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 adequacy of our allowance for loan 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, and to our primary service area; changes in interest rates; our ability to identify, negotiate, secure and develop new store locations and renew, modify, or terminate leases or dispose of properties for existing store 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; accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; rapidly changing technology; 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, 2019 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. We commonly refer to our branch locations as stores to reflect our retail oriented approach to customer service and convenience.
As of March 31, 2020, we serve our customers through 30 store locations, in addition to 4 loan offices that specialize in commercial, small business and residential mortgage lending. Our stores are open 7 days a week, 361 days a year, with extended lobby and drive-thru hours providing customers with some of the most convenient hours compared to any bank in the markets which we operate. We offer free checking, free coin counting, and ATM/Debit cards issued on the spot. We also provide access to more than 55,000 surcharge free ATM machines worldwide through the Allpoint network to our customers. Our commitment to deliver best in class customer service not only applies to our store locations, but includes by phone, online and mobile options as well. Our business model is built on customer loyalty and engagement, understanding customer needs and offering the financial products and services to help them achieve their goals and objectives.
Current Economic Environment
The coronavirus (COVID-19) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions as of the end of the first quarter of 2020 that did not exist at the beginning of the quarter. These conditions have continued to worsen as we progress into the second quarter. In response to these evolving conditions, the Board of Governors of the Federal Reserve System reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.
The recession that has begun in the U.S. as a result of the government-mandated business closures and stay-at-home orders is significantly impacting the labor market, consumer spending, business investment and profitability. As a result, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which is the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration (SBA) Paycheck Protection Program (PPP) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term.
COVID-19 Response Efforts
Republic is committed to providing the financial resources necessary to support the economic recovery in our market. We have taken an active role in participating in the PPP Program approved under the CARES Act. We quickly developed a process to accept PPP loan applications not only from our valued small business customers, but from non-customers throughout our community as well. As of May 5, 2020, we processed and obtained SBA approval for more than 4,000 PPP applications resulting in over $700 million in loans. We are now evaluating the guidelines of the Main Street Lending Program designed by the Federal Reserve to support small and medium-sized businesses that were unable to access the PPP Program or that require additional financial support after receiving a PPP loan.
We have also taken a number of steps to mitigate the potential spread of the coronavirus and to assist our customers, employees and other members of the community during this pandemic crisis. As of March 31, 2020 we have:
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Temporarily closed the lobbies in all of our suburban store locations. However, drive-thru lanes remain open for all transactions including new account openings.
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Encouraged customers to utilize our online, mobile and telephone banking systems. In addition, we continue to offer more than 55,000 surcharge free ATM machines to all of our customers.
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Directed our commercial lenders to contact each of their customers to discuss the impact of the current economic conditions on their business and to develop a plan for assistance if required.
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Implemented a work from home policy for all employees whose primary responsibilities can be completed in this manner.
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Initiated additional preventative measures by providing guidance and proper supplies to all employees to support appropriate hygiene and social distancing.
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Changed the Annual Shareholder Meeting held on April 29, 2020 to a virtual meeting only.
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Loss Mitigation and Loan Portfolio Analysis
We have taken a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the economic shutdown begin to unfold. A detailed analysis of loan concentrations and segments that may present the areas of highest risk has been prepared. Our commercial lending team has initiated contact with a majority of our loan customers to discuss the impact that this pandemic crisis has had on their businesses to date and the expected ramifications that could be felt in the future. As of May 5, 2020, we have received requests to defer loan payments from 415 customers with total outstanding balances of $357 million, or 20% of total loans outstanding as of March 31, 2020. Approximately $221 million, or 62%, of the deferral requests were for deferment of principal balances only. The remaining deferrals include requests to defer both principal and interest payments. We have executed loan modifications and initiated payment deferrals for all customers that have an immediate need for assistance. As of March 31, 2020, none of the documentation to formally modify these loans to incorporate the deferral requests had been executed. The regulatory agencies that supervise financial institutions have issued an Interagency Statement that encourages financial institutions to actively work with borrowers that have been impacted by the effects of COVID-19. 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 are not classified as TDRs if the related loans were not 30 days past due as of December 31, 2019.
As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of the Bank’s allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan to values on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program 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 the coronavirus pandemic begin to unfold. Based on the incurred loss methodology currently utilized by the Bank, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and length of the economic downturn and the full impact on our loan portfolio.
Recent Regulatory Reform Legislation
The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018 (the “Regulatory Relief Act”), amended certain provisions of the Dodd-Frank Act, as well as certain other statutes administered by the federal banking agencies. Some of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holding companies include: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans, which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.
In September 2019, the federal banking agencies approved the final rule to implement the provisions of Section 201 of the Regulatory Relief Act relating to the community bank leverage ratio (“CBLR”). Under the new rule, which became effective January 1, 2020, a qualifying community banking organization is defined as a depository institution or depository institution holding company with less than $10 billion in assets. A qualifying community banking organization has the option to elect the CBLR framework if its CBLR is greater than 9%, it has off-balance sheet exposures of 25% or less of consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. The leverage ratio for purposes of the CBLR is calculated as Tier I capital divided by average total assets, consistent with the manner banking organizations calculate the leverage ratio under generally applicable capital rules. Qualifying community banking organizations that exceed the CBLR level established by the agencies, and that elect to be covered by the CBLR framework, will be considered to have met: (i) the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules; (ii) the capital ratio requirements necessary to be considered “well capitalized” under the banking agencies’ prompt corrective action framework in the case of insured depository institutions; and (iii) any other applicable capital or leverage requirements. For institutions that fall below the 9% capital requirement but remain above 8%, are allowed a two-quarter grace period to either meet the qualifying criteria again or to comply with the generally applicable capital rules. We have not at this time opted to use the CBLR framework. We do not believe that the changes resulting from the Regulatory Relief Act, including whether we elect to use the CBLR framework, will materially impact our business, operations, or financial results.
