 2022, a decrease of $301,000, or 42%, compared to the same period in 2021. The decrease was primarily related to higher costs to carry foreclosed properties during the prior quarterly period.
All other non-interest expenses increased by $14.6 million, or 54%, for the nine months ended September 30, 2022 compared to the same period last year primarily due to the increase in legal expenses related to the lawsuits during the period as disclosed in Note 4, Commitment and Contingencies and other shareholder-related issues.
Another productivity measure utilized by management is the efficiency ratio. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 86.2% for the three months ended September 30, 2022, compared to 76.8% for the three months ended September 30, 2021. The efficiency ratio equaled 84.1% for the nine months ended September 30, 2022, compared to 75.5% for the nine months ended September 30, 2021. The increase for the three and nine months ended September 30, 2022 versus September 30, 2021 was due to non-interest expenses increasing at a faster rate than net interest income and non-interest income.
Provision for Federal Income Taxes
We recorded a provision for income taxes of $476,000 for the three months ended September 30, 2022, compared to a $2.0 million provision for income taxes for the three months ended September 30, 2021. For the nine months ended September 30, 2022, we recorded a provision for income taxes of $3.8 million, compared to a provision for income taxes of $6.1 million for the nine months ended September 30, 2021. The effective tax rates for the three months ended September 30, 2022 and 2021 were 24% and 25%, respectively. For the nine months ended September 30, 2022 and 2021, the effective tax rates were 24% and 24%, respectively.
The net deferred tax asset balance was $63.6 million as of September 30, 2022 and $14.2 million as of December 31, 2021. The increase in the deferred tax asset balance was primarily related to FASB Accounting Standards Codification Topic 320 (ASC 320) Accounting for Certain Investments in Debt and Equity and the unrealized losses in the investment portfolio. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
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 FASB Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.
In 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.
Preferred Dividends
Dividends of $644,000 and $2.2 million were declared and paid on the Company’s outstanding preferred stock during the three and nine months ended September 30, 2022 compared to $875,000 and $2.6 million for the three and nine months ended September 30, 2022.
Net Income and Net Income per Common Share
Net income available to common shareholders for the three months ended September 30, 2022 was $909,000, a decrease of $4.3 million, compared to a net income available to common shareholders of $5.2 million recorded for the three months ended September 30, 2021. For the three months ended September 30, 2022, basic and fully diluted net income per common share was $0.01 and $0.01, respectively, compared to basic and fully diluted net income per common share of $0.09 and $0.08 for the same period in 2021.
Net income available to common shareholders for the nine months ended September 30, 2022 was $9.6 million, a decrease of $6.8 million, compared to a net income available to common shareholders of $16.5 million recorded for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, basic and fully diluted net income per common share was $0.15 and $0.14, respectively, compared to basic and fully diluted net income per common share of $0.28 and $0.25 for the same period in 2021.
Return on Average Assets and Average Equity
Return on average assets (“ROA”) measures our net income in relation to our total average assets. The ROA for the three months ended September 30, 2022 was 0.10%, compared to 0.47% for the three months ended September 30, 2021. The ROA for the nine months ended September 30, 2022 and 2021 was 0.27% and 0.52%, respectively. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by our shareholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE was 2.71% for the three months ended September 30, 2022, compared to 7.47% for the three months ended September 30, 2021. The ROE for the nine months ended September 30, 2022 and 2021 was 6.03% and 8.07%, respectively.
Commitments, Contingencies and Concentrations
Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately $597.4 million and $549.8 million, and standby letters of credit of approximately $20.1 million and $18.0 million, at September 30, 2022 and December 31, 2021, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $597.4 million of commitments to extend credit at September 30, 2022 were committed as variable rate credit facilities.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment, and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment, and accounts receivable.
The exposure to credit loss for the Company in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same allowance for credit loss policies for evaluating expected losses associated with commitments and standby letters of credit as it does for on-balance sheet instruments.
Regulatory Matters
We are required to comply with certain “risk-based” capital adequacy guidelines issued by the Federal Reserve and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.
Management believes that the Company and Republic met, as of September 30, 2022 and December 31, 2021, all applicable capital adequacy requirements. 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 this categorization. However, because Republic’s capital conservation buffer fell below the required buffer amount of 2.5% as of September 30, 2022, Republic is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. Republic is limited to paying no more than 60% of Republic’s “eligible retained income” on paying dividends, engaging in share repurchases, and paying discretionary bonuses. Eligible retained income is the greater of : (1) Republic’s net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (2) the average of Republic’s net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter.
The Company and Republic’s ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on Republic’s loan customers and Republic’s ability to manage its interest rate risk, growth and other operating expenses.
