|
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, 2018 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.
Recent Regulatory Reform Legislation
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”),
which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Most of the changes made by the new Act can be grouped into five general areas: mortgage lending; certain
regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing
the threshold at which institutions are classified a systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and
certain changes to federal securities regulations designed to promote capital formation. Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (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 (HVCRE), 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. We continue to
analyze the changes implemented by the Act, but do not believe that such changes will materially impact our business, operations, or financial results.
Financial Condition
Assets
Total assets increased by $51.8 million to $2.81 billion at March 31, 2019, compared to $2.75 billion at December 31, 2018.
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 increased by $13.4 million to $85.9 million at March 31, 2019, from $72.5 million at December 31, 2018.
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 $2.0 million at March 31, 2019 as compared to $5.4 million at December 31, 2018.
Residential mortgage loans held for sale were $13.7 million at March 31, 2019 compared to $20.9 million at December 31, 2018. Loans held for sale, as a percentage of total Company assets, were less than 1% at March 31, 2019.
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 $34.4 million at March 31, 2019. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit.
Loans increased $41.2 million, or 3%, to $1.5 billion at March 31, 2019, versus $1.4 billion at December 31, 2018. 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 collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”),
municipal securities, and corporate bonds. Available-for-sale securities totaled $287.7 million at March 31, 2019, compared to $321.0 million at December 31, 2018. The decrease was primarily due to the sale of securities totaling $24.8 million
and paydowns of securities totaling $10.3 million during the first three months of 2019. At March 31, 2019, the portfolio had a net unrealized loss of $3.7 million compared to a net unrealized loss of $5.7 million at December 31, 2018. The change
in value of the investment portfolio was driven by a decrease in market interest rates in the two to seven year segment of the yield curve which drove an increase in value of the securities available-for-sale in our portfolio during the first
three months of 2019.
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 $736.7 million and $747.3 million at March 31, 2019 and December 31, 2018, respectively. The decrease was primarily due to paydowns of securities totaling $19.1 million and an increase of $8.9 million
in the value of securities held in the portfolio during the first three months of 2019. The change in value of the investment portfolio was driven by a decrease in market interest rates in the two to seven year segment of the yield curve which
drove an increase in value of the securities held-to-maturity in our portfolio during the first three months of 2019.
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, 2019
and December 31, 2018. 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, 2019 and December 31, 2018, the investment in FHLB of Pittsburgh capital stock totaled $2.0 million and $5.6 million,
respectively. The decrease was due to a lower required investment in FHLB stock during the first three months of 2019. At both March 31, 2019 and December 31, 2018, ACBB capital stock totaled $143,000.
Both the FHLB and ACBB issued dividend payments during the first quarter of 2019.
Premises and Equipment
The balance of premises and equipment increased to $94.4 million at
March 31, 2019 from $87.7 million at December 31, 2018. The increase was primarily due to premises and equipment expenditures of $8.1 million less depreciation and amortization expenses of $1.4 million during the first quarter of 2019. A new
store was opened in Lumberton, NJ during the first quarter of 2019 bringing the total store count to twenty-six
.
Construction is ongoing on a site in Feasterville, PA. There
are also multiple sites in various stages of development for future store locations.
Expansion into New York City is set to begin in 2019. Construction has begun on the first store location at 14
th
& 5
th
in Manhattan. We plan to open two or more new stores in Manhattan during
2019.
Other Real Estate Owned
The balance of other real estate owned was $6.1 million at March 31, 2019 and $6.2 million at December 31, 2018.
The decrease was primarily due to the sales and writedowns totaling $135,000.
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, 2019, the balance of operating leases – right-of-use asset was $54.7 million.
Goodwill
Goodwill is reviewed for impairment annually as of July 31 and between annual tests when events and circumstances indicate that
impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.
We early adopted Accounting Standards Update (“ASU”) 2017-04,
Simplifying the Test for Goodwill Impairment
during our annual goodwill impairment review in 2018. The new rules under this guidance provide that the goodwill impairment charge will be the amount by which the
reporting unit’s carrying amount exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We applied a qualitative assessment for the reporting unit to determine if the
one-step quantitative impairment test is necessary.