Financial Condition
Assets
Total assets decreased by $40.9 million to $3.300 billion at March 31, 2020, compared to $3.341 billion at December 31, 2019.
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 of these two categories decreased by $111.8 million to $56.5 million at March 31, 2020, from $168.3 million at December 31, 2019.
Loans Held for Sale
Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration (“SBA”) which we usually originate with the intention of selling in the future and residential mortgage loans originated which we also intend to sell in the future. Total SBA loans held for sale were $1.4 million at March 31, 2020 as compared to $3.0 million at December 31, 2019. Residential mortgage loans held for sale were $15.4 million at March 31, 2020 compared to $10.3 million at December 31, 2019. Loans held for sale, as a percentage of total Company assets, were less than 1% at March 31, 2020.
Loans Receivable
The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $38.2 million at March 31, 2020. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit.
Loans increased $132.9 million, or 8%, to $1.9 billion at March 31, 2020, versus $1.7 billion at December 31, 2019. This growth was the result of an increase in loan demand across all categories driven by the successful execution of our relationship banking strategy which focuses on delivering high levels of customer service.
Investment Securities
Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of U.S. Government agency Small Business Administration (“SBA”) bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Available-for-sale securities totaled $497.5 million at March 31, 2020, compared to $539.0 million at December 31, 2019. The decrease was primarily due to the paydown, maturity, or call, of securities totaling $34.7 million and the sale of securities totaling $26.9 million partially offset by the purchase of securities totaling $16.9 during the first three months of 2020. At March 31, 2020, the portfolio had a net unrealized gain of $1.8 million compared to a net unrealized loss of $1.7 million at December 31, 2019. The change in value of the investment portfolio was driven by a decrease in market interest rates which drove an increase in value of the securities available-for-sale in our portfolio during the first three months of 2020.
Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (“SBIC”) and Small Business Administration (“SBA”) bonds, CMOs and MBSs. The fair value of securities held-to-maturity totaled $636.9 million and $653.1 million at March 31, 2020 and December 31, 2019, respectively. The decrease was primarily due to the paydown, maturity, or call of securities totaling $32.8 million partially offset by an increase of $16.7 million in the value of securities held in the portfolio during the first three months of 2020. The change in value of the investment portfolio was driven by a decrease in market interest rates which drove an increase in value of the securities held-to-maturity in our portfolio during the first three months of 2020.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, is carried at cost as of March 31, 2020 and December 31, 2019. 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 March 31, 2020 and December 31, 2019, the investment in FHLB of Pittsburgh capital stock totaled $2.6 million. At both March 31, 2020 and December 31, 2019, ACBB capital stock totaled $143,000. Both the FHLB and ACBB issued dividend payments during the first quarter of 2020.
Premises and Equipment
The balance of premises and equipment increased to $119.9 million at March 31, 2020 from $117.0 million at December 31, 2019. The increase was primarily due to premises and equipment expenditures of $4.8 million less depreciation and amortization expenses of $1.9 million during the first quarter of 2020. A new store was opened in Northfield, NJ in January 2020 bringing the total store count to thirty. Construction is ongoing on a site in Bensalem, PA which scheduled to be completed by mid-2020. There are also multiple sites in various stages of development for future store locations.
More expansion into New York City is planned for 2020. We intend to open one or two more new stores in Manhattan during 2020 after opening two stores in 2019.
Other Real Estate Owned
The balance of other real estate owned was $1.1 million at March 31, 2020 and $1.7 million at December 31, 2019. The decrease was due to sale of one property totaling $586,000 during the three months ended March 31, 2020.
Operating Leases – Right of Use Asset
Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). ASC 842 represents a significant overhaul of the accounting treatment for leases, with the most significant change being that most leases, including most operating leases, will now be capitalized on the balance sheet. Under ASC 840, FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to twelve months in length.
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 March 31, 2020 and December 31, 2019, the balance of operating leases – right-of-use asset was $66.0 million and $64.8 million, respectively.
Goodwill
Goodwill amounted to $5.0 million at both March 31, 2020 and December 31, 2019. We completed an annual impairment test for goodwill as of July 31, 2019 and 2018. In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and other intangibles for potential impairment. During the first quarter of 2020, as a result of the various economic events which transpired we determined that a triggering event had occurred. Accordingly, we performed a quantitative test to assess whether or not goodwill had been impaired. Based on our analysis as of March 31, 2020, we have concluded that goodwill had not been impaired and no adjustment is required as of that date. During the years ended December 31, 2019 and 2018, there was also no goodwill impairment recorded. We will continue to closely monitor key economic indicators and any factors that may impact our analysis of potential goodwill impairment. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. As of July 31, 2019, the fair value of the Reporting Unit exceeded its carrying value by 20%. In the current analysis as of March 31, 2020, the fair value of the Reporting Unit exceeded its carrying value by 15%. The determination of the fair value of the Reporting Unit incorporates assumptions that marketplace participants would use in their estimates of fair value of the Reporting Unit in a change of control transaction, as prescribed by ASC Topic 820.
To arrive at a conclusion of fair value, we utilize both the Income and Market Approach and then apply weighting factors to each result. Weighting factors represent our best business judgment of the weightings a market participant would utilize in arriving at a fair value for the Reporting Unit. In performing our analyses, we also made numerous assumptions with respect to industry performance, business, economic and market conditions and various other matters, many of which cannot be predicted and are beyond our control. With respect to financial projections, projections reflect the best currently available estimates and judgments as to the expected future financial performance of the Reporting Unit.
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 decreased by $54.7 million to $2.9 billion at March 31, 2020 from $3.0 billion at December 31, 2019. The decline in deposit balances during the first quarter of 2020 was primarily driven by a reduction in interest-bearing demand balances driven by some of our larger customer accounts, including public fund relationships. Historically we have experienced seasonal outflows associated with these type of depositors during the first half of a calendar year as tax collection cycles result in lower deposit balances during this time period.
