The following discussion and analysis of the results of operations and financial condition should be read in conjunction with Item 6 “Selected Financial Data” and the consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, “Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.
2020 was a year filled with unprecedented challenges and economic uncertainty. During this time the Republic Bank Team maintained its commitment to outstanding customer service and satisfaction while driving positive momentum. We are extremely proud of our participation and performance in the PPP loan program which provided crucial funding to businesses throughout our footprint during a time of extreme economic distress. In recognition of our commitment to FANatical customer service we were named “America’s #1 Bank for Service” as a result of a survey conducted by Forbes during 2020. As we put an incredibly challenging year behind us, we look forward to growing our rapidly expanding network of FANS in the future.
During 2020 we continued to demonstrate our ability to produce strong organic growth in asset, loan and deposit balances even in an economic environment inhibited by governmental restrictions and the ongoing effects of the COVID-19 pandemic. We were also able to drive significant improvement in earnings despite the challenges faced in the current year. Our focus on cost control measures continues to drive positive operating leverage. We have consistently stated that it is our goal to deliver best in class service across all delivery channels; in-store, by phone, online and mobile options....as we strive to create new FANS each and every day. We are focused on meeting that goal in the most efficient manner possible.
The Paycheck Protection Program (“PPP”) included in the CARES Act authorized financial institutions to make loans to companies that have been impacted by the devastating economic effects of the coronavirus (COVID-19) pandemic. We responded by quickly developing a process to accept applications for the program not only from our valued small business customers, but from non-customers throughout our community as well.
Our selected financial data contains a non-GAAP financial measure calculated using non-GAAP amounts. This measure is tangible book value per common share. Tangible book value per share adjusts the numerator by the amount of Goodwill and Other Intangible Assets (as a reduction of Shareholders’ Equity). Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of non-GAAP measures provides additional clarity when assessing our financial results and use of equity. Disclosures of this type should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
The following table provides a reconciliation of tangible book value per common share as of December 31, 2020 and December 31, 2019.
In reviewing and understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, carrying values of other real estate owned, other than temporary impairment of securities, fair value of financial instruments and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies related to the allowance for loan losses, other-than-temporary impairment of securities, loans receivable, mortgage loans held for sale, interest rate lock commitments, forward loan sale commitments, goodwill, other real estate owned, and deferred income taxes as being critical.
The allowance for credit losses is an amount that represents management’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, the estimate of the allowance for credit losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are categorized as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment, include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower’s prior payment record. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.
For commercial, consumer, and residential loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Pursuant to the CARES Act, loan modifications made from March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the COVID–19 outbreak (the “national emergency”), a financial institution may elect to suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a troubled debt restructure (“TDR”), including impairment accounting. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declares a termination of the national emergency related to the COVID-19 pandemic. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. The Company elected to exclude modifications meeting these requirements from TDR classification.
As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of the allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan to values on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic begin to unfold. Based on the incurred loss methodology currently utilized, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and length of the economic downturn and the full impact on our loan portfolio.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or loss are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Commercial real estate and owner occupied real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and owner occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
Construction and land development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.
Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals originated through the Company’s retail network, which are typically secured by personal property or unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater credit risk because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Residential mortgage loans are secured by one to four family dwelling units. This group consists of first mortgages and are originated primarily at loan to value ratios of 80% or less.
Paycheck Protection Program (“PPP”) loans, authorized by the Small Business Administration (“SBA”) and Treasury Department through a provision in the CARES Act, are SBA-guaranteed loans to small business to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers and amortizes certain origination and commitment fees, and certain direct loan origination costs over the contractual life of the related loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of discounts related to loans purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest 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 of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Results of Operations
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
We reported net income available to common shareholders of $4.1 million, or $0.07 per diluted share, for the twelve months ended December 31, 2020 compared to a net loss of $3.5 million, or ($0.06) per diluted share, for the twelve months ended December 31, 2019. Earnings in 2020 were positively impacted by our participation in the PPP program and the Company’s focus on cost control initiatives while driving revenue growth.
Net interest income for the twelve months ended December 31, 2020 increased $14.0 million to $91.8 million as compared to $77.8 million for the twelve months ended December 31, 2019. Total assets grew by $1.7 billion, or 52%, during 2019 to $5.1 billion. Growth in net interest income of $14.0 million was a result of an increase in interest income of $10.1 million and a reduction in interest expense of $3.9 million. The increase in interest income of $10.1 million, or 10%, was driven by an increase in average interest-earning assets, primarily loans receivable. Interest expense decreased $3.9 million, or 15%, primarily due to a decrease in the rate on average interest-bearing liabilities. The net interest margin decreased by 34 basis points to 2.51% during the twelve months ended December 31, 2020 compared to 2.85% during the twelve months ended December 31, 2019.
We recorded a loan loss provision in the amount of $4.2 million, an increase of $2.3 million for the twelve months ended December 31, 2020 compared to a provision of $1.9 million during the twelve months ended December 31, 2019. The provision recorded for the twelve months ended December 31, 2020 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. The increase in the provision year over year was primarily a result of an increase in the allowance required for loans collectively evaluated for impairment during 2020. The increase was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment caused by the impact of the COVID-19 pandemic.
Non-interest income increased $12.5 million to $36.2 million during the twelve months ended December 31, 2020 as compared to $23.7 million during the twelve months ended December 31, 2019. The increase was primarily driven by an increase in mortgage banking income, higher loan and servicing fees, an increase in service fees on deposit accounts, and gains on sale of investment securities during the twelve months ended December 31, 2020.
Non-interest expenses increased $12.9 million to $117.4 million during the twelve months ended December 31, 2020 as compared to $104.5 million during the twelve months ended December 31, 2019. The increase was primarily driven by a one time charge for goodwill impairment, higher salaries, employee benefits, 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”.
Return on average assets and average equity were 0.13% and 1.86%, respectively, during the twelve months ended December 31, 2020 compared to (0.12%) and (3.41%), respectively, for the twelve months ended December 31, 2019.
Average Balances and Net Interest Income
Historically, our earnings have depended primarily upon Republic’s net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, a non-GAAP measure, using a rate of 21% in 2020, 21% in 2019, and 21% in 2018.
Average Balances and Net Interest Income
|
|
For the Year Ended
December 31, 2020
|
|
|
For the Year Ended
December 31, 2019
|
|
|
For the Year Ended
December 31, 2018
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Yield/
Rate(1)
|
|
|
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
|
|
$
|
242,132
|
|
|
$
|
514
|
|
|
0.21%
|
|
|
$
|
129,528
|
|
|
$
|
2,571
|
|
|
1.98%
|
|
|
$
|
40,931
|
|
|
$
|
847
|
|
|
2.07%
|
|
Investment securities and restricted stock
|
|
|
1,086,386
|
|
|
|
21,166
|
|
|
1.95%
|
|
|
|
1,074,706
|
|
|
|
27,886
|
|
|
2.59%
|
|
|
|
1,037,810
|
|
|
|
27,316
|
|
|
2.63%
|
|
Loans receivable
|
|
|
2,359,169
|
|
|
|
93,854
|
|
|
3.98%
|
|
|
|
1,544,904
|
|
|
|
74,946
|
|
|
4.85%
|
|
|
|
1,340,117
|
|
|
|
64,455
|
|
|
4.81%
|
|
Total interest-earning assets
|
|
|
3,687,687
|
|
|
|
115,534
|
|
|
3.13%
|
|
|
|
2,749,138
|
|
|
|
105,403
|
|
|
3.83%
|
|
|
|
2,418,858
|
|
|
|
92,618
|
|
|
3.83%
|
|
Other assets
|
|
|
265,893
|
|
|
|
|
|
|
|
|
|
|
229,767
|
|
|
|
|
|
|
|
|
|
|
131,369
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,953,580
|
|
|
|
|
|
|
|
|
|
$
|
2,978,905
|
|
|
|
|
|
|
|
|
|
$
|
2,550,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand – non-interest bearing
|
|
$
|
926,692
|
|
|
|
|
|
|
|
|
|
$
|
555,385
|
|
|
|
|
|
|
|
|
|
$
|
488,995
|
|
|
|
|
|
|
|
|
Demand – interest bearing
|
|
|
1,509,826
|
|
|
|
12,645
|
|
|
0.84%
|
|
|
|
1,184,530
|
|
|
|
15,621
|
|
|
1.32%
|
|
|
|
918,508
|
|
|
|
7,946
|
|
|
0.87%
|
|
Money market & savings
|
|
|
916,607
|
|
|
|
6,247
|
|
|
0.68%
|
|
|
|
705,445
|
|
|
|
6,796
|
|
|
0.96%
|
|
|
|
697,135
|
|
|
|
4,898
|
|
|
0.70%
|
|
Time deposits
|
|
|
211,636
|
|
|
|
3,859
|
|
|
1.82%
|
|
|
|
190,567
|
|
|
|
3,850
|
|
|
2.02%
|
|
|
|
128,892
|
|
|
|
1,588
|
|
|
1.23%
|
|
Total deposits
|
|
|
3,564,761
|
|
|
|
22,751
|
|
|
0.64%
|
|
|
|
2,635,927
|
|
|
|
26,267
|
|
|
1.00%
|
|
|
|
2,233,530
|
|
|
|
14,432
|
|
|
0.65%
|
|
Total interest bearing deposits
|
|
|
2,638,069
|
|
|
|
22,751
|
|
|
0.86%
|
|
|
|
2,080,542
|
|
|
|
26,267
|
|
|
1.26%
|
|
|
|
1,744,535
|
|
|
|
14,432
|
|
|
0.83%
|
|
Other borrowings
|
|
|
30,413
|
|
|
|
367
|
|
|
1.21%
|
|
|
|
22,911
|
|
|
|
790
|
|
|
3.45%
|
|
|
|
73,573
|
|
|
|
1,738
|
|
|
2.36%
|
|
Total interest-bearing liabilities
|
|
|
2,668,482
|
|
|
|
23,118
|
|
|
0.87%
|
|
|
|
2,103,453
|
|
|
|
27,057
|
|
|
1.29%
|
|
|
|
1,818,108
|
|
|
|
16,170
|
|
|
0.89%
|
|
Total deposits and other borrowings
|
|
|
3,595,174
|
|
|
|
23,118
|
|
|
0.64%
|
|
|
|
2,658,838
|
|
|
|
27,057
|
|
|
1.02%
|
|
|
|
2,307,103
|
|
|
|
16,170
|
|
|
0.70%
|
|
Non-interest bearing other liabilities
|
|
|
87,200
|
|
|
|
|
|
|
|
|
|
|
71,131
|
|
|
|
|
|
|
|
|
|
|
9,431
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
271,206
|
|
|
|
|
|
|
|
|
|
|
248,936
|
|
|
|
|
|
|
|
|
|
|
233,693
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,953,580
|
|
|
|
|
|
|
|
|
|
$
|
2,978,905
|
|
|
|
|
|
|
|
|
|
$
|
2,550,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(2)
|
|
|
|
|
|
$
|
92,416
|
|
|
|
|
|
|
|
|
|
$
|
78,346
|
|
|
|
|
|
|
|
|
|
$
|
76,448
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
2.26%
|
|
|
|
|
|
|
|
|
|
|
2.54%
|
|
|
|
|
|
|
|
|
|
|
2.94%
|
|
Net interest margin(2)
|
|
|
|
|
|
|
|
|
|
2.51%
|
|
|
|
|
|
|
|
|
|
|
2.85%
|
|
|
|
|
|
|
|
|
|
|
3.16%
|
|
(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 $585, $539, and $544 in 2020, 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 interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates. Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure.