As part of our qualitative assessment, we reviewed regional and national trends in current and expected economic conditions, examining
indicators such as GDP growth, interest rates and unemployment rates. We also considered our own historical performance, expectations of future performance and other trends specific to the banking industry as well as an initial valuation of the
Oak Mortgage business performed by an independent third party. Based on our qualitative assessment, we determined that there was no evidence of impairment on the balance of goodwill. As of March 31, 2019 and December 31, 2018, goodwill totaled
$5.0 million.
Deposits
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic’s
major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
Total deposits increased by $86.1 million to $2.5 billion at March 31, 2019 from $2.4 billion at December 31, 2018. The increase was
the result of significant growth in all deposit categories, led by significant accumulation in demand deposit balances. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking
model which is based upon a high level of customer service and satisfaction. This strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon the more volatile sources of funding found in brokered and
wholesale deposits.
We are also in the midst of an aggressive expansion plan which we refer to as “The Power of Red is Back”. During 2018, we opened new
stores in Gloucester Township, Evesboro, and Somers Point in NJ and Fairless Hills in PA. In 2019, we opened a new store in Lumberton, NJ and have several more in various stages of construction and development including sites in New York City
where we expect to open beginning in 2019.
Short-term Borrowings
As of March 31, 2019, we had no short-term borrowings with the FHLB compared to $91.4 million at December 31, 2018.
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, 2019, the balance of the operating lease liability obligation was $53.7 million.
Shareholders’ Equity
Total shareholders’ equity increased $3.2 million to $248.4 million at March 31, 2019 compared to $245.2 million at December 31, 2018.
The increase during the first quarter of 2019 was primarily due to a $1.8 million decrease in accumulated other comprehensive losses associated with an increase in the market value of the investment securities portfolio, net income of $426,000,
and stock option exercises of $240,000. 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, 2019 Compared to Three Months Ended March 31, 2018
We reported net income of $426,000 or $0.01 per diluted share, for the three month periods ended March 31, 2019 compared to net income
of $1.8 million for the three month period ended March 31, 2018. The decrease in net income of $1.4 million was related to increases in interest expense and non-interest expense partially offset by increases in interest income and non-interest
income.
Net interest income was $19.1 million for the three month period ended March 31, 2019 compared to $18.1 million for the three months
ended March 31, 2018. Interest income increased $4.6 million, or 22.1%, primarily due to an increase in average loans receivable and investment securities balances. Interest expense increased $3.6 million, or 129.2%, primarily due to an increase
in the average rate on deposit balances. The net interest margin decreased by 23 basis points to 3.00% during the first quarter of 2019 compared to 3.23% during the first quarter of 2018. Compression in the net interest margin was driven by
flattening of the yield curve resulting in a more rapid increase in our cost of funds compared to the yield on interest earning assets.
We recorded a provision for loan losses of $300,000 for the three months ended March 31, 2019 compared to $400,000 for the three
months ended March 31, 2018. This was primarily due to a decrease in the allowance required for loans individually evaluated for impairment.
Non-interest income increased by $410,000 to $4.9 million during the three months ended March 31, 2019 compared to $4.5 million during
the three months ended March 31, 2018. The increase during the three months ended March 31, 2019 was primarily due to increases in service fees on deposit accounts and gains on the sale of investment securities, partially offset by a decrease in
gains on sales of SBA loans.
Non-interest expenses increased $3.2 million to $23.3 million during the three months ended March 31, 2019 compared to $20.1 million
during the three months ended March 31, 2018. 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’ve also started to incur costs related to our planned expansion into New York City as we begin to hire a
management and lending team and commence rent payments for the build out of our future store locations. We expect to open two or more stores in New York during 2019.
Provision for income taxes decreased $280,000 to $92,000 during the three months ended March 31, 2019 compared to a $372,000 provision
for income taxes during the three months ended March 31, 2018. The amount recorded during the three months ended March 31, 2019 and 2018 is a normalized provision reflective of the new corporate tax rate included in the Tax Cuts and Jobs Act of
2017.
Return on average assets and average equity from continuing operations was 0.06% and 0.70%, respectively, during the three months
ended March 31, 2019 compared to 0.30% and 3.19%, respectively, for the three months ended March 31, 2018.