Operating Lease Liability Obligation
Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). ASC 842 represents a significant overhaul of the accounting treatment for leases, with the most significant change being that most leases, including most operating leases, will now be capitalized on the balance sheet. Under ASC 840, FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to twelve months in length.
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 March 31, 2020 and December 31, 2020, the balance of the operating lease liability obligation was $70.2 million and $68.9 million, respectively.
Shareholders’ Equity
Total shareholders’ equity increased $2.9 million to $252.1 million at March 31, 2020 compared to $249.2 million at December 31, 2019. The increase during the first quarter of 2020 was primarily due to a $2.9 million decrease in accumulated other comprehensive losses associated with an increase in the market value of the investment securities portfolio. The shift in market value of the securities portfolio was primarily driven by a decrease in market interest rates which drove an increase in the market value of the securities held in our portfolio.
Results of Operations
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
We reported a net loss of $593,000 or ($0.01) per diluted share, for the three month period ended March 31, 2020 compared to net income of $426,000 or $0.01 per diluted share, for the three month period ended March 31, 2019. The decline in earnings year over year was primarily driven by a 17% increase in non-interest expense amounting to $4.0 million. This increase was a result of the ongoing growth and expansion initiative which included the opening of the Company’s first two store locations in New York City during the second half of 2019. In addition, the net interest margin decreased to 2.76% for the three month period ended March 31, 2020 compared to 3.00% for the three month period ended March 31, 2019. This decrease was a result of the challenging nature of the interest rate environment driven by a flat and, at times, an inverted yield curve. The growth in non-interest expense outpaced the growth in revenue over the last twelve months resulting in a reduction in profitability.
Net interest income was $20.8 million for the three month period ended March 31, 2020 compared to $19.1 million for the three months ended March 31, 2019. Interest income increased $1.8 million, or 6.9%, primarily due to an increase in average loans receivable balances and investment securities partially offset by lower yields on those interest earning assets. Interest expense increased $150,000, or 2.3%, primarily due to an increase in the average deposit balances. The net interest margin decreased by 24 basis points to 2.76% during the first quarter of 2020 compared to 3.00% during the first quarter of 2019. Compression in the net interest margin was driven by a more rapid decrease in the yield on interest earning assets compared to our cost of funds.
We recorded a provision for loan losses of $950,000 for the three months ended March 31, 2020 compared to $300,000 for the three months ended March 31, 2019. This was primarily due to an increase in the allowance required for loans collectively evaluated for impairment. We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the first quarter of 2020, effective as of January 1, 2020.
Non-interest income increased by $1.6 million to $6.5 million during the three months ended March 31, 2020 compared to $4.9 million during the three months ended March 31, 2019. The increase during the three months ended March 31, 2020 was primarily due to increases in the gain on sale of investment securities, service fees on deposit accounts, loan and servicing fees, mortgage banking income, and gain on the sales of SBA loans.
Non-interest expenses increased $4.0 million to $27.3 million during the three months ended March 31, 2020 compared to $23.3 million during the three months ended March 31, 2019. This increase was primarily driven by higher salaries, employee benefits, and occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refer to as “The Power of Red is Back”. Annual merit increases contributed to the increase in salaries and employee benefit costs. We have also incurred costs related to our expansion into New York City as we hire a management and lending team and commence rent payments for our store locations. Our first store in New York City opened at 14th Street & 5th Avenue in Manhattan in July 2019. Construction was completed on a second store location at 51st Street & 3rd Avenue in November 2019.
A benefit for income taxes of $330,000 was recorded during the three months ended March 31, 2020, a decrease of $422,000, compared to a $92,000 provision for income taxes during the three months ended March 31, 2019.
Return on average assets and average equity from continuing operations was (0.07%) and (0.95%), respectively, during the three months ended March 31, 2020 compared to 0.06% and 0.70%, respectively, for the three months ended March 31, 2019.
Analysis of Net Interest Income
Historically, our earnings have depended 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, a non-GAAP measure, using a rate of 21% in 2020 and 21% in 2019.
Average Balances and Net Interest Income
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For the three months ended
March 31, 2020
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For the three months ended
March 31, 2019
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(dollars in thousands)
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Average Balance
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Interest
Income/
Expense
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Yield/
Rate(1)
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Average Balance
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Interest
Income/
Expense
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Yield/
Rate(1)
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Interest-earning assets:
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
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|
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Federal funds sold and other interest-earning assets
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$
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81,339
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|
$
|
289
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|
|
|
1.43
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%
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|
$
|
55,369
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|
|
$
|
336
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|
|
|
2.46
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%
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Investment securities and restricted stock
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1,156,504
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|
6,826
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|
|
|
2.36
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%
|
|
|
1,085,910
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|
|
|
7,420
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|
|
|
2.73
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%
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Loans receivable
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1,808,382
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|
20,319
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|
|
|
4.52
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%
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|
|
1,468,640
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|
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|
17,911
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|
|
|
4.95
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%
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Total interest-earning assets