The following table presents our regulatory capital ratios at September 30, 2022, and December 31, 2021.
| (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 September 30, 2022: |
||||||||||||||||||||||||||||||||
| Total risk based capital |
||||||||||||||||||||||||||||||||
| Republic |
$ | 366,280 | 10.22 | % |
$ | 286,722 | 8.00 | % |
$ | 376,322 | 10.50 | % |
$ | 358,402 | 10.00 | % |
||||||||||||||||
| Company |
374,974 | 10.42 | % |
287,781 | 8.00 | % |
377,713 | 10.50 | % |
- | - | % |
||||||||||||||||||||
| Tier one risk based capital |
||||||||||||||||||||||||||||||||
| Republic |
341,024 | 9.52 | % |
215,041 | 6.00 | % |
304,642 | 8.50 | % |
286,722 | 8.00 | % |
||||||||||||||||||||
| Company |
349,719 | 9.72 | % |
215,836 | 6.00 | % |
305,768 | 8.50 | % |
- | - | % |
||||||||||||||||||||
| CET 1 risk based capital |
||||||||||||||||||||||||||||||||
| Republic |
341,024 | 9.52 | % |
161,281 | 4.50 | % |
250,882 | 7.00 | % |
232,962 | 6.50 | % |
||||||||||||||||||||
| Company |
303,624 | 8.44 | % |
161,877 | 4.50 | % |
251,809 | 7.00 | % |
- | - | % |
||||||||||||||||||||
| Tier one leveraged capital |
||||||||||||||||||||||||||||||||
| Republic |
341,024 | 5.64 | % |
241,681 | 4.00 | % |
241,681 | 4.00 | % |
302,101 | 5.00 | % |
||||||||||||||||||||
| Company |
349,719 | 5.78 | % |
242,190 | 4.00 | % |
242,190 | 4.00 | % |
- | - | % |
||||||||||||||||||||
| At December 31, 2021: |
||||||||||||||||||||||||||||||||
| Total risk based capital |
||||||||||||||||||||||||||||||||
| Republic |
$ | 347,030 | 11.43 | % |
$ | 242,787 | 8.00 | % |
$ | 318,658 | 10.50 | % |
$ | 303,484 | 10.00 | % |
||||||||||||||||
| Company |
360,175 | 11.83 | % |
243,591 | 8.00 | % |
319,713 | 10.50 | % |
- | - | % |
||||||||||||||||||||
| Tier one risk based capital |
||||||||||||||||||||||||||||||||
| Republic |
328,066 | 10.81 | % |
182,091 | 6.00 | % |
257,962 | 8.50 | % |
242,787 | 8.00 | % |
||||||||||||||||||||
| Company |
341,211 | 11.21 | % |
182,693 | 6.00 | % |
258,816 | 8.50 | % |
- | - | % |
||||||||||||||||||||
| CET 1 risk based capital |
||||||||||||||||||||||||||||||||
| Republic |
328,066 | 10.81 | % |
136,568 | 4.50 | % |
212,439 | 7.00 | % |
197,265 | 6.50 | % |
||||||||||||||||||||
| Company |
281,886 | 9.26 | % |
137,020 | 4.50 | % |
213,142 | 7.00 | % |
- | - | % |
||||||||||||||||||||
| Tier one leveraged capital |
||||||||||||||||||||||||||||||||
| Republic |
328,066 | 5.85 | % |
224,247 | 4.00 | % |
224,247 | 4.00 | % |
280,309 | 5.00 | % |
||||||||||||||||||||
| Company |
341,211 | 6.08 | % |
224,656 | 4.00 | % |
224,656 | 4.00 | % |
- | - | % |
||||||||||||||||||||
Dividend Policy
On August 26, 2020, the Company issued 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $25.00 per share. The Company received net proceeds of $48.3 million from the offering, after deducting offering costs. The Company will pay dividends on the Series A Preferred Stock when and if declared by its Board of Directors or an authorized committee thereof. If declared, dividends will be due and payable at a rate of 7.00% per annum, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year. During the three month and nine-month periods ended September 30, 2022, dividends of $644,000 and $2.2 million were declared and paid on preferred stock compared to $875,000 and $2.6 million for the three- and nine-month periods ended September 30, 2021.
Pursuant to the terms of the Series A Preferred Stock, dividends on the Series A Preferred Shares will not be declared, paid or set aside for payment to the extent such act would cause the Company to fail to comply with applicable laws and regulations, including applicable capital adequacy guidelines.
We have not paid any cash dividends on our common stock. We have no current plans to pay cash dividends on common stock in 2022. Our ability to pay dividends will depend primarily on the receipt of dividends from our subsidiary, Republic. Dividend payments from Republic are subject to legal and regulatory limitations. The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures, and other cash flow requirements. As further discussed above under “Regulatory Matters,” because Republic’s capital conservation buffer fell below the required buffer amount of 2.5%, Republic was subject to limitations on paying dividends as of September 30, 2022. Republic is limited to paying no more than 60% of Republic’s “eligible retained income” on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
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 and available for sale securities.
Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we have formed an asset/liability committee (“ALCO”), comprised of certain members of Republic’s Board of Directors and senior management to monitor such ratios. The ALCO is responsible for managing the liquidity position and interest sensitivity. That committee’s primary objective is to maximize net interest income while configuring Republic’s interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. The ALCO 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 $52.5 million at September 30, 2022, compared to $118.9 million at December 31, 2021. Loan maturities and repayments are another source of asset liquidity. At September 30, 2022, Republic estimated that more than $170.0 million of loans would mature or repay in the six-month period ending March 31, 2023. 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 September 30, 2022, we had outstanding commitments (including unused lines of credit and letters of credit) of $597.4 million. Certificates of deposit scheduled to mature in one year totaled $93.4 million at September 30, 2022. We anticipate that we will have sufficient funds available to meet all current commitments.
Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds, or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB of Pittsburgh. Our maximum borrowing capacity with the FHLB was $1.5 billion at September 30, 2022. At September 30, 2022 and December 31, 2021, we had no outstanding term borrowings with the FHLB. At September 30, 2022, we had outstanding overnight borrowings totaling $442.5 million. We had no outstanding overnight borrowings at December 31, 2021. As of September 30, 2022 and December 31, 2021, the FHLB had issued letters of credit, on Republic’s behalf, totaling $100.0 million against our available credit line. Subsequent to September 30, 2022 and through the date of this report, outstanding overnight borrowings have increased by approximately $323.2 million. The letters of credit remain undrawn through the date of this report. We also established a Fed Funds line of credit with Zions Bank of $15.0 million to assist in managing our liquidity position. We had no amounts outstanding against the Zions Fed Funds line at both September 30, 2022 and December 31, 2021.
Interest Rate Risk
Net interest income is the primary source of revenue for the Company. Interest rate risk arises in the normal course of business due to differences in the repricing and cash flow characteristics of assets and liabilities, primarily through the Company's core business activities of extending loans and acquiring deposits. The Company actively manages its exposure to interest rate risk with the principal objective of optimizing net interest income and the economic value of equity while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. Since no single measurement system satisfies all management objectives, a combination of techniques is used to manage interest rate risk. These techniques examine the impact of interest rate risk on net interest income and the economic value of equity under a variety of alternative scenarios, including changes in the level, slope and shape of the yield curve utilizing multiple simulation analyses. Simulation analyses produce only estimates of net interest income as the assumptions used are inherently uncertain. Actual results may differ from simulated results due to many factors, including, but not limited to, the timing, magnitude and frequency of changes in interest rates, market conditions, regulatory impacts and management strategies.
Sensitivity of Economic Value of Equity to Changes in Interest Rates
In addition to the simulation analysis on net interest income, an economic value of equity analysis provides an alternative view of the interest rate risk position. The economic value of equity is the difference between the estimate of the economic value of the Company's financial assets, liabilities and off-balance sheet instruments, derived through discounting cash flows based on actual rates at the end of the period, and the estimated economic value after applying the estimated impact of rate movements. The Company primarily monitors the percentage change on the base-case economic value of equity. The economic value of equity analysis is based on an immediate parallel 100 basis point shock with a floor of zero percent.
The table below, as of September 30, 2022 and December 31, 2021, displays the estimated impact on the economic value of equity from the interest rate scenario described above.
| September 30, 2022 |
December 31, 2021 |
|||||||||||||||||
| (dollar amounts in thousands) |
Amount |
% |
Amount |
% |
||||||||||||||
| Change in Interest Rates: |
Change in Interest Rates: |
|||||||||||||||||
| Rising 100 basis points |
$ | (72 | ) | -6 | % | Rising 100 basis points |
$ | 12 | 1 | % | ||||||||
| Declining 100 basis points |
15 | 1 | Declining 100 basis points |
(135 | ) | -16 | ||||||||||||
Credit Quality
Republic’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 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 credit losses until prior charge-offs have been fully recovered.
