REPUBLIC FIRST BANCORP INC - Quarter Report: 2022 June (Form 10-Q)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2022 and December 31, 2021

(Dollars in thousands, except per share data)

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Three and Six Months Ended June 30, 2022 and 2021

(Dollars in thousands, except per share data)

(unaudited)

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

For the Three and Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

(unaudited)

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

(unaudited)

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Three and Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

(unaudited)

(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. The wholly owned subsidiary, Republic First Bank, does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state-chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through its offices and branch locations in Philadelphia, Montgomery, Delaware and Bucks in Pennsylvania, Camden, Burlington, Atlantic and Gloucester, New Jersey and New York County. In 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. In 2018, Oak Mortgage was merged with and into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional, and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.

The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“U.S. GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.  

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 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: 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 around the world that has affected daily living and negatively impacted the global economy.  Additionally, more recent geopolitical (including the conflict in Ukraine), inflationary pressures, and interest rate hikes by the Board of Governors of the Federal Reserve System (“Federal Reserve”) have added even further uncertainty to the overall economic environment. In response to the conditions initially surrounding the COVID-19 outbreak, the Federal Reserve  reduced the federal funds target range by 150 basis points to 0.00% to 0.25% as of March 2020.  Conversely, during the first half of 2022, the federal funds target range increased by 150 basis points to a range of 1.50% - 1.75% to curb inflation, with continued increases planned.   

The effects of the COVID-19 pandemic, geopolitical conflict, inflationary pressures, and higher interest rates 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 has a further impact on 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 the COVID-19 pandemic, geopolitical conflict, and inflationary pressure.

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are made by management in determining the allowance for credit losses and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

Mortgage Banking Activities and Mortgage Loans Held for Sale

Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.

Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

Interest Rate Lock Commitments (“IRLCs”)

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance in FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding interest rate lock commitments (“IRLCs”) are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation, or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 11: Derivatives and Risk Management Activities for further detail of IRLCs.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are made by management in determining the allowance for credit losses for in-scope financial instruments including investments of debt securities, loans, unfunded commitments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, composition of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for credit losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for credit losses and the carrying values of other real estate owned could differ materially in the near term.

The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments for their current expected credit losses (“CECL”) effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of governance and reporting processes and related internal controls; model development, documentation and validation; and the incorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (“PD/LGD”). We contracted with a third-party vendor to assist us in the application of ASU 2016-13 and utilize various methodologies such as Vintage, Cohort, and Weighted Average Remaining Maturity to estimate the allowance for credit losses.

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. The establishment of or an increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Stock-Based Compensation

The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants.  Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of June 30, 2022, the only grants outstanding under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015.

On April 29, 2014, the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all awards is calculated and recognized over the vesting period of the awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At June 30, 2022, the maximum number of common shares issuable under the 2014 Plan was 6.5 million shares. During the six months ended June 30, 2022, 714,167 stock units were granted under the 2014 Plan with a fair value of $3.7 million.

On April 27, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of June 30, 2022, no shares have been granted under the 2021 Plan.

The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant.

During the six months ended June 30, 2022 and 2021, 837,209 shares and 634,635 shares vested, respectively. Expense is recognized ratably over the period required to vest. On June 30, 2022, the intrinsic value of the 4,986,181 options outstanding was $1.2 million, while the intrinsic value of the 4,278,625 exercisable (vested) options was $851,000. On June 30, 2021, the intrinsic value of the 5,613,724 options outstanding was $2.1 million, while the intrinsic value of the 3,833,260 exercisable (vested) options was $1.0 million. During the six months ended June 30, 2022, 228,008 options were exercised resulting in cash receipts of $627,000 and 118,586 options were forfeited with a weighted average grant date fair value of $227,000. During the six months ended June 30, 2021, 26,375 options were exercised resulting in cash receipts of $92,000 and 259,326 options were forfeited with a weighted average grant date fair value of $487,533.

Information regarding stock option compensation for the six months ended June 30, 2022 and 2021 is set forth below:

The remaining unrecognized expense amount of $500,238 will be recognized ratably as expense through December 2024.