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3,046,225
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|
27,434
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|
3.62
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%
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|
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2,609,919
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|
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25,667
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|
|
|
3.99
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%
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Other assets
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260,829
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190,855
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Total assets
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$
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3,307,054
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$
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2,800,774
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|
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|
|
|
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|
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Interest-earning liabilities:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Demand – non-interest bearing
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$
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644,601
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|
|
|
|
|
|
$
|
512,172
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|
|
|
|
|
|
|
|
|
Demand – interest bearing
|
|
|
1,337,646
|
|
|
|
3,421
|
|
|
|
1.03
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%
|
|
|
1,113,758
|
|
|
|
3,938
|
|
|
|
1.43
|
%
|
Money market & savings
|
|
|
752,510
|
|
|
|
1,783
|
|
|
|
0.95
|
%
|
|
|
675,506
|
|
|
|
1,452
|
|
|
|
0.87
|
%
|
Time deposits
|
|
|
226,185
|
|
|
|
1,221
|
|
|
|
2.17
|
%
|
|
|
153,832
|
|
|
|
624
|
|
|
|
1.65
|
%
|
Total deposits
|
|
|
2,960,942
|
|
|
|
6,425
|
|
|
|
0.87
|
%
|
|
|
2,455,268
|
|
|
|
6,014
|
|
|
|
0.99
|
%
|
Total interest-bearing deposits
|
|
|
2,316,341
|
|
|
|
6,425
|
|
|
|
1.12
|
%
|
|
|
1,943,096
|
|
|
|
6,014
|
|
|
|
1.26
|
%
|
Other borrowings
|
|
|
11,952
|
|
|
|
104
|
|
|
|
3.50
|
%
|
|
|
46,969
|
|
|
|
365
|
|
|
|
3.15
|
%
|
Total interest-bearing liabilities
|
|
|
2,328,293
|
|
|
|
6,529
|
|
|
|
1.13
|
%
|
|
|
1,990,065
|
|
|
|
6,379
|
|
|
|
1.30
|
%
|
Total deposits and other borrowings
|
|
|
2,972,894
|
|
|
|
6,529
|
|
|
|
0.88
|
%
|
|
|
2,502,237
|
|
|
|
6,379
|
|
|
|
1.03
|
%
|
Non-interest bearing other liabilities
|
|
|
84,211
|
|
|
|
|
|
|
|
|
|
|
|
52,037
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
249,949
|
|
|
|
|
|
|
|
|
|
|
|
246,500
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,307,054
|
|
|
|
|
|
|
|
|
|
|
$
|
2,800,774
|
|
|
|
|
|
|
|
|
|
Net interest income (2)
|
|
|
|
|
|
$
|
20,905
|
|
|
|
|
|
|
|
|
|
|
$
|
19,288
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.49
|
%
|
|
|
|
|
|
|
|
|
|
|
2.69
|
%
|
Net interest margin (2)
|
|
|
|
|
|
|
|
|
|
|
2.76
|
%
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
(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, a non-GAAP measure. Net interest income has been increased over the financial statement amount by $151 and $148 for the three months ended March 31, 2020 and 2019, 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, a Non-GAAP measure.
|
|
For the three months ended
March 31, 2020 vs. 2019
|
|
|
|
Changes due to:
|
|
(dollars in thousands)
|
|
Average Volume
|
|
|
Average
Rate
|
|
|
Total
Change
|
|
Interest earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning assets
|
|
$
|
92
|
|
|
$
|
(139
|
)
|
|
$
|
(47
|
)
|
Securities
|
|
|
417
|
|
|
|
(1,011
|
)
|
|
|
(594
|
)
|
Loans
|
|
|
3,633
|
|
|
|
(1,225
|
)
|
|
|
2,408
|
|
Total interest-earning assets
|
|
|
4,142
|
|
|
|
(2,375
|
)
|
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
573
|
|
|
|
(1,090
|
)
|
|
|
(517
|
)
|
Money market and savings
|
|
|
201
|
|
|
|
130
|
|
|
|
331
|
|
Time deposits
|
|
|
391
|
|
|
|
206
|
|
|
|
597
|
|
Total deposit interest expense
|
|
|
1,165
|
|
|
|
(754
|
)
|
|
|
411
|
|
Other borrowings
|
|
|
(169
|
)
|
|
|
(92
|
)
|
|
|
(261
|
)
|
Total interest expense
|
|
|
996
|
|
|
|
(846
|
)
|
|
|
150
|
|
Net interest income
|
|
$
|
3,146
|
|
|
$
|
(1,529
|
)
|
|
$
|
1,617
|
|
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the three months ended March 31, 2020, increased $1.6 million, or 8.4%, over the same period in 2019. Interest income on interest-earning assets totaled $27.4 million for the three months ended March 31, 2020, an increase of $1.8 million, compared to $25.7 million for the three months ended March 31, 2019. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable and investment securities partially offset by lower yields on those interest earning assets. Total interest expense for the three months ended March 31, 2020 increased by $150,000, or 2.4%, over the same period in 2019. Interest expense on deposits increased by $411,000, or 6.8%, for the three months ended March 31, 2020 versus the same period in 2019 due primarily to an increase in the average balance on deposit balances. Interest expense on other borrowings decreased by $261,000 for the three months ended March 31, 2020 as compared to March 31, 2019 due primarily to a decrease in the average balances on overnight borrowings.
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 2.49% during the first three months of 2020 compared to 2.69% during the first three months of 2019. 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 first three months of 2020 and 2019, the fully tax-equivalent net interest margin was 2.76% and 3.00%, respectively. The decrease in the net interest margin was a result of the challenging nature of the interest rate environment driven by a flat and, at times, an inverted yield curve.
Provision for Loan Losses
We recorded a provision of $950,000 for the three month period ended March 31, 2020 and a $300,000 provision for loan losses for the three month period ended March 31, 2019. During the first three months of 2020, there was an increase in the allowance required for loans collectively evaluated for impairment. We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the first quarter of 2020, effective as of January 1, 2020.
As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of the Bank’s allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program 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 the coronavirus pandemic begin to unfold. Based on the incurred loss methodology currently utilized by the Bank, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and length of the economic downturn and the full impact on our loan portfolio.
Non-interest Income
Total non-interest income for the three months ended March 31, 2020 increased by $1.6 million, or 32.4%, compared to the same period in 2019. Service fees on deposit accounts totaled $2.1 million for the first three months of 2020 which represents an increase of $452,000 over the same period in 2019. This increase was due to the growth in the number of customer accounts and transaction volume. There were gains on the sale of investment securities during the first three months of 2020 of $841,000 compared to $322,000 during the first three months of 2019. Mortgage banking income totaled $2.5 million during the three months ended March 31, 2020 which represents an increase of $238,000 from the same period in 2019. Gains on the sale of SBA loans totaled $649,000 for the first three months of 2020, an increase of $147,000, versus $502,000 for the same period in 2019
Non-interest Expenses
Non-interest expenses increased $4.0 million, or 17.2%, to $27.3 million for the first three months of 2020 compared to $23.3 million for the same period in 2019. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.
Salaries and employee benefits increased by $1.0 million, or 8.3%, for the first three months of 2020 compared to the same period in 2019 which was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores, which we refer to as “The Power of Red is Back”. There were thirty stores open as of March 31, 2020 compared to twenty-six stores at March 31, 2019.
Occupancy expense, including depreciation and amortization expense, increased by $1.3 million or 31.9%, for the first three months of 2020 compared to the same period last year, also as a result of our continuing growth and relocation strategy.
Other real estate expenses totaled $282,000 during the first three months of 2020, a decrease of $55,000, or 16.3%, compared to the same period in 2019. This decrease was a result of lower costs to carry foreclosed properties in the current period.
All other non-interest expenses increased by $1.8 million, or 26.8%, for the first three months of 2020 compared to the same period last year due to increases in expenses related to data processing fees, debit card processing, regulatory assessments and costs, professional fees, and other expenses which were mainly associated with our growth strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net non-interest expenses to average assets, a non-GAAP measure. For the purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the three month period ended March 31, 2020, the ratio was 2.52% compared to 2.65% for the three month period ended March 31, 2019. The decrease in this ratio was mainly due to an increase in average assets year over year.
Another productivity measure utilized by management is the operating efficiency ratio, a non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 99.9% for the first three months of 2020, compared to 96.6% for the first three months of 2019. The increase for the three months ended March 31, 2020 versus March 31, 2019 was due to non-interest expenses increasing at a faster rate than net interest income and non-interest income.
Provision (Benefit) for Federal Income Taxes
We recorded a benefit for income taxes of $330,000 for the three months ended March 31, 2020, compared to a $92,000 provision for the three months ended March 31, 2019. The effective tax rates for the three-month periods ended March 31, 2020 and 2019 were (36%) and 18%, respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a pre-tax loss position.
We evaluate the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by a financial institution and the ability to absorb potential losses are important distinctions to be considered for bank holding companies like us. In addition, it is also important to consider that net operating loss carryforwards (“NOLs”) calculated for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years, for NOLs created prior to January 1, 2018. Federal NOLs generated after December 31, 2017 can be carried forward indefinitely and carried back five years to the extent the losses are generated in taxable years beginning before January 1, 2021. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
The Company is in a 3-year cumulative profit position factoring in pre-tax GAAP income and permanent book to tax differences. Strong growth in interest-earning assets is expected to continue in future periods. A number of cost control measures have been implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin. Since the beginning of 2017, the Company has added twelve store locations. Since the inception of the “Power of Red is Back” growth and expansion strategy in 2014, almost every new store location has met or exceeded expectations. The success of the expansion into New York, combined with the stabilization of interest rates and continued loan growth are expected to improve profitability going forward.
Conversely, the Company generated a loss in 2019 and in the first quarter of 2020 when factoring in pre-tax GAAP income and permanent book to tax differences. The Bank’s net interest margin declined during 2019 as a result of the challenging interest rate environment which appears to be consistent across the financial services industry. Rising interest rates and a downturn in the economy could significantly decrease the volume of mortgage loan originations.
The Company has experienced a growing balance sheet driven by the growth and expansion strategy over the last several years. Loans and deposits have consistently grown at rates far above industry standards generating a higher level of interest earning assets. Assets quality metrics have improved consistently through the period ended March 31, 2020. From 2014 to 2018, the Company demonstrated consistent and steady improvement in earnings despite the investments required to initiate the expansion plan.
In 2019, the Company began opening branches in New York City. Management was aware of the initial costs and investments required to expand into this new market. As a result of the flat and inverted yield curve experienced in 2019, the net interest margin compressed and revenue did not grow at the rate necessary to support the increased expense levels which caused a decline in earnings. Management and the Board of Directors have engaged in detailed discussions on how to improve profitability going forward. During the preparation of the 2020 budget, several cost reduction and control initiatives were identified and incorporated into the Company’s financial projections. These initiatives include, but are not limited to, a reduction of store hours and slowing of the number of locations to be opened in the coming years. This has resulted in declines in non-interest expense for two consecutive quarters through the first quarter of 2020. Efforts to reduce high cost deposits and increase loan production to improve the net interest margin have also been initiated and have shown results.
The effect of the COVID-19 pandemic on the bank’s future earnings is uncertain. Economic hardship created by the COVID-19 pandemic may result in the increase of reserve levels for the bank. However, the recently enacted CARES Act is expected to result in the generation of significant amounts of taxable income for the bank over the next twelve to eighteen months related to the Act’s Paycheck Protection Program (PPP). The Company’s updated multi-year budget plan continues to project future taxable income which will be more than sufficient to support the realization of the deferred tax assets.
Based on the guidance provided in ASC 740, we believed that the positive evidence considered at March 31, 2020 and December 31, 2019 outweighed the negative evidence and that it was more likely than not that all of our deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance is not required.
The net deferred tax asset balance was $12.4 million as of March 31, 2020 and $12.6 million as of December 31, 2019. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
Net Income (Loss) and Net Income (Loss) per Common Share
The net loss for the first three months of 2020 was $593,000, a decrease of $1.0 million, compared to net income of $426,000 recorded for the first three months of 2019. The decline in earnings year over year was primarily driven by a 17% increase in non-interest expense amounting to $4.0 million. This increase was a result of the ongoing growth and expansion initiative which included the opening of the Company’s first two store locations in New York City during the second half of 2019. In addition, the net interest margin decreased to 2.76% for the three month period ended March 31, 2020 compared to 3.00% for the three month period ended March 31, 2019. This decrease was a result of the challenging nature of the interest rate environment driven by a flat and, at times, an inverted yield curve. The growth in non-interest expense outpaced the growth in revenue over the last twelve months resulting in a reduction in profitability. For the three month period ended March 31, 2020, basic and fully-diluted net loss per common share was ($0.01) compared to basic and fully-diluted net income per common share of $0.01 for the three month period ended March 31, 2019.