The following table shows information concerning loan delinquency and non‑performing assets as of the dates indicated (dollars in thousands):
| September 30, 2022 |
December 31, 2021 |
|||||||
| Loans accruing, but past due 90 days or more |
$ | 1,935 | $ | 323 | ||||
| Non-accrual loans |
13,515 | 12,541 | ||||||
| Total non-performing loans |
15,450 | 12,864 | ||||||
| Other real estate owned |
876 | 360 | ||||||
| Total non-performing assets |
$ | 16,326 | $ | 13,224 | ||||
| Non-performing loans as a percentage of total loans, net of unearned income |
0.50 | % | 0.51 | % | ||||
| Non-performing assets as a percentage of total assets |
0.27 | % | 0.24 | % | ||||
Non-performing asset balances increased by $3.1 million to $16.3 million as of September 30, 2022 from $13.2 million at December 31, 2021. Non-accrual loans increased $974,000 to $13.5 million at September 30, 2022, from $12.5 million at December 31, 2021. There were $1.9 million in loans accruing, but past due 90 days or more at September 30, 2022 compared to $323,000 at December 31, 2021.
The following table presents our 30 to 89 days past due loans at September 30, 2022 and December 31, 2021.
| (dollars in thousands) |
September 30, |
December 31, |
||||||
| 2022 |
2020 |
|||||||
| 30 to 59 days past due |
$ | 11,795 | $ | 4,851 | ||||
| 60 to 89 days past due |
3,307 | 4,706 | ||||||
| Total loans 30 to 89 days past due |
$ | 15,102 | $ | 9,557 | ||||
Loans with payments 30 to 59 days past due increased to $11.8 million at September 30, 2022 from $4.9 million at December 31, 2021. Loans with payments 60 to 89 days past due decreased to $3.3 million at September 30, 2022 from $4.7 million at December 31, 2021.
Other Real Estate Owned
The balance of other real estate owned was $876,000 at September 30, 2022 and $360,000 at December 31, 2021. The following table presents a reconciliation of other real estate owned for the nine months ended September 30, 2022 and the year ended December 31, 2021:
| (dollars in thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
| Beginning Balance, January 1st |
$ | 360 | $ | 1,188 | ||||
| Additions |
1,173 | 360 | ||||||
| Valuation adjustments |
(328 | ) | (722 | ) | ||||
| Dispositions |
(329 | ) | (466 | ) | ||||
| Ending Balance |
$ | 876 | $ | 360 | ||||
At September 30, 2022, we had no credit exposure to “highly leveraged transactions” as defined by the FDIC.
Allowance for Credit Losses
On January 1, 2022, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management’s estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and management judgment and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis that considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions as well as the incorporation of reasonable and supportable forecasts. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the management’s assessment, may not be adequately represented in the quantitative analysis. The allowance is available for any loan that, in management’s judgment, should be charged off.
Management evaluates a variety of factors including available published economic information in arriving at its forecast. Factors considered in the calculation of the allowance for credit losses 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 as well as external factors, such as competition, legal and regulatory requirements. Historical loss experience is analyzed by reviewing charge-offs over a life of loan period to determine loss rates consistent with the loan categories depicted in the allowance for credit loss table below.
The factors supporting the allowance for credit losses do not diminish the fact that the entire allowance for credit losses is available to absorb losses in the loan portfolio and related commitment portfolio. Our principal focus, therefore, is on the adequacy of the total allowance for credit losses. The allowance for credit losses is subject to review by banking regulators along with the Audit Committee and the Board of Directors. Our primary bank regulators regularly conduct examinations of the allowance for credit losses and make assessments regarding the adequacy and the methodology employed in their determination.
An analysis of the allowance for credit losses for the nine months ended September 30, 2022 and 2021, and the twelve months ended December 31, 2021 is as follows:
| (dollars in thousands) |
For the nine months ended September 30, 2022 |
For the twelve months ended December 31, 2021 |
For the nine months ended September 30, 2021 |
|||||||||
| Balance at beginning of period |
$ | 18,964 | $ | 12,975 | $ | 12,975 | ||||||
| CECL Day 1 Adjustment |
4,240 | - | - | |||||||||
| Balance at beginning of period (as adjusted) |
23,204 | - | - | |||||||||
| Charge‑offs: |
||||||||||||
| Commercial real estate |
621 | 311 | - | |||||||||
| Construction and land development |
- | - | - | |||||||||
| Commercial and industrial |
2,161 | 61 | 60 | |||||||||
| Owner occupied real estate |
787 | - | - | |||||||||
| Consumer and other |
209 | 117 | 48 | |||||||||
| Residential mortgage |
- | - | - | |||||||||
| Paycheck protection program |
- | - | - | |||||||||
| Total charge‑offs |
3,778 | 489 | 108 | |||||||||
| Recoveries: |
||||||||||||
| Commercial real estate |
215 | 33 | - | |||||||||
| Construction and land development |
- | - | - | |||||||||
| Commercial and industrial |
166 | 462 | 162 | |||||||||
| Owner occupied real estate |
597 | 64 | 88 | |||||||||
| Consumer and other |
102 | 169 | 201 | |||||||||
| Residential mortgage |
- | - | - | |||||||||
| Paycheck protection program |
- | - | - | |||||||||
| Total recoveries |
1,080 | 728 | 451 | |||||||||
| Net charge‑offs/(recoveries) |
2,698 | (239 | ) | (343 | ) | |||||||
| Provision for credit losses(1) |
4,749 | 5,750 | 3,900 | |||||||||
| Balance at end of period |
$ | 25,255 | $ | 18,964 | $ | 17,218 | ||||||
| Average loans outstanding(2) |
$ | 2,680,415 | $ | 2,577,498 | $ | 2,609,622 | ||||||
| As a percent of average loans:(2) |
||||||||||||
| Net charge‑offs (annualized) |
(0.13% | ) | (0.01% | ) | 0.02 | % | ||||||
| Provision for loan losses (annualized) |
0.24 | % | 0.22 | % | 0.20 | % | ||||||
| Allowance for loan losses |
0.82 | % | 0.74 | % | 0.66 | % | ||||||
| Allowance for credit losses to: |
||||||||||||
| Total loans, net of unearned income |
0.71 | % | 0.79 | % | 0.69 | % | ||||||
| Total non‑performing loans |
141.67 | % | 147.42 | % | 133.01 | % | ||||||
(1) Provision to rollforward the allowance for credit losses excludes a provision of $7,000 for the nine months ended September 30, 2022 related to off-balance sheet commitments.