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 2019 and 21% in 2018.
Average Balances and Net Interest Income
|
|
|
For the three months ended
March 31, 2019
|
|
|
For the three months ended
March 31, 2018
|
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield/
Rate
(1)
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield/
Rate
(1)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning assets
|
|
$
|
55,369
|
|
|
$
|
336
|
|
|
|
2.46
|
%
|
|
$
|
40,425
|
|
|
$
|
172
|
|
|
|
1.73
|
%
|
|
Investment securities and restricted stock
|
|
|
1,085,910
|
|
|
|
7,420
|
|
|
|
2.73
|
%
|
|
|
1,015,605
|
|
|
|
6,487
|
|
|
|
2.55
|
%
|
|
Loans receivable
|
|
|
1,468,640
|
|
|
|
17,911
|
|
|
|
4.95
|
%
|
|
|
1,235,124
|
|
|
|
14,365
|
|
|
|
4.72
|
%
|
|
Total interest-earning assets
|
|
|
2,609,919
|
|
|
|
25,667
|
|
|
|
3.99
|
%
|
|
|
2,291,154
|
|
|
|
21,024
|
|
|
|
3.72
|
%
|
|
Other assets
|
|
|
190,855
|
|
|
|
|
|
|
|
|
|
|
|
127,001
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,800,774
|
|
|
|
|
|
|
|
|
|
|
$
|
2,418,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand – non-interest bearing
|
|
$
|
512,172
|
|
|
|
|
|
|
|
|
|
|
$
|
431,234
|
|
|
|
|
|
|
|
|
|
|
Demand – interest bearing
|
|
|
1,113,758
|
|
|
|
3,938
|
|
|
|
1.43
|
%
|
|
|
893,530
|
|
|
|
1,257
|
|
|
|
0.57
|
%
|
|
Money market & savings
|
|
|
675,506
|
|
|
|
1,452
|
|
|
|
0.87
|
%
|
|
|
687,818
|
|
|
|
972
|
|
|
|
0.57
|
%
|
|
Time deposits
|
|
|
153,832
|
|
|
|
624
|
|
|
|
1.65
|
%
|
|
|
129,897
|
|
|
|
369
|
|
|
|
1.15
|
%
|
|
Total deposits
|
|
|
2,455,268
|
|
|
|
6,014
|
|
|
|
0.99
|
%
|
|
|
2,142,479
|
|
|
|
2,598
|
|
|
|
0.49
|
%
|
|
Total interest-bearing deposits
|
|
|
1,943,096
|
|
|
|
6,014
|
|
|
|
1.26
|
%
|
|
|
1,711,245
|
|
|
|
2,598
|
|
|
|
0.62
|
%
|
|
Other borrowings
|
|
|
46,969
|
|
|
|
365
|
|
|
|
3.15
|
%
|
|
|
40,552
|
|
|
|
185
|
|
|
|
1.85
|
%
|
|
Total interest-bearing liabilities
|
|
|
1,990,065
|
|
|
|
6,379
|
|
|
|
1.30
|
%
|
|
|
1,751,797
|
|
|
|
2,783
|
|
|
|
0.64
|
%
|
|
Total deposits and other borrowings
|
|
|
2,502,237
|
|
|
|
6,379
|
|
|
|
1.03
|
%
|
|
|
2,183,031
|
|
|
|
2,783
|
|
|
|
0.52
|
%
|
|
Non-interest bearing other liabilities
|
|
|
52,037
|
|
|
|
|
|
|
|
|
|
|
|
9,540
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
246,500
|
|
|
|
|
|
|
|
|
|
|
|
225,584
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,800,774
|
|
|
|
|
|
|
|
|
|
|
$
|
2,418,155
|
|
|
|
|
|
|
|
|
|
|
Net interest income
(2)
|
|
|
|
|
|
$
|
19,288
|
|
|
|
|
|
|
|
|
|
|
$
|
18,241
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.69
|
%
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
|
Net interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
3.23
|
%
|
(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 $148 and $125 for the three months ended March 31, 2019 and 2018, 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 tax-equivalent interest income and expense are allocated to volume and rate categories
based upon the respective changes in average balances and average rates.