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 first three months of 2020 and 2019 was (0.07%) and 0.06%, respectively. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the first three months of 2020 and 2019 was (0.95%) and 0.70%, respectively.
Commitments, Contingencies and Concentrations
Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately $314.3 million and $329.9 million, and standby letters of credit of approximately $17.4 million and $17.2 million, at March 31, 2020 and December 31, 2019, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $314.3 million of commitments to extend credit at March 31, 2020 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. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of liability as of March 31, 2020 and December 31, 2019 for guarantees under standby letters of credit issued is not material.
Regulatory Matters
We are required to comply with certain “risk-based” capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” 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 March 31, 2020 and December 31, 2019, all applicable capital adequacy requirements. In the current year, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification which management believes would have changed Republic’s category.
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 March 31, 2020, and December 31, 2019.
(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 March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
253,152
|
|
|
|
11.33
|
%
|
|
$
|
178,670
|
|
|
|
8.00
|
%
|
|
$
|
234,504
|
|
|
|
10.50
|
%
|
|
$
|
223,337
|
|
|
|
10.00
|
%
|
Company
|
|
|
262,989
|
|
|
|
11,76
|
%
|
|
|
178,963
|
|
|
|
8.00
|
%
|
|
|
234,889
|
|
|
|
10.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
242,935
|
|
|
|
10.88
|
%
|
|
|
134,002
|
|
|
|
6.00
|
%
|
|
|
189,837
|
|
|
|
8.50
|
%
|
|
|
178,670
|
|
|
|
8.00
|
%
|
Company
|
|
|
252,772
|
|
|
|
11.30
|
%
|
|
|
134,222
|
|
|
|
6.00
|
%
|
|
|
190,148
|
|
|
|
8.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
242,935
|
|
|
|
10.88
|
%
|
|
|
100,502
|
|
|
|
4.50
|
%
|
|
|
156,336
|
|
|
|
7.00
|
%
|
|
|
145,169
|
|
|
|
6.50
|
%
|
Company
|
|
|
241,772
|
|
|
|
10.81
|
%
|
|
|
100,667
|
|
|
|
4.50
|
%
|
|
|
156,593
|
|
|
|
7.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier 1 leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
248,191
|
|
|
|
7.38
|
%
|
|
|
131,596
|
|
|
|
4.00
|
%
|
|
|
131,596
|
|
|
|
4.00
|
%
|
|
|
164,495
|
|
|
|
5.00
|
%
|
Company
|
|
|
252,116
|
|
|
|
7.67
|
%
|
|
|
131,751
|
|
|
|
4.00
|
%
|
|
|
131,751
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
252,307
|
|
|
|
11.94
|
%
|
|
$
|
169,016
|
|
|
|
8.00
|
%
|
|
$
|
221,833
|
|
|
|
10.50
|
%
|
|
$
|
211,270
|
|
|
|
10.00
|
%
|
Company
|
|
|
261,759
|
|
|
|
12.37
|
%
|
|
|
169,251
|
|
|
|
8.00
|
%
|
|
|
222,141
|
|
|
|
10.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
243,041
|
|
|
|
11.50
|
%
|
|
|
126,762
|
|
|
|
6.00
|
%
|
|
|
179,579
|
|
|
|
8.50
|
%
|
|
|
169,016
|
|
|
|
8.00
|
%
|
Company
|
|
|
252,493
|
|
|
|
11.93
|
%
|
|
|
126,938
|
|
|
|
6.00
|
%
|
|
|
179,829
|
|
|
|
8.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
243,041
|
|
|
|
11.50
|
%
|
|
|
95,071
|
|
|
|
4.50
|
%
|
|
|
147,889
|
|
|
|
7.00
|
%
|
|
|
137,325
|
|
|
|
6.50
|
%
|
Company
|
|
|
241,493
|
|
|
|
11.41
|
%
|
|
|
95,203
|
|
|
|
4.50
|
%
|
|
|
148,094
|
|
|
|
7.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier 1 leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
245,158
|
|
|
|
7.54
|
%
|
|
|
128,935
|
|
|
|
4.00
|
%
|
|
|
128,935
|
|
|
|
4.00
|
%
|
|
|
161,169
|
|
|
|
5.00
|
%
|
Company
|
|
|
249,168
|
|
|
|
7.83
|
%
|
|
|
129,058
|
|
|
|
4.00
|
%
|
|
|
129,058
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Dividend Policy
We have not paid any cash dividends on our common stock. We have no plans to pay cash dividends in 2020. Our ability to pay dividends depends primarily on 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.
Liquidity
A financial institution must maintain and manage liquidity to ensure it has the ability to meet its financial obligations. These obligations include the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loans and other funding commitments; and the ability to take advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing liabilities. Our most liquid assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we have formed an asset/liability committee (ALCO), comprised of certain members of Republic’s Board of Directors and senior management to monitor such ratios. The ALCO committee is responsible for managing the liquidity position and interest sensitivity. That committee’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 committee meets on a quarterly basis or more frequently if deemed necessary.
Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $56.5 million at March 31, 2020, compared to $168.3 million at December 31, 2019. Loan maturities and repayments are another source of asset liquidity. At March 31, 2020, Republic estimated that more than $95.0 million of loans would mature or repay in the six-month period ending September 30, 2020. 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 March 31, 2020, we had outstanding commitments (including unused lines of credit and letters of credit) of $314.3 million. Certificates of deposit scheduled to mature in one year totaled $177.5 million at March 31, 2020. 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 $953.3 million at March 31, 2020. At March 31, 2020 and December 31, 2019, we had no outstanding term borrowings and no outstanding overnight borrowings with the FHLB. As of March 31, 2020 and December 31, 2019, FHLB had issued letters of credit, on Republic’s behalf, totaling $150.0 million against our available credit line. We also established a contingency line of credit of $10.0 million with ACBB and a Fed Funds line of credit with Zions Bank in the amount of $15.0 million to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit or the Zions Fed Funds line at both March 31, 2020 and December 31, 2019.
Investment Securities Portfolio
At March 31, 2020, we identified certain investment securities that were being held for indefinite periods of time, including securities that will be used as part of our asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as available-for-sale and are intended to increase the flexibility of our asset/liability management. Our investment securities classified as available for sale consist primarily of SBAs, CMOs, MBSs, municipal securities, and corporate bonds. Available for sale securities totaled $497.5 million and $539.0 million as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, securities classified as available for sale had a net unrealized gain of $1.8 million and a net unrealized loss of $1.7 million at December 31, 2019.
Loan Portfolio
Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic’s commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic’s legal lending limit of approximately $38.2 million at March 31, 2020. Individual customers may have several loans often secured by different collateral.
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, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment of principal and/or interest in full is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual, any collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
The following table shows information concerning loan delinquency and non-performing assets as of the dates indicated (dollars in thousands):
|
|
March 31,
2020
|
|
|
December 31, 2019
|
|
Loans accruing, but past due 90 days or more
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-accrual loans
|
|
|
14,185
|
|
|
|
12,413
|
|
Total non-performing loans
|
|
|
14,185
|
|
|
|
12,413
|
|
Other real estate owned
|
|
|
1,144
|
|
|
|
1,730
|
|
Total non-performing assets
|
|
$
|
15,329
|
|
|
$
|
14,143
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans, net of unearned income
|
|
|
0.75
|
%
|
|
|
0.71
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
0.46
|
%
|
|
|
0.42
|
%
|
Non-performing asset balances increased by $1.2 million to $15.3 million as of March 31, 2020 from $14.1 million at December 31, 2019. Non-accrual loans increased $1.8 million to $14.2 million at March 31, 2020, from $12.4 million at December 31, 2019 due primarily to $2.0 million in transfers of loans from performing to non-performing status during the three months ended March 31, 2020. There were no loans accruing, but past due 90 days or more at both March 31, 2020 and December 31, 2019. At March 31, 2020 and December 31, 2019, all identified impaired loans are internally classified and individually evaluated for impairment in accordance with the guidance under ASC 310.
We have taken a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the economic shutdown begin to unfold. A detailed analysis of loan concentrations and segments that may present the areas of highest risk has been prepared. Our commercial lending team has initiated contact with a majority of our loan customers to discuss the impact that this pandemic crisis has had on their businesses to date and the expected ramifications that could be felt in the future. We have initiated payment deferrals for all customers that have an immediate need for assistance. Further, where appropriate we have worked with borrowers to facilitate access to PPP loans. These loans will assist in addressing liquidity needs of our borrowers, and mitigate credit issues for the terms of the loans. The regulatory agencies that supervise financial institutions have issued an Interagency Statement that not only encourages financial institutions to actively work with borrowers that have been impacted by the effects of COVID-19, but will not automatically consider loan modifications granted under these circumstances as troubled debt restructurings.
The following table presents our 30 to 89 days past due loans at March 31, 2020 and December 31, 2019.
(dollars in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
30 to 59 days past due
|
|
$
|
17,042
|
|
|
$
|
112
|
|
60 to 89 days past due
|
|
|
26
|
|
|
|
1,823
|
|
Total loans 30 to 89 days past due
|
|
$
|
17,068
|
|
|
$
|
1,935
|
|
Loans with payments 30 to 59 days past due increased to $17.0 million at December 31, 2020. This increase was driven by a number of loan relationships that reached maturity or have requested deferment of payments as a result of the current economic conditions caused by the COVID-19 pandemic. Due to the stay-at-home orders initiated by state and local government agencies, several of the mature loans were unable to be renewed or extended prior to March 31, 2020. Many of the deferral requests are being reviewed and modifications are being processed to accommodate customers during this unprecedented crisis. Some of the delinquencies are associated with loans guaranteed by the SBA which will paid by the SBA for the next six months. Management does not currently expect the loans in the 30 to 59 days past due category to be permanent delinquency issues and expects to resolve most of them during the second quarter of 2020.
Other Real Estate Owned
The balance of other real estate owned was $1.1 million at March 31, 2020 and $1.7 million at December 31, 2019. The following table presents a reconciliation of other real estate owned for the three months ended March 31, 2020 and the year ended December 31, 2019:
(dollars in thousands)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Beginning Balance, January 1st
|
|
$
|
1,730
|
|
|
$
|
6,223
|
|
Additions
|
|
|
-
|
|
|
|
1,225
|
|
Valuation adjustments
|
|
|
-
|
|
|
|
(646
|
)
|
Dispositions
|
|
|
(586
|
)
|
|
|
(5,072
|
)
|
Ending Balance
|
|
$
|
1,144
|
|
|
$
|
1,730
|
|
At March 31, 2020, we had no credit exposure to “highly leveraged transactions” as defined by the FDIC.
Allowance for Loan Losses
We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the CARES Act for the first quarter of 2020, effective as of January 1, 2020.
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish an allowance against loan losses on a quarterly basis. When an increase in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan losses consists of three components. The first component is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310 Receivables. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310-10 (“non-impaired loans”). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450 Contingencies. The third component is an unallocated allowance to account for a level of imprecision in management’s estimation process.