The Company granted stock units under the 2014 Plan during the six-month period ended June 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 for the three and six months ended June 30, 2022 and June 30, 2021:

Information regarding stock unit compensation for the six months ended June 30, 2022 and 2021 is set forth below:

The remaining unrecognized expense amount of $4,104,128 will be recognized ratably as expense through June 2026.

Earnings per Share

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options/units granted through the Company’s stock option plans for the six months ended June 30, 2022 and June 30, 2021.

The calculation of EPS for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands, except per share amounts):

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.

Recent Accounting Pronouncements

ASU 2016-13

On January 1, 2022, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) (“ASC 326”), as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13, including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020.

Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief will expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.

The Company elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020 and 2021. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period which the Company has established as a one-year period. In the unprecedented circumstances surrounding the COVID-19 pandemic and the response thereto, the Company believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to further delay adoption of ASU 2016-13 to January 1, 2022. This allowed the Company to utilize the CECL standard for the entire year of adoption.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (OBS) credit exposures. Results for reporting periods beginning after January 1, 2022 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $2.2 million as of January 1, 2022 for the cumulative effect of adopting ASC 326.

The following table illustrates the impact of ASC 326.

ASU 2020-04

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.

ASU 2021-01

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.

Note 3: Commitments and Contingencies

The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic, except as noted below.

On March 8, 2022, George E. Norcross, III, Gregory B. Braca, and Philip Norcross filed a complaint in the Court of Common Pleas of Philadelphia County (Commerce Program) against the Company and Company directors Vernon W. Hill II, Theodore J. Flocco, Jr., Brian Tierney, and Barry Spevak. The complaint seeks, among other things, declaratory and injunctive relief enjoining the Company and the individual defendants from implementing any amendments to the Company’s executive employment agreements until after the Company’s 2022 annual meeting of shareholders or taking any other actions outside the ordinary course of business, including executing or extending any related party agreements or any agreements obligating the incurrence of expenses related to the opening of new branches and the renovation of existing branches, without the affirmative vote of a majority of independent directors.

On March 29, 2022, George E. Norcross, III filed suit in the Philadelphia Court of Common Pleas to compel the Company to make available for inspection the books and records as is required under Pennsylvania law.

As of the date of this filing, Mr. Norcross has filed papers with the Court dismissing the actions without prejudice.

On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its current Interim Chief Executive Officer and director and two other current directors.  The lawsuit is styled Vernon Hill et al. v. Lisa Jacobs, et al., Case No. 220901684.  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 former Chairman of the Board and Chief Executive Officer also alleges a breach of his employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and (as against the individual defendants) punitive damages. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter. On November 21, 2022, the defendants all filed Preliminary Objections to the Complaint.  Plaintiffs’ response to those objections are due in the latter part of December.  The Company plans to defend itself vigorously.

The Company is aware that 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, complains 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 the upcoming annual meeting of shareholders, scheduled for January 2023.  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.  The parties are awaiting a conference with the court to set a schedule for proceedings related to plaintiffs’ motion. Given the procedural posture and 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. 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), misappropriation of trade secrets under federal and state law (against all Defendants), tortious interference (against Republic), breach of contract (against Republic), breach of the duty of loyalty (against Dean and Chessa), unfair competition (against Republic), and a request for a declaratory judgment relating to these claims (against all Defendants).  Hill, in turn, brings a claim for trademark infringement (against Republic), and Hill and Interarch together bring a claim for unjust enrichment (against Republic).  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 in this matter.

Note 4: Segment Reporting

The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and consumer loan products in the area surrounding its branches. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. Republic does not have loan production offices in those states.

Note 5: Investment Securities

A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities as of June 30, 2022 and December 31, 2021 is as follows:

The following table presents investment securities by stated maturity as of June 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.

The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities. Equity securities consist of investments in non-cumulative preferred stock. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of June 30, 2022 or December 31, 2021. There was also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis. The adoption of CECL on 1/1/22 resulted in no impact to the HTM securities portfolio, as the Company’s entire portfolio consists of securities ultimately guaranteed by various agencies or government-sponsored enterprises and carries zero risk of nonpayment.

The Company evaluates investment securities that are in an unrealized/unrecognized loss position on a quarterly basis and more frequently when warranted in order to determine if the decline in fair value is 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 six months ended June 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 June 30, 2022 and December 31, 2021: