The following table presents additional information regarding the Company's impaired loans for the three months ended March 31, 2016 and 2015:
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2016 and 2015:
The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of March 31, 2016 and December 31, 2015:
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2016 and December 31, 2015:
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of March 31, 2016 and December 31, 2015:
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $200,000 and $245,000 for the three months ended March 31, 2016 and 2015, respectively.
A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring ("TDR"). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.
The following table summarizes the balance of outstanding TDRs at March 31, 2016 and December 31, 2015:
All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into the Company's estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions. There were no loan modifications made during the three months ended March 31, 2016 and 2015 that met the criteria of a TDR.
There were no residential mortgages in the process of foreclosure as of March 31, 2016 and December 31, 2015. Other real estate owned relating to residential real estate was $157,000 and $193,000 at March 31, 2016 and December 31, 2015.
After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three months ended March 31, 2016. There was one TDR that subsequently defaulted during the year ended December 31, 2015.
Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
An asset or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2016 and December 31, 2015 were as follows:
Fair value adjustments are recorded as loan advisory and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $434,000 and $417,000 for the three months ended March 31, 2016 and 2015, respectively.
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2016 and 2015:
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2016 and December 31, 2015 were as follows:
The table below presents additional quantitative information about level 3 assets measured at fair value on a nonrecurring basis (dollars in thousands):
The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company's actual sales of other real estate owned which are assessed annually.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at March 31, 2016 and December 31, 2015.
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values.
The types of instruments valued based on matrix pricing in active markets include all of the Company's U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. The Level 3 investment securities classified as available for sale are comprised of various issues of trust preferred securities and a single corporate bond.
The trust preferred securities are pools of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations ("CDOs") which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically.
T
he secondary market for these securities has become inactive, and therefore these securities are classified as Level 3 securities. The fair value analysis does not reflect or represent the actual terms or prices at which any party could purchase the securities. There is currently a limited secondary market for the securities and there can be no assurance that any secondary market for the securities will expand.
An independent, third party pricing service is used to estimate the current fair market value of each CDO held in the investment securities portfolio. The calculations used to determine fair value are based on the attributes of the trust preferred securities, the financial condition of the issuers of the trust preferred securities, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of each security and its specific collateral as of March 31, 2016 and December 31, 2015. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and SNL Financial. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss severity percentages. Due to the current state of the global capital and financial markets, the fair market valuation is subject to greater uncertainty that would otherwise exist.
The fair market valuation for each CDO was determined based on discounted cash flow analyses. The cash flows are primarily dependent on the estimated speeds at which the trust preferred securities are expected to prepay, the estimated rates at which the trust preferred securities are expected to defer payments, the estimated rates at which the trust preferred securities are expected to default, and the severity of the losses on securities that do default.
Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of the Company's senior and mezzanine tranches of CDOs. The values of the Company's mezzanine tranches of CDOs are also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of the Company's holdings are not quantifiably estimable.
The fair values of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan. The Company did not write down any loans held for sale during the three months ended March 31, 2016 and the year ended December 31, 2015.
Impaired loans are those that the Company has measured impairment based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows or it is calculated based on discounted collateral values if the loans are collateral dependent.
These assets are carried at the lower of cost or fair value. At March 31, 2016 and December 31, 2015, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.
The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a quarterly basis and adjustments are presented as loan advisory and servicing fees on the statement of operations. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company's market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing the Company's market-based discount ratio assumptions. In all cases, the Company's models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. At March 31, 2016 and December 31, 2015, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are included in the accompanying table.
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.
The carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities. Restricted stock is classified within Level 2 of the fair value hierarchy.
The carrying amounts of accrued interest receivable and accrued interest payable approximates fair value and are classified within Level 2 of the fair value hierarchy.
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Due to their short-term nature, the carrying amounts of short-term borrowings, which include overnight borrowings approximate their fair value. Short-term borrowings are classified within Level 2 of the fair value hierarchy.
Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Due to the significant judgment involved in developing the spreads used to value the subordinated debt, it is classified within Level 3 of the fair value hierarchy.
The estimated fair values of the Company's financial instruments were as follows at March 31, 2016 and December 31, 2015:
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 presentation. 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; impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act; 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, 2015 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.
Regulatory Reform and Legislation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") has and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. For information regarding our updated capital requirements, see "Regulatory Matters" below.
Financial Condition
Assets
Total assets increased by $43.2 million, or 3.0%, to $1.5 billion at March 31, 2016, compared to $1.4 billion at December 31, 2015.
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 $38.1 million, to $65.2 million at March 31, 2016, from $27.1 million at December 31, 2015, primarily due to deposit growth during the first quarter of 2016.
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. Total SBA loans held for sale were $2.0 million at March 31, 2016 as compared to $3.7 million at December 31, 2015. Loans held for sale, as a percentage of total Company assets, were less than 0.2% at March 31, 2016.
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. 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 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 $20.6 million at March 31, 2016. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit at March 31, 2016.
Loans increased $24.3 million, or 2.8%, to $899.1 million at March 31, 2016, compared to $874.8 million at December 31, 2015. This growth was the result of an increase in loan demand in the commercial real estate and owner occupied real estate categories over the first three months of 2016 along with the successful execution of our relationship banking strategy which focuses on customer service.
Investment Securities
Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), municipal securities, corporate bonds, asset-backed securities (ABS), and pooled trust preferred securities (CDO). Available-for-sale securities totaled $260.3 million at March 31, 2016, compared to $284.8 million at December 31, 2015. The decrease was primarily due to the sale and pay down of securities totaling $60.6 million partially offset by the purchase of securities totaling $32.9 million during the first three months of 2016. At March 31, 2016, the portfolio had a net unrealized loss of $980,000 compared to a net unrealized loss of $4.0 million at December 31, 2015. 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 bonds held in our portfolio during the first three months of 2016.
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 (SBIC) and Small Business Administration (SBA) bonds, CMOs, and MBSs.
T
he fair value of securities held-to-maturity totaled $181.3 million
and $171.8 million at March 31, 2016 and December 31, 2015, respectively. The increase was due to the purchase of $10.5 million of held-to-maturity securities partially offset by the pay down of mortgage-backed securities totaling $4.1 million during the first three months of 2016.
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, 2016
and December 31, 2015. 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, 2016 and December 31, 2015, the investment in FHLB of Pittsburgh capital stock totaled $1.0 million and $2.9 million respectively. The decrease at March 31, 2016 was due to the repayment of overnight borrowings which reduced our required investment in FHLB stock. At both March 31, 2016 and December 31, 2015, ACBB capital stock totaled $143,000.
Both the FHLB and ACBB issued dividend payments during the first quarter of 2016.
Other Real Estate Owned
The balance of other real estate owned increased to $11.4 million at March 31, 2016 from $11.3 million at December 31, 2015,
primarily due to transfers from loan receivable totaling $282,000, partially offset by writedowns in the amount of $126,000 on existing foreclosed properties and sales totaling $76,000 at March 31, 2016.
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 $88.3 million, or 7.1%, to $1.3 billion at March 31, 2016 from $1.2 billion at December 31, 2015. The increase was primarily the result of increases in noninterest-bearing demand deposit balances, interest-bearing demand deposit balances, and money market and savings balances partially offset by a reduction in certificate of deposit balances. We will continue to focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction. We are also in the midst of an aggressive expansion and relocation plan which we refer to as "The Power of Red is Back." Over the last two years we have opened five new store locations and have several more in various stages of construction and development. This strategy has also allowed us to nearly eliminate our dependence upon the more volatile sources of funding found in brokered and public fund certificates of deposit.
Short-term Borrowings
As of March 31, 2016, there were no short-term borrowings from FHLB compared to $47.0 at December 31, 2015. The decrease in borrowings was the result of a temporary outflow of deposits at year end which returned in the early part of 2016.
Shareholders' Equity
Total shareholders' equity increased $3.2 million to $116.6 million at March 31, 2016 compared to $113.4 million at December 31, 2015. The increase was primarily due to the reduction in accumulated other comprehensive losses associated with an increase in the market value of the investment securities portfolio and net income of $1.1 million recognized during the first three months of 2016. The shift in market value of the securities portfolio resulting in accumulated other comprehensive losses of $980,000 at March 31, 2016 compared to accumulated other comprehensive losses of $4.0 million at December 31, 2015 was primarily driven by a decrease in market interest rates which drove an increase in value of the securities held in our portfolio.
Results of Operations
Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
We reported net income of $1.1 million or $0.03 per share, for the three months ended March 31, 2016, compared to net income of $528,000, or $0.01 per share, for the three months ended March 31, 2015. The increase in net income was primarily driven by a combined increase in net interest income and non-interest income of 24% which outpaced the 17% increase in non-interest expenses primarily required to support the growth and expansion strategy.
Net interest income was $11.3 million for the three month period ended March 31, 2016 compared to $9.5 million for the three months ended March 31, 2015. Interest income increased $2.0 million, or 18.6%, to $12.8 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. This increase was primarily due to a $182.8 million increase in average investment securities and a $104.1 million increase in average loan balances. Interest expense increased $177,000, or 13.7%, to $1.5 million for the three months ended March 31, 2016 compared to $1.3 million for the three months ended March 31, 2015. This increase was primarily due to an increase in average deposits outstanding.