|
|
Year ended
December 31, 2020 vs. 2019
|
|
|
Year ended
December 31, 2019 vs. 2018
|
|
|
|
Changes due to:
|
|
|
|
|
|
|
Changes due to:
|
|
|
|
|
|
(dollars in thousands)
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Total
Change
|
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Total
Change
|
|
Interest earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other interest-earning assets
|
|
$
|
239
|
|
|
$
|
(2,296
|
)
|
|
$
|
(2,057
|
)
|
|
$
|
1,759
|
|
|
$
|
(35
|
)
|
|
$
|
1,724
|
|
Securities
|
|
|
227
|
|
|
|
(6,947
|
)
|
|
|
(6,720
|
)
|
|
|
958
|
|
|
|
(388
|
)
|
|
|
570
|
|
Loans
|
|
|
32,296
|
|
|
|
(13,388
|
)
|
|
|
18,908
|
|
|
|
9,439
|
|
|
|
1,052
|
|
|
|
10,491
|
|
Total interest-earning assets
|
|
|
32,762
|
|
|
|
(22,631
|
)
|
|
|
10,131
|
|
|
|
12,156
|
|
|
|
629
|
|
|
|
12,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
2,725
|
|
|
$
|
(5,701
|
)
|
|
$
|
(2,976
|
)
|
|
$
|
3,508
|
|
|
$
|
4,167
|
|
|
$
|
7,675
|
|
Money market and savings
|
|
|
1,462
|
|
|
|
(2,011
|
)
|
|
|
(549
|
)
|
|
|
46
|
|
|
|
1,852
|
|
|
|
1,898
|
|
Time deposits
|
|
|
384
|
|
|
|
(375
|
)
|
|
|
9
|
|
|
|
1,246
|
|
|
|
1,016
|
|
|
|
2,262
|
|
Total deposit interest expense
|
|
|
4,571
|
|
|
|
(8,087
|
)
|
|
|
(3,516
|
)
|
|
|
4,800
|
|
|
|
7,035
|
|
|
|
11,835
|
|
Other borrowings
|
|
|
27
|
|
|
|
(450
|
)
|
|
|
(423
|
)
|
|
|
(1,402
|
)
|
|
|
454
|
|
|
|
(948
|
)
|
Total interest expense
|
|
|
4,598
|
|
|
|
(8,537
|
)
|
|
|
(3,939
|
)
|
|
|
3,398
|
|
|
|
7,489
|
|
|
|
10,887
|
|
Net interest income
|
|
$
|
28,164
|
|
|
$
|
(14,094
|
)
|
|
$
|
14,070
|
|
|
$
|
8,758
|
|
|
$
|
(6,860
|
)
|
|
$
|
1,898
|
|
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months ended December 31, 2020 increased by $14.1 million, or 18%, over twelve months ended December 31, 2019. Interest income on interest-earning assets totaled $115.5 million for the twelve months ended December 31, 2020, an increase of $10.1 million, compared to $105.4 million for the twelve months ended December 31, 2019. The increase in interest income earned was the result of an increase in average interest-earning balances, primarily loans receivable during 2020. Loan growth was driven by continued success with our expansion strategy driving new customer relationships, in addition to our participation in the PPP loan program. PPP loans earn a fixed interest rate of 1.00% and mature in either two years or five years depending upon the date of origination. Origination fees paid by the SBA are also recognized as interest income over the life of the loans. We recognized approximately $6.8 million of origination fees related to PPP loans during the twelve month period ended December 31, 2020. Growth in loan balances and corresponding interest income helped offset the decline in interest income driven by a lower rate environment, including interest income associated with the investment securities portfolio. A decline in mortgage interest rates resulted in a sharp increase in prepayment speeds on mortgage-backed securities held in our portfolio which caused acceleration in the amortization of premiums related to those investments.
Total interest expense for the twelve months ended December 31, 2020 decreased $3.9 million, or 15%, to $23.1 million from $27.1 million for the twelve months ended December 31, 2019. Interest expense on deposits decreased by $3.5 million, or 13%, for the twelve months ended December 31, 2020 versus the twelve months ended December 31, 2019 due to lower rates offset by increases in average deposit balances. Lower interest rates were caused by actions taken by the Federal Reserve Bank during the first quarter of 2020 in response to the onset of the COVID-19 pandemic. Interest expense on other borrowings decreased by $423,000 for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 due primarily to a decrease in the average rate on other borrowings.
Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.26% during the twelve months ended December 31, 2020 versus 2.54% during the twelve months ended December 31, 2019. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the twelve months ended December 31, 2020 and 2019, the fully tax-equivalent net interest margin was 2.51% and 2.85%, respectively. Compression in the net interest margin was primarily driven by a 70 basis point decrease in the yield on interest earning assets resulting from the lower interest rate environment and fixed rate 1.00% loans generated through PPP lending.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $4.2 million, an increase of $2.3 million, for the twelve months ended December 31, 2020 compared to a $1.9 million provision for the twelve months ended December 31, 2019. 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. The provision recorded for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 increased primarily due to an increase required for loans collectively evaluated for impairment. This change was primarily driven by the uncertainty surrounding the economic environment as a result of the impact of the COVID-19 pandemic. Qualitative factors in the calculation of the provision for loan losses were adjusted to account for this uncertainty. While the U.S. government has taken swift action to provide stimulus and implement programs to support the economy, the long-term impact of the effect on the economy remains uncertain.
Non-performing assets as a percentage of total assets declined to 0.28% as of December 31, 2020 compared to 0.42% as of December 31, 2019. This is the sixth consecutive year that this ratio has declined. Net charge-offs as a percentage of average loans also declined during 2020.
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2020 increased by $12.5 million, or 53%, compared to the twelve months ended December 31, 2019. Mortgage banking income totaled $17.6 million for the twelve months ended December 31, 2020, an increase of $7.5 million, compared to $10.1 million for the twelve months ended 2019. An increase in the volume of residential mortgage loans due to a decline in interest rates drove the increase in mortgage banking income. Loan and servicing fees totaled $2.9 million for the twelve months ended December 31, 2020 which represents an increase of $1.4 million compared to the twelve months ended December 31, 2019. For the twelve months ended December 31, 2020, service fees on deposit accounts totaled $11.1 million which represents an increase of $3.5 million compared to the twelve months ended December 31, 2019. This increase was driven by growth in customer deposit accounts and transaction volume as we continue with our growth and expansion strategy. We recognized gains of $2.8 million on the sale of securities during the twelve months ended December 31, 2020, an increase of $1.7 million, compared to gains of $1.1 million on the sales of securities for the twelve months ended December 31, 2019. Gains on the sale of SBA loans totaled $1.7 million for the twelve months ended December 31, 2020, a decrease of $1.4 million, versus $3.2 million for the twelve months ended December 31, 2019. Lower origination volumes related to SBA loans was caused by the effects of the COVID-19 pandemic.
Non-Interest Expenses
Non-interest expenses increased by $12.9 million, or 12%, for the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019. An explanation of changes of non-interest expenses for certain categories is presented in the following paragraphs.
Salary expenses and employee benefits for the twelve months ended December 31, 2020 increased by $2.4 million, or 4%, compared to the twelve months ended December 31, 2019. The increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores, which we refer to as “The Power of Red is Back”. There were thirty-one stores open as of December 31, 2020 compared to twenty-nine stores open at December 31, 2019. The increase was also a result of higher commissions paid to residential mortgage lenders as a result of growth in the volume of mortgage loan originations.
Occupancy expense, including depreciation and amortization expense, increased by $4.2 million, or 23%, for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019, also as a result of our continuing growth and expansion strategy. The full year impact of the two new stores opened in New York City during 2019 was recognized in 2020.
Other real estate owned expenses totaled $459,000 during the twelve months ended December 31, 2020, a decrease of $1.7 million, when compared to the twelve months ended December 31, 2019. This decrease was a result of lower costs to carry foreclosed assets during the twelve months ended December 31, 2020.
Goodwill impairment totaled $5.0 million during the twelve months ended December 31, 2020. During the third quarter of 2020 a goodwill impairment analysis was completed which concluded that a write-off was required. All goodwill on the balance sheet was written off as a result of this one-time, non-cash charge for goodwill impairment.
All other non-interest expenses for the twelve months ended December 31, 2020 increased $3.0 million compared to the twelve months ended December 31, 2019. Increases in expenses related to data processing, debit card processing, professional fees, and regulatory assessments and costs 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 purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve months ended December 31, 2020, the ratio was 2.97% compared to 2.71% for the twelve months ended December 31, 2019, respectively. The increase in this ratio was mainly due to our growth and expansion strategy.
Another productivity measure utilized by management is the operating efficiency ratio, another non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio was 91.69% for the twelve months ended December 31, 2020, compared to 102.90% for the twelve months ended December 31, 2019. The decrease for the twelve months ended December 31, 2020 versus the twelve months ended December 31, 2019 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.
Provision (Benefit) for Income Taxes
We recorded a provision for income taxes of $1.4 million for the twelve months ended December 31, 2020 compared to a benefit of $1.4 million for the twelve months ended December 31, 2019. The effective tax rates for the twelve month periods ended December 31, 2020 and 2019 were 22% and (28%), respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a pre-tax loss position and decreases the effective tax rate when in a pre-tax income position. The impact of these permanent differences on the effective tax rate is proportional to the level of the non taxable income in relation to pre-tax income.
The Company evaluates 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 assessing the need for a valuation allowance, the Company carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
The Company is in a three year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets is expected to continue and is supported by the capital raise completed during 2020. The ratio of non-performing assets to total assets along with other credit quality metrics continue to improve. A number of cost control measures have been implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin. The Company has added thirteen store locations in the past four years and since the inception of the growth and expansion strategy in 2014, almost every new store location has met or exceeded expectations. The success of the expansion strategy, combined with the stabilization of interest rates and continued loan growth are expected to continue to support improvement in profitability going forward. As of December 31, 2020, the Company has no federal NOLs to carry forward which could expire in the future.
Conversely, the Company’s net interest margin declined during 2020 as a result of the challenging interest rate environment which appears to be consistent across the financial services industry. The effects of the COVID-19 pandemic to the local and global economy may result in a significant increase in future loan loss provisions and charge-offs. Rising interest rates and a downturn in the economy could significantly decrease the volume of mortgage loan originations.
Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive evidence considered at December 31, 2020 outweighed the negative evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2020.
The net deferred tax asset balance was $12.0 million as of December 31, 2020 and $12.6 million as of December 31, 2019. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
Preferred Dividends
Preferred dividends of $923,000 were declared and paid on preferred stock during the twelve months ended December 31, 2020.
Net Income and Net Income per Common Share
The net income available to shareholders for the twelve months ended December 31, 2020 was $4.1 million, compared to a net loss of $3.5 million for the twelve months ended December 31, 2019. For the twelve months ended December 31, 2020, basic and fully-diluted net income per common share was $0.07, compared to basic and fully-diluted net loss per common share of ($0.06) for the twelve months ended December 31, 2019.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve months ended December 31, 2020 and 2019 was 0.13% and (0.12%), 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 twelve months ended December 31, 2020 was 1.86%, compared to (1.41%) for the twelve months ended December 31, 2019.
Results of Operations
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
We reported a net loss of $3.5 million, or ($0.06) per diluted share, for the twelve months ended December 31, 2019 compared to net income of $8.6 million, or $0.15 per diluted share, for the twelve months ended December 31, 2018. Earnings in 2019 were negatively impacted by compression of the net interest margin caused by a flat and inverted yield curve which drove lower yields on interest earning assets and higher rates on interest bearing liabilities. In the midst of this challenging rate environment we also incurred costs to execute our expansion strategy in New York City. In addition to new hires, training, advertising, and occupancy expenses related to the opening of our first two stores in New York, we also established a management and lending team for this new market.
Net interest income for the twelve months ended December 31, 2019 increased $1.9 million to $77.8 million as compared to $75.9 million for the twelve months ended December 31, 2018. Total assets grew by $588 million, or 21%, during 2019 to $3.3 billion. However, growth in net interest income of $8.8 million driven by the increase in interest earning assets was offset by a decrease of $6.9 million as a result of interest rate changes resulting in a net increase of only $1.9 million in net interest income. For comparison purposes net interest income increased by $13.5 million during 2018 on growth in assets of $431 million. Interest income increased $12.8 million, or 14%, due primarily to an increase in average interest-earning assets, primarily loans receivable. Interest expense increased $10.9 million, or 67%, primarily due to an increase in the rate on average interest-bearing liabilities and average deposit balances. The net interest margin decreased by 31 basis points to 2.85% during the twelve months ended December 31, 2019 compared to 3.16% during the twelve months ended December 31, 2018.
We recorded a loan loss provision in the amount of $1.9 million, a decrease of $395,000 for the twelve months ended December 31, 2019 compared to a provision of $2.3 million during the twelve months ended December 31, 2018. The provision recorded for the twelve months ended December 31, 2019 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. The decrease in the provision year over year was primarily a result of a decrease in the allowance required for loans individually evaluated for impairment during 2019 and is supported by the steady decline in the ratio of non-performing assets to total assets.
Non-interest income increased $3.4 million to $23.7 million during the twelve months ended December 31, 2019 as compared to $20.3 million during the twelve months ended December 31, 2018. The increase was primarily driven by higher service fees on deposit accounts and gains on sale of investment securities during the twelve months ended December 31, 2019.
Non-interest expenses increased $20.8 million to $104.5 million during the twelve months ended December 31, 2019 as compared to $83.7 million during the twelve months ended December 31, 2018. The 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 which we refer to as “The Power of Red is Back”.
Return on average assets and average equity were (0.12%) and (1.41%), respectively, during the twelve months ended December 31, 2019 compared to 0.34% and 3.69%, respectively, for the twelve months ended December 31, 2018.
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months ended December 31, 2019 increased by $1.9 million, or 2%, over twelve months ended December 31, 2018. Interest income on interest-earning assets totaled $105.4 million for the twelve months ended December 31, 2019, an increase of $12.8 million, compared to $92.6 million for the twelve months ended December 31, 2018. The increase in interest income earned was primarily the result of an increase in average interest-earning balances, primarily loans receivable. Total interest expense for the twelve months ended December 31, 2019 increased $10.9 million, or 67%, to $27.1 million from $16.2 million for the twelve months ended December 31, 2018. Interest expense on deposits increased by $11.8 million, or 82%, for the twelve months ended December 31, 2019 versus the twelve months ended December 31, 2018 due to higher rates and increases in average deposit balances. Interest expense on other borrowings decreased by $948,000 for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 due primarily to a $48.2 million decrease in average overnight borrowings.
Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.54% during the twelve months ended December 31, 2019 versus 2.94% during the twelve months ended December 31, 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 twelve months ended December 31, 2019 and 2018, the fully tax-equivalent net interest margin was 2.85% and 3.16%, respectively. 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.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $1.9 million, a decrease of $395,000, for the twelve months ended December 31, 2019 compared to a $2.3 million provision for the twelve months ended December 31, 2018. 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. The provision recorded for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 decreased primarily as a result of a decrease in the allowance required for loans individually evaluated for impairment. Non-performing assets as a percentage of total assets declined to 0.42% as of December 31, 2019 compared to 0.60% as of December 31, 2018. This is the fifth consecutive year that this ratio has declined. Net charge-offs as a percentage of average loans also declined during 2019.
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2019 increased by $3.4 million, or 17%, compared to the twelve months ended December 31, 2018. Service fees on deposit accounts totaled $7.5 million for the twelve months ended December 31, 2019 which represents an increase of $2.1 million compared to the twelve months ended December 31, 2018. This increase was driven by growth in customer deposit accounts and transaction volume. We recognized gains of $1.1 million on the sale of securities during the twelve months ended December 31, 2019, an increase of $1.2 million, compared to losses of $67,000 on the sales of securities for the twelve months ended December 31, 2018. Loan and servicing fees totaled $1.6 million for the twelve months ended December 31, 2019 which represents an increase of $167,000 compared to the twelve months ended December 31, 2018. Gains on the sale of SBA loans totaled $3.2 million for the twelve months ended December 31, 2019, an increase of $82,000, versus $3.1 million for the twelve months ended December 31, 2018. Mortgage banking income totaled $10.1 million and $10.2 million for the twelve months ended December 31, 2019 and 2018.
Non-Interest Expenses
Non-interest expenses increased by $20.8 million, or 25%, for the twelve months ended December 31, 2019, compared to the twelve months ended December 31, 2018. An explanation of changes of non-interest expenses for certain categories is presented in the following paragraphs.
Salary expenses and employee benefits for the twelve months ended December 31, 2019 increased by $9.8 million, or 22%, compared to the twelve months ended December 31, 2018. The increase 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-nine stores open as of December 31, 2019 compared to twenty-five stores open at December 31, 2018. The strategic decision to expand into New York City was also a significant factor driving the increase in salaries and employee benefits.
Occupancy expense, including depreciation and amortization expense, increased by $4.6 million, or 34%, for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018, also as a result of our continuing growth and expansion strategy.
Other real estate owned expenses totaled $2.1 million during the twelve months ended December 31, 2019, an increase of $521,000, when compared to the twelve months ended December 31, 2018. This increase was a result of higher costs to carry foreclosed properties on foreclosed assets during the twelve months ended December 31, 2019.
All other non-interest expenses for the twelve months ended December 31, 2019 increased $5.8 million compared to the twelve months ended December 31, 2018. Increases in expenses related to data processing, advertising, automated teller machine expenses, and professional fees 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 purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve months ended December 31, 2019, the ratio equaled 2.71% compared to 2.49% for the twelve months ended December 31, 2018, respectively. The increase in this ratio was mainly due to our growth and expansion strategy which drives the addition of new stores, along with additional employees to support the growth strategy.
Another productivity measure utilized by management is the operating efficiency ratio, another non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 102.90% for the twelve months ended December 31, 2019, compared to 87.0% for the twelve months ended December 31, 2018. The increase for the twelve months ended December 31, 2019 versus the twelve months ended December 31, 2018 was due to non-interest expenses increasing at a faster rate than net interest income and non-interest income.
Provision (Benefit) for Income Taxes
We recorded a benefit for income taxes of $1.4 million for the twelve months ended December 31, 2019 compared to a provision of $1.6 million for the twelve months ended December 31, 2018. The effective tax rates for the twelve month periods ended December 31, 2019 and 2018 were (28%) and 15%, respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a pre-tax loss position and decreases the effective tax rate when in a pre-tax income position.
We evaluate the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, we believe it is important to consider the unique characteristics of an industry or business. In particular, characteristics such as business model, level of capital and reserves held by a financial institution and the ability to absorb potential losses are important distinctions to be considered for bank holding companies like us. In addition, it is also important to consider that net operating loss carryforwards (“NOLs”) calculated for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years, for NOLs created prior to January 1, 2018. Federal NOLs generated after December 31, 2017 can be carried forward indefinitely. 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, the Company carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
The Company is in a three year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Strong growth in interest-earning assets is expected to continue and is supported by the capital raise completed at the end of 2016. The ratio of non-performing assets to total assets along with other credit quality metrics continue to improve. A number of cost control measures have been implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin. The Company has added eleven store locations in the past three years and since the inception of the “Power of Red is Back” growth and expansion strategy in 2014, almost every new store location has met or exceeded expectations. The success of the expansion into New York, combined with the stabilization of interest rates and continued loan growth are expected to improve profitability going forward.
Conversely, the Company generated a loss in the current year when factoring in pre-tax GAAP income and permanent book/tax differences. The Bank’s net interest margin declined during 2019 as a result of the challenging interest rate environment which appears to be consistent across the financial services industry. Non-accrual loans increased by 20% during 2019. Rising interest rates and a downturn in the economy could significantly decrease the volume of mortgage loan originations.
The Company has experienced a growing balance sheet driven by the growth and expansion strategy over the last several years. Loans and deposits have consistently grown at rates far above industry standards generating a higher level of interest earning assets. Assets quality metrics have improved to levels not seen in more than 20 years. From 2014 to 2018, the Company demonstrated consistent and steady improvement in earnings despite the investments required to initiate the expansion plan which put it in a position to comfortably rely on projections of future taxable income when evaluating the need for a valuation allowance against its deferred tax assets for the years ended December 31, 2018 and 2017.
In 2019, the Company began opening branches in New York City. Management was aware of the initial costs and investments required to expand into this new market. As a result of the flat and inverted yield curve experienced in 2019, the net interest margin compressed and revenue did not grow at the rate necessary to support the increased expense levels which caused a decline in earnings. Management and the Board of Directors have engaged in detailed discussions on how to improve profitability going forward. During the preparation of the 2020 budget, several cost reduction and control initiatives were identified and incorporated into the projections. These initiatives include, but are not limited to, a reduction of store hours and slowing of the number of locations to be opened in the coming years. Efforts to reduce high cost deposits and increase loan production to improve the net interest margin have also been initiated. The Company’s multi-year budget plan projects future taxable income will be more than sufficient to support the realization of the deferred tax assets.
Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive evidence considered at December 31, 2019 outweighed the negative evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2019.
The net deferred tax asset balance was $12.6 million as of December 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
The net loss for the twelve months ended December 31, 2019 was $3.5 million, compared to net income of $8.6 million for the twelve months ended December 31, 2018. For the twelve months ended December 31, 2019, basic and fully-diluted net loss per common share was ($0.06), compared to basic and fully-diluted net income per common share of $0.15, respectively for the twelve months ended December 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 twelve months ended December 31, 2019 and 2018 was (0.12%) and 0.34%, 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 twelve months ended December 31, 2019 was (1.41%), compared to 3.69% for the twelve months ended December 31, 2018.
Financial Condition
December 31, 2020 compared to December 31, 2019
Total assets increased by $1.7 billion, or 52%, to $5.1 billion at December 31, 2020, compared to $3.3 billion at December 31, 2019. In addition to our ongoing success with our expansion strategy, the growth in assets was also driven by our participation in the PPP loan program during 2020 which resulted in a significant increase in new business relationships and account openings. A more detailed discussion of changes in the balance sheet accounts can be found in the following paragraphs.
Cash and Cash Equivalents
Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories increased by $607.0 million to $775.3 million at December 31, 2020, from $168.3 million at December 31, 2019. The increase as of December 31, 2020 was caused by borrowings in the amount of $633.8 million related to the PPP loan program which were repaid shortly after the year end.
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, which we also intend to sell in the future. Total SBA loans held for sale were $3.0 million at both December 31, 2020 and December 31, 2019. Residential mortgage loans held for sale totaled $50.4 million at December 31, 2020, an increase of $40.1 million, versus $10.3 million at December 31, 2019. An increase in the volume of residential mortgage loans during 2020, particularly in the fourth quarter, drove the increase in residential mortgage loans held for sale as of December 31, 2020. Loans held for sale, as a percentage of our total assets, were less than 2% at December 31, 2020.
Loans Receivable
The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $45.0 million at December 31, 2020. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit. There were no loans in excess of the legal lending limit at December 31, 2020. A $30 million threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal monitoring guideline. We had no loan relationships in excess of $30 million at December 31, 2020. The internal monitoring guideline in place as of December 31, 2019 was $25 million. We had one loan relationship in excess of that guideline at December 31, 2019 that amounted to $28.0 million.
Loans increased $893 million, or 51%, to $2.6 billion at December 31, 2020, versus $1.7 billion at December 31, 2019. This growth was primarily the result our of participation in the PPP loan program during 2020. As of December 31, 2020, we held approximately $637 million in PPP loans which are expected to be forgiven by the SBA and repaid during the early part of 2021. We also grew loans during 2020 as a result of our successful execution of our relationship banking strategy which focuses on customer service. During an incredibly challenging year that consisted of governmental restrictions and other obstacles related to the COVID-19 pandemic, we grew loan balances outside of PPP by $273 million, or 16%, during 2020. We also expect many of the new business relationships that grew from our success with PPP to provide significant opportunities for commercial loan growth in future periods.
Investment Securities
Investment securities available for sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our debt securities consist primarily of U.S. Government agency Small Business Administration (“SBA”) bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Investment securities available for sale totaled $528.5 million at December 31, 2020 as compared to $539.0 million at December 31, 2019. The $10.5 million decrease was primarily due to sales, paydowns, maturities, and calls of securities totaling $296.1 million offset by the purchase of securities totaling $284.1 million by during 2020. At December 31, 2020, the portfolio had a net unrealized gain of $1.3 million compared to a net unrealized loss of $1.7 million at December 31, 2019. The $3.0 million increase in the unrealized gain/(loss) of the investment portfolio was driven by a decrease in market interest rates which drove an increase in value of the securities held in our portfolio during 2020.
Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMO’s and MBS’s. The fair value of securities held-to-maturity totaled $837.0 million and $653.1 million at December 31, 2020 and December 31, 2019, respectively. The $170.3 million increase was primarily due to the purchase of securities held to maturity totaling $402.6 million partially offset paydowns, maturities, and calls of securities held in the portfolio totaling $232.2 million during the year ended December 31, 2020.
ASC 320 “Investments – Debt Securities” requires an entity to determine how to classify a security at the time of acquisition. The appropriateness of the original classification should be reassessed at each reporting period. The transfer of investment securities from available-for-sale to held-to maturity category during the quarter ended December 31, 2018 was completed after an extensive analysis of the characteristics of all securities held in the portfolio, in addition to a review of our liquidity position under multiple scenarios including varying interest rate environments. Twenty-three of the twenty-five securities transferred from available-to-sale to held-to-maturity were collateralized mortgage obligations. Thirteen securities transferred were GNMA collateralized mortgage obligations which are backed by the full faith and credit of the U.S. government. The remaining ten collateralized mortgage obligations were issued by FNMA or FHLMC. Bonds issued by GNMA receive favorable risk rating when calculating regulatory risk-based capital ratios. In addition, GNMA, FNMA, and FHLMC securities are often pledged as collateral as required to hold certain government deposits and are accepted as collateral as a result of the high quality and low-risk nature of these bonds. The other two securities transferred from available-for sale to held-to-maturity were FNMA agency mortgage-backed securities.
After completion of these analyses and consideration of the factors mentioned above, management determined that it had the intent and ability to hold specific securities until maturity and it was appropriate to transfer them to the held-to-maturity category during the fourth quarter of 2018.
The fair value of the securities transferred to the held-to-maturity category was $230.1 million. The book value of the securities on the date of transfer was $239.5 million. The unrealized holding gain or loss on each individual security calculated at the time of transfer was reported as a component of shareholders’ equity in the accumulated other comprehensive income account and will be amortized as an adjustment to yield over the remaining life of each security.
Equity securities consist of investments in the preferred stock of domestic banks. Equity securities are held at fair value. The fair value of equity securities purchased during 2020 totaled $9.0 million at December 31, 2020. We did not have any equity securities at December 31, 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 December 31, 2020 and December 31, 2019. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”).
At December 31, 2020 and December 31, 2019, the investment in FHLB stock totaled $2.9 million and $2.6 million, respectively. The $293,000 increase was due to a higher required investment in FHLB stock during 2020. At both December 31, 2020 and December 31, 2019, ACBB stock totaled $143,000.