(2) Includes non-accruing loans.
We recorded a provision for credit losses of $4.0 million for the three-month period ended September 30, 2022 and a $4.8 million provision for credit losses for the nine months ended September 30, 2022. The portion of the provision for credit losses related to unfunded commitments for the three and nine months ended September 30, 2022 was $98,000 and $8,000. We recorded a provision for credit losses of $900,000 for the three-month period ended September 30, 2021 and a $3.9 million provision was recorded for the nine months ended September 30, 2021. The provision recorded is charged to operations in an amount necessary to bring the total allowance for credit losses to a level that management believes is adequate to absorb expected losses in the loan portfolio.
The allowance for credit losses as a percentage of non-performing loans (coverage ratio) was 141.7% at September 30, 2022, compared to 147.4% at December 31, 2021 and 133.0% at September 30, 2021. Total non-performing loans were $15.5 million, $12.9 million, and $11.9 million at September 30, 2022, December 31, 2021 and September 30, 2022, respectively. The increase in the coverage ratio at September 30, 2022 compared to December 31, 2021 was a result of an increase in the allowance for credit losses at September 30, 2022.
Management makes at least a quarterly determination as to an appropriate provision to maintain an allowance for credit losses that it determines is adequate to absorb life of loan credit 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, reasonable and supportable forecast of future credit losses, and other relevant factors in reviewing the adequacy of the allowance for credit losses. Any additions deemed necessary to the allowance for credit losses are charged to operating expenses.
We evaluate loans for payment delinquency 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 Company policy to determine if any further adjustments need to be made to the allowance for expected credit losses. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance from all potential sources. When a loan is expected to be uncollectible it is charged-off against the allowance for credit losses. Unsecured commercial loans and all consumer loans are charged-off upon reaching the 90-day delinquency mark unless they are well-secured and in the process of collection. The timing on charge-offs of all other loan types is subjective and will be recognized when management determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or guarantors, will not be sufficient and that repayment is unlikely. A full or partial charge-off is recognized equal to the amount of the estimated deficiency calculation.
Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised collateral values and deteriorating financial condition of borrowers and guarantors are factors considered when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a borrower’s financial condition is also assessed when considering a charge-off.
Partial charge-offs of non-performing and collateral dependent loans can significantly reduce the coverage ratio and other credit loss statistics due to the fact that the balance of the allowance for credit losses will be reduced while still carrying the remainder of a non-performing loan balance. The amount of non-performing loans for which partial charge-offs have been recorded amounted to $441,000 at September 30, 2022 and $4.2 million at December 31, 2021.
The following table provides additional analysis of partially charged-off loans.
| (dollars in thousands) |
September 30, 2022 |
December 31, 2021 |
||||||
| Total nonperforming loans |
$ | 15,450 | $ | 12,864 | ||||
| Nonperforming loans with partial charge-offs |
441 | 4,242 | ||||||
| Ratio of nonperforming loans with partial charge-offs to total loans |
0.01 | % |
0.17 | % |
||||
| Ratio of nonperforming loans with partial charge-offs to total nonperforming loans |
2.85 | % |
32.98 | % |
||||
| Coverage ratio net of nonperforming loans with partial charge-offs |
5,730.50 | % |
447.05 | % |
||||
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the nine month period ended September 30, 2022, there were no changes made to this policy.