We recorded a provision for loan losses in the amount of $300,000 for the three months ended March 31, 2016 primarily due to an increase in the allowance required for loans individually evaluated for impairment. For the three months ended March 31, 2015, no provision for loan losses was recorded due to a decrease in the allowance required for loans collectively evaluated for impairment driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.
Non-interest income increased by $835,000 to $2.4 million during the three months ended March 31, 2016 compared to $1.6 million during the three months ended March 31, 2015. The increase during the three months ended March 31, 2016 was primarily due to gains on sale of investment securities, as well as increases in gains on the sale of SBA loans and service fees on deposit accounts.
Non-interest expenses increased $1.8 million to $12.3 million during the three months ended March 31, 2016 compared to $10.5 million during the three months ended March 31, 2015. This increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy over the last twelve months. Annual merit increases also contributed to higher salary costs in the first quarter of 2016.
Return on average assets and average equity from continuing operations was 0.30% and 3.37%, respectively, during the three months ended March 31, 2016 compared to 0.17% and 1.89%, respectively, for the three months ended March 31, 2015.
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.
All yields are adjusted for tax equivalency.
Average Balances and Net Interest Income
|
|
For the three months ended
March 31, 2016
|
|
|
For the three months ended
March 31, 2015
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
(1)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
(1)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning assets
|
|
$
|
47,109
|
|
|
$
|
63
|
|
|
|
0.54
|
%
|
|
$
|
130,418
|
|
|
$
|
77
|
|
|
|
0.24
|
%
|
Investment securities and restricted stock
|
|
|
437,514
|
|
|
|
2,862
|
|
|
|
2.62
|
%
|
|
|
254,741
|
|
|
|
1,674
|
|
|
|
2.63
|
%
|
Loans receivable
|
|
|
887,499
|
|
|
|
10,046
|
|
|
|
4.55
|
%
|
|
|
783,379
|
|
|
|
9,145
|
|
|
|
4.73
|
%
|
Total interest-earning assets
|
|
|
1,372,122
|
|
|
|
12,971
|
|
|
|
3.80
|
%
|
|
|
1,168,538
|
|
|
|
10,896
|
|
|
|
3.78
|
%
|
Other assets
|
|
|
87,685
|
|
|
|
|
|
|
|
|
|
|
|
61,974
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,459,807
|
|
|
|
|
|
|
|
|
|
|
$
|
1,230,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand – non-interest bearing
|
|
$
|
261,810
|
|
|
|
|
|
|
|
|
|
|
$
|
226,708
|
|
|
|
|
|
|
|
|
|
Demand – interest bearing
|
|
|
412,558
|
|
|
|
415
|
|
|
|
0.40
|
%
|
|
|
295,630
|
|
|
|
290
|
|
|
|
0.40
|
%
|
Money market & savings
|
|
|
559,458
|
|
|
|
609
|
|
|
|
0.44
|
%
|
|
|
489,779
|
|
|
|
553
|
|
|
|
0.46
|
%
|
Time deposits
|
|
|
65,414
|
|
|
|
141
|
|
|
|
0.87
|
%
|
|
|
75,485
|
|
|
|
175
|
|
|
|
0.94
|
%
|
Total deposits
|
|
|
1,299,240
|
|
|
|
1,165
|
|
|
|
0.36
|
%
|
|
|
1,087,602
|
|
|
|
1,018
|
|
|
|
0.38
|
%
|
Total interest-bearing deposits
|
|
|
1,037,430
|
|
|
|
1,165
|
|
|
|
0.45
|
%
|
|
|
860,894
|
|
|
|
1,018
|
|
|
|
0.48
|
%
|
Other borrowings
|
|
|
37,428
|
|
|
|
306
|
|
|
|
3.29
|
%
|
|
|
22,516
|
|
|
|
276
|
|
|
|
4.97
|
%
|
Total interest-bearing liabilities
|
|
|
1,074,858
|
|
|
|
1,471
|
|
|
|
0.55
|
%
|
|
|
883,410
|
|
|
|
1,294
|
|
|
|
0.59
|
%
|
Total deposits and other borrowings
|
|
|
1,336,668
|
|
|
|
1,471
|
|
|
|
0.44
|
%
|
|
|
1,110,118
|
|
|
|
1,294
|
|
|
|
0.47
|
%
|
Non interest-bearing other liabilities
|
|
|
7,478
|
|
|
|
|
|
|
|
|
|
|
|
7,094
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
115,661
|
|
|
|
|
|
|
|
|
|
|
|
113,300
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,459,807
|
|
|
|
|
|
|
|
|
|
|
$
|
1,230,512
|
|
|
|
|
|
|
|
|
|
Net interest income
(2)
|
|
|
|
|
|
$
|
11,500
|
|
|
|
|
|
|
|
|
|
|
$
|
9,602
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
3.19
|
%
|
Net interest margin
(2)
|
|
|
|
|
|
|
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Yields on investments are calculated based on amortized cost.
(2)
Net interest income and net interest margin are presented on a tax equivalent basis. Net interest income has been increased over the financial statement amount by $209 and $135 for the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016, as compared to the three months ended March 31, 2015. 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.
|
|
For the three months ended
March 31, 2016 vs. 2015
|
|
|
|
Changes due to:
|
|
(dollars in thousands)
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Total
Change
|
|
Interest earned:
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other
interest-earning assets
|
|
$
|
(111
|
)
|
|
$
|
97
|
|
|
$
|
(14
|
)
|
Securities
|
|
|
1,196
|
|
|
|
(8
|
)
|
|
|
1,188
|
|
Loans
|
|
|
1,168
|
|
|
|
(267
|
)
|
|
|
901
|
|
Total interest-earning assets
|
|
|
2,253
|
|
|
|
(178
|
)
|
|
|
2,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
117
|
|
|
|
8
|
|
|
|
125
|
|
Money market and savings
|
|
|
76
|
|
|
|
(20
|
)
|
|
|
56
|
|
Time deposits
|
|
|
(21
|
)
|
|
|
(13
|
)
|
|
|
(34
|
)
|
Total deposit interest expense
|
|
|
172
|
|
|
|
(25
|
)
|
|
|
147
|
|
Other borrowings
|
|
|
22
|
|
|
|
8
|
|
|
|
30
|
|
Total interest expense
|
|
|
194
|
|
|
|
(17
|
)
|
|
|
177
|
|
Net interest income
|
|
$
|
2,059
|
|
|
$
|
(161
|
)
|
|
$
|
1,898
|
|
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, for the first quarter of 2016 increased $1.9 million, or 19.8%, over the same period in 2015. Interest income, on a fully tax-equivalent basis, on interest-earning assets totaled $13.0 million and $10.9 million for the first quarter of 2016 and 2015, respectively. The increase in interest income was the result of a $182.8 million increase in average investment securities and a $104.1 million increase in average loans receivable partially offset by an 18 basis point decrease in loan yields for the three months ended March 31, 2016 as compared to March 31, 2015.
Total interest expense for the first quarter of 2016 increased by $177,000, or 13.7%, for the first quarter of 2016 to $1.5 million from $1.3 million for the first quarter of 2015. Interest expense on deposits increased by $147,000, or 14.4%, for the first quarter of 2016 versus the same period in 2015.
Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 3.25% during the first quarter of 2016 versus 3.19% during the first quarter of 2015. 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 quarter of 2016 and 2015, the fully tax-equivalent net interest margin was 3.37% and 3.33%, respectively. The net interest margin for the first quarter ending March 31, 2016 increased primarily as a result of an increase in average investment securities and an increase in average loans receivable partially offset by a decrease in the yield on loans receivable and an increase in average total interest bearing deposits.
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. We recorded a provision for loan losses of $300,000 for the three month period ended March 31, 2016. We did not record a provision for loan losses for the three months ended March 31, 2015. During the first quarter of 2016, there was an increase in the allowance for loans individually evaluated for impairment. During the first quarter of 2015, there was a decrease in the allowance required for loans collectively evaluated for impairment driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.
Nonperforming assets at March 31, 2016 totaled $31.2 million, or 2.11%, of total assets, up $7.3 million, or 30.6%, from $23.9 million, or 1.66%, of total assets at December 31, 2015 and up $2.5 million, or 8.5%, from $28.8 million, or 2.28%, of total assets at March 31, 2015. Loans accruing, but past due 90 days or more increased to $8.0 million at March 31, 2016 from $0 at December 31, 2015 and $5.0 million at March 31, 2015, due primarily to one loan relationship which is currently in the process of collection.
Noninterest Income
Total noninterest income increased by $835,000, or 52.9%, from the same period in 2015. Gains on the sale of investment securities totaled $296,000 for the first quarter of 2016. Gains on the sale of SBA loans totaled $833,000 for the first quarter of 2016 versus $578,000 for the same period in 2015. The increase of $255,000 in gains on the sale of SBA loans was driven by an increase in SBA loan balances sold during the first quarter of 2016. Service fees on deposit accounts totaled $570,000 for the first quarter of 2016, an increase of $207,000 over the first quarter of 2015, due to the growth in the number of customer accounts and deposit balances.
Noninterest Expenses
Total noninterest expenses increased $1.8 million, or 17.4%, for the first quarter of 2016 compared to same period in 2015. A detailed explanation of noninterest expenses for certain categories for the three months ended March 31, 2016 and March 31, 2015 is presented in the following paragraphs.