Premises and Equipment
The balance of premises and equipment increased to $123.2 million at December 31, 2020 from $117.0 million at December 31, 2019. The increase was primarily due to premises and equipment expenditures of $14.4 million reduced by depreciation and amortization expense of $6.2 million during 2020. The expenditures made during 2020 primarily relate to the construction of new store locations in addition to normal investments in hardware, software and other operating equipment. New stores were opened in Northfield, NJ in January 2020 and Bensalem, PA in September 2020 bringing the total store count to thirty-one at December 31, 2020. There are also additional sites in various stages of development for future store locations.
Other Real Estate Owned
The balance of other real estate owned decreased to $1.2 million at December 31, 2020 from $1.7 million at December 31, 2019. The decrease was primarily the result of dispositions totaling $744 thousand partially offset by additions of $233,000 during 2020.
Operating Leases – Right of Use Asset
Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the FASB. ASC 842 represents a significant modification to the accounting treatment for leases, with the most significant change being that most leases, including operating leases, will now be capitalized on the balance sheet. Under the previous guidance (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 December 31, 2020 and 2019, the balance of the operating lease right-of-use asset was $72.9 million and $64.8 million, respectively.
Goodwill
The Company completed an annual impairment test for goodwill as of July 31, 2020 and 2019. Goodwill was written off as a result of an interim test completed as of September 30, 2020. This was a complete write-off off all goodwill on the balance sheet. During the year ended December 31, 2019, there was no goodwill impairment recorded.
Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. Based on the interim impairment test completed as of September 30, 2020, management determined that the carrying amount of goodwill exceeded its implied fair value and that the balance should be written off as of that date. The determination of the fair value of the Reporting Unit incorporates assumptions that marketplace participants would use in their estimates of fair value of the Reporting Unit in a change of control transaction, as prescribed by ASC Topic 820.
To arrive at a conclusion of fair value, we utilize both the Income and Market Approach and then apply weighting factors to each result. Weighting factors represent our best business judgment of the weightings a market participant would utilize in arriving at a fair value for the reporting unit. In performing our analyses, we also made numerous assumptions with respect to industry performance, business, economic and market conditions and various other matters, many of which cannot be predicted and are beyond our control. With respect to financial projections, projections reflect the best currently available estimates and judgments as to the expected future financial performance of the Reporting Unit.
Deposits
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are Republic’s major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships.
Total deposits increased by $1.0 billion to $4.0 billion at December 31, 2020, from $3.0 billion at December 31, 2019. 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 internet certificates of deposit. We continued to have success with this strategy during 2020 which lead to the growth in deposit balances despite a year filled with challenges, governmental restrictions and business closings due to the COVID-19 pandemic. Our participation in the PPP loan program also resulted in significant growth in new deposit relationships throughout the year. Approximately half of the applications that we accepted for the PPP program were from businesses that were not Republic Bank customers at the time. Many of those applicants were so pleased with their experience during the PPP process that they chose to move their primary banking relationship to Republic.
Other Borrowings
At December 31, 2020, we borrowed $633.9 million through the Paycheck Protection Program Liquidity Facility (“PPPLF”) provided by the Federal Reserve Bank at a rate of 35 basis points. This borrowing was repaid in full during the first week of January 2021. As of December 31, 2019, we had no PPPLF borrowings.
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 FASB. ASC 842 represents a significant modification to the accounting treatment for leases, with the most significant change being that most leases, including operating leases, will now be capitalized on the balance sheet. Under the previous guidance (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 December 31, 2020 and 2019, the balance of the operating lease liability obligation was $77.6 million and $68.9 million, respectively.
Shareholders’ Equity
Total shareholders’ equity increased $58.9 million to $308.1 million at December 31, 2020 compared to $249.2 million at December 31, 2019. The increase was primarily due to the net proceeds of a preferred stock offering of $48.3 million completed during 2020. The balance was also affected by a $4.5 million decrease in accumulated other comprehensive losses associated with an increase in the market value of the investment securities portfolio, and an increase driven by net income available to common shareholders of $4.1 million, and entries related to stock based compensation of $1.9 million. 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.
Investment Securities Portfolio
Republic’s investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest rate risk. Investment securities in the portfolio consist primarily of U.S. Government agency collateralized mortgage obligations (CMO), agency mortgage-backed securities (MBS), corporate bonds, municipal securities, U.S. Government agency Small Business Investment Company bonds (SBIC), and Small Business Administration (SBA) bonds. Equity securities in the portfolio consist of non-cumulative preferred stock. Our ALCO committee monitors and reviews all security purchases.
A summary of investment securities available for sale at fair value, investment securities held-to-maturity, and equity securities at December 31, 2020, 2019, and 2018 is as follows:
|
|
At December 31,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
32,312
|
|
|
$
|
38,743
|
|
|
$
|
-
|
|
Collateralized mortgage obligations
|
|
|
218,232
|
|
|
|
329,492
|
|
|
|
197,812
|
|
Agency mortgage-backed securities
|
|
|
149,325
|
|
|
|
98,953
|
|
|
|
39,105
|
|
Municipal securities
|
|
|
8,201
|
|
|
|
4,064
|
|
|
|
20,807
|
|
Corporate bonds
|
|
|
119,118
|
|
|
|
69,499
|
|
|
|
62,583
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
6,433
|
|
Amortized cost of investment securities available for sale
|
|
$
|
527,188
|
|
|
$
|
540,751
|
|
|
$
|
326,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of investment securities available for sale
|
|
$
|
528,508
|
|
|
$
|
539,042
|
|
|
$
|
321,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
82,093
|
|
|
$
|
94,913
|
|
|
$
|
107,390
|
|
Collateralized mortgage obligations
|
|
|
363,363
|
|
|
|
416,177
|
|
|
|
500,690
|
|
Agency mortgage-backed securities
|
|
|
369,480
|
|
|
|
133,752
|
|
|
|
153,483
|
|
Amortized cost of investment securities held to maturity
|
|
$
|
814,936
|
|
|
$
|
644,842
|
|
|
$
|
761,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of investment securities held to maturity
|
|
$
|
836,972
|
|
|
$
|
653,109
|
|
|
$
|
747,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
$
|
9,039
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The total amortized cost of the investment securities portfolio has grown to $1.3 billion at December 31, 2020 compared to $1.2 billion at December 31, 2019, and $1.1 billion at December 31, 2018. Investment securities represented 27% of total assets at December 31, 2020 and 35% of total assets at December 31, 2019. We evaluate our investment securities portfolio on a continual basis in light of the interest rate environment and changing market conditions and when appropriate, take necessary actions to improve and enhance our overall positioning. We consider the portfolio to be well structured and of high quality. At December 31, 2020, 91% of the portfolio consisted of U.S. government debt securities or U.S. government agency issued mortgage-backed securities which were rated Aaa /AA+ by the major credit rating agencies.
The investment securities portfolio includes investment securities classified as both available for sale and held to maturity and equity securities at fair value. During 2020 and 2019, we designated a portion of our securities portfolio as held to maturity based our intent and ability to hold those securities until they mature.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates rise and increases when interest rates fall. In addition, the fair value generally decreases when credit spreads widen and increases when credit spreads tighten. Net unrealized gains in the total investment securities portfolio were $23.4 million at December 31, 2020 compared to net unrealized gains of $6.6 million at December 31, 2019. The increase was a result of a decrease in market interest rates in 2020. The comparable amounts for the securities classified as available for sale were unrealized gains of $1.3 million at December 31, 2020 and unrealized losses of $1.7 million at December 31, 2019.
No single issuer of securities (excluding government agencies) in the portfolio exceeded more than 10% of shareholders’ equity at December 31, 2020 and December 31, 2019. We held four U.S. Government agency securities, fifteen collateralized mortgage obligations and six agency mortgage-backed securities that were in an unrealized loss position at December 31, 2020. Principal and interest payments of the underlying collateral for each of these securities carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of December 31, 2020.
At December 31, 2020, the investment portfolio included eleven municipal securities with a total market value of $8.2 million. These securities are reviewed quarterly for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, we periodically conduct our own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey where nine municipal securities had a market value of $7.4 million. As of December 31, 2020, management found no evidence of other than temporary impairment (“OTTI”) on any of the municipal securities held in the investment securities portfolio.
At December 31, 2020, the investment portfolio included nine corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. Eight of the nine corporate bonds are with five of the largest U.S. financial institutions. Each financial institution is well capitalized.
Proceeds associated with the sale of securities available for sale in 2020 were $125.2 million. Gross gains of $3.0 million and gross losses of $230,000 were realized on these sales. The tax provision applicable to the net gains of $2.8 million for the year ended December 31, 2020 amounted to $700,000.
Proceeds associated with the sale of securities available for sale in 2019 were $54.7 million. Gross gains of $1.2 million and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $1.1 million for the year ended December 31, 2019 amounted to $280,000.
Proceeds associated with the sale of securities available for sale in 2018 were $6.4 million. Gross losses of $67,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2018 amounted to $18,000. Included in the 2018 sales activity was the sale of one CDO security. Proceeds from the sale of the CDO security totaled $660,000. A gross loss of $66,000 was realized on this sale. The tax benefit applicable to the net loss for the twelve months ended December 31, 2018 amounted to $17,000. Management had previously stated that it did not intend to sell the CDO security prior to its maturity or the recovery of its cost basis, nor would it be forced to sell this security prior to maturity or recovery of the cost basis. This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2018, management received several inquiries regarding the availability of the remaining CDO security and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell the remaining CDO security resulting in a net loss of $66,000 during 2018.
The following table presents the maturity distribution and weighted average yield by holding type and year of maturity of our investment securities portfolio at December 31, 2020. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date. Equity securities are at fair value.
|
|
December 31, 2020
|
|
|
|
Within
One Year
|
|
|
One to
Five Years
|
|
|
Five to Ten
Years
|
|
|
Past Ten
Years
|
|
|
No Specific
Maturity
|
|
|
Total
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Fair
value
|
|
|
Amortized Cost
|
|
|
Yield
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
31,886
|
|
|
|
1.34
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
31,886
|
|
|
$
|
32,312
|
|
|
|
1.34
|
%
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
221,546
|
|
|
|
1.61
|
%
|
|
|
221,546
|
|
|
|
218,232
|
|
|
|
1.61
|
%
|
Agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,528
|
|
|
|
1.88
|
%
|
|
|
150,528
|
|
|
|
149,325
|
|
|
|
1.88
|
%
|
Municipal securities
|
|
|
1,301
|
|
|
|
3.30
|
%
|
|
|
1,009
|
|
|
|
2.06
|
%
|
|
|
5,915
|
|
|
|
3.04
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,225
|
|
|
|
8,201
|
|
|
|
2.96
|
%
|
Corporate bonds
|
|
|
11,676
|
|
|
|
3.59
|
%
|
|
|
43,531
|
|
|
|
2.35
|
%
|
|
|
44,393
|
|
|
|
1.47
|
%
|
|
|
16,723
|
|
|
|
1.81
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
116,323
|
|
|
|
119,118
|
|
|
|
2.08
|
%
|
Total AFS securities
|
|
$
|
12,977
|
|
|
|
3.56
|
%
|
|
$
|
76,426
|
|
|
|
1.92
|
%
|
|
$
|
50,308
|
|
|
|
1.66
|
%
|
|
$
|
16,723
|
|
|
|
1.81
|
%
|
|
$
|
372,074
|
|
|
|
1.72
|
%
|
|
$
|
528,508
|
|
|
$
|
527,188
|
|
|
|
1.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
763
|
|
|
|
2.36
|
%
|
|
$
|
77,214
|
|
|
|
2.45
|
%
|
|
$
|
8,301
|
|
|
|
2.62
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
86,278
|
|
|
$
|
82,093
|
|
|
|
2.47
|
%
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
375,819
|
|
|
|
1.80
|
%
|
|
|
375,819
|
|
|
|
363,363
|
|
|
|
1.80
|
%
|
Agency mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
374,875
|
|
|
|
1.77
|
%
|
|
|
374,875
|
|
|
|
369,480
|
|
|
|
1.77
|
%
|
Total HTM securities
|
|
$
|
763
|
|
|
|
2.36
|
%
|
|
$
|
77,214
|
|
|
|
2.45
|
%
|
|
$
|
8,301
|
|
|
|
2.62
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
750,694
|
|
|
|
1.78
|
%
|
|
$
|
836,972
|
|
|
$
|
814,936
|
|
|
|
2.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
9,039
|
|
|
|
-
|
|
|
$
|
9,039
|
|
|
|
-
|
|
|
|
-
|
|
Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of our 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 we could have realized in a sale 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.
We follow the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset’s 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.
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities, which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments, are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
The types of instruments valued based on matrix pricing in active markets include all of our U.S. government and agency securities, corporate bonds, and municipal obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, we do 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. There was one Level 3 investment security classified as available-for-sale at December 31, 2020. This security is a corporate bond.
The trust preferred securities held during 2018 were 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. The secondary market for these securities had become inactive, and therefore the securities were classified as a Level 3 securities. The fair value analysis did not reflect or represent the actual terms or prices at which any party could purchase the securities. The last trust preferred security was sold in 2018.