|
|
|
For the three months ended
March 31, 2019 vs. 2018
|
|
|
|
|
Changes due to:
|
|
|
(dollars in thousands)
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Total
Change
|
|
|
Interest earned:
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning assets
|
|
$
|
91
|
|
|
$
|
73
|
|
|
$
|
164
|
|
|
Securities
|
|
|
480
|
|
|
|
453
|
|
|
|
933
|
|
|
Loans
|
|
|
2,760
|
|
|
|
786
|
|
|
|
3,546
|
|
|
Total interest-earning assets
|
|
|
3,331
|
|
|
|
1,312
|
|
|
|
4,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
779
|
|
|
|
1,902
|
|
|
|
2,681
|
|
|
Money market and savings
|
|
|
(29
|
)
|
|
|
509
|
|
|
|
480
|
|
|
Time deposits
|
|
|
97
|
|
|
|
158
|
|
|
|
255
|
|
|
Total deposit interest expense
|
|
|
847
|
|
|
|
2,569
|
|
|
|
3,416
|
|
|
Other borrowings
|
|
|
-
|
|
|
|
180
|
|
|
|
180
|
|
|
Total interest expense
|
|
|
847
|
|
|
|
2,749
|
|
|
|
3,596
|
|
|
Net interest income
|
|
$
|
2,484
|
|
|
$
|
(1,437
|
)
|
|
$
|
1,047
|
|
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the first three months of 2019 increased $1.0 million,
or 5.7%, over the same period in 2018. Interest income on interest-earning assets totaled $25.7 million for the three months ended March 31, 2019, an increase of $4.6 million, compared to $21.0 million for the three months ended March 31, 2018.
The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable and investment securities in addition to higher yields on those interest earning assets.
Total interest expense for the first three months of 2019 increased by $3.6 million, or 129.2%, to $6.4 million from $2.8 million for the first three months of 2018. Interest expense on deposits increased by
$3.4 million, or 131.5%, for the first three months of 2019 versus the same period in 2018
due primarily to an increase in the average rate on deposit balances.
Interest
expense on other borrowings increased by $180,000 for the three months ended March 31, 2019 as compared to March 31, 2018 due primarily to an increase in the average rate on overnight borrowings balances. The flattening of the yield curve has
resulted in a more rapid increase in the cost of interest bearing liabilities when compared to the yield on interest earning assets.
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 2.69% during the first three months of 2019 compared to 3.08% during the first three months of 2018. 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 2019 and 2018, the fully tax-equivalent net interest margin was 3.00% and 3.23%, respectively. The decrease in the net
interest margin for the three months ending March 31, 2019 was primarily
due to a 64 basis point increase in the average rate on deposit balances.
Provision for Loan Losses
We recorded a provision of $300,000 for the three month period ended March 31, 2019 and a $400,000 provision for loan losses for the
three month period ended March 31, 2018. During the first three months of 2019, there was a decrease in the allowance required for loans individually evaluated for impairment.
Non-interest Income
Total non-interest income for the three months ended March 31, 2019 increased by $410,000, or 9.0%, compared to the same period in
2018. Service fees on deposit accounts totaled $1.6 million for the first three months of 2019 which represents an increase of $437,000 over the same period in 2018. 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 2019 of $322,000 compared to $0 during the first three months of 2018. Gains on the sale of SBA loans totaled $502,000 for the first three
months of 2019, a decrease of $490,000, versus $992,000 for the same period in 2018. The decrease was primarily due to a decrease in the volume of loan sold in the first three months of 2019.
Non-interest Expenses
Non-interest expenses increased $3.2 million, or 15.7%, to $23.3 million for the first three months of 2019 compared to $20.1 million
for the same period in 2018. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.
Salaries and employee benefits increased by $1.7 million, or 16.1%, for the first three months of 2019 compared to the same period in
2018 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 twenty-six stores open as
of March 31, 2019 compared to twenty-three stores at March 31, 2018. We have also started to hire team members for our expansion into the New York market. Our first store in New York City is expected to open by mid-year in 2019.
Occupancy expense, including depreciation and amortization expense, increased by $545,000 or 15.7%, for the first three months of 2019
compared to the same period last year, also as a result of our continuing growth and relocation strategy.