We evaluate loans for impairment and potential charge-off on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary repayment source. If the primary repayment source is determined to be insufficient and unlikely to repay the debt, we then look to the secondary repayment sources. Secondary sources are conservatively reviewed for liquidation values. Updated appraisals and financial data are obtained to substantiate current values. If the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs associated with the resolution of a troubled loan, an estimate of the deficient amount will be calculated and a specific allocation of loan loss reserve is recorded.
Factors considered in the calculation of the allowance for non-impaired loans include several qualitative and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan balances, changes in risk composition and underwriting standards, experience and ability of management, and general economic conditions along with other external factors. Historical loss experience is analyzed by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below.
The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators. Our primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding the adequacy and the methodology employed in their determination.
An analysis of the allowance for loan losses for the three months ended March 31, 2020 and 2019, and the twelve months ended December 31, 2019 is as follows:
(dollars in thousands)
|
|
For the three months ended March 31, 2020
|
|
|
For the twelve months ended December 31, 2019
|
|
|
For the three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9,266
|
|
|
$
|
8,615
|
|
|
$
|
8,615
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
1,356
|
|
|
|
929
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
Consumer and other
|
|
|
22
|
|
|
|
126
|
|
|
|
13
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total charge-offs
|
|
|
22
|
|
|
|
1,482
|
|
|
|
1,017
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
17
|
|
|
|
217
|
|
|
|
1
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
Consumer and other
|
|
|
6
|
|
|
|
9
|
|
|
|
1
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total recoveries
|
|
|
23
|
|
|
|
228
|
|
|
|
2
|
|
Net charge-offs/(recoveries)
|
|
|
(1
|
)
|
|
|
1,254
|
|
|
|
1,015
|
|
Provision for loan losses
|
|
|
950
|
|
|
|
1,905
|
|
|
|
300
|
|
Balance at end of period
|
|
$
|
10,217
|
|
|
$
|
9,266
|
|
|
$
|
7,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding(1)
|
|
$
|
1,808,382
|
|
|
$
|
1,544,904
|
|
|
$
|
1,468,640
|
|
As a percent of average loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (annualized)
|
|
|
(0.00
|
%
|
)
|
|
0.08
|
%
|
|
|
0.28
|
%
|
Provision for loan losses (annualized)
|
|
|
0.21
|
%
|
|
|
0.12
|
%
|
|
|
0.08
|
%
|
Allowance for loan losses
|
|
|
0.56
|
%
|
|
|
0.60
|
%
|
|
|
0.54
|
%
|
Allowance for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
|
0.54
|
%
|
|
|
0.53
|
%
|
|
|
0.53
|
%
|
Total non-performing loans
|
|
|
72.03
|
%
|
|
|
74.65
|
%
|
|
|
74.00
|
%
|
(1) Includes non-accruing loans
We recorded a provision for loan losses of $950,000 at March 31, 2020. During the first three months of 2020, there was an increase in the allowance required for loans collectively evaluated for impairment driven by an increase in loans receivable as well as COVID-19 considerations that were evaluated when assessing certain qualitative factors to account for potential uncertainty with losses brought on by this pandemic crisis. This increase in the overall required allowance for loan losses was partially offset by a reduction in calculated historical losses resulting from lower charge-off history in recent periods. We recorded a provision for loan losses of $300,000 at March 31, 2019. During the first three months of 2019, there was also an increase in the allowance required for loans collectively evaluated for impairment driven by an increase in loans receivable.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 72.0% at March 31, 2020, compared to 74.7% at December 31, 2019 and 74.0% at March 31, 2019. Total non-performing loans were $14.2 million, $12.4 million and $10.7 million at March 31, 2020, December 31, 2019, and March 31, 2019, respectively. The decrease in the coverage ratio at March 31, 2020 compared to December 31, 2019 was a result of an increase in non-performing loans during the first three months of 2020 that did not require a specific reserve.
Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that it determines is adequate to absorb inherent losses in the loan portfolio. The Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the management team. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the allowance for loan losses. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses.
We evaluate loans for impairment and potential charge-offs on a quarterly basis. Any loan rated as substandard or lower will have a collateral evaluation analysis completed in accordance with the guidance under GAAP on impaired loans to determine if a deficiency exists. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance from all potential sources. When a loan is determined to be uncollectible it is charged-off against the allowance for loan losses. Unsecured commercial loans and all consumer loans are charged-off immediately upon reaching the 90-day delinquency mark unless they are well-secured and in the process of collection. The timing on charge-offs of all other loan types is subjective and will be recognized when management determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or guarantors, will not be sufficient and that repayment is unlikely. A full or partial charge-off is recognized equal to the amount of the estimated deficiency calculation.
Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised collateral values and deteriorating financial condition of borrowers and guarantors are factors considered when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a borrower’s financial condition is also assessed when considering a charge-off.
Partial charge-offs of non-performing and impaired loans can significantly reduce the coverage ratio and other credit loss statistics due to the fact that the balance of the allowance for loan losses will be reduced while still carrying the remainder of a non-performing loan balance in the impaired loan category. The amount of non-performing loans for which partial charge-offs have been recorded amounted to $3.6 million at both March 31, 2020 and December 31, 2019.
The following table provides additional analysis of partially charged-off loans.
(dollars in thousands)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Total nonperforming loans
|
|
$
|
14,185
|
|
|
$
|
12,413
|
|
Nonperforming and impaired loans with partial charge-offs
|
|
|
3,631
|
|
|
|
3,642
|
|
|
|
|
|
|
|
|
|
|
Ratio of nonperforming loans with partial charge-offs to total loans
|
|
|
0.19
|
%
|
|
|
0.21
|
%
|
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans
|
|
|
25.60
|
%
|
|
|
29.34
|
%
|
Coverage ratio net of nonperforming loans with partial charge-offs
|
|
|
255.19
|
%
|
|
|
254.42
|
%
|
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the three month period ended March 31, 2020, 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.