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on its financial results is through our need and ability to react to changes in interest rates. Management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on October 26, 2022.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the principal executive officer and the principal financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the principal executive officer and the principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e), were not effective due to the identification of the following previously disclosed material weaknesses and additional material weaknesses relating to effective controls over the measurement of Allowance for Credit Losses:
| ● |
A failure to maintain an effective control environment, which resulted in deficiencies in the communication of certain relevant information to the Board of Directors of the Company, including information related to branch expenditures and the material weaknesses identified below. |
| ● |
A failure to design and maintain effective controls over the review, analysis and approval of related party transactions. |
| ● |
A failure to maintain effective controls over the implementation of FASB’s accounting standard, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, specifically, with regard to the quantification and review of the transition adjustment from the incurred loss model to the Current Expected Loss Model (“CECL”). |
| ● |
A failure to maintain effective controls over the measurement of Allowance for Credit Losses in accordance with FASB’s accounting standard, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, specifically the material weaknesses relate to a failure: (1) to identify and asses the risk introduced by ASC 326 impacting the system of internal control; (2) over the design and operation of the controls over the data, assumptions and methods utilized in the development of the Allowance for Credit Losses; (3) over the relevant expertise to assess the model; and (4) to maintain appropriate oversight and governance over the Allowance for Credit Losses. These material weaknesses resulted in a misstatement of the Company’s financial statements. Refer to Note 2 to these financial statements for further details on this. |
These material weaknesses could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Efforts of Material Weaknesses
Management and the Board of Directors have been actively engaged in taking action to remediate the material weaknesses noted above. Such changes, all of which were made subsequent to the quarter ended September 30, 2022, include:
| ● |
the implementation of an ACL Governance Committee, which include the Chief Accounting Officer, Chief Financial Officer, and Chief Credit Officer and the review of CECL results by the ACL Governance Committee and Audit Committee, including the key assumptions, inputs, and model results; |
| ● |
the implementation of additional oversight by the Audit Committee over the CECL results; |
| ● |
a quarterly review of key model assumptions utilized in the CECL analysis, documented in writing, including considerations of any changes to the assumptions or methodology; |
| ● |
the implementation of a checklist for review of model output including confirmation and documentation of each checklist item performed; |
| ● |
the implementation of CECL model input and output reconciliations; |
| ● |
the implementation of additional processes around the identification of loan segments; |
| ● |
the implementation of additional governance review over the day 1 adoption of the new accounting standard; |
| ● |
the enhancement of supporting documentation over initial key model assumptions and input selections; and |
| ● |
changes in and additional training of personnel who perform processes relating to the measurement of CECL. |
The material weaknesses will not be considered fully remediated until the enhanced controls are fully implemented and operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
The following changes in response to the previously disclosed material weaknesses were made prior to the quarter ended September 30, 2022:
| ● |
the appointment of Harry D. Madonna as Executive Chair of the Board and Interim Chief Executive Officer of the Company; |
| ● |
the re-appointment of a Lead Independent Director of the Company; |
| ● |
the restructuring of the Board of Directors to strengthen its risk and financial reporting oversight functions, including the addition of one new independent director with extensive public company and financial reporting experience; |
| ● |
reconstitution of the membership of the committees of the Board of Directors and the appointment of new committee chairs; |
| ● |
more frequent meetings of the Board of Directors and its committees; |
| ● |
the active encouragement by management, with the assistance of the Chairman and the rest of the Board, of an open and collaborative culture, to set an appropriate “tone at the top”; |
| ● |
the enhancement of information to be provided by management to the Board of Directors, specifically with regard to any potential branch expansion opportunities and anticipated expenses associated therewith; |
| ● |
the enhancement of the Company’s policies and procedures for the identification, review and reporting of existing related party transactions and the discontinuation of many future transactions with related parties; and |
| ● |
the implementation of design controls related to CECL and the Allowance for Credit Losses, which includes hiring an external consultant to assist with the continued refinement and testing of design features and controls. |
The material weaknesses will not be considered fully remediated until the enhanced controls are fully implemented and operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Controls
The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended September 30, 2022 that have materially affected or that are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended September 30, 2022. Management and the Board of Directors continue to be actively engaged in taking action to remediate the material weaknesses noted above.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not an absolute, level of assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic, except as noted below.