Salaries and employee benefits which represent the largest component of noninterest expenses, increased by $830,000, or 15.9%, for the first quarter of 2016 compared to the first quarter of 2015 which was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores. There were seventeen stores open as of March 31, 2016 compared to fifteen stores at March 31, 2015. In addition, two additional stores were under construction as of March 31, 2016 and opened in the second quarter of 2016.
Occupancy expense increased by $240,000, or 20.6%, and depreciation and amortization increased by $246,000, or 34.0%, for the first quarter of 2016 versus the same period last year also as a result of our continuing growth and relocation strategy.
Other real estate expenses totaled $585,000 during the first quarter of 2016, an increase of $208,000, or 55.2%, compared to the first quarter of 2015. This increase was a result of higher costs to carry foreclosed properties in the current period.
All other noninterest expenses increased by $301,000, or 9.9%, compared to the same quarter in 2015. This increase was mainly attributable to data processing expense, transaction fees, regulatory assessment expense, and other expenses resulting from our growth strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net noninterest expenses to average assets. For the purposes of this calculation, net noninterest expenses equal noninterest expenses less noninterest income and non-recurring expenses. For the three month period ended March 31, 2016, the ratio equaled 2.74% compared to 2.95% for the three month period ended March 31, 2015, respectively, reflecting higher average balances related to our growth strategy of adding and relocating stores.
Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of noninterest expenses to net interest income plus noninterest income. The efficiency ratio equaled 90.1% for the first three months of 2016, compared to 95.2% for the first months of 2015. The decrease for the three months ended March 31, 2016 versus March 31, 2015 was due to a 24.1% increase in combined net interest and noninterest income compared to a 17.4% increase in noninterest expenses.
Provision (Benefit) for Federal Income Taxes
We recorded a benefit for income taxes of $25,000 for the three months ended March 31, 2016, compared to a $2,000 benefit for the three months ended March 31, 2015. The $25,000 benefit recorded during the first three months of 2016 was the net result of a tax provision in the amount of $255,000 calculated on the net profit generated during the period using our normal estimated tax rate, offset by an adjustment to the deferred tax asset valuation allowance in the amount of $280,000. The effective tax rates for the three-month periods ended March 31, 2016 and 2015 were 24% and 20%, respectively, excluding an adjustment to the deferred tax asset valuation allowance.
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 financial institutions and their 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 for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years. In order to realize our deferred tax assets, we must generate sufficient taxable income in such future years.
In assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.
When calculating an estimate for a valuation allowance, we assessed the possible sources of taxable income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in ASC 740. We did not use projections of future taxable income, exclusive of reversing temporary differences and carryforwards, as a factor in the analysis. We will exclude future taxable income as a factor until we can show increasing and sustainable profitability. Based on the analysis of available positive and negative evidence, we determined that a valuation allowance should be recorded as of March 31, 2016 and December 31, 2015.
We did assess tax planning strategies as defined under ASC 740 to determine the amount of a valuation allowance. Strategies reviewed included the sale of investment securities and loans with fair values greater than book values, redeployment of cash and cash equivalents into higher yielding investment options, a switch from tax-exempt to taxable investments and loans, and the election of a decelerated depreciation method for tax purposes on future fixed asset purchases. We believe that these tax planning strategies are (a) prudent and feasible, (b) steps that we would not ordinarily take, but would take to prevent an operating loss or tax credit carryforward from expiring unused, and (c) would result in the realization of existing deferred tax assets. These tax planning strategies, if implemented, would result in taxable income in the first full reporting period after deployment and accelerate the recovery of deferred tax asset balances if faced with the inability to recover those assets or the risk of potential expiration. We believe that these are viable tax planning strategies and appropriately considered in the analysis at this time, but may not align with the strategic direction of the organization today and therefore, have no present intention to implement such strategies.
The net deferred tax asset balance before consideration of a valuation allowance was $18.8 million as of March 31, 2016 and $20.2 million as of December 31, 2015. After assessment of all available tax planning strategies, we determined that a partial valuation allowance in the amount of $13.4 million as of March 31, 2016 and $13.7 million as of December 31, 2015 should be recorded.
The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. When the determination is made to include projections of future taxable income as a factor in recovering the deferred tax asset, the valuation allowance will be reduced accordingly resulting in a corresponding increase in net income.
Net Income and Net Income per Common Share
Net income for the first quarter of 2016 was $1.1 million, an increase of $557,000, compared to $528,000 recorded for the first quarter of 2015. The increase in net income in the first quarter of 2016 was due to an increase of $1.5 million in net interest income after provision for loan losses, an increase of $835,000 in noninterest income, partially offset by an increase of $1.8 million in noninterest expenses.
For the three month period ended March 31, 2016, basic and fully-diluted net income per common share was $0.03 compared to basic and fully-diluted net income per common share of $0.01 for the three month period ended March 31, 2015.