Other real estate expenses totaled $337,000 during the first three months of 2019, an increase of $26,000, or 3.2%, compared to the
same period in 2018.
All other non-interest expenses increased by $880,000, or 15.5%, for the first three months of 2019 compared to the same period last
year due to increases in expenses related to data processing fees, automated teller machine expenses, appraisal and other loan expenses, 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, 2019, the ratio was
2.65% compared to 2.61% for the three month period ended March 31, 2018. The increase in this ratio was mainly due to our growth strategy of adding and relocating stores.
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 96.6% for the first three months of 2019, compared to 88.8% for the first three months of 2018. The increase for the three months
ended March 31, 2019 versus March 31, 2018 was due to non-interest expenses increasing at a faster rate than net interest income and non-interest income.
Provision for Federal Income Taxes
We recorded a provision for income taxes of $92,000 for the three months ended March 31, 2019, compared to a $372,000 provision for
the three months ended March 31, 2018. The $92,000 and $372,000 provision recorded during the first three months of 2019 and 2018 is a normalized provision reflective of the new corporate tax rate included in the Tax Cuts and Jobs Act of 2017.
The effective tax rates for the three-month periods ended March 31, 2019 and 2018 were 18% and 17%, respectively.
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 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.
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 ongoing success of the our growth and expansion strategy, along with the successful integration of the mortgage company and the
limited exposure remaining with current asset quality issues, put us in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against deferred tax assets. Based on the guidance provided in
ASC 740, we believed that the positive evidence considered at March 31, 2019 and December 31, 2018 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 $11.7 million as of March 31, 2019 and $12.3 million as of December 31, 2018. The deferred tax
asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
Net Income and Net Income per Common Share
Net income for the first three months of 2018 was
$426,000, a decrease of $1.4 million, compared to $1.8 million recorded for the first three months of 2018.
The decrease in net income of $1.4 million was related to an increase in interest expense and non-interest expense partially
offset by an increase in interest income and non-interest income.
For the three month period ended March 31, 2019, basic and fully-diluted net income per common share was $0.01 compared to
basic and fully-diluted net income per common share of $0.03 for the three month period ended March 31, 2018.
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 2019 and 2018 was 0.06% and 0.30%, respectively. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net
income by average stockholders’ equity. The ROE for the first three months of 2019 and 2018 was 0.70% and 3.19%, respectively.
Commitments, Contingencies and Concentrations
Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately
$290.1 million and $286.4 million, and standby letters of credit of approximately $14.0 million and $13.9 million, at March 31, 2019 and December 31, 2018, respectively. These financial instruments constitute off-balance sheet arrangements.
Commitments often expire without being drawn upon. Substantially all of the $290.1 million of commitments to extend credit at March 31, 2019 were committed as variable rate credit facilities.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer.
Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that
guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is
based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. 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, 2019 and December 31, 2018 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.
In July 2013, the federal bank regulatory agencies adopted revisions to
the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III.
The final rules generally implemented higher minimum capital requirements, added a new common equity tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity tier 1 capital, additional tier
1 capital or tier 2 capital.
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 the Federal Reserve’s 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 new 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. The capital conservation buffer, which is composed of common equity tier 1 capital, began on January 1, 2016 at the 0.625% level and was phased in over a three year period (increasing by that amount on each
January 1, until it reached 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and were phased-in over a three-year period (beginning at 40% on January 1,
2015 and an additional 20% per year thereafter).
The following table shows the required capital ratios with the conversation buffer over the phase-in period.
|
|
|
Basel III Community Banks
Minimum Capital Ratio Requirements
|
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital (CET1)
|
|
|
5.125
|
%
|
|
|
5.750
|
%
|
|
|
6.375
|
%
|
|
|
7.000
|
%
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
6.625
|
%
|
|
|
7.250
|
%
|
|
|
7.875
|
%
|
|
|
8.500
|
%
|
|
Total capital (to risk-weighted assets)
|
|
|
8.625
|
%
|
|
|
9.250
|
%
|
|
|
9.875
|
%
|
|
|
10.500
|
%
|
The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure;
liquidity, funding and market risks; quality and level or earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor
and control risks.