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 years ended December 31, 2020, 2019, and 2018:
|
|
Year Ended
December 31, 2020
|
|
|
Year Ended
December 31, 2019
|
|
|
Year Ended
December 31, 2018
|
|
Level 3 Investments Only
(dollars in thousands)
|
|
Trust
Preferred
Securities
|
|
|
Corporate
Bonds
|
|
|
Trust
Preferred
Securities
|
|
|
Corporate
Bonds
|
|
|
Trust
Preferred
Securities
|
|
|
Corporate
Bonds
|
|
Balance, January 1,
|
|
$
|
-
|
|
|
$
|
2,820
|
|
|
$
|
-
|
|
|
$
|
3,069
|
|
|
$
|
489
|
|
|
$
|
3,086
|
|
Security transferred to Level 3 measurement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Unrealized (losses) gains
|
|
|
-
|
|
|
|
(189
|
)
|
|
|
-
|
|
|
|
(249
|
)
|
|
|
237
|
|
|
|
(17
|
)
|
Paydowns
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(660
|
)
|
|
|
-
|
|
Realized losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
-
|
|
Impairment charges on Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31,
|
|
$
|
-
|
|
|
$
|
2,631
|
|
|
$
|
-
|
|
|
$
|
2,820
|
|
|
$
|
-
|
|
|
$
|
3,069
|
|
An independent, third party pricing service was used to estimate the current fair market value of the CDO previously held in the investment securities portfolio. The calculations used to determine fair value were based on the attributes of the trust preferred security, the financial condition of the issuers of the trust preferred security, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of the security and its specific collateral as of December 31, 2018. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and S&P Global Market Intelligence. 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.
The fair market valuation for the CDO was determined based on discounted cash flow analyses. The cash flows were primarily dependent on the estimated speeds at which the trust preferred security was expected to prepay, the estimated rates at which the trust preferred security were expected to defer payments, the estimated rates at which the trust preferred security were expected to default, and the severity of the related losses on the security.
Increases (decreases) in actual or expected issuer defaults tended to decrease (increase) the fair value of our senior and mezzanine tranches of CDOs. The values of our mezzanine tranches of CDOs were 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 our holdings were not quantifiably estimable.
The remaining Level 3 investment security classified as available for sale is a corporate bond that is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.
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, residential mortgages and PPP loans. 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 $45 million at December 31, 2020. Management has established an internal monitoring guideline for loan relationships in the amount of $30 million which approximates 10% of capital and reserves. Individual customers may have several loans often secured by different collateral. We had no loan relationships in excess of $30 million at December 31, 2020. The internal monitoring guideline in place as of December 31, 2019 was $25 million. We had one loan relationship in excess of that guideline at December 31, 2019 that amounted to $28.0 million.
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and the surrounding suburbs, Southern New Jersey, and New York City. In addition, we have loans to customers whose assets and businesses are concentrated in real estate. Repayment of our loans is in part dependent upon general economic conditions affecting our market place and specific industries in which our customers operate. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties.
At December 31, 2020, we had loan concentrations exceeding 10% of total loans for credits extended to lessors of nonresidential real estate in the aggregate amount of $453.5 million, which represented 17% of gross loans receivable. Loan concentrations are considered to exist when amounts are loaned to multiple numbers of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. At December 31, 2020, we had no foreign loans outstanding.
The following table sets forth gross loans by major categories for the periods indicated:
|
|
At December 31,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
705,748
|
|
|
$
|
613,631
|
|
|
$
|
515,738
|
|
|
$
|
433,304
|
|
|
$
|
378,519
|
|
Construction and land development
|
|
|
142,821
|
|
|
|
121,395
|
|
|
|
121,042
|
|
|
|
104,617
|
|
|
|
61,453
|
|
Commercial and industrial
|
|
|
200,188
|
|
|
|
223,906
|
|
|
|
200,423
|
|
|
|
173,343
|
|
|
|
174,744
|
|
Owner occupied real estate
|
|
|
475,206
|
|
|
|
424,400
|
|
|
|
367,895
|
|
|
|
309,838
|
|
|
|
276,986
|
|
Consumer and other
|
|
|
102,368
|
|
|
|
101,320
|
|
|
|
91,152
|
|
|
|
76,183
|
|
|
|
63,660
|
|
Residential mortgage
|
|
|
395,174
|
|
|
|
263,444
|
|
|
|
140,364
|
|
|
|
64,764
|
|
|
|
9,682
|
|
Paycheck protection program
|
|
|
636,637
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total loans
|
|
$
|
2,658,142
|
|
|
$
|
1,748,096
|
|
|
$
|
1,436,614
|
|
|
$
|
1,162,049
|
|
|
$
|
965,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs (fees)
|
|
|
(12,800
|
)
|
|
|
99
|
|
|
|
(16
|
)
|
|
|
229
|
|
|
|
(72
|
)
|
Total loans, net of deferred loan fees
|
|
$
|
2,645,342
|
|
|
$
|
1,748,195
|
|
|
$
|
1,436,598
|
|
|
$
|
1,162,278
|
|
|
$
|
964,972
|
|
Total loans, net of deferred loan costs, increased $897 million, or 51%, to $2.6 billion at December 31, 2020, versus $1.7 billion at December 31, 2019. This growth includes more than $600 million in PPP loans. Excluding the impact of the PPP loan program loans grew $273 million, or 16%, year over year.
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated, which are due in: (i) one year or less, (ii) more than one year through five years, and (iii) over five years, is shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.
(dollars in thousands)
|
|
Commercial
Real
Estate
|
|
|
Construction
and Land Development
|
|
|
Commercial
and
Industrial
|
|
|
Owner
Occupied
Real Estate
|
|
|
Consumer
and
Other
|
|
|
Residential Mortgage
|
|
|
Paycheck
Protection
Program
|
|
|
Total
|
|
Fixed rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year or less
|
|
$
|
56,728
|
|
|
$
|
3,123
|
|
|
$
|
6,565
|
|
|
$
|
49,042
|
|
|
$
|
702
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
116,160
|
|
1-5 years
|
|
|
417,914
|
|
|
|
84,058
|
|
|
|
96,277
|
|
|
|
209,732
|
|
|
|
1,702
|
|
|
|
-
|
|
|
|
636,637
|
|
|
|
1,446,320
|
|
After 5 years
|
|
|
210,427
|
|
|
|
11,298
|
|
|
|
40,141
|
|
|
|
138,200
|
|
|
|
12,930
|
|
|
|
393,076
|
|
|
|
-
|
|
|
|
806,072
|
|
Total fixed rate
|
|
|
685,069
|
|
|
|
98,479
|
|
|
|
142,983
|
|
|
|
396,974
|
|
|
|
15,334
|
|
|
|
393,076
|
|
|
|
636,637
|
|
|
|
2,368,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year or less
|
|
$
|
16,435
|
|
|
$
|
26,772
|
|
|
$
|
46,184
|
|
|
$
|
10,723
|
|
|
$
|
1,057
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
101,171
|
|
1-5 years
|
|
|
3,866
|
|
|
|
17,516
|
|
|
|
4,305
|
|
|
|
5,509
|
|
|
|
2,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,963
|
|
After 5 years
|
|
|
378
|
|
|
|
54
|
|
|
|
6,716
|
|
|
|
62,000
|
|
|
|
83,210
|
|
|
|
2,098
|
|
|
|
-
|
|
|
|
154,456
|
|
Total adjustable rate
|
|
|
20,679
|
|
|
|
44,342
|
|
|
|
57,205
|
|
|
|
78,232
|
|
|
|
87,034
|
|
|
|
2,098
|
|
|
|
-
|
|
|
|
289,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
705,748
|
|
|
$
|
142,821
|
|
|
$
|
200,188
|
|
|
$
|
475,206
|
|
|
$
|
102,368
|
|
|
$
|
395,174
|
|
|
$
|
636,637
|
|
|
$
|
2,658,142
|
|
In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount, and at interest rates prevailing at the date of renewal. At December 31, 2020, 89% of total loans were fixed rate compared to 82% at December 31, 2019.
Loss Mitigation and Loan Portfolio Analysis
We have taken a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the
Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declares a termination of the national emergency related to the COVID-19 pandemic. Deferrals reached a peak during the second quarter of 2020, at which time we had granted payment deferrals to 491 customers with outstanding balances of $444 million, or 24% of total loans outstanding. As of December 31, 2020, deferrals declined to 21 customers with outstanding balances of $16 million, or less than 1% of total loans outstanding. At December 31, 2020, approximately $4 million of the deferral requests were for deferment of principal balances only. The remaining deferrals include requests to defer both principal and interest payments. Deferrals as of December 31, 2020 were comprised of the following categories: 90 day deferrals amounted to 8 customers with outstanding balances of $3 million and second deferrals amounted to 13 customers with outstanding balances of $13 million.
As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of Republic’s allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan to values on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic begin to unfold. Based on the incurred loss methodology currently utilized by Republic, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and length of the economic downturn and the full impact on our loan portfolio.
Credit Quality
Republic’s written lending policies require specific underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee consisting of senior management and certain members of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment of principal and/or interest in full is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual, any collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
The following summary shows information concerning loan delinquency and non-performing assets at the dates indicated:
|
|
At December 31,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Loans accruing, but past due 90 days or more
|
|
$
|
612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
302
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
4,421
|
|
|
|
4,159
|
|
|
|
4,631
|
|
|
|
8,963
|
|
|
|
13,089
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,963
|
|
|
|
3,087
|
|
|
|
3,661
|
|
|
|
2,895
|
|
|
|
3,151
|
|
Owner occupied real estate
|
|
|
2,859
|
|
|
|
3,337
|
|
|
|
1,188
|
|
|
|
2,136
|
|
|
|
1,546
|
|
Consumer and other
|
|
|
1,302
|
|
|
|
1,062
|
|
|
|
861
|
|
|
|
851
|
|
|
|
808
|
|
Residential mortgage
|
|
|
701
|
|
|
|
768
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Paycheck Protection Program
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total non-accrual loans
|
|
|
12,246
|
|
|
|
12,413
|
|
|
|
10,341
|
|
|
|
14,845
|
|
|
|
18,594
|
|
Total non-performing loans(1)
|
|
|
12,858
|
|
|
|
12,413
|
|
|
|
10,341
|
|
|
|
14,845
|
|
|
|
18,896
|
|
Other real estate owned
|
|
|
1,188
|
|
|
|
1,730
|
|
|
|
6,223
|
|
|
|
6,966
|
|
|
|
10,174
|
|
Total non-performing assets(1)
|
|
$
|
14,046
|
|
|
$
|
14,143
|
|
|
$
|
16,564
|
|
|
$
|
21,811
|
|
|
$
|
29,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percentage of total loans, net of unearned income(1)
|
|
|
0.49
|
%
|
|
|
0.71
|
%
|
|
|
0.72
|
%
|
|
|
1.28
|
%
|
|
|
1.96
|
%
|
Non-performing assets as a percentage of total assets
|
|
|
0.28
|
%
|
|
|
0.42
|
%
|
|
|
0.60
|
%
|
|
|
0.94
|
%
|
|
|
1.51
|
%
|
(1) Non-performing loans are comprised of (i) loans that are on non-accrual basis and (ii) accruing loans that are 90 days or more past due. Non-performing assets are composed of non-performing loans and other real estate owned.
Problem loans can consist of loans that are performing, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At December 31, 2020, all identified problem loans included in the preceding table are internally classified and have been evaluated for a specific reserve allocation in the allowance for loan losses (see discussion on “Allowance for Loan Losses”).
Non-performing assets decreased by $97 thousand, or 1%, to $14.0 million at December 31, 2020, compared to $14.1 million at December 31, 2019. An increase in non-performing loans was driven by additions to non-performing loans of $3.2 million during 2020, offset by payments of $2.3 million, transfers to other real estate owned of $233,000, charge-offs of $199,000, and a write down of $31,000. The reduction in other real estate owned was the result of the disposition of two OREO properties for a total of $744,000 offset by the addition of one property for a total of $233,000.
The following summary shows the impact on interest income of non-accrual loans, subsequent to being placed on non-accrual for the periods indicated:
|
|
For the Year Ended December 31,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Interest income that would have been recorded had the loans been in accordance with their original terms
|
|
$
|
718
|
|
|
$
|
548
|
|
|
$
|
498
|
|
|
$
|
590
|
|
|
$
|
1,024
|
|
Interest income included in net income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 pursuant to ASC 310-10 (“non-impaired loans”). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450 Contingencies. The third component is an unallocated allowance to account for a level of imprecision in management’s estimation process.
We evaluate loans for impairment and potential charge-off on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary repayment source. If the primary repayment source is determined to be insufficient and unlikely to repay the debt, we then look to the secondary repayment sources. Secondary sources are conservatively reviewed for liquidation values. Updated appraisals and financial data are obtained to substantiate current values. If the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs associated with the resolution of a troubled loan, an estimate of the deficient amount will be calculated and a specific allocation of loan loss reserve is recorded.