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 quarter of 2016 and 2015 was 0.30% and 0.17%, 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 quarter of 2016 was 3.77%, compared to 1.89% for the first quarter of 2015.
Commitments, Contingencies and Concentrations
Financial instruments, whose contract amounts represent potential credit risk, were commitments to extend credit of approximately $170.4 million and $165.1 million, and standby letters of credit of approximately $5.1 million and $5.2 million, at March 31, 2016 and December 31, 2015, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $170.4 million of commitments to extend credit at March 31, 2016 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 guidelines. The current amount of liability as of March 31, 2016 and December 31, 2015 for guarantees under standby letters of credit issued is not material.
Regulatory Matters
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies' capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implemented higher minimum capital requirements, added a new common equity tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements were a common equity tier 1 capital ratio of 4.5% (6.5% to be considered "well capitalized") and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered "well capitalized"); the total capital ratio remained at 8.0% under the new rules (10.0% to be considered "well capitalized").
Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. We have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. The Company believes that, as of March 31, 2016, all capital adequacy requirements are met under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.
The following table presents our regulatory capital ratios at March 31, 2016, and December 31, 2015.
(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, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
139,181
|
|
|
|
12.48
|
%
|
|
|
$
|
89,182
|
|
|
|
8.00
|
%
|
|
$
|
96,150
|
|
|
|
8.625
|
%
|
|
$
|
111,478
|
|
|
|
10.00
|
%
|
Company
|
|
|
145,591
|
|
|
|
13.00
|
%
|
|
|
|
89,555
|
|
|
|
8.00
|
%
|
|
|
96,551
|
|
|
|
8.625
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
130,152
|
|
|
|
11.67
|
%
|
|
|
|
66,887
|
|
|
|
6.00
|
%
|
|
|
73,854
|
|
|
|
6.625
|
%
|
|
|
89,182
|
|
|
|
8.00
|
%
|
Company
|
|
|
136,562
|
|
|
|
12.20
|
%
|
|
|
|
67,166
|
|
|
|
6.00
|
%
|
|
|
74,162
|
|
|
|
6.625
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
130,152
|
|
|
|
11.67
|
%
|
|
|
|
50,165
|
|
|
|
4.50
|
%
|
|
|
57,132
|
|
|
|
5.125
|
%
|
|
|
72,461
|
|
|
|
6.50
|
%
|
Company
|
|
|
114,762
|
|
|
|
10.25
|
%
|
|
|
|
50,374
|
|
|
|
4.50
|
%
|
|
|
57,371
|
|
|
|
5.125
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
130,152
|
|
|
|
8.97
|
%
|
|
|
|
58,062
|
|
|
|
4.00
|
%
|
|
|
58,062
|
|
|
|
4.00
|
%
|
|
|
72,577
|
|
|
|
5.00
|
%
|
Company
|
|
|
136,562
|
|
|
|
9.37
|
%
|
|
|
|
58,271
|
|
|
|
4.00
|
%
|
|
|
58,271
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
138,566
|
|
|
|
12.65
|
%
|
|
|
$
|
87,617
|
|
|
|
8.00
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
109,521
|
|
|
|
10.00
|
%
|
Company
|
|
|
145,089
|
|
|
|
13.19
|
%
|
|
|
|
87,976
|
|
|
|
8.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
129,863
|
|
|
|
11.86
|
%
|
|
|
|
65,712
|
|
|
|
6.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
87,617
|
|
|
|
8.00
|
%
|
Company
|
|
|
136,386
|
|
|
|
12.40
|
%
|
|
|
|
65,982
|
|
|
|
6.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
129,863
|
|
|
|
11.86
|
%
|
|
|
|
49,284
|
|
|
|
4.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
71,189
|
|
|
|
6.50
|
%
|
Company
|
|
|
114,586
|
|
|
|
10.42
|
%
|
|
|
|
49,487
|
|
|
|
4.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
129,863
|
|
|
|
9.22
|
%
|
|
|
|
56,328
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
70,410
|
|
|
|
5.00
|
%
|
Company
|
|
|
136,386
|
|
|
|
9.65
|
%
|
|
|
|
56,531
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Dividend Policy
We have not paid any cash dividends on our common stock. We have no plans to pay cash dividends in 2016. 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 and amounts due from banks.
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 $65.2 million at March 31, 2016, compared to $27.1 million at December 31, 2015. Loan maturities and repayments are another source of asset liquidity. At March 31, 2016, Republic estimated that more than $40.0 million of loans would mature or repay in the six-month period ending September 30, 2016. 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, 2016, we had outstanding commitments (including unused lines of credit and letters of credit) of $175.5 million. Certificates of deposit scheduled to mature in one year totaled $49.7 million at March 31, 2016. 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 $406.0 million at March 31, 2016. At March 31, 2016 and December 31, 2015, we had no outstanding term borrowings with the FHLB. At March 31, 2016, we had no short-term borrowings. As of December 31, 2015, we had outstanding borrowings with the FHLB of $47.0 million. As of March 31, 2016, FHLB had issued letters of credit, on Republic's behalf, totaling $75.1 million against our available credit line. We also established a contingency line of credit of $10.0 million with ACBB to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit at both March 31, 2016 and December 31, 2015.
Investment Securities Portfolio
At March 31, 2016, 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, corporate bonds, ABSs, and CDOs. Available-for-sale securities totaled $260.3 million and $284.8 million as of March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, the portfolio had a net unrealized loss of $980,000 and a net unrealized loss of $4.0 million at December 31, 2015.
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 $20.6 million at March 31, 2016.
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,
2016
|
|
|
December 31,
2015
|
|
Loans accruing, but past due 90 days or more
|
|
$
|
8,037
|
|
|
$
|
-
|
|
Non-accrual loans
|
|
|
11,819
|
|
|
|
12,622
|
|
Total non-performing loans
|
|
|
19,856
|
|
|
|
12,622
|
|
Other real estate owned
|
|
|
11,393
|
|
|
|
11,313
|
|
Total non-performing assets
|
|
$
|
31,249
|
|
|
$
|
23,935
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans, net of unearned income
|
|
|
2.21
|
%
|
|
|
1.44
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
2.11
|
%
|
|
|
1.66
|
%
|
Non-performing asset balances increased by $7.3 million to $31.2 million as of March 31, 2016 from $23.9 million at December 31, 2015. Non-accrual loans decreased $803,000 to $11.8 million at March 31, 2016, from $12.6 million at December 31, 2015. Loans accruing, but past due 90 days or more increased to $8.0 million at March 31, 2016, due primarily to one loan relationship which is currently in the process of collection. In addition to non-accrual loans, impaired loans also include loans that are currently performing but potential credit concerns with the borrowers' financial condition have caused management to have doubts as to the ability of such borrowers to continue to comply with present repayment terms. At March 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.
(dollars in thousands)
|
March 31,
|
|
December 31,
|
|
2016
|
|
2015
|
30 to 59 days past due
|
$
|
4,513
|
|
$
|
2,878
|
60 to 89 days past due
|
|
17
|
|
|
9,315
|
Total loans 30 to 89 days past due
|
$
|
4,530
|
|
$
|
12,193
|
Other Real Estate Owned
The balance of other real estate owned increased to $11.4 million at March 31, 2016 from $11.3 million at December 31, 2015. The following table presents a reconciliation of other real estate owned for the three months ended March 31, 2016 and the year ended December 31, 2015:
(dollars in thousands)
|
|
March 31
,
2016
|
|
|
December 31,
2015
|
|
Beginning Balance, January 1
st
|
|
$
|
11,313
|
|
|
$
|
3,715
|
|
Additions
|
|
|
282
|
|
|
|
11,459
|
|
Valuation adjustments
|
|
|
(126
|
)
|
|
|
(3,069
|
)
|
Dispositions
|
|
|
(76
|
)
|
|
|
(792
|
)
|
Ending Balance
|
|
$
|
11,393
|
|
|
$
|
11,313
|
|
At March 31, 2016, 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. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310 ("non-impaired loans"). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450. 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 seriously inadequate and unlikely to repay the debt, we then look to the other available 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, 2016 and 2015, and the twelve months ended December 31, 2015 is as follows:
(dollars in thousands)
|
|
For the three
months ended
March 31, 2016
|
|
|
For the twelve
months ended
December 31, 2015
|
|
|
For the three
months ended
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
8,703
|
|
|
$
|
11,536
|
|
|
$
|
11,536
|
|
Charge‑offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
2,624
|
|
|
|
231
|
|
Construction and land development
|
|
|
-
|
|
|
|
260
|
|
|
|
222
|
|
Commercial and industrial
|
|
|
18
|
|
|
|
408
|
|
|
|
169
|
|
Owner occupied real estate
|
|
|
28
|
|
|
|
133
|
|
|
|
55
|
|
Consumer and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total charge‑offs
|
|
|
46
|
|
|
|
3,425
|
|
|
|
677
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
Construction and land development
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
Commercial and industrial
|
|
|
72
|
|
|
|
49
|
|
|
|
45
|
|
Owner occupied real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other
|
|
|
-
|
|
|
|
34
|
|
|
|
31
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total recoveries
|
|
|
72
|
|
|
|
92
|
|
|
|
85
|
|
Net charge‑offs/(recoveries)
|
|
|
(26
|
)
|
|
|
3,333
|
|
|
|
592
|
|
Provision for loan losses
|
|
|
300
|
|
|
|
500
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
9,029
|
|
|
$
|
8,703
|
|
|
$
|
10,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
(1)
|
|
$
|
887,499
|
|
|
$
|
820,820
|
|
|
$
|
783,379
|
|
As a percent of average loans:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge‑offs (annualized)
|
|
|
(0.01
|
)%
|
|
|
0.41
|
%
|
|
|
0.31
|
%
|
Provision for loan losses (annualized)
|
|
|
0.14
|
%
|
|
|
0.06
|
%
|
|
|
-
|
%
|
Allowance for loan losses
|
|
|
1.02
|
%
|
|
|
1.06
|
%
|
|
|
1.40
|
%
|
Allowance for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
|
1.00
|
%
|
|
|
0.99
|
%
|
|
|
1.39
|
%
|
Total non‑performing loans
|
|
|
45.47
|
%
|
|
|
68.95
|
%
|
|
|
43.83
|
%
|
(1)
Includes non-accruing loans.
We recorded a provision for loan losses of $300,000 for the three month period ended March 31, 2016. We did not record a provision for loan losses for the three months ended March 31, 2015. During the first quarter of 2016, there was an increase in the allowance for loans individually evaluated for impairment. During the first quarter of 2015, there was a decrease in the allowance required for loans collectively evaluated for impairment driven by a reduction in the factor used in the calculation related to historical charge-offs which has declined as a result of lower charge-offs in recent years.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 45.47% at March 31, 2016, compared to 68.95% at December 31, 2015 and 43.83% at March 31, 2015. Total non-performing loans were $19.9 million, $12.6 million and $25.0 million at March 31, 2016, December 31, 2015 and March 31, 2015, respectively. The decrease in the coverage ratio at March 31, 2016 compared to December 31, 2015 was a result of an increase in non-performing assets, specifically loans past due 90 days or more and still accruing.
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 are also assessed when considering a charge-off. We recorded net recoveries of $26,000 during the three month period ended March 31, 2016, compared to net charge-offs of $592,000 during the three month period ended March 31, 2015.
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 $2.5 million at March 31, 2016
compared to $3.4 million at December 31, 2015.
The following table provides additional analysis of partially charged-off loans.
(dollars in thousands)
|
|
March 31
,
2016
|
|
|
December 31,
2015
|
|
Total nonperforming loans
|
|
$
|
19,856
|
|
|
$
|
12,622
|
|
Nonperforming and impaired loans with partial charge-offs
|
|
|
2,542
|
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
Ratio of nonperforming loans with partial charge-offs to total loans
|
|
|
0.28
|
%
|
|
|
0.39
|
%
|
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans
|
|
|
12.80
|
%
|
|
|
27.18
|
%
|
Coverage ratio net of nonperforming loans with partial charge-offs
|
|
|
355.19
|
%
|
|
|
253.66
|
%
|
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the three month period ended March 31, 2016, there were no changes made to this policy.
Recent Accounting Pronouncements
ASU 2014-04
In January 2014, the FASB issued ASU 2014-04, "Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure – a consensus of the FASB Emerging Issues Task Force." The guidance clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate property recognized. For public business entities, the ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU was effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.
The adoption of ASU 2014-04 did not have a material effect on the Company's consolidated financial statements.
ASU 2014-09
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs – Contracts with Customers (Subtopic 340-40)." The purpose of this guidance is to clarify the principles for recognizing revenue. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, early adoption of the update will be effective for interim and annual periods beginning after December 15, 2016. For public companies that elect to defer the update, adoption will be effective for interim and annual periods beginning after December 15, 2017. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect a material impact. In August 2015, the FASB issued ASU 2015-14,
Revenue from
Contracts with The Company (Topic 606): Deferral of the Effective Date
. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company does not expect this ASU to have a significant impact on its financial condition or results of operations.
ASU 2014-14
In August 2014, the FASB issued ASU 2014-14, "Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure - a consensus of the FASB Emerging Issues Task Force."
The amendments in this Update address a practice issue related to the classification of certain foreclosed residential and nonresidential mortgage loans that are either fully or partially guaranteed under government programs. Specifically, creditors should reclassify loans that meet certain conditions to "other receivables" upon foreclosure, rather than reclassifying them to other real estate owned (OREO). The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The ASU was effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For all other entities, the amendments are effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. The Company adopted ASU 2014-14 effective January 1, 2015. The adoption of ASU 2014-14 did not have a material effect on the Company's consolidated financial statements.
ASU 2016-01
In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01,
Financial Instruments - Overall.
The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
ASU 2016-02
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02,
Leases.
From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn't convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
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.