Management believes that the Company and Republic met, as of March 31,
2019 and December 31, 2018, all capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.
In the current year, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that
notification which management believes would have changed Republic’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, 2019, and December 31, 2018.
|
(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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
232,316
|
|
|
|
12.68
|
%
|
|
$
|
146,533
|
|
|
|
8.00
|
%
|
|
$
|
192,324
|
|
|
|
10.50
|
%
|
|
$
|
183,166
|
|
|
|
10.00
|
%
|
|
Company
|
|
|
264,360
|
|
|
|
14.40
|
%
|
|
|
146,883
|
|
|
|
8.00
|
%
|
|
|
192,784
|
|
|
|
10.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
224,416
|
|
|
|
12.25
|
%
|
|
|
109,900
|
|
|
|
6.00
|
%
|
|
|
155,691
|
|
|
|
8.50
|
%
|
|
|
146,533
|
|
|
|
8.00
|
%
|
|
Company
|
|
|
256,460
|
|
|
|
13.97
|
%
|
|
|
110,162
|
|
|
|
6.00
|
%
|
|
|
156,063
|
|
|
|
8.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
CET 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
224,416
|
|
|
|
12.25
|
%
|
|
|
82,425
|
|
|
|
4.50
|
%
|
|
|
128,216
|
|
|
|
7.00
|
%
|
|
|
119,058
|
|
|
|
6.50
|
%
|
|
Company
|
|
|
245,460
|
|
|
|
13.37
|
%
|
|
|
82,622
|
|
|
|
4.50
|
%
|
|
|
128,522
|
|
|
|
7.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
Tier 1 leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
223,893
|
|
|
|
8.05
|
%
|
|
|
111,539
|
|
|
|
4.00
|
%
|
|
|
111,539
|
|
|
|
4.00
|
%
|
|
|
139,424
|
|
|
|
5.00
|
%
|
|
Company
|
|
|
248,386
|
|
|
|
9.18
|
%
|
|
|
111,723
|
|
|
|
4.00
|
%
|
|
|
111,723
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
231,610
|
|
|
|
13.26
|
%
|
|
$
|
139,722
|
|
|
|
8.00
|
%
|
|
$
|
172,489
|
|
|
|
9.875
|
%
|
|
$
|
174,652
|
|
|
|
10.00
|
%
|
|
Company
|
|
|
262,964
|
|
|
|
15.03
|
%
|
|
|
140,009
|
|
|
|
8.00
|
%
|
|
|
172,824
|
|
|
|
9.875
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
222,995
|
|
|
|
12.77
|
%
|
|
|
104,791
|
|
|
|
6.00
|
%
|
|
|
137,539
|
|
|
|
7.875
|
%
|
|
|
139,722
|
|
|
|
8.00
|
%
|
|
Company
|
|
|
254,349
|
|
|
|
14.53
|
%
|
|
|
105,007
|
|
|
|
6.00
|
%
|
|
|
137,821
|
|
|
|
7.875
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
CET 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
222,995
|
|
|
|
12.77
|
%
|
|
|
78,594
|
|
|
|
4.50
|
%
|
|
|
111,341
|
|
|
|
6.375
|
%
|
|
|
113,524
|
|
|
|
6.50
|
%
|
|
Company
|
|
|
243,349
|
|
|
|
13.90
|
%
|
|
|
78,755
|
|
|
|
4.50
|
%
|
|
|
111,570
|
|
|
|
6.375
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
Tier 1 leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
222,995
|
|
|
|
8.21
|
%
|
|
|
108,685
|
|
|
|
4.00
|
%
|
|
|
108,685
|
|
|
|
4.00
|
%
|
|
|
135,857
|
|
|
|
5.00
|
%
|
|
Company
|
|
|
254,349
|
|
|
|
9.35
|
%
|
|
|
108,800
|
|
|
|
4.00
|
%
|
|
|
108,800
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Dividend Policy
We have not paid any cash dividends on our common stock. We have no plans to pay cash dividends in 2019. 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 $85.9 million at March 31, 2019, compared to $72.5 million at December 31, 2018.