Factors considered in the calculation of the allowance for non-impaired loans include several qualitative and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan balances, changes in risk composition and underwriting standards, experience and ability of management, and general economic conditions along with other external factors. Historical loss experience is analyzed by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below.
The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators on a regular basis. 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.
A detailed analysis of our allowance for loan losses for the years ended December 31, 2020, 2019, 2018, 2017, and 2016 is as follows:
|
|
For the Year Ended December 31,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9,266
|
|
|
$
|
8,615
|
|
|
$
|
8,599
|
|
|
$
|
9,155
|
|
|
$
|
8,703
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1,603
|
|
|
|
-
|
|
|
|
-
|
|
Construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
Commercial and industrial
|
|
|
333
|
|
|
|
1,356
|
|
|
|
151
|
|
|
|
1,366
|
|
|
|
143
|
|
Owner occupied real estate
|
|
|
48
|
|
|
|
-
|
|
|
|
465
|
|
|
|
157
|
|
|
|
1,052
|
|
Consumer and other
|
|
|
107
|
|
|
|
126
|
|
|
|
219
|
|
|
|
53
|
|
|
|
11
|
|
Residential mortgage
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
Paycheck Protection Program
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total charge-offs
|
|
|
555
|
|
|
|
1,482
|
|
|
|
2,438
|
|
|
|
1,576
|
|
|
|
1,276
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
|
|
54
|
|
|
|
6
|
|
Construction and land development
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
48
|
|
|
|
217
|
|
|
|
81
|
|
|
|
64
|
|
|
|
163
|
|
Owner occupied real estate
|
|
|
1
|
|
|
|
2
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other
|
|
|
12
|
|
|
|
9
|
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Paycheck Protection Program
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total recoveries
|
|
|
64
|
|
|
|
228
|
|
|
|
154
|
|
|
|
120
|
|
|
|
171
|
|
Net charge-offs
|
|
|
491
|
|
|
|
1,254
|
|
|
|
2,284
|
|
|
|
1,456
|
|
|
|
1,105
|
|
Provision for loan losses
|
|
|
4,200
|
|
|
|
1,905
|
|
|
|
2,300
|
|
|
|
900
|
|
|
|
1,557
|
|
Balance at end of period
|
|
$
|
12,975
|
|
|
$
|
9,266
|
|
|
$
|
8,615
|
|
|
$
|
8,599
|
|
|
$
|
9,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding(1)
|
|
$
|
2,359,169
|
|
|
$
|
1,544,904
|
|
|
$
|
1,340,117
|
|
|
$
|
1,090,851
|
|
|
$
|
936,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of average loans:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
0.02
|
%
|
|
|
0.08
|
%
|
|
|
0.17
|
%
|
|
|
0.13
|
%
|
|
|
0.12
|
%
|
Provision for loan losses
|
|
|
0.18
|
%
|
|
|
0.12
|
%
|
|
|
0.17
|
%
|
|
|
0.08
|
%
|
|
|
0.17
|
%
|
Allowance for loan losses
|
|
|
0.55
|
%
|
|
|
0.60
|
%
|
|
|
0.64
|
%
|
|
|
0.79
|
%
|
|
|
0.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income
|
|
|
0.49
|
%
|
|
|
0.53
|
%
|
|
|
0.60
|
%
|
|
|
0.74
|
%
|
|
|
0.95
|
%
|
Total non-performing loans
|
|
|
100.91
|
%
|
|
|
74.65
|
%
|
|
|
83.31
|
%
|
|
|
57.93
|
%
|
|
|
48.45
|
%
|
(1) Includes non-accruing loans.
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 loan loss provision in the amount of $4.2 million in 2020 compared to a $1.9 million provision in 2019. The increase in the provision during 2020 was driven by an increase required for loans collectively evaluated for impairment. This change was primarily caused by the uncertainty surrounding the economic environment as a result of the COVID-19 pandemic. Qualitative factors in the calculation of the provision for loan losses were adjusted to account for this uncertainty.
The ratio of non-performing assets to total assets declined to 0.28% as of December 31, 2020 compared to 0.42% as of December 31, 2019. Net charge-offs as a percentage of average loans outstanding declined to 0.02% for the year ended December 31, 2020 from 0.08% for the year ended December 31, 2019.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 101% at December 31, 2020 as compared to 75% at December 31, 2019 and 83% at December 31, 2018. The increase in the coverage ratio during 2020 was mainly driven by the increase in the allowance for loan losses during 2020 driven by the conditions described earlier. All loans individually evaluated for impairment are adequately secured with collateral and/or specific reserves. Coverage is considered adequate by management as of December 31, 2020.
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 generally accepted accounting principles (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 during the year amounted to $1.1 million at December 31, 2020 compared to $3.6 million at December 31, 2019. This decrease was primarily driven by full charge-offs during 2019. Our charge-off policy is reviewed on an annual basis and updated as necessary. During the twelve months ended December 31, 2020, there have been no changes made to this policy.
We have an existing loan review program, which monitors the loan portfolio on an ongoing basis. A loan review officer who reviews both the loan portfolio and overall adequacy of the allowance for loan losses conducts this loan review on a quarterly basis and reports directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In management’s opinion, the allowance for loan losses was appropriate at December 31, 2020. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required.
Management is unable to determine in which loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is based on management’s evaluation of historical charge-off experience and adjusted for several qualitative factors. The entire allowance for loan losses is available to absorb loan losses in any loan category.
The allocation of the allowance for loan losses for the past five years is as follows:
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
% of
Loans
|
|
|
Amount
|
|
|
% of
Loans
|
|
|
Amount
|
|
|
% of
Loans
|
|
|
Amount
|
|
|
% of
Loans
|
|
|
Amount
|
|
|
% of
Loans
|
|
Commercial real estate
|
|
$
|
4,394
|
|
|
|
26.6
|
%
|
|
$
|
3,043
|
|
|
|
35.1
|
%
|
|
$
|
2,462
|
|
|
|
35.9
|
%
|
|
$
|
3,774
|
|
|
|
37.3
|
%
|
|
$
|
3,254
|
|
|
|
39.2
|
%
|
Construction and land development
|
|
|
948
|
|
|
|
5.4
|
%
|
|
|
688
|
|
|
|
6.9
|
%
|
|
|
777
|
|
|
|
8.4
|
%
|
|
|
725
|
|
|
|
9.0
|
%
|
|
|
557
|
|
|
|
6.4
|
%
|
Commercial and industrial
|
|
|
1,367
|
|
|
|
7.5
|
%
|
|
|
931
|
|
|
|
12.8
|
%
|
|
|
1,754
|
|
|
|
14.0
|
%
|
|
|
1,317
|
|
|
|
14.9
|
%
|
|
|
2,884
|
|
|
|
18.1
|
%
|
Owner occupied real estate
|
|
|
2,374
|
|
|
|
17.9
|
%
|
|
|
2,292
|
|
|
|
24.3
|
%
|
|
|
2,033
|
|
|
|
25.6
|
%
|
|
|
1,737
|
|
|
|
26.7
|
%
|
|
|
1,382
|
|
|
|
28.7
|
%
|
Consumer and other
|
|
|
723
|
|
|
|
3.9
|
%
|
|
|
590
|
|
|
|
5.8
|
%
|
|
|
577
|
|
|
|
6.3
|
%
|
|
|
573
|
|
|
|
6.5
|
%
|
|
|
588
|
|
|
|
6.6
|
%
|
Residential mortgage
|
|
|
3,025
|
|
|
|
14.9
|
%
|
|
|
1,705
|
|
|
|
15.1
|
%
|
|
|
894
|
|
|
|
9.8
|
%
|
|
|
392
|
|
|
|
5.6
|
%
|
|
|
58
|
|
|
|
1.0
|
%
|
Paycheck Protection Program
|
|
|
-
|
|
|
|
24.0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Unallocated
|
|
|
144
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
118
|
|
|
|
-
|
|
|
|
81
|
|
|
|
-
|
|
|
|
432
|
|
|
|
-
|
|
Total allowance for loan losses
|
|
$
|
12,975
|
|
|
|
100
|
%
|
|
$
|
9,266
|
|
|
|
100
|
%
|
|
$
|
8,615
|
|
|
|
100
|
%
|
|
$
|
8,599
|
|
|
|
100
|
%
|
|
$
|
9,155
|
|
|
|
100
|
%
|
The allowance for loan losses is an amount that represents management’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for loan losses is dependent, to a great extent, on the general economy and other conditions that may be beyond our control, the estimate of the allowance for loan losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers the remainder of the portfolio and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
1. Lending policies and procedures, including underwriting standards and collection, charge-off and
recovery practices.
2. National, regional and local economic and business conditions as well as the condition of various
segments.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans as well as other loan
modifications.
6. Quality of our loan review system, and the degree of oversight by our
Board of Directors.
7. Existence and effect of any concentration of credit and changes in the level of such
concentrations.
8. Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
We also provide specific reserves for impaired loans to the extent the estimated realizable value of the underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Also, we estimate and recognize reserve allocations on loans identified as “internally classified accruing loans” based upon any factor that might impact loss estimates. Those factors include but are not limited to the impact of economic conditions on the borrower and management’s potential alternative strategies for loan or collateral disposition. An unallocated allowance is established for losses that have not been identified through the formulaic and other specific components of the allowance as described above. Management has identified several factors that impact credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of macro and micro economic conditions, industry and geographic loan concentrations, changes in the composition of the loan portfolio, changes in underwriting processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light of management’s conclusions as to the overall adequacy of underlying collateral and other factors.
The majority of our loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. We attempt to evaluate larger loans individually, on the basis of our loan review process, which scrutinizes loans on a selective basis and other available information. Even if all commercial purpose loans could be reviewed, information on potential problems might not be available. Our portfolio of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. PPP loans include an embedded credit enhancement guarantee from the SBA, which guarantees 100% of the principal and interest owed by the borrower.
A loan is considered impaired, in accordance with ASC 310, when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include internally classified accruing loans. As of December 31, 2020, management identified one troubled debt restructuring in the loan portfolio in the amount of $4.5 million. One troubled debt restructuring in the amount of $6.2 million was identified as of December 31, 2019.
The following table presents our impaired loans at December 31, 2020, 2019, and 2018:
(dollars in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Impaired loans without a valuation allowance
|
|
$
|
12,842
|
|
|
$
|
12,862
|
|
|
$
|
10,602
|
|
Impaired loans with a valuation allowance
|
|
|
5,127
|
|
|
|
6,020
|
|
|
|
7,428
|
|
Total impaired loans
|
|
$
|
17,969
|
|
|
$
|
18,882
|
|
|
$
|
18,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans
|
|
$
|
591
|
|
|
$
|
556
|
|
|
$
|
1,473
|
|
Total nonaccrual loans
|
|
|
12,246
|
|
|
|
12,413
|
|
|
|
10,341
|
|
Total loans past-due ninety days or more and still accruing
|
|
|
612
|
|
|
|
-
|
|
|
|
-
|
|
For the years ended December 31, 2020, 2019, and 2018, the average recorded investment in impaired loans was approximately $19.6 million, $18.1 million, and $22.8 million, respectively. Republic earned $478,000, $386,000, and $451,000 of interest income on impaired loans (internally classified accruing loans) in 2020, 2019, and 2018, respectively. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein.
Total impaired loans decreased by $913,000, or 5%, during the year ended December 31, 2020. This decrease demonstrates the Company’s continued focus on maintaining its high standard of asset quality. The valuation allowance related to impaired loans increased to $591,000 at December 31, 2020 compared to $556,000 at December 31, 2019. At December 31, 2020 and 2019, internally classified accruing loans totaled approximately $1.8 million and $2.3 million, respectively.
The following table presents our 30 to 89 days past due loans at December 31, 2020, 2019, and 2018:
(dollars in thousands)
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
30 to 59 days past due
|
|
$
|
2,321
|
|
|
$
|
112
|
|
|
$
|
1,135
|
|
60 to 89 days past due
|
|
|
938
|
|
|
|
1,823
|
|
|
|
1,574
|
|
Total loans 30 to 89 days past due
|
|
$
|
3,259
|
|
|
$
|
1,935
|
|
|
$
|
2,709
|
|
Management has engaged in active discussions with all delinquent relationships to address delinquencies and is confident that acceptable resolutions will be achieved in the near term.
Deposits
Total deposits at December 31, 2020 were $4.0 billion, an increase of $1.0 billion or 34% from total deposits of $3.0 billion at December 31, 2019. Total deposits by account type at December 31, 2020, 2019, and 2018 are as follows:
(dollars in thousands)
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Demand deposits, non-interest bearing
|
|
$
|
1,006,876
|
|
|
$
|
661,431
|
|
|
$
|
519,056
|
|
Demand deposits, interest bearing
|
|
|
1,776,995
|
|
|
|
1,352,360
|
|
|
|
1,042,561
|
|
Money market & savings deposits
|
|
|
1,043,519
|
|
|
|
761,793
|
|
|
|
676,993
|
|
Time deposits
|
|
|
186,361
|
|
|
|
223,579
|
|
|
|
154,257
|
|
Total deposits
|
|
$
|
4,013,751
|
|
|
$
|
2,999,163
|
|
|
$
|
2,392,867
|
|
In general, Republic pays higher interest rates on time deposits compared to other deposit categories. Republic’s various deposit liabilities may fluctuate from period-to-period, reflecting customer behavior and strategies to optimize net interest income. The increase in total deposits of $1.0 billion to $4.0 billion at December 31, 2020 from $3.0 billion at December 31, 2019 was primarily the result of a $770.1 million increase in demand deposits, which reflects the success of our strategy based on a high level of customer service and satisfaction, which in turn drives the gathering of low-cost core deposits. This strategy has also allowed us to eliminate our dependence on the more volatile source of funding in brokered and internet based certificates of deposit.
We continued to have success with our strategy during 2020 which lead to the growth in deposit balances even in a year filled with challenges, governmental restrictions and business closings due to the COVID-19 pandemic. Our participation in the PPP loan program also resulted in significant growth in new deposit relationships throughout the year. Approximately half of the applications that we accepted for the PPP program were from businesses that were not Republic Bank customers at the time. Many of those applicants were so pleased with their experience during the PPP process that they chose to move their primary banking relationship to Republic. On a percentage basis the largest increase in deposits was in the non-interest bearing demand deposit category. These deposits grew by 52% during 2020 which demonstrates the success of our strategy outlined above.
The average balances and weighted average rates of Republic’s interest bearing deposits for the last three years are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Rate
|
|
Interest bearing demand deposits
|
|
$
|
1,509,826
|
|
|
|
0.84
|
%
|
|
$
|
1,184,530
|
|
|
|
1.32
|
%
|
|
$
|
918,508
|
|
|
|
0.87
|
%
|
Money market & savings deposits
|
|
|
916,607
|
|
|
|
0.68
|
%
|
|
|
705,445
|
|
|
|
0.98
|
%
|
|
|
697,135
|
|
|
|
0.70
|
%
|
Time deposits
|
|
|
211,636
|
|
|
|
1.82
|
%
|
|
|
190,567
|
|
|
|
2.02
|
%
|
|
|
128,892
|
|
|
|
1.23
|
%
|
Total interest bearing deposits
|
|
$
|
2,638,069
|
|
|
|
0.86
|
%
|
|
$
|
2,080,542
|
|
|
|
1.26
|
%
|
|
$
|
1,744,535
|
|
|
|
0.83
|
%
|
The remaining maturity of certificates of deposit for $100,000 or more as of December 31, 2020 is as follows:
(dollars in thousands)
|
|
|
|
|
Maturity:
|
|
|
|
|
3 months or less
|
|
$
|
31,966
|
|
3 to 6 months
|
|
|
62,898
|
|
6 to 12 months
|
|
|
33,031
|
|
Over 12 months
|
|
|
16,998
|
|
Total
|
|
$
|
144,893
|
|
The following is a summary of the remaining maturity of time deposits, which includes certificates of deposits of $100,000 or more, as of December 31, 2020:
(dollars in thousands)
|
|
|
|
|
Maturity:
|
|
|
|
|
2021
|
|
$
|
162,450
|
|
2022
|
|
|
19,210
|
|
2023
|
|
|
1,443
|
|
2024
|
|
|
805
|
|
2025
|
|
|
2,453
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
186,361
|
|
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. We use the same underwriting standards and policies in making credit commitments as we do for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $428.9 million and $329.9 million and standby letters of credit of approximately $16.6 million and $17.2 million at December 31, 2020 and 2019, respectively. Commitments often expire without being drawn upon. The $428.9 million of commitments to extend credit at December 31, 2020, substantially all were variable rate commitments.
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.
Contractual Obligations and Other Commitments
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2020:
(dollars in thousands)
|
|
Total
|
|
|
Less than
One Year
|
|
|
One to
Three Years
|
|
|
Three to
Five Years
|
|
|
After Five
Years
|
|
Minimum annual rentals or non-cancellable operating leases
|
|
$
|
124,093
|
|
|
$
|
8,260
|
|
|
$
|
15,719
|
|
|
$
|
14,938
|
|
|
$
|
85,176
|
|
Other borrowings
|
|
|
633,866
|
|
|
|
-
|
|
|
|
614,601
|
|
|
|
19,265
|
|
|
|
-
|
|
Branch construction commitments
|
|
|
2,509
|
|
|
|
2,509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Remaining contractual maturities of time deposits
|
|
|
186,361
|
|
|
|
162,450
|
|
|
|
20,653
|
|
|
|
3,258
|
|
|
|
-
|
|
Subordinated debt
|
|
|
11,341
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,323
|
|
Director and Officer retirement plan obligations
|
|
|
1,092
|
|
|
|
686
|
|
|
|
104
|
|
|
|
104
|
|
|
|
198
|
|
Loan commitments
|
|
|
428,875
|
|
|
|
174,121
|
|
|
|
92,981
|
|
|
|
48,066
|
|
|
|
113,707
|
|
Standby letters of credit
|
|
|
16,587
|
|
|
|
15,809
|
|
|
|
778
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,404,724
|
|
|
$
|
363,853
|
|
|
$
|
744,836
|
|
|
$
|
85,631
|
|
|
$
|
210,404
|
|
As of December 31, 2020, we had entered into non-cancelable lease agreements for our main office and operations center, twenty current and pending retail branch facilities, five loan offices, one storage facility, and fifteen equipment leases expiring on various dates through December 31, 2058. The leases are accounted for as operating leases. The minimum rental payments required under these leases are $99.4 million through the year 2058.
We have retirement plan agreements with certain directors and officers. At December 31, 2020, the accrued benefits under the plan were approximately $1.1 million, with a minimum age of 65 established to qualify for the payments.
Interest Rate Risk Management
We attempt to manage our assets and liabilities in a manner that optimizes net interest income in a range of interest rate environments. Management uses an “interest sensitivity gap” (“GAP”) analysis and simulation models to monitor behavior of its interest sensitive assets and liabilities. A GAP analysis is the difference between interest-sensitive assets and interest-sensitive liabilities. Adjustments to the mix of assets and liabilities are made periodically in an effort to provide steady growth in net interest income.
Management presently believes that the effect of any future reduction in interest rates, reflected in lower yielding assets, could be detrimental since we may not have the immediate ability to commensurately decrease rates on interest bearing liabilities, primarily time deposits, other borrowings and certain transaction accounts. An increase in interest rates could have a negative effect due to a possible lag in the re-pricing of core deposits not taken into account in the static GAP analysis. Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. We attempt to optimize net interest income while managing period-to-period fluctuations therein. We typically define interest-sensitive assets and interest-sensitive liabilities as those that re-price within one year or less. Generally, we limit long-term fixed rate assets and liabilities in our efforts to manage interest rate risk.
A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities re-pricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets re-pricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse. Static GAP analysis describes interest rate sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income as changes in interest rates do not impact all categories of assets and liabilities equally or simultaneously. Interest rate sensitivity analysis also requires assumptions about re-pricing certain categories of assets and liabilities. For purposes of interest rate sensitivity analysis, assets and liabilities are stated at their contractual maturity, estimated likely call date, or earliest re-pricing opportunity. Mortgage-backed securities and amortizing loans are scheduled based on their anticipated cash flow, including prepayments based on historical data and current market trends. Savings, money market and interest-bearing demand accounts do not have a stated maturity or re-pricing term and can be withdrawn or re-priced at any time. Management estimates the re-pricing characteristics of these accounts based upon decay rates and run off projections obtained in a deposit study performed by an independent third party, along with management’s estimates of when rates would have to be increased to retain balances in response to competition. Such estimates are necessarily arbitrary and wholly judgmental. As a result of the run off projections, these deposits are not considered to re-price simultaneously and, accordingly, a portion of the deposits are moved into time brackets exceeding one year. However, management may choose not to re-price liabilities proportionally to changes in market interest rates, for competitive or other reasons.
Shortcomings, inherent in a simplified and static GAP analysis, may result in an institution with a negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Furthermore, re-pricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayments and other cash flows could also deviate significantly from those assumed in calculating GAP in the manner presented in the table below.
The following tables present a summary of our GAP analysis at December 31, 2020. Amounts shown in the table include both estimated maturities and instruments scheduled to re-price, including prime based loans. For purposes of these tables, we have used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally, certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage-backed securities.
Interest Rate Sensitivity Gap
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
0 – 90
Days
|
|
|
91-180
Days
|
|
|
181-365
Days
|
|
|
1-2
Years
|
|
|
2-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5
Years
|
|
|
Financial
Statement
Total
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities and other interest-bearing balances
|
|
$
|
928,001
|
|
|
$
|
112,052
|
|
|
$
|
149,697
|
|
|
$
|
170,853
|
|
|
$
|
128,089
|
|
|
$
|
214,500
|
|
|
$
|
387,525
|
|
|
$
|
2,090,717
|
|
|
$
|
2,123,112
|
|
Loans receivable
|
|
|
898,847
|
|
|
|
86,889
|
|
|
|
162,289
|
|
|
|
411,243
|
|
|
|
263,171
|
|
|
|
446,377
|
|
|
|
363,551
|
|
|
|
2,632,367
|
|
|
|
2,618,104
|
|
Total
|
|
$
|
1,826,848
|
|
|
$
|
198,941
|
|
|
$
|
311,986
|
|
|
$
|
582,096
|
|
|
$
|
391,260
|
|
|
$
|
660,877
|
|
|
$
|
751,076
|
|
|
$
|
4,723,084
|
|
|
$
|
4,741,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative totals
|
|
$
|
1,826,848
|
|
|
$
|
2,025,789
|
|
|
$
|
2,337,775
|
|
|
$
|
2,919,871
|
|
|
$
|
3,311,131
|
|
|
$
|
3,972,008
|
|
|
$
|
4,723,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand interest bearing(1)
|
|
$
|
1,776,995
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
1,776,995
|
|
|
$
|
1,776,995
|
|
Savings accounts(1)
|
|
|
327,195
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327,195
|
|
|
|
327,195
|
|
Money market accounts(1)
|
|
|
716,324
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
716,324
|
|
|
|
716,324
|
|
Time deposits
|
|
|
41,358
|
|
|
|
72,932
|
|
|
|
48,160
|
|
|
|
19,209
|
|
|
|
1,443
|
|
|
|
3,259
|
|
|
|
-
|
|
|
|
186,361
|
|
|
|
187,292
|
|
Other borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
614,601
|
|
|
|
-
|
|
|
|
19,265
|
|
|
|
-
|
|
|
|
633,866
|
|
|
|
633,866
|
|
Subordinated debt
|
|
|
11,271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,271
|
|
|
|
8,026
|
|
Total
|
|
$
|
2,873,143
|
|
|
$
|
72,932
|
|
|
$
|
48,160
|
|
|
$
|
633,810
|
|
|
$
|
1,443
|
|
|
$
|
22,524
|
|
|
|
-
|
|
|
$
|
3,652,012
|
|
|
$
|
3,649,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative totals
|
|
$
|
2,873,143
|
|
|
$
|
2,946,075
|
|
|
$
|
2,994,235
|
|
|
$
|
3,628,045
|
|
|
$
|
3,629,488
|
|
|
$
|
3,652,012
|
|
|
|
3,652,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity GAP
|
|
$
|
(1,046,295
|
)
|
|
$
|
126,009
|
|
|
$
|
263,826
|
|
|
$
|
51,714
|
|
|
$
|
389,817
|
|
|
$
|
638,353
|
|
|
|
751,076
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(1,046,295
|
)
|
|
$
|
(920,286
|
)
|
|
$
|
(656,460
|
)
|
|
$
|
(708,174
|
)
|
|
$
|
(318,357
|
)
|
|
$
|
319,996
|
|
|
|
1,071,072
|
|
|
|
|
|
|
|
|
|
Interest sensitive assets/Interest sensitive liabilities
|
|
|
63.58
|
%
|
|
|
68.76
|
%
|
|
|
78.08
|
%
|
|
|
80.48
|
%
|
|
|
91.23
|
%
|
|
|
108.76
|
%
|
|
|
129.33
|
%
|
|
|
|
|
|
|
|
|
Cumulative GAP/ Total earning assets
|
|
|
(22.15
|
)%
|
|
|
(19.48
|
)%
|
|
|
(13.90
|
)%
|
|
|
(14.99
|
)%
|
|
|
(6.74
|
)%
|
|
|
6.78
|
%
|
|
|
22.68
|
%
|
|
|
|
|
|
|
|
|
(1) Demand, savings and money market accounts are scheduled to reprice based upon decay rate and run off percentage estimates obtained through a deposit study performed by an independent third party, along with management’s estimates of when rates would have to be increased to retain balances in response to competition. Such estimates are necessarily arbitrary and wholly judgmental.
In addition to the GAP analysis, we utilize income simulation modeling in measuring our interest rate risk and managing our interest rate sensitivity. Income simulation considers not only the impact of changing market interest rates on forecasted net interest income, but also other factors such as yield curve relationships, the volume and mix of assets and liabilities and general market conditions.
Net Portfolio Value and Net Interest Income Analysis
The income simulation models management used to measure interest rate risk and manage interest rate sensitivity generates estimates of the change in net portfolio value (NPV) and net interest income (NII) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of December 31, 2020 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated (dollars in thousands):
Change in
Interest Rates
in Basis Points
(Rate Shock)
|
|
|
Net Portfolio Value
|
|
|
NPV as a % of Portfolio
Value of Assets
|
|
|
|
Amount
|
|
|
$
Change
|
|
|
%
Change
|
|
|
NPV
Ratio
|
|
|
Change
(in Basis Points)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+400
|
|
|
$
|
638,123
|
|
|
$
|
134,246
|
|
|
|
26.64
|
%
|
|
|
14.00
|
%
|
|
|
405
|
|
+300
|
|
|
|
646,952
|
|
|
|
143,075
|
|
|
|
28.39
|
%
|
|
|
13.79
|
%
|
|
|
384
|
|
+200
|
|
|
|
635,426
|
|
|
|
131,549
|
|
|
|
26.11
|
%
|
|
|
13.17
|
%
|
|
|
322
|
|
+100
|
|
|
|
592,430
|
|
|
|
88,553
|
|
|
|
17.57
|
%
|
|
|
11.96
|
%
|
|
|
201
|
|
Static
|
|
|
|
503,877
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
9.95
|
%
|
|
|
-
|
|
-100
|
|
|
|
464,134
|
|
|
|
(169,068
|
)
|
|
|
(33.55
|
)%
|
|
|
6.52
|
%
|
|
|
(343
|
)
|
In addition to modeling changes in NPV, we also analyze potential changes to NII for a forecasted twelve-month period under rising and falling interest rate scenarios. The following tables shows the NII model as of December 31, 2020 and December 31, 2019:
(dollars in thousands)
|
|
|
December 31, 2020
|
|
Change in Interest Rates
in Basis Points(1)
|
|
|
Net Interest
Income
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+400
|
|
|
$
|
131,184
|
|
|
|
27,010
|
|
|
|
25.93
|
%
|
+300
|
|
|
|
125,317
|
|
|
|
21,143
|
|
|
|
20.30
|
%
|
+200
|
|
|
|
119,142
|
|
|
|
14,968
|
|
|
|
14.37
|
%
|
+100
|
|
|
|
112,732
|
|
|
|
8,558
|
|
|
|
8.22
|
%
|
Static
|
|
|
|
104,174
|
|
|
|
-
|
|
|
|
0.00
|
%
|
-100
|
|
|
|
95,041
|
|
|
|
(9,133
|
)
|
|
|
(8.76
|
)%
|
(dollars in thousands)
|
|
|
December 31, 2019
|
|
Change in Interest Rates
in Basis Points(1)
|
|
|
Net Interest
Income
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+400
|
|
|
$
|
81,477
|
|
|
|
(2,125
|
)
|
|
|
(2.54
|
)%
|
+300
|
|
|
|
83,011
|
|
|
|
(591
|
)
|
|
|
(0.71
|
)%
|
+200
|
|
|
|
84,132
|
|
|
|
530
|
|
|
|
0.63
|
%
|
+100
|
|
|
|
84,782
|
|
|
|
1,180
|
|
|
|
1.41
|
%
|
Static
|
|
|
|
83,602
|
|
|
|
-
|
|
|
|
0.00
|
%
|
-100
|
|
|
|
80,201
|
|
|
|
(3,401
|
)
|
|
|
(4.06
|
)%
|
(1) The net interest income results were calculated assuming a rate ramp, achieving the rate change over a 12-month period, not an immediate and sustained rate shock.
As is the case with the GAP table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or re-pricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Management believes that the assumptions utilized in evaluating our estimated net interest income are reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. Periodically, we may and do make significant changes to underlying assumptions, which are wholly judgmental. Prepayments on residential mortgage loans and mortgage-backed securities have increased over historical levels in recent years due to the lower interest rate environment, and may result in reductions in margins.
Capital Resources
We have sponsored two outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Corporation more commonly known as trust preferred securities. The subsidiary trusts are not consolidated for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
In December 2006, Republic Capital Trust II (“Trust II”) issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to the Company. Trust II purchased $6.2 million of junior subordinated debentures of the Company due 2037, and the Company used the proceeds to call the securities of Republic Capital Trust I (“Trust I”). The debentures supporting Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month Libor. The Company may call the securities on any interest payment date after five years without a prepayment penalty.
On June 28, 2007, the Company caused Republic Capital Trust III (“Trust III”), through a pooled offering, to issue $5.0 million of trust preferred securities to investors and $0.2 million common securities to the Company. Trust III purchased $5.2 million of junior subordinated debentures of the Company due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month Libor. The Company has the ability to call the securities on any interest payment date without a prepayment penalty.
On June 10, 2008, the Company caused Republic First Bancorp Capital Trust IV (“Trust IV”) to issue $10.8 million of convertible trust preferred securities as part of the Company’s strategic capital plan. The securities were purchased by various investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp and, since December 5, 2016, chairman of the Company. This investor group also included a family trust of Harry D. Madonna, president and chief executive officer of Republic First Bancorp, Inc, and Theodore J. Flocco, Jr., who, since the investment, has been elected to the Company’s Board of Directors and serves as the Chairman of the Audit Committee. Trust IV also issued $0.3 million of common securities to the Company. Trust IV purchased $11.1 million of junior subordinated debentures due 2038, which paid interest at an annual rate of 8.0% and were callable after the fifth year under certain terms and conditions. The trust preferred securities of Trust IV were convertible into approximately 1.7 million shares of common stock of the Company, based on a conversion price of $6.50 per share of Company common stock. One independent director converted $240,000 of trust preferred securities into 37,000 shares of common stock in 2017. On January 31, 2018, the Company notified the existing holders of Trust IV of its intent to fully redeem these securities in accordance with the Optional Redemption terms included in the Indenture Agreement. The securities were redeemed on March 31, 2018 at a price equal to the outstanding principal amount. The holders had the option to convert these securities into shares of the Company’s common stock at any time until the end of the last business day preceding the redemption date. During the first quarter of 2018, $10.1 million of trust preferred securities were converted into 1.6 million shares of common stock. After redemption of the remaining securities on March 31 2018, Trust IV was dissolved.
Deferred issuance costs included in subordinated debt were $70,000 and $76,000 at December 31, 2020 and December 31, 2019, respectively. Amortization of deferred issuance costs were $6,000, $6,000, and $6,000 for the years ended December 31, 2020, 2019, and 2018, respectively. Deferred issuance costs in the amount of $467,000 were recorded against additional paid in capital during the first quarter of 2018 as a result of the conversion of trust preferred securities into common stock in accordance with ASC 470-20.
Shareholders’ equity as of December 31, 2020 totaled approximately $308.1 million compared to approximately $249.2 million as of December 31, 2019. The book value per share of our common stock increased to $4.41 as of December 31, 2020, based upon 58,859,778 shares outstanding, from $4.23 as of December 31, 2019, based upon 58,842,778 shares outstanding at December 31, 2019. Outstanding shares are adjusted for treasury stock and deferred compensation plan shares.
Regulatory Capital Requirements
We are required to comply with certain “risk-based” capital adequacy guidelines issued by the Federal Reserve and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.
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 December 31, 2020 and 2019, all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. 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 the Company’s and Republic’s capital regulatory ratios calculated based on Basel III guidelines at December 31, 2020 and 2019:
(dollars in thousands)
|
|
Actual
|
|
|
Minimum Capital
Adequacy
|
|
|
Minimum Capital
Adequacy with
Capital Buffer
|
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
At December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
298,291
|
|
|
|
12.36
|
%
|
|
$
|
193,062
|
|
|
|
8.00
|
%
|
|
$
|
253,394
|
|
|
|
10.50
|
%
|
|
$
|
241,327
|
|
|
|
10.00
|
%
|
Company
|
|
|
326,554
|
|
|
|
13.50
|
%
|
|
|
193,498
|
|
|
|
8.00
|
%
|
|
|
253,967
|
|
|
|
10.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
285,316
|
|
|
|
11.82
|
%
|
|
|
144,796
|
|
|
|
6.00
|
%
|
|
|
205,128
|
|
|
|
8.50
|
%
|
|
|
193,062
|
|
|
|
8.00
|
%
|
Company
|
|
|
313,579
|
|
|
|
12.96
|
%
|
|
|
145,124
|
|
|
|
6.00
|
%
|
|
|
205,592
|
|
|
|
8.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
285,316
|
|
|
|
11.82
|
%
|
|
|
108,597
|
|
|
|
4.50
|
%
|
|
|
168,929
|
|
|
|
7.00
|
%
|
|
|
156,863
|
|
|
|
6.50
|
%
|
Company
|
|
|
254,254
|
|
|
|
10.51
|
%
|
|
|
108,843
|
|
|
|
4.50
|
%
|
|
|
169,311
|
|
|
|
7.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
287,114
|
|
|
|
7.44
|
%
|
|
|
153,414
|
|
|
|
4.00
|
%
|
|
|
153,414
|
|
|
|
4.00
|
%
|
|
|
191,767
|
|
|
|
5.00
|
%
|
Company
|
|
|
308,113
|
|
|
|
8.17
|
%
|
|
|
153,621
|
|
|
|
4.00
|
%
|
|
|
153,621
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$
|
252,307
|
|
|
|
11.94
|
%
|
|
$
|
169,016
|
|
|
|
8.00
|
%
|
|
$
|
221,833
|
|
|
|
10.50
|
%
|
|
$
|
211,270
|
|
|
|
10.00
|
%
|
Company
|
|
|
261,759
|
|
|
|
12.37
|
%
|
|
|
169,251
|
|
|
|
8.00
|
%
|
|
|
222,141
|
|
|
|
10.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
243,041
|
|
|
|
11.50
|
%
|
|
|
126,762
|
|
|
|
6.00
|
%
|
|
|
179,579
|
|
|
|
8.50
|
%
|
|
|
169,016
|
|
|
|
8.00
|
%
|
Company
|
|
|
252,493
|
|
|
|
11.93
|
%
|
|
|
126,938
|
|
|
|
6.00
|
%
|
|
|
179,829
|
|
|
|
8.50
|
%
|
|
|
-
|
|
|
|
-
|
%
|
CET 1 risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
243,041
|
|
|
|
11.50
|
%
|
|
|
95,071
|
|
|
|
4.50
|
%
|
|
|
147,889
|
|
|
|
7.00
|
%
|
|
|
137,325
|
|
|
|
6.50
|
%
|
Company
|
|
|
241,493
|
|
|
|
11.41
|
%
|
|
|
95,203
|
|
|
|
4.50
|
%
|
|
|
148,094
|
|
|
|
7.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Tier one leveraged capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
|
245,158
|
|
|
|
7.54
|
%
|
|
|
128,935
|
|
|
|
4.00
|
%
|
|
|
128,935
|
|
|
|
4.00
|
%
|
|
|
161,169
|
|
|
|
5.00
|
%
|
Company
|
|
|
249,168
|
|
|
|
7.83
|
%
|
|
|
129,058
|
|
|
|
4.00
|
%
|
|
|
129,058
|
|
|
|
4.00
|
%
|
|
|
-
|
|
|
|
-
|
%
|
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 $775.3 million at December 31, 2020, compared to $168.3 million at December 31, 2019. Loan maturities and repayments are another source of asset liquidity. At December 31, 2020, Republic estimated that more than $85 million of loans would mature or repay in the six-month period ending June 30, 2021. 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 December 31, 2020, we had outstanding commitments (including unused lines of credit and letters of credit) of $445.5 million. Certificates of deposit scheduled to mature in one year totaled $162.5 million at December 31, 2020. We anticipate that we will have sufficient funds available to meet all current commitments.
Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB of Pittsburgh. Our maximum borrowing capacity with the FHLB was $1.1 billion at December 31, 2020. As of December 31, 2020, we had no outstanding overnight borrowings. At December 31, 2020, FHLB had issued a letter on Republic’s behalf, totaling $150.0 million against our available credit. Our maximum borrowing capacity with the FHLB was $860.5 million at December 31, 2019. As of December 31, 2019, we had no outstanding overnight borrowings. At December 31, 2019, FHLB had issued a letter on Republic’s behalf, totaling $150.0 million against our available credit. 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 December 31, 2020 and December 31, 2019. As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowing capacity to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. At December 31, 2020, the Company pledged $633.9 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $633.9 million of funds at a rate of 0.35%.
Variable Interest Entities
We follow the guidance under ASC 810, Consolidation, with regard to variable interest entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which voting rights are not effective in identifying the investor with the controlling financial interest. An entity is subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns (“variable interest entities”). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both.
We do not consolidate our subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if we have the right to a majority of the trusts’ expected residual returns. The non-consolidation results in the investment in the common securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of $341,000. In addition, the income received on our investment in the common securities of the trusts is included in other income.
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 financial results is our need and ability to react to changes in interest rates. As discussed previously, 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.