On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its current Interim Chief Executive Officer and director and two other current directors. The lawsuit is styled Vernon Hill et al. v. Lisa Jacobs, et al., Case No. 220901684. The complaint was amended on December 12, 2022. The two plaintiffs, the former Chairman of the Board and Chief Executive Officer of the Company and a former director of the Company, allege defamation, defamation per se and false light against the three individual defendants. The amended complaint includes three additional allegations by the former Chairman of the Board and Chief Executive Officer of the Company, alleging fraudulent inducement (against Madonna and Wildstein), fraudulent concealment (against Madonna, Jacobs and Wildstein), and unjust enrichment (against the Company). The former Chairman of the Board and Chief Executive Officer also alleges a breach of his employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and (as against the individual defendants) punitive damages. The defendants all filed Preliminary Objections to the complaint, as well as to the amended complaint, and discovery has commenced. On February 27, 2023, Plaintiffs filed papers opposing the Preliminary Objections, and briefing of those Objections is ongoing. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter. The Company plans to defend itself vigorously.
On November 22, 2022, shareholders George E. Norcross, III, Gregory B. Braca and Philip A. Norcross filed a complaint in the same Philadelphia Court of Common Pleas against the Company and its directors. The lawsuit, captioned George E. Norcross, III, et al. v. Republic First Bancorp, Inc. Case No. 221102195, alleges generally that the Company and its Board have acted in violation of their fiduciary duties by rejecting Plaintiffs’ efforts to nominate Mr. Braca as a director candidate at its 2022 annual meeting of shareholders. The Company rejected that attempted nomination on grounds that the plaintiff who made the nomination was not a stockholder of record, as the Company’s By-Laws require. Plaintiffs seek injunctive and declaratory relief that includes a demand that the Court waive enforcement of the Company’s By-Laws, reopen the deadline for nominating director candidates or find that the defendants violated the Company’s By-Laws in connection with its appointment of director Benjamin Duster to fill a vacancy on the Board. On December 6, 2022, plaintiffs filed a motion for preliminary injunction and asked defendants to accept service of the complaint, which they have done. Following a status conference on January 18, 2023, a hearing on the preliminary injunction motion was scheduled for April 25, 2023, and the Company was ordered not to hold any shareholder vote with regard to any vacancy on its board of directors until May 31, 2023, at the earliest. Given its early stage, the Company cannot predict potential outcomes of the matter or plaintiffs’ motion; however, the defendants deny the alleged wrongdoing and intend to defend the matter vigorously.
On November 28, 2022, Plaintiffs Vernon Hill (“Hill”) and Interarch, Inc. (“Interarch”) filed an action in the United States District Court for the Eastern District of Pennsylvania, captioned Hill and Interarch v. Republic First Bancorp, Inc. et al., No. 2:22-cv-04735, and they filed an amended complaint on February 10, 2023. Hill is a former Republic First Bancorp, Inc. (“Republic”) board chair and Chief Executive Officer and a former Republic director. Interarch, owned by Hill’s wife, Shirley Hill, provided certain branding and architecture services to Republic. Plaintiffs Hill and Interarch bring claims against Defendants Republic and two Republic employees (who are former Interarch employees), Rodney Dean (“Dean”) and John Chessa (“Chessa”). Plaintiff Interarch brings claims for copyright infringement (against Republic), breach of contract (against Republic), and breach of the duty of loyalty (against Dean and Chessa). Hill, in turn, brings a claim for trademark infringement (against Republic) and violation of Hill’s right of publicity (against Republic). Hill and Interarch together bring claims for unjust enrichment (against Republic), unfair competition (against Republic), misappropriation of trade secrets under federal and state law (against all Defendants), misappropriation of trade secrets under federal and state law (against all Defendants), misappropriation of confidential information under state law (against all Defendants), tortious interference (against Republic) and a request for a declaratory judgment relating to these claims (against all Defendants). This matter is in its early stages, and Republic is assessing the potential outcome and materiality of this matter. The Company intends to defend itself vigorously.
ITEM 1A. RISK FACTORS
Significant risk factors could adversely affect the Company’s business, financial condition and results of operation. Risk factors discussing these risks can be found below and in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. You should carefully consider these risk factors. The risks described in the Company’s Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The Company continually encounters technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, including the entrance of financial technology companies offering new financial service products. The Company regularly upgrades or replaces technological systems to increase efficiency, enhance product and service capabilities, eliminate risks of end-of-lifecycle products, reduce costs, and better serve our customers. In June 2022, the Company replaced its core customer and deposit systems and other ancillary systems (collectively referred to as "core system"). While the conversion was completed successfully, the Company may face operational risks after the conversion, including disruptions to its technology systems, which may adversely impact customers. The Company's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company's operations. Many of the Company's competitors have substantially greater resources to invest in technological improvements. The Company may encounter significant problems in effectively implementing new technology-driven products and services and may not be successful in marketing the new products and services to its customers. These problems might include significant time delays, cost overruns, loss of key people, and technological system failures. Failure to successfully keep pace with technological change affecting the financial services industry or failure to successfully complete the replacement of technological systems could have a material adverse effect on the Company's business, financial condition and results of operations.
Continued delays in the filing of our periodic reports with the SEC and our failure to hold an annual meeting no later than one year after the end of the Company’s fiscal year-end could impact our listing on Nasdaq, which would materially and adversely affect our stock price, financial condition and/or results of operations.
Due to the Company needing additional time to assess the disclosure controls and procedures of the Company’s internal controls and evaluate the appropriateness of the methodology and assumptions contained in, the model established by the Company’s prior management in connection with the required adoption of FASB’s Topic 326 – Current Expected Credit Losses (“CECL”) accounting standard, effective January 1, 2022, we were unable to file this Quarterly Report on Form 10-Q on a timely basis. We were also previously unable to our Annual Report on Form 10-K for the year ended December 31, 2021 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022 on a timely basis. Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with the SEC. If we are not able to timely file our required periodic financial reports with the SEC, our common stock may be subject to delisting by Nasdaq.
Additionally, the Company is not in compliance with Listing Rule 5620(a), which requires the Company to hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end for continued listing on The Nasdaq Global Market. On January 19, 2023, the Nasdaq Hearings Panel granted the Company’s request for an extension through June 30, 2023 to hold its 2022 annual meeting of shareholders. If the Company is unable to comply with Listing Rule 5620(a) by June 30, 2023, our common stock may be subject to delisting by Nasdaq.
If our common stock is delisted by Nasdaq, it would materially and adversely affect our stock price, financial condition and/or results of operations.
A lack of liquidity could adversely affect the Company’s financial condition and results of operations.
Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively manage the repayment and maturity schedules of loans to ensure that there is adequate liquidity to fund its operations. An inability to raise funds through deposits, borrowings, the sale and maturities of loans and securities and other sources could have a substantial negative effect on liquidity. The Company’s most important source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff, which are strongly influenced by such external factors as the direction of interest rates, local and national economic conditions and the availability and attractiveness of alternative investments. Further, the demand for deposits may be reduced due to a variety of factors such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, the monetary policy of the Federal Reserve or regulatory actions that decrease customer access to particular products. If customers move money out of bank deposits and into other investments such as money market funds, the Company would lose a relatively low-cost source of funds, which would increase its funding costs and reduce net interest income. Any changes made to the rates offered on deposits to remain competitive with other financial institutions may also adversely affect profitability and liquidity.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and borrowings from the FHLB of Pittsburgh. The Company also may borrow funds from third-party lenders, such as other financial institutions. The Company’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry, a decrease in the level of the Company’s business activity as a result of a downturn in markets or by one or more adverse regulatory actions against the Company.
Any decline in available funding could adversely impact the Company’s ability to originate loans, invest in securities, meet expenses, or to fulfill obligations such as repaying borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations.
We are subject to stringent capital requirements which may adversely impact return on equity, require additional capital raises, or limit the ability to pay dividends or repurchase shares.
Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define "capital" for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a "capital conservation buffer" of 2.5%, which if complied will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount. As of September 30, 2022, the Company fell below the capital conservation buffer amount for its total capital ratio calculation. As such, the Company is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonus. For further information, see “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters.” The application of these capital requirements could, among other things, require us to maintain higher capital resulting in lower returns on equity, and we may be required to obtain additional capital to comply or result in regulatory actions if we are unable to comply with such requirements.
Our 100 largest deposit clients account for 16% of our total deposits and, therefore, if we were unable to maintain their deposits, we would be forced to replace such funds, which may prove difficult or costly.
As of September 30, 2022, our 100 largest bank depositors accounted for, in the aggregate, 16% of our total deposits. The majority of these deposits are not insured by the FDIC and could present a heightened risk of withdrawal, if such depositors materially decreased the volume of those deposits, it could reduce our liquidity. As a result, it could become necessary for us to replace those deposits with higher-cost deposits or FHLB borrowings, which would adversely affect our net interest income and, therefore, our results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S‑K for quarterly reports on Form 10‑Q).
| Exhibit Number |
Description |
Location |
||
| 101 |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL; (i) Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021, (iii) Consolidated Statements of Comprehensive (Loss) Income (Loss) for the three and nine months ended September 30, 2022 and 2021, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, (v) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2022 and 2021, and (vi) Notes to Consolidated Financial Statements. |
|||
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| REPUBLIC FIRST BANCORP, INC. |
|||
| Date: March 15, 2023 |
By: |
/s/ Thomas X. Geisel |
|
| Thomas X. Geisel |
|||
| Chief Executive Officer and President (principal executive officer) |
|||
| Date: March 15, 2023 |
By: |
/s/ Michael W. Harrington |
|
| Michael W. Harrington |
|||
| Chief Financial Officer (principal financial and accounting officer) |
|||