Loan maturities and repayments are another source of asset liquidity. At March 31, 2019, Republic estimated that more than $100.0 million of loans would mature or repay in the six-month period ending September 30, 2019. Additionally, a
significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At March 31, 2019, we had outstanding commitments
(including unused lines of credit and letters of credit) of $290.1 million. Certificates of deposit scheduled to mature in one year totaled $94.4 million at March 31, 2019. 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 $753.9 million at March 31, 2019. At March 31, 2019
and December 31, 2018, we had no outstanding term borrowings with the FHLB. At March 31, 2019, we had no outstanding overnight borrowings with the FHLB. At December 31, 2018, we had outstanding overnight borrowings of $91.4 million with the FHLB.
As of March 31, 2019 and December 31, 2018, FHLB had issued letters of credit, on Republic’s behalf, totaling $100.0 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, 2019 and December 31,
2018.
Investment Securities Portfolio
At March 31, 2019, 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 CMOs, MBSs, municipal securities, and corporate bonds. Available for sale securities totaled
$287.7 million and $321.0 million as of March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, securities classified as available for sale had a net unrealized loss of $3.7 million and a net unrealized loss of $5.7 million at
December 31, 2018.
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 $34.4 million at March 31, 2019.
Individual customers may
have several loans often secured by different collateral.
Credit Quality
Republic’s written lending policies require specified 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 in full
of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period
of repayment performance 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,
2019
|
|
|
December 31,
2018
|
|
|
Loans accruing, but past due 90 days or more
|
|
$
|
1,744
|
|
|
$
|
-
|
|
|
Non-accrual loans
|
|
|
8,932
|
|
|
|
10,341
|
|
|
Total non-performing loans
|
|
|
10,676
|
|
|
|
10,341
|
|
|
Other real estate owned
|
|
|
6,088
|
|
|
|
6,223
|
|
|
Total non-performing assets
|
|
$
|
16,764
|
|
|
$
|
16,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans, net of unearned income
|
|
|
0.72
|
%
|
|
|
0.72
|
%
|
|
Non-performing assets as a percentage of total assets
|
|
|
0.60
|
%
|
|
|
0.60
|
%
|
Non-performing asset balances increased by $200,000 to $16.8 million as of March 31, 2019 from $16.6 million at December 31, 2018.
Non-accrual loans decreased $1.4 million to $8.9 million at March 31, 2019, from $10.3 million at December 31, 2018 due primarily to $1.0 million in loan charge-offs and payments of $686,000 during the three months ended March 31, 2019. The $1.0
million in charge-offs during the first quarter of 2019 was primarily driven by a single loan relationship for which loan losses provisions had been recorded in prior periods. Management determined this amount to be uncollectible and accordingly
charged-off the balance in the first quarter. There were loans accruing, but past due 90 days or more at March 31, 2019 of $1.7 million compared to $0 at December 31, 2018. At March 31, 2019 and December 31, 2018, all identified impaired loans
are internally classified and individually evaluated for impairment in accordance with the guidance under ASC 310.
The following table presents our 30 to 89 days past due loans at March 31, 2019 and December 31, 2018.
|
(dollars in thousands)
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
30 to 59 days past due
|
|
$
|
1,263
|
|
|
$
|
1,135
|
|
|
60 to 89 days past due
|
|
|
-
|
|
|
|
1,574
|
|
|
Total loans 30 to 89 days past due
|
|
$
|
1,263
|
|
|
$
|
2,709
|
|
Other Real Estate Owned
The balance of other real estate owned was $6.1 million at March 31, 2019 and $6.2 million at December 31, 2018. The following table
presents a reconciliation of other real estate owned for the three months ended March 31, 2019 and the year ended December 31, 2018:
|
(dollars in thousands)
|
|
March 31
,
2019
|
|
|
December 31,
2018
|
|
|
Beginning Balance, January 1
st
|
|
$
|
6,223
|
|
|
$
|
6,966
|
|
|
Additions
|
|
|
-
|
|
|
|
315
|
|
|
Valuation adjustments
|
|
|
(16
|
)
|
|
|
(563
|
)
|
|
Dispositions
|
|
|
(119
|
)
|
|
|
(495
|
)
|
|
Ending Balance
|
|
$
|
6,088
|
|
|
$
|
6,223
|
|
At March 31, 2019, we had no credit exposure to “highly leveraged transactions” as defined by the FDIC.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to
establish an allowance against loan losses on a quarterly basis. When an increase in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan losses consists of three components. The first component
is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310
Receivables
. The second component is
allocated to all other loans that are not individually identified as impaired. 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 the 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, 2019 and 2018, and the twelve months ended December
31, 2018 is as follows:
|
(dollars in thousands)
|
|
For the three
months ended
March 31, 2019
|
|
|
For the twelve
months ended
December 31, 2018
|
|
|
For the three
months ended
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
8,615
|
|
|
$
|
8,599
|
|
|
$
|
8,599
|
|
|
Charge‑offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
1,603
|
|
|
|
1,535
|
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial and industrial
|
|
|
929
|
|
|
|
151
|
|
|
|
151
|
|
|
Owner occupied real estate
|
|
|
75
|
|
|
|
465
|
|
|
|
465
|
|
|
Consumer and other
|
|
|
13
|
|
|
|
219
|
|
|
|
198
|
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total charge‑offs
|
|
|
1,017
|
|
|
|
2,438
|
|
|
|
2,349
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
81
|
|
|
|
-
|
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
Consumer and other
|
|
|
1
|
|
|
|
3
|
|
|
|
-
|
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total recoveries
|
|
|
2
|
|
|
|
154
|
|
|
|
-
|
|
|
Net charge‑offs/(recoveries)
|
|
|
1,015
|
|
|
|
2,284
|
|
|
|
2,349
|
|
|
Provision for loan losses
|
|
|
300
|
|
|
|
2,300
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
7,900
|
|
|
$
|
8,615
|
|
|
$
|
6,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
(1)
|
|
$
|
1,468,640
|
|
|
$
|
1,340,117
|
|
|
$
|
1,235,124
|
|
|
As a percent of average loans:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge‑offs (annualized)
|
|
|
0.28
|
%
|
|
|
0.17
|
%
|
|
|
0.77
|
%
|
|
Provision for loan losses (annualized)
|
|
|
0.08
|
%
|
|
|
0.17
|
%
|
|
|
0.13
|
%
|
|
Allowance for loan losses
|
|
|
0.54
|
%
|
|
|
0.64
|
%
|
|
|
0.54
|
%
|
|
Allowance for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
|
0.53
|
%
|
|
|
0.60
|
%
|
|
|
0.53
|
%
|
|
Total non‑performing loans
|
|
|
74.00
|
%
|
|
|
83.31
|
%
|
|
|
47.06
|
%
|
|
(1)
|
Includes non-accruing loans
|
We recorded a provision for loan losses of $300,000 at March 31, 2019. During the first three months of 2019, there was an increase in
the allowance required for loans collectively evaluated for impairment driven by an increase in loans receivable. We recorded a provision for loan losses of $400,000 at March 31, 2018. During the first three months of 2018, there was 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 74.0% at March 31, 2019, compared to 83.3%
at December 31, 2018 and 47.1% at March 31, 2018. Total non-performing loans were $10.7 million, $10.3 million and $14.1 million at March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The decrease in the coverage ratio at March
31, 2019 compared to December 31, 2018 was a result of charge-offs recorded during the first three months of 2019.
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
$4.6 million at
March 31, 2019
and
$4.4 million at December 31, 2018.
The following table provides additional analysis of partially charged-off loans.
|
(dollars in thousands)
|
|
March 31
,
2019
|
|
|
December 31,
2018
|
|
|
Total nonperforming loans
|
|
$
|
10,676
|
|
|
$
|
10,341
|
|
|
Nonperforming and impaired loans with partial charge-offs
|
|
|
4,570
|
|
|
|
4,387
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of nonperforming loans with partial charge-offs to total loans
|
|
|
0.31
|
%
|
|
|
0.31
|
%
|
|
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans
|
|
|
42.81
|
%
|
|
|
42.42
|
%
|
|
Coverage ratio net of nonperforming loans with partial charge-offs
|
|
|
172.87
|
%
|
|
|
196.38
|
%
|
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the three month period ended March 31, 2019,
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.